Colombian Coffee Growers Federation Luis Munoz, Chief Executive The world´s co undefined
ffee market is facing a significant transformation. New consumers are entering the market in Latin America, Asia and Eastern Europe, supporting significant growth in the instant category. Traditional markets continue to grow, although at lower rates.
However, this growth sets new dynamics, especially for those involved in the production and distribution of high-quality mild Arabica beans. While instant coffee is a very interesting market, the mild Arabica bean segment allows for more specialisation and single origin propositions. More competition in this segment brings about the need for differentiation.
The premium coffee segment, specialty coffee shops in particular, is also making significant inroads in Asia and Latin America. Juan Valdez, the Colombian Coffee Grower’s brand, recently opened shops in the Middle East and announced plans for expansion into Southeast Asia, while Starbucks wants to capitalise on Latin America’s increased purchasing power by entering the growing Colombian market in 2014.
More mature coffee-consuming nations also show changes in demand. The premium category continues to show dynamism, in both the out-of-home and in-home categories (single-serve brewing systems especially). These trends favour differentiation and the use of more expensive mild Arabica coffees, as their cost can be absorbed more easily in these distribution channels.
From the supply side, there is confidence that mainstream Arabica and Robusta coffees won’t see major challenges. Mild Arabica coffees, however, are a different story. Few countries produce washed Arabica coffee at the high altitudes necessary to generate the flavour profile and acidity that is the backbone of the premium segment. Coffees grown at lower altitudes simply lack the nuances in flavour that sophisticated consumers demand.
These coffees are grown in the mountains near the equatorial line in places such as Central America, Colombia, Peru, Eastern Africa and South India and Indonesia. The origins of what is called the “other mild Arabica segment”, Central America and Peru, are currently experiencing harsh difficulties due to coffee leaf rust fungus. The financial efforts that need to be made to recover from this crisis during a low price cycle will be very difficult for thousands of coffee growers to meet.
Perhaps the most concerted effort to successfully combat rust comes from Colombia, the country that could become the major source of mild coffees in the future. During the past few years, we have renovated plantations with rust resistant varieties and improved productivity. As a result, green coffee buyers from around the world have made Colombia a not-to-miss stop on their international sourcing trips.
Although there may be some variability in mild Arabica premiums, growers will largely face difficult times. Perhaps those who invested in high-quality coffee production over the past few years will be rewarded for their efforts.
4C Association
Melanie Rutten-Sülz, Executive Director
In our journey towards more sustainability we have achieved remarkable progress over the past years with more and more coffee farmers harvesting the fruits of their efforts to apply sustainable agriculture and production practices. And yet we are reminded over and over again of the volatile nature of the coffee market and how it is hampering these efforts. We saw one of its key determining factors – international market prices – plummet once again in 2013.
This year, in our function as the global multi-stakeholder platform for coffee sustainability, the 4C Association appeals for intensified international cooperation among coffee stakeholders to ensure the vitality and sustainability of the sector.
The challenges remain as diverse as they are numerous; and cannot be addressed by any company or organisation on its own. For example, farmers in Central America, as well as in Eastern and Central Africa have battled the damaging effects of the coffee leaf rust disease and the black coffee twig borer respectively, expounded by a complex combination of old coffee trees, insufficient nutrition, inadequate treatment and adverse weather patterns.
The volatile nature of the coffee sector makes it difficult to ensure long-term planning and adequate investment by the most vulnerable in coffee supply chains. Moreover, while coffee exports are generally increasing, farmers have grappled with the continued rise of production costs over the past 10 years. This makes it imperative to increase joint efforts towards strengthening the capacity of those who make their living from coffee and reducing their vulnerability to price instability. As one of its defining characteristics, the 4C Association looks at factors beyond price such as farm productivity (crop output/yields), or the cost of inputs (such as fertilisers, chemicals and implements). The association and its partners assist farmers in improving their agricultural and management practices, work towards the long-term sustainability of their businesses and thus become more resilient to changing market conditions.
Aside from concerns about production, the sector has also seen a new trend develop on the consumption end of the coffee story. We are seeing a rise in demand from emerging markets such as India and China, as well as a rapidly growing taste for coffee in traditional producing countries such as Brazil and Vietnam. This interest is also growing noticeably on the African continent. Moreover, consumers are more informed and savvy than ever before. While I do not foresee a major revolution in sustainability activism, I think we can all agree that consumers will continue to expect basic things of the products they consume – namely, that they are not enjoying these products at the cost of someone else or of the environment. Continued multi-stakeholder engagement for baseline sustainability will therefore go a long way to improve coffee production and processing, ensure fairer market conditions for farmers and allow consumers to enjoy that worry-free cup of coffee that they deserve.
