BANGALORE - Besides the recession, high inflation, volatile currency rates and scarce finance are also posing challenges to the global coffee sector, an industry expert said Thursday.

“High inflation rates have reduced the power of coffee producers with production costs squeezing margins and fluctuating exchange rates impacting exporters and buyers,” International Coffee Organisation (ICO) executive director Nestor Osorio said here at the India International Coffee Festival (ICCF-2009).

The global financial crisis has also put pressure on sourcing institutional funds to retain stocks by producers, leading to lower inventories and more coffee beans being put on sale in international auctions.

“But the paradox is that job losses and less money in consumer pockets have declined retail coffee consumption in developed markets like the US and Europe,” Osorio told about 500 delegates participating in the three-day event.

Decline in retail sales, however, is being compensated with consumption at homes increasing and protecting the world market.

“Growing unemployment means less money for consumption, which is a worrying factor. The industry is going through an unusual crisis due to global recession, fund crunch, job losses and the impact of climate change in producing countries,” Osorio said.

For instance, a sudden production shortfall in Colombia to the tune of 30-40 percent due to the vagaries of weather last year resulted in a loss of three million bags of 50 kg for auction sale.

Prices, however, remained steady with Brazil and Vietnam filling up the gap by exporting 30 million bags.

Giving an overview of the world coffee market and outlook for 2009-10, Osorio said production costs would remain high due to inflation and labour costs shooting up in producing countries.

“Secondly, coffee prices will remain volatile in countries with exchange rates linked to the US dollar. Production has become less attractive due to fall in prices in local currency,” Osorio pointed out.

Producing countries account for 26 percent and emerging markets 16 percent of the world coffee consumption, while the developed countries accounting for 58 percent.

“In developing countries and emerging markets, coffee consumption is still considered to be a luxury beverage. Possible devaluations of local currency vis–vis US dollar may increase prices to consumers,” Osorio noted.

Macro-economic dislocations such as unemployment and lack of credit will reduce demand and impact consumption.