Winners and Losers in the Coffee Economy 10
Coffee beans on ground coffee background


  • The benefits of the strong rebound in robusta coffee prices will be felt most strongly in Africa. They will support the incomes of drought-affected farmers in Indonesia and Vietnam, but Brazilian robusta growers face several years of low incomes.
  • Arabica prices have also risen, although not as sharply, and they are probably more vulnerable to retrenchment. A strong harvest is forecast for Brazilian arabica in the year to September 2017, while the Columbian harvest is expected to be flat.

Arabica farmers are unlikely to have received much benefit from this year’s price rally, and Central American producers in particular are suffering. Perhaps the only beneficiaries of recent price action are Honduran growers.

After discussing 2016 price developments, this article concludes with some general observations on the rather dispiriting economics of coffee production.

With a value at source of some $180 billion in the year ended September 2016, coffee is the seventh most valuable (legal) agricultural commodity and a substantial contributor to the economies of many producing countries. Large economies such as those of Brazil or Indonesia no longer rely as heavily on coffee as they once did, and are consuming increasing portions of their own production domestically. But coffee exports’ $6 billion contribution to the Brazilian economy and $2 billion to Indonesia’s last year were hardly unwelcome. In the case of some producing countries, coffee’s contribution to their economies is vital:

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2016 Coffee Price Developments

Average monthly coffee prices at the farm gate bottomed 3¢ above their long-term average in January 2016, but by November were 35% higher than that average:

While prices have a long way to go before they repeat their 2011 bonanza, aggregate prices in November were better than they have been in all but 40 of the previous 252 months. Total production volume increased by 0.9% in the year ended September 2016. Since about 60% of world supply is consumed outside the area of production, coffee is priced in a global marketplace where price is dictated primarily by harvest outcomes in the three or four largest producing countries, which between them account for nearly 70% of world tonnage.

A composite indicator can conceal nearly as much as it reveals. Figure Five below, detailing the breakdown between arabica and robusta production, only hints at the complexity of coffee supply, and even Figure Two, while detailed, still gives only a general impression.

The price composites for the three principal arabica categories shown in Figure Two are obviously fairly volatile. The main reason for this volatility ─ well in excess of that displayed by the Standard & Poor’s 500 Index over the same period ─ is the vagaries of coffee production, particularly the outcome of the all-important Brazilian and Colombian arabica harvests. ‘Other Milds’ are less volatile than the other arabica classifications because the indicator draws on a wider range of producing sources: none of them dominate the composite, so their disparate fortunes tend to offset each other and reduce the indicator’s volatility.

Robusta Price Developments

Vietnam produces 44% of the world robusta crop by tonnage; Brazil is the next-largest producer at 21%, but domestic consumption absorbs the bulk of the Brazilian robusta crop. So Indonesia (18% of global robusta production) India (9%) and Uganda (6%) are more important than Brazil in export markets. This is reinforced by the fact that virtually all of Vietnam’s crop is exported (Vietnamese are tea-drinkers, as are Indians), while 27% of Indonesia’s production is consumed domestically. So Vietnam provides about 55% of the robusta tonnage available on world markets and Indonesia 13%. Consequently, the influence of the Vietnamese crop on robusta export prices (as tracked by coffee futures, rather than the ICO’s farm gate indicator) is determinant.

Vietnam’s and Indonesia’s market leadership has recently been good news for other robusta growers. Hot, dry weather from January through April 2016 is expected to reduce robusta yields and cause Vietnamese production to decline by nearly 7%, while Indonesian production is expected to decline by 15% at the same time that domestic consumption is expected to continue its rising trend, and Indian production is expected to be flat. The result is 41% increase in monthly average farm gate robusta prices since February shown in Figure Two.

The price of robusta in export markets rose even more dramatically: monthly average prices increased 55% over the same period. From their January 20 bottom to their peak on November 7th, daily prices rose 71%. The correction arrived when Vietnam announced that it would release inventoried stocks: daily prices at source reacted similarly.

