2015 Coffee Outlook: Brazilian Rains & African Gains

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The growing concentration of production is now finally leading to a greater focus on lower-tier producers within Central America and Africa. The macro landscape supports the expansion of production in these areas to offset risks faced by the top three, but the lack of state support for farmers and distributors, coupled with weaker domestic demand and high transportation costs makes the math a bit more complicated. 

Globally, incomes are rising and middle classes are emerging—realities that suggest that the consumer market for coffee, thus far somewhat untapped, is likely to evolve. This changing landscape is exciting for the growing set of retail entrepreneurs around the world, especially within Africa. On the other hand, conglomerates, such as Starbucks, poor infrastructure, and a lack of short-term incentives for producers pose considerable obstacles for emerging retailers in the space. Through interviews with a coffee washing station and a pioneer retail entrepreneur, we dig deeper to understand the factors that are at play within the African coffee landscape from the macro, supply, and demand perspectives. 



According to legend, the story of coffee all started with some excitable goats. Kaldi, a 9th-century Ethiopian goatherd, observed his animals acting erratically after chewing red berries from a tall bush. A concerned Kaldi presented the berries to the chief monk, who, deducing that they were satanic in origin, threw them into a fire. The monks soon noticed a sweet roasting aroma, and under orders from the chief Monk, crushed the beans and covered them with hot water for preservation: the first cup of coffee was brewed. 

The berries that Kaldi discovered were in all likelihood coffea arabica—one of the two major species of the plant. Coffea arabica, or Arabica coffee, has a growth period of 7-9 months, requires at least 1500 millimeters of rainfall, and grows best between 1000-2000 meters above sea level. Its brew is typically considered to have acidic characteristics. The other major species, coffea canephora, or Robusta coffee, has a comparatively longer growth period of 10 to 11 months, requires at least 2000 millimeters of rainfall, and grows best between 0-700 meters above sea level; Robusta brews are noted to have bitter characteristics. 

Arabica coffee is grown throughout East and Central Africa, South and Central America and India. Robusta production is heavily concentrated to South-East Asia, but also occurs in West and Central Africa, and even Brazil. In 1960/1, over 80% of total coffee produced was Arabica, while the less popular Robusta species contributed the remaining 20%. With recent supply struggles for Brazilian Arabica and increased non-traditional demand for Robusta, namely through the variety’s suitability for use in instant coffee and espresso pods, the production gap between the two has never been tighter—the 2014/15 projection indicates that just 55% of the world’s coffee will be Arabica. 

Despite what ninth-century Abyssinian monks might say, there is now little debate around the sanctity of coffee. The debate around coffee has now grown more complex: will Robusta blends be well received by consumers? How do producers deal with diseases like berry disease and leaf rust? How can the global market better protect itself from supply shocks? 

Outside of Asia—where Robusta is traditionally consumed—demand for the blend has grown thanks to the changing nature of coffee consumption. Robusta, which is traditionally cheaper and oftentimes of lower quality than Arabica, also typically has more caffeine—making it perfect for high-caffeine, inexpensive instant coffee, demand for which is growing worldwide. Further, the increased efficiency from single-serve machines has also translated to higher demand for Robusta. The latter phenomenon has most notably widened a natural arbitrage between Arabica coffee futures contracts, which were historically traded on the New York Board of Trade (NYBOT), and Robusta coffee futures contracts, which are traded on the London International Financial Futures and Options Exchange (LIFFE); after a series of mergers and acquisitions, both Arabica and Robusta futures now ultimately trade under the Intercontinental Exchange Group (ICE). 

Brazilian rains 

Southern and Eastern Brazil—including the country’s coffee capital, the state of Minas Gerais—have suffered through unprecedented droughts, which have significantly diminished output. To put these losses in perspective, the amount of coffee that Brazil lost to drought in 2014/15 will likely be greater than Colombian, Indonesian, or Ethiopian annual outputs for the same period. The latest estimates from Brazil’s Companhia Nacional de Abastecimento (CONAB) peg output at 45.3 million bags (coffee output is expressed in 60-kilogram bags), 15 million bags below maximum 2014/15 projections. 

Since the turn of the century (2011 being a notable exception), the coffee market had been in a period of oversupply and depressed prices, and countries producing at a small or medium scale suffered as a result of seemingly ever-increasing output from the top producers. The Brazilian drought, and the production shortfall it has caused, has translated into elevated Arabica prices for much of 2014 and into 2015. 

