Quality and Supply Driven Markets – The Future of Washed Arabica Coffee
Coffee in general and specialty coffee in particular, is a cyclical business. From the natural rhythms of planting, pruning and harvesting to the start up, growth and consolidation of roasters and retailers, this cyclical nature plays out over and over again, and those of us getting longer in the tooth recognize and accept these cycles as a part of the business.
The year we saw what would appear to be some reaffirmations of this cyclical nature of the coffee business. In particular, after two years of tight supply and elevated prices, we saw coffee stocks increase and prices begin to subside. This is typical of coffees history, with high prices driven by tight supply spurring more intensive husbandry, new plantings and renovation of existing farms. The resulting increase in supply drives price down, and if the cycle continues over time the market pushes to new bottoms before the cycle continues and husbandry declines, new plantings cease, and the supply and demand equation slowly turns pushing prices higher again. There is nothing new under the sun here, and it is very tempting to accept this as the nature of the business.
On closer inspection, there is something fundamentally different in the current cycle. This time, while overall supply of coffee has increased somewhat, the real story is not the downward price pressure of increased supply of coffee to the market. The story of real interest is tied up in the kinds of coffees being produced, exported and roasted in the marketplace.
Total production of coffee in the 2011/12 crop year was nearly 135 million bags of coffee to satisfy a demand of roughly 140 million bags worldwide. Closer examination reveals two downward drivers on price. First, is a 2012/13 crop prediction for upwards of 146 million bags, producing the first substantial surplus in supply since 2006. The second is the change in the mix of both supply and demand by coffee type. In the 2011/12 crop year robusta production accounted for over 53 million bags, or 40% of the world total. Brazil and other natural arabicas accounted for another 41 million bags Colombian and other milds just 40 million bags. The resulting mix on the world market is less than 30% washed Arabica and over 70% naturals and robustas. The overall result was significant downturn in both the ICO indicator price and the benchmark New York ‘C’ price. In spite of a diminished production of the underlying product, washed Arabica coffee, forecast for the coming crop year, prices remain low as roasters turned to ever increasing commitments to coffees other than washed Arabica.
Much of this change in the mix can be ascribed to increasing consumption in traditional producing countries, where price sensitivity and entry level consumption patterns push greater consumption of lower priced and/or qualities. Some small measure is also attributable to mature markets, particularly in Europe, demonstrating a willingness to sacrifice quality for price and pushing consumer expectations downwards. This is another cycle in itself, where decreasing quality drags down consumption, a scenario played out in the US in the not distant past. This confluence of decreasing prices, changes in production mix and increasing aggregate supply create an unusual, decidedly non-cyclical scenario in which quality is hard to find and producers struggle to find a balance between the costs of quality and disappearing price incentives.
The cyclical nature of growth and consolidation in the retail markets also had some interesting manifestations this year, most notably the acquisitions of Peet’s Coffee and Tea and Caribou Coffee by the Joh. A. Benckiser Group. In the independent specialty world smaller companies continued to grow, with new capital infusions, perhaps most notably Blue Bottle Coffee, driving expansion in a variety of markets.
The SCAA continue to work to support and inform the specialty coffee community, and we will be adding more insights into the supply and demand scenario and its implications for specialty coffee as the new year begins. We will also be continuing our work from last year in understanding the consumer’s relationship to specialty coffee and will have new information to share on that topic.
Ric Rhinehart is currently serving as the Executive Director of the Specialty Coffee Association of America. Prior to taking on this position he was the President of a Los Angeles, California based roaster and retailer. Mr. Rhinehart has over the past twenty years held executive positions in several coffee & tea firms.