While prices may well retreat further, it is unlikely that they will retrace completely: Vietnam’s total stocks only amount to about this year’s expected harvest shortfall, and it certainly will not liquidate its entire inventory. No major producer is expected to increase production in the 2016/17 growing season, and there is serious concern about Brazil’s 2016/17 and 2017/18 robusta crops, because of extended drought in the Espirito Santo region where nearly three quarters of Brazil’s robusta is grown.

The price increases should offset the effect of weak yields on the incomes of Vietnamese and Indonesian robusta producers, while times will remain hard for Brazilian ones. Assuming robusta prices do not retreat too drastically, strong prices in an environment of restrained supply is very good news for smaller producing countries, most of which are in Africa. Uganda in particular is enjoying these higher prices, since the previous year’s crop was damaged but this year’s rebounded strongly, producing an 18% increase in output.

Coffee Arbitrages

The majority of every producing country’s arabica production is exported. As a consequence, prices of different types of arabica are highly correlated, as shown in Table Two above. Major coffee roasters blend coffee of various types and qualities to achieve a consistent taste and to minimize their purchasing costs. This subjects the prices of different types of arabica coffee from different regions to an arbitrage that prevents them from diverging too greatly. The largest roasters have developed sophisticated optimization software to help them control costs.

Higher prices realized in some locations do not imply greater prosperity for growers. These will typically be locations where yields are low and operating costs high, usually due to a climate that is minimally supportive of coffee cultivation. However, the beans will only attract a premium if they have attractive blending characteristics, sufficient for roasters to justify their expense. This typically requires that small amounts of them are sufficient to achieve the desired blending result, so that their cost can be offset by using larger amounts of cheaper beans in the blend. While their prices may exceed the category average, they will tend to maintain a fairly constant premium relative to it. A supply shortfall is unlikely to result in greatly increased prices for them because their most attractive characteristic is that, despite a premium price, with judicious blending they reduce the blender’s aggregate costs.

Biology and taste conspire to make robustas less fungible with arabica coffees. Being less vulnerable to pests and disease, robusta requires fewer pesticides, so it is cheaper to cultivate. It is higher yielding and hardier, providing a more consistent yield. It is primarily suited to making instant coffee, espresso and other dark roasts, so it cannot be used broadly as a substitute for arabica.

However, high quality robusta may replace arabica in some cases, a certain amount of robusta is present in most blends and many allegedly pure arabica products sneak in a little cheaper robusta. Consequently, there is an arbitrage between arabica and robusta, but the spread is wide and quite variable, as Figure Two clearly indicates. Consistency of yield renders robusta prices less volatile than those of arabica coffees ─ comparable to the volatility of the S&P 500 over the period shown. This despite the fact that the robusta indicator-at-source is dominated by coffee from two sources ─ Vietnam and Brazil.

Arabica Price Developments

Average monthly prices at source for ‘Colombian Milds,’ ‘Other Milds’ and ‘Brazilian Naturals’ are up 27.8%, 27.7% and 26.8%, respectively, since their January lows. Their close correlation indicates that arbitrageurs are as active as ever in the arabica market. Average monthly prices for exported beans rose 35.9%. Dates for this year’s trough and peak were the same as for robusta: from January 20th to November 7th, the price of arabica exports rose 56.2%.

The coincidence of dates suggests that arbitrage between robusta and arabica is alive and well, too. However, arabica’s comparatively muted price increase indicates that supply conditions are not as tight. Brazil had another weak year for arabica, but the USDA expects the harvest for the crop year ended September 2017 to jump 21% to record tonnage. Colombian production is expected to decline slightly as a result of poor weather and increased borer beetle infestation.

After several weak years Central American production is expected to tick up in the year to September 2017, due almost entirely to higher production in Honduras. Central America has suffered from widespread leaf rust problems, and Central American production is only 79% of what it was five years ago. This is especially difficult for Nicaragua and Guatemala: coffee is both countries’ most important export earner. Damage to trees and roads from November’s Hurricane Otto, which affected Nicaragua and Costa Rica, will certainly not help recovery in the near term, although damage to trees may accelerate re-planting and improve yields in the longer term. A program of land reclamation and planting rust-resistant bushes in Honduras accounts for its improving performance, and it is to be hoped that storm damage will accelerate similar efforts elsewhere in Central America.

