Divergent views on short and long-term price prospects for arabica coffee
11 November 2012
According to reports by commodity analysts in the press, while arabica coffee prices in mid August were 2.1% lower for September, at 158.55 cents/lb, a recovery in prices was thought likely, with the quality of beans also improving. Analysts at Commerzbank described the arabica market as ‘still very tight’. With an underlying supply deficit and stockpiles in exporting countries at ‘near record lows’, it was projected that ‘prices will rise to 200 cents/lb’ in 2012 and 240 cents/lb in 2014.
However, demand was seen as slack, and there was ‘a stand-off between roasters and producers’, with roasters expecting price reductions as the new crop comes onto the market, and producers ‘betting that roasters will soon need to undertake a big restocking of their inventories, currently at very low levels’.
Similarly, Rabobank in September 2012 increased its short-term forecasts for arabica coffee prices following ‘the poor quality of Brazil’s crop and weak prospects for a Colombian output recovery’. Rabobank projects a 5 cent increase in the price to 170 cents/lb for New York arabica prices in October–December 2012, and price prospects of 175 cents/lb in the first quarter of 2013. This is below Commerzbank estimates and substantially below the recent peak of 300 cents/lb attained in May 2011.
However, Rabobank warned ‘of the risk of lower international arabica prices’ in the longer term as Brazilian growers ‘invest in fresh trees and measures to improve yield’. According to industry analysts, Brazilian output could surge by as much as 6 million bags in the coming 8 years, ‘even with only modest yield gains’. Rabobank sees ‘the potential of oversupply in the global arabica market as a major risk’.
Given the potential for oversupply, growing attention is being paid in East Africa to the production of quality-differentiated coffee. In August, press reports highlighted the growing success being enjoyed by Rwandan coffee exports in speciality coffee markets, with 27% of exports falling into this category. This is reported to be resulting in ‘a considerable increase in profits per kilo’. Earnings from speciality coffee sales have reached over US$12 million from zero in 2001, growing at 10% per annum in recent years.
Given the constraints on overall production, increasing attention is being paid to quality issues. According to reports on the ‘How we made it in Africa’ website, for a product to be graded as speciality, ‘freshly-picked coffee cherries must be fully washed, score above 85 points by expertly trained coffee “cuppers”, and be traceable to their exact origin’ . Speciality coffee, which ‘makes up just 3% of the global coffee market’ by volume, ‘commands an additional 15% to 25% premium on top of current market prices’. In addition, better organisation of farmers’ cooperatives and investments in coffee farms, through a number of international development projects, are helping to put more money directly into the hands of producers.
In 2011, sales of fair-trade coffee globally rose by 12% despite the economic downturn, while the market for sustainably produced coffee increased by more than 433% between 2004 and 2009. Eight per cent of coffee sales worldwide now carry sustainable production labels. This constitutes a further area for product differentiation, with scope for enhancing revenues of coffee producers.
Editorial comment
Views on what directions coffee markets will take are necessarily divergent, as the world coffee market is going through a major revolution. Coffee producing countries are increasingly becoming major coffee consuming countries with, according to ICO figures, consumption growing from 26.3 million 60-kg bags in 2000 to 41.3 million in 2010.
For example, in addition to being the world’s largest producer, Brazil is now also the number two consumer of coffee, with 53.3% of Brazilian production consumed domestically. Similarly, Indonesia now consumes 38% of its own production, up from 24% in 2000, while India now consumes 32.7% of its own production.
In China, meanwhile, household coffee consumption is reportedly registering an annual increase of 40%, while annual retail sales are growing by over 25%. This is setting China on its way to becoming the world’s leading consumer of coffee. However, it is unclear what pattern of demand will dominate in China – whether Chinese consumers will favour coffee that is mild and full of flavour, to be consumed in a relaxed manner, or strong and black to provide a morning boost.
More broadly, will consumers in emerging markets prefer nationally produced and branded coffee, with national geographical origins emerging similar to the French appellations for wine, or will they prefer global brands or even speciality coffees?
Major coffee retailers are already seeking to both anticipate and shape demand. Starbucks opened its first outlet in India on 19 October, and also plans to increase its outlets in China from the current 570 to 1,500 by 2015. Nespresso, Costa Coffee and Blenz are also seeking to position themselves. While these are all global brands, the launch of emerging countries’ coffee companies could stimulate very different consumption trends. This would serve to further complicate the marketing challenges facing ACP coffee producers in seeking to effectively engage with rapidly evolving coffee markets across the globe.
Against this background, regional initiatives to brand and position speciality coffees similar to the successful EU-supported Caribbean rum programme could potentially prove of value, provided that strong local private sector participation is effectively mobilised.
