High Demand for Coffee Perfect Brew

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High demand for coffee’s perfect brewBy Gary Mead

Published: August 17 2010 17:01 | Last updated: August 17 2010 17:01

Rich harvest: a coffee farmer in Colombia, the world’s third-biggest coffee producer

“Chocolate, men, coffee – some things are better rich.” – Anon

Here is a pub-quiz question that floors most people: everyone knows Brazil is the world’sbiggest producer of coffee, but which country is number two? The answer – Vietnam – usually comes as a surprise.

This Brazil/Vietnam grip over the bulk of the world’s coffee production contains within it yet

another surprise: the two countries dominate the two main types of coffee. Brazil is thebiggest producer of arabica, while Vietnam is the top producer of robusta.

Both types of coffee have their fans, but there is no escaping the fact that, for the true coffeeaficionado, arabica is the most highly prized. As with all commodities, supply and demand iskey to price. Demand for arabica is much higher than for robusta, and this is reflected in asubstantial price premium for arabica.

Most instant coffee – the granular kind that dissolves in hot water – tends to be largelyprocessed using robusta coffee beans, while the ground version used in a cafetiere orpercolator tends to be arabica. But even within the arabica/robusta divide there is a vast range

of sub-types and distinctly different qualities.



Why is arabica more highly prized than robusta? It is a matter of taste. Arabica is said to havea superior aroma and flavour – a fuller, richer “body”. Moreover, it usually lacks the harsher,occasionally even bitter, overtones of robusta. Many people spend their lives drinking instantcoffee based on robusta, but if they switch to arabica, few switch back. Once tried, arabicausually remains the universal preference.

But if arabica is such a superior cup, why bother growing robusta? Like all commodities,supply/demand fundamentals will, over time, reassert themselves.

Robusta may be regarded as an inferior form of coffee, but it has its place. For one thing,nature favours growing robusta. Robusta trees tend to produce their first yields two or threeyears after planting, whereas arabica needs roughly twice that time before it starts to producethe “cherries” that contain coffee beans.

Arabica trees are also climate sensitive, requiring a precise temperature range and annualrainfall to be at their most productive. Robusta trees are more choosy, and can be cultivated in

a wider range of environmental conditions.

At the other end of the production chain are the roasters, the coffee wholesale and retailsuppliers who roast the green coffee beans they buy to highly variable specifications,producing their own flavour to customise the green beans according to their own brandidentity.

Annual global production is measured in two ways: either in bags – the standard delivery isvia a 60kg bag – or tonnes. The global outlook for 2010-11 is total arabica production of 86mbags and demand of 80m bags; for robusta it is a slightly tighter balance, with roughly 54mbags of output and 51m bags of consumption.

Overall growth in demand for coffee was hardly dented by the recession – its mildly addictivenature means consumers are reluctant to give up their daily intake. On the other hand, theincrease in demand has been relatively slow for some time, at roughly 1-1.5 per cent a year.

Coffee production remains of vital importance to many of the world’s emerging markets. Aswell as Vietnam, other big robusta producers are Brazil, Indonesia, India and Uganda. AfterBrazil, Colombia is the next-biggest arabica producer, with Central American countries alsokey producers.

The weather can play a crucial role in determining productivity levels, and Colombia’s recenthistory is a good example of what can happen if the climate turns nasty. A couple of seasonsago, the country was on track to produce roughly 12m bags, but torrential rainfall towards theend of 2008 made harvesting and transportation of the coffee to export points extremelydifficult. The country’s exports fell by about a third, and premiums for Colombian arabicasoared as roasters struggled to find substitutes of sufficiently high quality.

The impact of the weather can also be seen every year in the regular “Brazilian frost scare”,which takes place during the country’s winter season from June to August. The developingcherries on Brazil’s coffee trees are sometimes badly damaged by frost, forcing arabica priceshigher.



But this issue has receded in recent years, partly because the market has been lulled intocomplacency – there has not been a serious case of frost damage since the early 1990s – andpartly because coffee growing has steadily migrated out of the zones that experience the mostsevere cold weather during the Brazilian winter.

The big advantage that Vietnam has enjoyed is partly climate related. Its rainy seasons have proved to be very regular in recent years, and the country’s decision to go for robusta ratherthan arabica (although it does produce a small amount of the latter) was sensible, as therobusta trees are simply – as the name implies – robust.

What does the long-term future hold for coffee supply/demand and prices? Global warming – about which there now appears to be universal consensus – will be a serious threat, perhapsespecially to arabica, whose trees like cooler, higher levels but hate temperatures that are toolow. But this threat is not simply to arabica – many agricultural commodities are facing asimilarly anxious prospect.

In the very long term, supply growth may not keep in step with rising demand, which willresult in demand rationing via much higher prices. Those days are not yet in view, but theperiod when commodity prices tended to drift endlessly lower – thanks to techniques of improving yields – is probably behind us.

According to Jonathan Swift, “coffee makes us severe, and grave, and philosophical”. Soundslike the perfect brew for the uncertainties that lie ahead.

The writer is a senior commodity analyst at VM Group, a London-based commodity research

consultancy

Coffee exchanges

The two leading futures exchanges where coffee is traded are in New York, on ICE FuturesUS, where the coffee contract is for arabica and measured in US cents a pound; and inLondon, on NYSE Liffe, where the contract is for robusta and measured in US dollars atonne.

Historically, arabica futures have tended to trade at twice the price of robusta. In late July

2010, arabica futures in New York were the equivalent of about $3,700 a tonne while inLondon the robusta futures’ price was about $1,730 a tonne. While these futures’ marketsplay a crucial role in setting benchmark international prices, a lot of coffee is also traded inthe over-the-counter market – with producers, farmers and exporters striking their own directdeals with trading houses and coffee processors.

The rise of Vietnam

Vietnam’s rise to the top of the coffee production tree has been rapid and recent. A s recentlyas the 1980s, Vietnam produced almost no coffee. The decision to become a world-dominantproducer of robusta was a political one, taken by the communist authorities to boost overall



economic growth. Hanoi’s political masters spotted an opportunity in the market – instantcoffee drinking back then was a fast-growing business – and the Vietnamese state hasregularly supported the country’s coffee producers.

However, almost no coffee is consumed within Vietnam, where the preferred hot beverage

remains tea. By contrast, about 50 per cent of Brazil’s annual arabica production is consumedlocally, and domestic consumption is growing at a relatively strong pace, rather more than theoverall global growth rate.

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High Demand for Coffee Perfect Brew