Who's Winning and Who's Losing as Coffee Prices Slump

Coffee Industry Makeup

Growers worldwide produced a combined 174.5 million 60 kg bags of coffee last year (10.47 million tonnes), up 28% from 10 years earlier. Brazil, with a 37% share, is the biggest producer, followed by Vietnam and Colombia. Brazil has an even bigger share of production, 46%, of arabica beans, and is the dominant exporter of this popular variety. A host of smaller players, from Honduras to Indonesia and Ethiopia, grow the balance of the world’s coffee.

The above tree map breaks down arabica coffee production (60 kg bags) by country. Brazil (blue) dominates the market, accounting for roughly 46% of global production. 

The rising production has been well received by consumers, who drank 31% more coffee last year than 10 years earlier. More people moving to cities worldwide has helped stir this increase, as has a growing taste for artisanal coffee drinks, especially in Western countries. This latter trend has encouraged some producers to expand plantings of robusta beans, a more bitter variety typically used in espresso.

Brazil's Advantage

Brazil has taken a dominant role in the coffee world, increasing efficiency and expanding production in the face of declining prices. The country’s presence looms large, as the price of coffee routinely tracks Brazil's production and currency exchange rate.

Brazil’s leg up in the worldwide coffee rivalry is a ridiculously low currency exchange rate. The Brazilian real plunged 57% against the US dollar over the past decade, due in part to government mismanagement and malfeasance. For industries like coffee that export much of their production, while paying mostly in local currency to produce those goods, a weakening currency is a distinct advantage, when one dollar buys ever more reals.

The chart above compares Brazil’s annual production of arabica coffee (green line) to the Brazilian real’s falling exchange rate (blue line). Over the past decade, the value of the real against the US dollar has declined. Because coffee exports are priced in US dollars, sales from Brazil bring in more reals, which have been reinvested over time into increasing production efficiency.

Brazil isn’t the only coffee producing country to have had the “good fortune” of a falling currency. Colombia’s peso is down 45% against the US dollar in the past 10 years, for example, and the Honduran lempira fell 24%.

But Brazil had other things going for it. During an earlier cycle of strong coffee prices from 2010 to 2013, Brazil’s large coffee plantations invested in cost-saving efficiencies that come with economies of scale. Irrigation projects and mechanized harvesting adoption, among other moves, helped increase production per unit of area. Brazil’s coffee yields rose 50%, to 1.49 tonnes per hectare, in the 10 years through 2017. That compares with static or even declining yields in other countries, such as in Guatemala and Honduras. To be sure, Brazil’s overall gains have accrued mainly to the country’s large, industrialized producers.

The chart above shows Brazilian coffee yields (orange line) have increased much faster than yields in other Central and South American coffee-producing countries. When coffee prices were favorable in the past, Brazil invested in irrigation projects and mechanized harvesting on large plantations, increasing efficiency and driving down production costs. 

Guatemala’s Plight

Guatemalan coffee is grown at higher altitudes than Brazilian coffee, which slows development and concentrates flavor. This difference in elevation produces some of the highest-quality beans available on the market. Guatemalan beans, along with other premium beans grown in places such as Colombia and Panama, typically fetch a higher price than Brazilian beans.

However, because prices for Brazilian beans are currently so low, buyers are reluctant to shell out additional cash for higher-quality beans. Small producers in countries like Guatemala continue to lobby companies to purchase more of their beans.

The chart above shows the composite US prices for arabica coffee beans from Brazil (blue) and from Colombia (red) as well as the price for robusta beans (green). The prices of both arabica varieties and robusta reached 14-year and nine-year lows, respectively, in early May. 

Unlike in Brazil, most coffee-producing farms in Guatemala and elsewhere in Central and South America are small. Colombia has more than half a million coffee farms, 95% of which cover less than 5 hectares each. Favorable prices in prior years, and urgency to keep pace with Brazil’s increasing dominance, incentivized growers in these countries to plant more coffee trees, which contributed to the oversupply seen on the market today.

Many of these farms still harvest by hand. Low incomes, and consequent lack of investment, have left trees more vulnerable to threats from disease, such as leaf rust, which decimated farms throughout Central America in 2012. Roughly 20% of Guatemala’s crop was lost to leaf rust outbreak. The fallout persists, and Guatemalan farmers are expected to produce 15% less coffee in 2019 due to complications from the infestation which reduces yield. What’s more, tree renovation, including buying and planting rust resistant varieties, continues to push up production costs by an average of 28% on Guatemalan farms, according to USDA estimates.

Seeking Diversification

In response, some Guatemalan coffee farmers have added shade tree crops like avocado and nuts that can provide revenue as well as protect coffee trees from too much sunlight. More producers also are joining coffee cooperatives and other organizations, such as ANACAFE, Guatemala’s national coffee growers association, which facilitates direct connections to business opportunities in export markets.

In Colombia, an estimated 40,000 hectares of planted coffee area have been lost over the past 18 months as producers look to expand into more lucrative crops, while those still hanging on to coffee farms are receiving government subsidies in the interim until prices recover.

Producers in several Central American countries, where virtually all coffee produced is arabica, are considering growing more robusta beans. Robusta production currently is concentrated mainly in Indonesia and Vietnam. Although robusta is considered a lower quality bean than arabica, and fetches a lower price in the market, it produces higher yields and can grow at lower elevations. Robusta, used in making espresso, is much more bitter, and has a higher caffeine content than arabica. A benefit: Robusta often has a lower cost of production because its high caffeine content serves as a natural deterrent to pests and the trees can thrive in more varied growing conditions than can arabica.

The chart above details monthly exports of arabica coffee from major Central and South American production centers. Brazil (purple line) routinely leads the charge, exporting a record 39.72 million 60-kg bags during the 2018 market year. 

Brazil’s robusta production took off in earnest during the early 2000s, and now accounts for roughly 31% of total coffee production. In 2018, the price of robusta beans in the US declined 14% according to the International Coffee Organization, much less than the 27.5% drop for arabica. Still, Central America has long been reluctant to embrace robusta—a ban on the trees was only lifted last year in Costa Rica. But expanding into robusta production could allow Central American countries to compete with Indonesia and Vietnam by allowing big American buyers to source closer to home.

Conclusion

A return to more normal coffee prices will be good news for producers worldwide. But countries such as Brazil, which took advantage of industry cycles to strengthen their position, will benefit the most. One possible outcome is the further development of niche consumer markets, such as artisanal and specialized beans, sold directly to roasters in export markets. Last week, industry representatives from major coffee-producing nations met in Brazil at the World Coffee Producers Forum to hash out possible price remedies. The group decided to form a legal entity intended to increase market transparency with respect to production costs and coffee quality data to ensure fairer price formulation. Colombia, for its part, announced a stabilization fund that will kick in to rescue farmers when international prices fall below production costs. Such limited measures, however, still leave many coffee producers globally straining to find a sustainable solution to the growing glut of coffee and unfavorable currency exchange.