Robusta prices also increased during 2014, though to a lesser magnitude. Robusta prices rose 13% through 2014, supported by well-financed Vietnamese farmers holding back exports, but ironically countered by a bumper crop in Brazil; the main Brazilian Robusta production region is the state of Espirito Santo, due east of Minas Gerais, which experienced favorable weather. Additionally, Central American producers including Costa Rica and Guatemala are currently struggling with Roya disease, a leaf fungus detrimental to both coffee varieties, but more likely to affect Arabica. Roya-driven shortages in Central American stocks, which typically serve as a supplement to lackluster Brazilian supply, will only exacerbate the short-term supply issues. 

Looking ahead to the 2015/16 crop, weather remains a top concern. The Climate Prediction Center maintains its El Niño probability forecast of 50% to 60% odds of occurrence; a mild El Niño would have a bearish effect on coffee prices, as this would likely lead to drier conditions across Colombia and Peru—limiting Roya disease potential—and wetter conditions across South-East Brazil. However, it is important to note that the new crop is already in development stages in Brazil, as cultivation occurs between October and April, and February is often when the flowers begin to bud. The recent Brazilian rains have only grazed the southern boundaries of the coffee belt. Long-term model guidance indicates a potential dry spell for the end of February into March, with more deficits occurring across Minas Gerais through the end of the rainy season. It is also critical to note that the trees are in much worse condition than they were last year, as reservoirs are below crucial thresholds and branch growth has been stunted, which may mean that trees are unable to hold onto their cherries through maturation. 

Distribution of Caffeine: Concentrated 

The world’s top-three producers, Brazil, Vietnam and Colombia, have consistently provided reliable supplies for the market throughout recent memory. But these countries are holding an increasing share of total global production, which means that if any of them fail to produce at normal levels, the effect can be monumental—a fact which became all-too apparent last year. Brazil, Vietnam, and Colombia now produce upwards of 63.2% of the market’s supply; though concentration among producers has always existed, the only other time in history it was at such a magnitude was in 1961/62, when Brazil, Colombia, and Ethiopia claimed 64.8% of the market’s share. 

In the Arabica market, 8 out of the top 10 producers are in Latin America, and those countries account for nearly half of the world’s total Arabica production. Ethiopia is one of the two non-Latin American countries in the top ten, producing an estimated 7.6% of total Arabica in 2014/15. Sub-Saharan Africa’s contribution to global Arabica production reached a peak of 15.6% market share in 1976/77 before slipping to the single digits for much of the past decade. The region’s share has, however, been steadily increasing and is forecasted grow to 11.2% for 2014/15 due to another record year for Ethiopia, as well as a recent trend of rapid growth for Uganda. 

Vietnam is the world’s top Robusta producer, responsible for 42.1% of total production in 2014/15. Although Vietnam represents a highly concentrated top-producer, the Robusta market is otherwise a bit more diversified. Four of the top-ten Robusta producers are in Africa: Uganda, Ivory Coast, Tanzania, and Madagascar. These four countries will collectively account for 9.3% of total Robusta in 2014/15. Rwanda and Burundi were once larger producers, but land pressure and depressed prices have given farmers little incentive to select coffee over other cash crops. Sub-Saharan Africa used to produce most of the world’s Robusta: in 1960/1, 83.4% of total Robusta came from the region, but this proportion has since been in free-fall, reaching a low of 9.8% in 2013/14. Much of this loss in market share can be attributed to the drop in production in just one country: Ivory Coast, once the world’s top Robusta producer. 

Once Ivory Coast’s political strongman president Houphouët-Boigny died after 30 years in power, the country descended into an uncertainty that ultimately culminated in civil war. The conflict was a major blow to the country’s coffee and cocoa industries—and as a result, to the country’s economy as a whole. 

Prior to this unrest, Ivory Coast consistently harvested more than 3 million bags of Robusta coffee, and in peak years, produced more than 5 million bags. The descent into war can be clearly identified via production figures: in 2000/01, Ivory Coast produced 5.1 million bags; in 2001/02, this figure dropped to 3.5 million; and in 2002/03, it produced just 1.8 million bags. Unfortunately, this downward trend has largely continued, and current Ivorian production struggles to exceed 1.6 million bags, nearly a 70% decline within a decade for what was once Africa’s top producer. 

