Analyzing the World Coffee Market

Is it more challenging for buyers to find constant and reliable sources of high quality coffees?

By David Piza C.

The world coffee supply is currently under pressure, and the situation for higher quality coffees is even more challenging. Many industry experts warn that quality coffee supplies may be reaching its upper limit.

According to the International Coffee Organization’s (ICO) preliminary estimates, world production in calendar year 2009 reached only 123.5 million bags (73.3 million coffees were Arabicas and 50.2 million were Robustas). This production level represents a decrease of 3.6 percent in comparison to calendar year 2008; and in the case of Arabicas, a reduction of over two million bags. The most dramatic drops were experienced in South America, the largest washed Arabicas-producing region, with a decrease of more than 6.3 million bags of Arabica beans.

Looking at production more closely, Brazil shrank by 14.18 percent to 39.5 million bags, while Colombian harvest decreased to 8.3 million bags. According to Colombian authorities, that’s its lowest level in more than three decades. The first phenomenon is mainly explained by Brazil’s bi-annual production cycle, while Colombia’s output was impacted by heavy rains that led to decreasing crop yields and higher levels of berry borer infestation, poor fertilization due to high oil prices and the nationwide crop rejuvenation efforts. Brazilian coffee authorities’ preliminary estimates for the crop year 2010/2011 anticipate production levels between 45.9 and 48.7 million bags, comprising 34 to 36.2 million bags of Arabicas and 11.9 to 12.5 million bags of Robustas. It is uncertain when Colombia will recuperate its historic average production, even though Colombian authorities are optimistic and forecast a production level of over 11 million bags for this crop year due to “optimal weather conditions” earlier this year.

Asia and Oceania’s production recorded the largest production increase in regional terms, growing 5.8 percent in 2009 to 36.9 million bags. Indonesia’s output grew 23 percent, reaching 11.5 million bags, beating Colombia for the second year in a row as the third largest producer. Vietnam slightly decreased by 2.7 percent; still, its production surpassed 18 million bags. In regional terms, Arabica production only increased 500 thousand bags while Robusta grew more than 1.5 million bags.

In Mexico and Central America, production practically remained the same with a 0.75 percent increase in 2009, reaching 17.8 million bags. In Costa Rica, production increased 25.7 percent, reaching 1.66 million bags, while Nicaragua had the biggest fall in the region—26.6 percent, descending to 1.14 million. Central American production struggled in the last decade with increasing land pressure and cost of labor. In 2009, Arabica production only grew 0.7 percent.

Africa produced 14.78 million bags, experiencing a 3.19 percent production decline, mainly driven by Ivory Coast and Tanzania drops, which were 21.4 and 26.2 respectively. Arabica production increased more than 300,000 bags, reaching 7.7 million, while Robusta fell 10.3 percent to 7.1 million bags. Some industry experts pointed out an opportunity for East Africa to provide two million bags of specialty coffees over the next 10 years, if the region makes a strong commitment to high quality production.

Exacerbating production declines are raising consumption at origin. Consumption in producing countries has shown steady growth and experienced a compounded annual growth rate of 3.9 percent between 2004 and 2008. Those countries represented 28 percent of world consumption in 2009, more than 36.7 million bags. This trend is expected to continue as Brazil consolidates its position as the world’s second largest consuming nation, retaining more than 17.5 million bags in 2008, 38 percent of its production. Some industry experts think that Brazil could take over the lead of the United States as the largest consuming country within the next five to seven years.

Inventory levels at producing countries have consistently reduced in order to keep up with the pace of demand, and they exhibited a decrease of 16 percent between coffee years 2004/2005 and 2008/2009, leaving less coffee available to be exported.

When combined, all those factors are seriously impacting the global offer. The total volume exported during calendar year 2009 was 94.7 million bags compared to 97.7 million bags in 2008, a three percent reduction. Arabica exports fell 5.2 percent while Robusta exports barely increased 0.9 percent.

The supply picture is clear, and it seems that as time passes, it is harder for buyers to find consistent and reliable sources of high quality coffees, usually washed Arabicas. In sum, we’re on the razor’s edge and many monitoring the situation predict that sharp price increases are inevitable.

The ICO composite index gained more than 18 cents between January 2009 and January 2010 reaching $1.26 a pound, accounting for an increase of 17 percent in 12 months. This growth was mainly driven by increasing prices with the Colombian milds that experienced an impressive growth of 65 cents per pound during the same period. Decreasing quantities have pushed prices up, and this trend is expected to continue as long as producers of washed Arabicas keep facing adverse conditions. Quality also plays an important role in this equation as prices paid in New York and London for Colombian milds, other milds and Brazilian naturals went up by 45.81 percent, 23.85 percent and 20.60 percent respectively. Robusta prices fell 15.30 percent, making the differentials between washed Arabicas and Naturals and Robustas more significant every day. Specialty coffee importers and roasters have also been challenged with increasing raw material costs, forcing them to either decrease their margins or transfer some of this markup to clients—making quality coffee a tougher option for coffee retailers and consumers.

Among the most common responses to overcoming production shortfalls of high quality beans: planting more coffee; looking for substitute sources (countries); increasing quality of existing commercial producers; and increasing yields of high quality producers. These reactions are not as obvious as they seem. Land pressure exerted by other crops or economic activities like tourism—combined with the effect of global warming—are changing the landscape of areas where coffee can be grown and the qualities and quantities of coffees being produced. While long term interventions may be layered and complex, more immediate solutions, such as evaluation systems for identifying quality at origin, can play an important role in better protecting existing supplies. The Specialty Coffee Association of America is encouraged by countries adopting its standards and protocols so that higher quality coffees are discovered earlier in the process. There’s also an expansion of high quality coffee programs worldwide like Nespresso’s AAA Sustainable Quality Coffee Program, the Cup of Excellence, Green Mountain Coffee Roasters Farm Identified coffees, Starbucks C.A.F.E practices and the Q Coffee System, and other programs focused on direct methods of sourcing; they’re gaining momentum and they’re sending a powerful message to producers: quality improvements are a prerequisite to successfully compete in international markets.

Certainly in the long-term, addressing this shortage will require an industry-wide effort. In fact, the SCAA, along with a global panel of industry representatives, plans to introduce the Global Coffee Research Initiative (GCRI) at this year’s Symposium in Anaheim, Calif. Focused on increasing cup quality and volumes of quality coffee through research interventions at origin, this program aims to build and fund a global network of coffee research institutions and scientists that work with the specialty coffee industry worldwide to raise farmer returns, increase roaster profits and stimulate higher consumer interest and demand. As Dr. Timothy Schilling, Texas A&M Borlaug Institute’s assistant director for enterprise partnerships and member of the SCAA Board of Directors, notes: “Without increases in total world volume of quality coffees, the specialty coffee industry will plateau.” Then what’s at stake here is not only the future of producers in developing nations but of importers, roasters and retailers in consuming markets; in other words, the sustainability of the entire coffee value chain is at stake.

David Piza C. is a market analyst at the Coffee Quality Institute and the Specialty Coffee Association of America. He specializes in value chain development and competitiveness strategies. He’s currently working on a competitiveness assessment for 10 Eastern Africa nations. He can be reached at