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Origin Focus: Honduras - Part 1


Honduras At-A-Glance 

  • Production: Avg ~6.2m bags, last 10 years 

  • Coffee Types: Arabica (100%) 

  • Coffee Harvest: Oct-Jan (can vary to Nov-Mar) 

  • Manual harvesting 

  • High elevations (mountainous) 

  • Key Regions: El Paraiso, Copán, Comayagua, Montecillos, Opalaca, Agalta 

  • Avg farm size: between 1-3 hectares  

  • ~95% output from smallholders 





Why Honduras Matters 

Honduras holds a pivotal position in the global coffee market, for several reasons. It stands as a high-ranking Arabica origin, boasting the largest output in Central America. Notably, Honduras is a provider of both commercial grades and specialty Arabicas, positioning itself as the fourth-largest Arabica producer globally, following Brazil, Colombia, and Ethiopia.  

 

Historically, Honduras is the second-largest supplier of washed Arabica coffees behind Colombia, although Brazil has challenged this role in recent years. Crucially, Honduras coffees play a substantial role in certified stocks, comprising 40-60% of this important inventory and serving as a benchmark for coffees on the Intercontinental Exchange (ICE). Consequently, Honduras is essential in shaping the underlying quality of Arabica futures contracts, as well as the volume sitting on the exchange, which directly affects futures price and calendar spread dynamics (very relevant lately with inverted spreads). 

Beyond its role in the commercial segment of the coffee market, Honduras is a key player in the specialty coffee industry. The mountainous regions of this small country are conducive to high-grown coffees, placing Honduras among the top 10 specialty origins ranked by volume.  


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Altogether, Honduras is an important and price-sensitive component of the coffee market, capable of influencing not only the decisions of roasters but also those of futures and physical traders and analysts. Understanding the intricacies of Honduras's coffee production is, therefore, essential for having a good understanding of this origin. In this article, we delve into the historical development of Honduras's coffee production, shedding light on the various aspects that underscore its importance. 

 

History of Production 

Honduras has been producing coffee since the 18th century when it was first introduced by Jesuit priests. The country's favorable climate served as the fertile ground on which the foundations of its coffee industry were laid. While the initial coffee production began in the late 1800s, it wasn't until the next century that it evolved into being a substantial contributor to the global coffee scene. While coffee gradually became an economic driver in Honduras, production followed along by consistently increasing.  




Hence, Honduras experienced a steady rise in coffee production from the 1970s to the 2000s, reaching a peak of 7.5 million bags. However, over the past eight years, the industry has faced setbacks, with production levels stabilizing around 5.5 million bags. This decline can be attributed to persistent challenges posed by adverse weather conditions and the prevalence of rust diseases, exacerbated by La Niña events in 2018 and 2020/21. 

 

Back in the 1960s, world coffee consumption was smaller than it is today, there was a notable lack of infrastructure and incentive to farmers in Honduras, and as a result, Honduras didn’t produce very much coffee, merely 10% of today’s volume, or ~500k bags per year. Back then, the coffee industry grappled with disorganized trade infrastructure, high government export taxes, a lack of transportation means, and insufficient coastal facilities for shipping. However, a transformation occurred between the 1960s and 1970s, leading to an upswing in coffee production. 


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Two primary factors drove the rise in production. Firstly, the International Coffee Agreement, backed by the US Agency for International Development, played a crucial role. This initiative focused on assisting vulnerable coffee-producing origins and collaborated closely with government entities. Secondly, the establishment of IHCAFE in 1970, by the Honduras government, as a non-profit organization dedicated to developing production (later underwent privatization). 




IHCAFE started facilitating credit to farmers, providing technical improvements and support, and ensuring easier access to fertilizers/inputs and securing better prices. Additionally, Honduras created laws encouraging coffee production that served as protection and incentives to coffee farmers.   


The implementation of these measures led to a steady improvement in production over the following decades. Even though the production rise was somewhat slow throughout the years, it was rather consistent, as Honduras experienced minimal setbacks since the resurgence initiated in the 1970s up to the 2000s. However, there were a few noteworthy setbacks after the 2000s. 

 



The first notable obstacle was Hurricane Mitch, a calamity that resulted in a 14% decrease in coffee output during the 98/99 period. The hurricane not only impacted the coffee industry but also inflicted substantial economic losses, with Honduras’ GDP dropping by a hefty 40%. Following the hurricane, Arabica prices experienced a staggering 91% decrease from March 1997 to September 2001, leading to an 18% reduction in the Honduras coffee production during that time. 

 

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The plummeting prices in the coffee market placed a heavy burden on the smallholder Honduran farmers. However, the tide would later shift in their favor, with a significant upswing in Arabica futures prices from 2002, reaching 34-year highs in 2011. This rally provided renewed incentives for Hondo's coffee production. 




The revival of Hondo's coffee industry was not solely attributed to price dynamics. Government incentives, coupled with favorable consumption trends, played a crucial role in supporting and propelling the recovery. As a result, Honduras achieved a notable milestone in 2011 by surpassing Guatemala, becoming the largest coffee origin in Central America, a position that’s still held today.  


However, the Honduran coffee industry later faced a more prominent setback in 2012 with the onset of a rust epidemic, resulting in a substantial 15.6% decline in production. There was a gradual recovery in the subsequent years, with focus on cultivating rust-resistant varieties, and the climax of Honduran production was achieved in 2017, when the country produced 7.6 million bags. This production was celebrated as a great success, and there was much optimism about the future with the new rust-resistant trees. Unfortunately, this was not to be the end of the country’s struggle with rust disease. 



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