African gains 

An obvious way Africa can take advantage of future weather volatility and growing global consumption is to simply produce more coffee. Unfortunately, a lack of government support in many places has made it uneconomical for farmers to do this. At the 12th Annual African Fine Coffee Conference & Exhibition, hosted by the African Fine Coffee Association (AFCA), which is being held this week in Nairobi, Kenya’s Minister of Agriculture, Felix Koskei, lamented a missed opportunity for Africa when he stated, “the decline in our production is happening against a backdrop of an increase in world coffee consumption which is growing at an average of 2 percent.” Kenya’s coffee sector in particular has been impacted by urban development, as coffee farmers on city edges, failing to see sufficient profit, have been selling their plantations to real estate developers. AFCA’s chairman, Abdullah Bagersh, noted that governments need to support the industry in order to stimulate production, and urged closer monitoring and support of local consumption to ensure farmers have access to a market. 

Ethiopia is one major exception to the downward trend in African coffee production. This is due to coffee’s centrality to Ethiopian culture, as well as its vitality to Ethiopian export revenues. At the end of 2014, the chair of the Ethiopian Coffee Exporters’ Association, Hussein Agraw, projected 2014/15 exports to rise to nearly 4 million bags, which would garner roughly $862 million—roughly 30% of total Ethiopian export revenue, and a 23.6% increase from 2013/14. Over the past 10 years, Ethiopia has increased output by 56.1%, from 4.1 million bags to 6.3 million bags. This year, production is expected to reach a record 6.35 million bags, and that which is not exported will be consumed domestically. 

Important to note is that farmers and governments need to have a long-term commitment to supporting production increases: although one mature coffee plant can produce roughly 2000 cherries per year (approximately 1/120 of a 60-kg bag of coffee), it takes three to four years for a coffee plant to reach maturity, and fifteen years until the plant’s yields drop towards zero. As a result, any proactive efforts to increase supply cannot expect an ROI until that three to four year maturation process has completed. 

As mentioned, Ethiopia’s marked success in coffee has also been driven by a strong consumer base—close to 40% of production is consumed domestically, giving farmers the reassurance of a clear local market. African consumption overall is highly concentrated, as Ethiopia and Algeria comprise about two-thirds of the continent’s total consumption. Although the Ethiopian domestic consumer base has remained consistent, the nature of its export market has been shifting. Historically, the country would export more than 50% of its coffee to Europe, but this figure is now closer to one third. Ethiopia now taps into emerging consumer coffee markets, notably Saudi Arabia, to whom Ethiopia exports 18% of its beans. Its strong domestic consumer base coupled with an increasingly diversified exporter base hedges Ethiopia from several macroeconomic headwinds, like decreased incomes or an over-supplied market. 

Protection from an over-supplied market is a particularly important trait, as the global coffee market over the past few years has been characterized by over-supply. The largest producers control prices, leaving smaller producers at their mercy. As a result, several smaller producers have simply exited the market, turning instead to more profitable crops over which they can exercise more control over prices; Tanzania, Rwanda, and Burundi are all good examples of this. Other small producers have coped in a different way: rather than chasing after volumes, they are chasing after exceptional quality, for which consumers may be willing to pay higher prices. 

A special cup 

This quality-over-quantity mindset has led to the creation of the specialty coffee market—an arena filled with small, niche producers who produce and market high quality, often certified, beans. Through exclusive interviews with Gilbert Gatali of KZNoir Ventures, a processor and distributor of coffee in Rwanda; and Ngozi Dozie, a retail café entrepreneur, we piece together both the supply and demand factors that are at play in the African specialty market. 

Gilbert Gatali is the owner of KZNoir Ventures, a company which owns and operates coffee washing stations across Rwanda. Washing stations process raw coffee cherries into finished product: first, the cherries are placed in a tank, where underdeveloped cherries float to the surface and are skimmed out. Next, the cherries are spread on a flat surface and under or overripe cherries are removed. Weight is usually then recorded, and acts as a receipt for a farmer’s delivery. From there, the cherries are de-pulped from the bean, fermented, agitated, soaked again, and graded onto drying tables. Pre-drying often occurs in the shade, as not to crack the beans. The beans are then moved to sunlight where full drying can take anywhere from one to three weeks, and once that is complete, the beans can be bagged and exported. 

