The International Coffee Organisation reflects on the lasting effects of economic challenges and adverse weather events, and how production and consumption results will fare in 2024.
The dust has settled. Coffee year 2022/23 is over, and the world coffee industry has headed into another new year.
However, there are some challenges that continue to linger, such as those brought about by the COVID-19 pandemic and additional difficulties related to the high cost of living, and decreased disposable income arising in coffee year 2022/23. In the first two years of COVID-19 and following the consequent global economic and social disruptions, world coffee consumption was severely curtailed, falling in coffee year 2019/20, followed by a marginal recovery in coffee year 2020/21.
The pent-up demand was released in coffee year 2021/22 by the near complete removal of all social restrictions around the world, and the sharp global economic bounce back. The International Monetary Fund (IMF) confirmed that the world economy had expanded by an average 4.8 per cent in 2021–22, the highest average growth rate for two consecutive years since the two immediate recovery years following the Great Recession. The subsequent 4.0 per cent or 6.7 million bags growth of world coffee consumption in coffee year 2021/22 was the biggest increase since 4.6 per cent in coffee year 2000/01 and 7.0 million bags in 1978. As a result, world coffee consumption increased to a record high of 176.6 million bags in coffee year 2021/22.
An immediate adjustment followed in coffee year 2022/23 and world coffee consumption decreased to 173.1 million bags, a fall of 2.0 per cent. However, the magnitude and the direction of the adjustment did not adhere strictly to the established path of an ecosystem navigating an impact from an external shock. The usual pattern of a negative shock is negative growth rate, followed initially by a relatively greater positive growth rate, and then a smaller positive growth rate, before returning to its long-term growth rate. The duration of the whole cycle is around four years.
Consumption in coffee year 2022/23 did not faithfully follow the established pattern due to the impact of the high cost of living, falling disposable incomes, and a long stocks drawdown. Despite coffee being a relatively inelastic product, the challenging global economic environment may have had a negative impact on its consumption, counterbalancing the positive growth rates triggered by coffee’s fifth wave, and new generations’ demand.
For 2021, world inflation reached 8.7 per cent, the highest level since 1996 when the inflation rate hit 9.4 per cent. Although the price level did fall in 2022, it dropped only to 6.9 per cent, the second highest level for 27 years. The response of central banks across the world to the high inflation was to carry out a sustained policy of monetary tightening, increasing the nominal interest rates from zero at the end of 2021 to an average 4.9 per cent by the end of September 2023 in the European Union, the United Kingdom, and the United States. This is the highest average reached since 5.8 per cent in 2000. Thus, consumers came under twin pressures: high costs and falling disposable income. In December 2021, the average annual mortgage payment for a terraced house in the UK was £7992 (about US$10,096) while the average salary for 2021 was £31,356 (about US$39,612). The following year, mortgage payments rose to £12,756 (about US$16,114) and salaries to £32,864 (about US$41,517). As a result, the average disposable income of a household in the UK shrank by 13.9 per cent from increased mortgage payments alone.
At the same time, there was large drawdown of stocks, with combined stocks reported by the European Coffee Federation and those held at the Intercontinental Exchange’s warehouses in the United States, falling by 4.8 million bags from 14.5 million to 9.8 million. This drawdown would have reduced the need for purchases on the international market, seemingly reflected as lower and anomalous global consumption rates for coffee year 2022/23.
It’s the weather
Brazil’s coffee industry was in its “on-year” of the biennial production cycle in coffee year 2022/23. However, for an “on-year” the rate of growth was rather muted, increasing by 8.4 per cent. This was because Brazil’s coffee industry is still suffering from the impact of July 2021 frost. At the time, the Brazilian government’s National Supply Company, under the Ministry of Agriculture, Livestock and Food Supply, stated that 70 per cent of all Brazilian coffee had already been harvested for coffee year 2021/22, and thus the impact of the frost was not felt until the following year: coffee year 2022/23.
In India and Colombia, there was too much rain, which beset with persistent, unfavourable weather conditions throughout coffee year 2022/23, leading to a 9.1 per cent decrease in output to 10.7 million bags. This was the third consecutive year of negative growth for Colombia, with the output level down to its lowest since 2012. In Uganda and Côte d’Ivoire, drought played a major part in the origins’ outputs, falling by 6.8 per cent and 64.7 per cent respectively. This is the second consecutive years of falling production for Uganda, decreasing for the same reason it did in coffee year 2021/22. First reported as early February 2022, this drought affected most coffee-growing regions, leading to a lower and shorter harvest in central and eastern parts of Uganda, hence lower output.
Indonesia and Honduras, on the other hand, managed to overcome adverse weather conditions, and for the latter, labour issues, to post increases in their output in coffee year 2022/23. The former saw its production increase by 2.4 per cent to 12.0 million bags despite the La Niña weather phenomenon because of the expansion of the area under coffee, increasing by 71,000 hectares from 2018 to 2022. Honduras, the largest producer in the Caribbean, Central America and Mexico, saw its production increase by 14.7 per cent to 5.7 million bags. The jump came in the face of labour shortages, high fertiliser costs, heavy rain, and reports of a resurgence of coffee leaf rust disease. In regards to labour shortages, according to the Honduran Coffee Exporters’ Association, at least 350,000 pickers are required to harvest coffee across the nation with approximately 50,000 workers coming in from neighbouring countries. Much of the increase in coffee year 2022/23 is due to the biennial production effect, it appears, following the 19.2 per cent decrease in output in coffee year 2021/22.
As a result of these events, the world coffee production increased by 0.1 per cent to 168.2 million bags in coffee year 2022/23.
What now?
Well, weather still. Adverse weather conditions, first noted in coffee year 2022/23 and continuing into coffee year 2023/24, will have a negative impact on production. The anticipated El Niño weather event is set to dampen the outlook in Asia, especially in Indonesia. Meanwhile, Vietnam is expected to benefit from the drier/hotter weather as irrigation mitigates the reduced precipitation. The biennial production effect, however, will play a decisive role in the outlook, especially from Brazil and the Arabicas, as the impact of the July 2021 frost continues to be resolved. Coffee year 2023/24 is anticipated to be an exceptional off-biennial year in Brazil, feeling more like a good on-biennial following an average on-biennial year. Status quo on labour and capital availabilities are especially pertinent for the outlooks of Caribbean, Central American, and Mexican origins.
As for consumption, deceleration of the growth of the world economy in 2024, based on the October coffee year 2023 economic outlook by the IMF, will inform growth in coffee consumption.
However, the pent-up demand of the COVID-19 years are now thought to have dissipated and will not feature in the factors influencing coffee year 2023/24 consumption outlook. Impact of the high cost of living on coffee consumption will be mitigated through changes in consumption patterns, with consumers possibly switching from the most costly to the most economical forms of coffee.
As a result of these factors, world coffee production is expected to increase by 5.8 per cent to 178.0 million bags in coffee year 2023/24.
World coffee consumption is expected to grow by 2.2 per cent to 177.0 million bags, with non-producing countries to make the biggest contribution to the overall increase. As such, the world coffee market is expected to run a small surplus in coffee year 2023/24. GCR
The outlook is an extract from the newest publication of the Statistics Section of the Secretariat of the International Coffee Organization, the Coffee Report and Outlook.
For more information, visit www.icocoffee.org
This article was first published in the January/February 2024 edition of Global Coffee Report. Read more HERE.