However, life has been difficult for growers of arabica for some time, as Figure Four clearly indicates. Even during the current rally, export prices managed to exceed the five year average price for only three days. Growers of arabica worldwide have had a difficult time since 2011, and the outlook for them, with Brazilian production expected to rebound, is not good. Central American growers are especially vulnerable.

Background: Coffee Economics

While Figure Five is not entirely authoritative ─ few countries are as strictly producers of one or the other coffee species as it implies, and several low-volume producing countries (for instance, the U.S.) are neglected. But it clearly indicates that, with the exception of Brazil (where robusta accounts for nearly a quarter of total production), the largest producing countries to a substantial extent specialize in one variety or the other.

Commercial arabica farming for the most part takes place at altitudes above 4300 feet (1300m), in regions that receive more than 40″ (1m) of rain spread fairly evenly throughout the year and that do not experience frost. Robusta is more tolerant of lower altitudes but also requires rain and a frost-free climate. So coffee agriculture occurs exclusively in the so-called coffee belt between the Tropics of Cancer and Capricorn. With the exception of small amounts produced in Hawaii and Puerto Rico, its climate requirements ensure that coffee is entirely an emerging markets crop.

While there are such things as coffee plantations, and also what might be called yeoman farmers with fairly large properties, coffee is primarily cultivated by smallholders ─ about 70% is produced by farmers with properties of less than 25 acres (10 hectares). Between owners and field hands, there are thought to be twenty-five million people directly employed in coffee cultivation, five million in Brazil alone. If this estimate is even approximately correct, coffee workers and their families constitute more than one percent of the developing world’s population, and, directly or indirectly, coffee may support as much as 2.5% of the developing world’s population.

Mountain locations, labor intensity and small plots more or less dictate a monoculture: few other crops thrive at high altitude, and the relief of the landscape makes farming those that do difficult and vulnerable to erosion. While beans or similar crops may be grown between rows of juvenile coffee bushes, after three or four years the bushes will overshadow them. Since bushes last for decades, the period during which mixed farming is possible is brief, and in the mountainous regions where arabica is grown, it is restricted to row crops such as beans. Plowing is out of the question where erosion is an obvious risk. So smallholders are rather different from many other peasants: they produce a non-nutritious, highly labor-intensive cash crop, and little else.

Coffee takes three to five years to reach productive maturity, although trees may remain economically viable as long as sixty years. Thus planting coffee is a significant capital investment: it costs a farmer at least three years of income foregone. Growers cannot switch into and out of coffee production the way other farmers can choose to plant soybeans one year and return to corn the next. Reports that Brazilian robusta growers are uprooting trees implies a medium-term change in supply, even if all of the acreage is re-planted under coffee (which it is not).

Consequently, coffee growers lack the potential for autarky typical of many farmers: they are inevitably tied to the market economy both as producers and consumers. When times are hard they cannot divert production to subsistence or redirect their labor to replacing market purchases, as less specialized farmers can. Hence their propensity to consume is entirely dictated by the aggregate effects of the most recent crop’s quality and the price realized for it. These may offset each other (low yields offset by improved quality, for example), but they can also reinforce each other (e.g., poor yields and poor quality).

Since prices are set in a global market, harvest outcomes in smaller producing regions have limited effect on the prices that producers there can command, and they may be forced to accept weak prices even when low yields result in local scarcity. In fact, reflecting the extreme diversity of coffee-producing regions, such a disastrous combination of circumstances is likely to affect some producers in any year in which global pricing is soft. The results for farm incomes are obvious, and the multiplier effect on economies that rely significantly on coffee exports can be brutal.

These dynamics mean that making a living through coffee agriculture has been difficult for years. In a recent study, the International Coffee Organization observed, rather bleakly,

  • Coffee production is not economically sustainable for many producers, and those who can make a profit struggle to cover the costs of establishment and plant renewal.
  • Costs of production generally increase consistently over time, whereas international prices vary significantly with no clear upwards or downwards trend, meaning that coffee growing is on average becoming less profitable over time.

A single year of comparatively good prices will not repair this situation, and countries that rely on coffee for a significant portion of their exports will remain vulnerable to global market prices that reflect harvest condition in only a handful of countries.


John Abbink is Principal at Apeiron LLC.

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