Gatali has an intimate knowledge of the specialty coffee market. He notes that the market operates on a contract basis, with export contracts formed with a slew of market participants, ranging from large conglomerate retailers like Starbucks, to smaller conglomerate retailers, to “mom and pop” shops. Large-volume contracts, typically those agreed with the biggest retailers, are often done at a price similar to the world price, with a small built-in premium. As such, macro conditions, like the Brazilian drought, can impact the exporters’ bottom line profit. Unfortunately, it has been more often the case that macro events depress prices and hurt these exporters—bumper crop after bumper crop for Brazil and Vietnam do not offer any good news for smaller producers. Specialty exporters are able to command greater premiums on smaller volumes traded with small retailers or mom and pop shops, and as such, this is a consumer base they would like to grow. For smaller countries like Rwanda, the business strategy for producers and processors alike is clear—operate in niche markets and command greater price for greater quality. 

Though the vast majority of Rwandan coffee exports leave the continent, there is an emerging domestic consumer market. In 2013, for example, the upscale Kigali café, Brioche was opened, making it the first of its kind in the Rwandan capital. Interest has been growing steadily, and the café now has several stores across the city. African domestic coffee consumption—with of course the exception of Ethiopia—has been a massive obstacle for producers to overcome, as having local demand increases synergies across the value chain and attracts new market entrants. The gap between producers and potential consumers has created a massive opportunity for African retail entrepreneurs who believe Africans may soon grow to love the beverage. 

Café Neo, a Lagos-based coffee retailer, is an example of such retail entrepreneurship. In a Gro interview with Ngozi Dozie, co-founder of Café Neo, Dozie noted that above all, building a brand around the café environment is instrumental to the future of African retail. He explains that many African repatriates developed a taste for coffee during their time away from the continent are easy sells requiring little marketing. The interesting opportunity from a demand perspective lies within the instant coffee market; rather than whipping up a quick sachet at home, Dozie hopes instant coffee drinkers will come to appreciate the comfortable furniture, Wi-Fi, jazz, and creative conversations that exist in a good café. When that environment is combined with a rising middle class and growing incomes, it becomes even more likely that consumers will try an espresso or cappuccino, which may present a new potential upside to the business. Dozie shares perhaps the most interesting consumer opportunity of all—the lack of high-end fast food merchants in sub-Saharan Africa. Traditional fast food with low price points exist, as do upscale boutique restaurants with high price points, yet there are few if any options in the middle where a consumer can enjoy service at a lower price point without being rushed out the door. 


Towards the end of the twentieth century and through much of the current twenty-first century, over-supply from the world’s largest coffee producers has outpaced and out-priced smaller producers. Farmers within these smaller-producing countries, like Kenya, have identified other crops for which prices are more favorable or at least manageable, and as such, these coffee markets have diminished over time. At the same time, a relatively new niche marketplace is flourishing across several of these smaller African producers, most recently Rwanda. 

The consequences of a supply drop from a leading producer was made apparent in 2014/15, and those impacts will very likely continue to be felt throughout 2015/16 and perhaps even into 2016/17. Though the Brazilian drought benefited global producers with a more dynamic pricing scheme, the reality is that had a once-in-a-century drought not plagued Minas Gerais, coffee prices would have likely remained depressed under US 200 cents per pound. 

Producers like Ivory Coast have already demonstrated that they are able to produce large amounts of coffee, so the question is not about whether this is possible, but rather, about whether it is likely, and what is necessary to make it so. Incentives must be in place in order to support farmers in making coffee profitable. Brazil and Colombia harvested 7% and 6% less area in 2012 than in 2007, respectively, while Ethiopia and Rwanda increased their areas harvested by 75% and 45%, respectively. Ethiopia’s increase in area devoted to coffee resulted in a 56% increase in total production over that same five-year period, a difference of nearly 2.25 million bags and a 1.5% contribution to total world output. 

The future for African coffee holds many possibilities. Should supply disruptions from mega-producers continue into the future—which is likely given that global weather patterns are growing more volatile—the market will have to diversify, which in turn should allow African producers to play a larger role. If regional producers like Ethiopia and Uganda are able to boost production and have a greater say in the global market, and should domestic consumption grow within the continent, even smaller producers, such as Kenya and Rwanda, may be able to grow enough to become relevant on a global scale. Though much of this remains to be seen, the opportunities are evident, and the time is ripe. 

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