Olam
Vivek Verma, Managing Director
Robusta
An empty terminal market and thin pipeline will support Robusta prices through the first quarter of 2014, leading to firm cash differentials and a stable to rising futures market. Going into the second quarter, the Robusta market is likely to start feeling the weight of a big Robusta crop from Brazil, a weak Arabica market, and a more comfortable pipeline. The Robusta futures market will likely start falling, but cash differentials will likely stay at a slight premium to tenderable parity.
The full weight of the excess Robusta supply will be felt in the third quarter, as the Indonesian and Brazil crops are marketed along with the tail end of the crop from Vietnam. The futures market and cash differentials will likely both be under pressure. A seasonal low in futures prices is expected towards the end of the third quarter or at the beginning of the fourth quarter with cash prices at, or near, tenderable parity.
The futures market will likely stabilise in the fourth quarter, with cash differentials staying near tenderable parity. We could see Robusta futures prices trading as high as US$1800 per metric tonne and as low as US$1300 per metric tonne.
Arabica
In general, mild Arabica differentials are likely to remain steady at or just above tenderable parity for all of 2014, as wide carry in the futures market make owning Arabicas attractive to the trade. Natural Arabica cash differentials are likely t
o firm up during the first half of 2014 due to the put option program in Brazil, which is expected to take a large portion of the good cupping natural Arabica in Brazil off the market. Differentials during the second half of 2014 will be highly contingent on the weather during the harvest in Brazil. Assuming that the Brazil harvest weather is normal/dry, natural Arabica differentials are expected to weaken during the third quarter of 2014 as the large on-cycle crop is marketed.
The narrow NY-London arbitrage and wide carries in NY will continue to support demand for under-grade natural Arabica coffee. This, along with declining availability will lead to a strengthening of under-grade natural Arabica premiums during the first half of 2014.
The NY futures market could stage a rally at the start of 2014 on fund short-covering and index fund buying. However the market will likely trade in a dull sideways pattern throughout a large portion of next year. Recovery is more likely to happen during the last quarter of 2014.
NY futures price range is expected to be between US$1.00 per pound and $1.20 per pound. A brief dip below US$1.00 cannot be ruled out.
Sustainable, Organic and Fair-trade Certified and Specialty segment
And finally, sustainable and speciality coffee will witness a much higher growth rate than the rest with 4C verification programs leading the way in sustainable segments and single serve gourmet category leading the way in the specialty market.
Volcafe
Jan Kees van der Wild, Divisional Managing Director
We’re economic traditionalists. We think it’s all about supply and demand, and it’s clear there has been a little too much of the former over the past year or so.
With the Arabica market in particular starting to trade below the cost of production, even on some high-yielding Brazilian mechanised farms, the question of how both supply and demand will respond to low prices becomes an urgent one.
Supply Response
Brazilian 2014 production has already benefitted from last year’s fertiliser application. Weather in the last three months has been almost perfect for flowering, fruit setting and crop development. However, in this low price environment, we may now see a drop-off in fertilisation, and more hard decisions to prune trees to avoid harvesting costs.
Another important factor is the number of trees planted or renovated throughout the coffee world during the high-price period, which are now coming into production. Many of Colombia’s renovated trees are having a strong first crop now or in the coming months. In addition, trees planted in new areas of Peru, Honduras, and even China will also bear fruit now, and in the 2014 crop.
The 86 million bags of Arabica supply expected for 2013-14 is similar to 2012-13 production. In 2014-15 Colombia and Honduras could produce more coffee, while Brazilian 2014-15 production is still a large question mark.
The lack of inputs and pruning will have a negative effect on Arabica farms which did not replant. We may have to look to 2015-16 production before we see the real consequences of Arabica price trading below costs of production.
Robusta is not yet trading below the average cost of production. We see a record Robusta crop of 28.8 million bags being harvested in Vietnam in 2013-14, and we see no reason not to expect a record Robusta crop from Brazil in 2014-15. Brazil and Vietnam are on opposite biannual cycles, thus overall Robusta supply hovers around 69 million bags in 2013-14 and 2014-15 respectively.
Demand Response
The response of overall coffee demand to price is famously rather inelastic in traditional markets. We see Western Europe with continuing stable demand, and the US showing demand growth derived from demographic change and new ways of drinking coffee.
Non-traditional markets are another story. Any change in price has a marked effect on consumption at this point on the income curve. These markets, particularly Asia, are Robusta markets. The Robusta price has not plunged on the same scale that Arabica has, nor do we expect it to do so. Demand in non-traditional coffee markets should receive a boost from slightly lower Robusta prices, but rates of growth are not excessive, and somewhat balanced by an economic deceleration in these markets.
All in all, we are in a second year of surplus in the Arabica market, while Robusta is balanced. Futures prices should start to price in 2014-15 balances very soon – the crop surveys currently ongoing in Brazil post-flowering are likely to be crucial to market sentiment. Brazil is still the key.
