Brewing up the Perfect Storm

The price of coffee is soaring.

When you consider that coffee is second in value only to oil as a source of foreign exchange in terms of world trade and provides employment for hundreds of millions of people worldwide, the ramifications on a domestic and global scale are huge.

In the past eight months alone, the cost of high-quality washed Arabica beans has increased by more than 80 percent on the London and New York exchanges, representing a 13-year high.

Unpredictable weather patterns and a fragile supply/demand balance are largely cited as being responsible for this surge.

Colombia, the world’s second largest producer of hand-picked Arabica beans after Brazil, has been hit particularly hard. Extreme shifts in climatic conditions have devastated once reliable harvests. Successive years of drought and heavy rainfall have resulted in a steep drop in production from its peak production of 17m bags in 1992 to 8.9m last year.

Rising humidity is also having an impact with crop diseases such as Coffee Leaf Rust and insect infestations like the Broca Beetle reaching epidemic levels. As a result, family growers who have been in the business for generations are now diversifying into farming plantain, avocados and oranges from the rich volcanic soils of their plantations to soften the blow, and ensure their future sustainability.

It is of course true that growers will always welcome a high price for their lucrative cash crop. In India, where unseasonably heavy monsoons have reduced coffee yields in recent years, a BBC report highlights that smaller harvests do not necessarily have to translate into less profit when coffee fetches a premium. However, pressure to produce high quality Arabica beans in the face of climatic change and hyper-volatility of the markets continues to be a concern for growers.

The Fairtrade Foundation are already introducing measures to help mitigate the impact of climate change affecting small scale co-operatives like those in the Mbale region of Uganda. It is feared that the increase in average temperature could cease Arabica bean production entirely within the next decade. When more than half of the country’s GDP is derived from coffee production, the devastation to the economy and livelihoods of millions of Ugandans’ would be nothing short of a catastrophe.

Elsewhere, production is on the up. In Nepal, a relative newcomer as an emerging exporter of Arabica beans, the quantity of  coffee parchments has jumped four-fold in the last five years; partly due to the increase of farmers establishing plantations in the high altitude pastures of the Himalaya. The vast majority of Nepali coffee is also organically grown which is increasingly in demand. Realising this economic potential, the government has introduced measures to further double production in the next three years. Whether this will be fairly traded or not remains to be seen.

As global demand for coffee consumption increases at a steady one to two percent every year without any sign of abating, there is no reason to see why prices will fall anytime soon. The latest forecast in last month’s International Coffee Organization’s (ICO) report estimates a 9.5 percent increase in global production this year (2010/11). Strong exports from countries like Brazil and emerging markets have helped to reverse the 1.2 percent drop in production from the year previously, which means that global stocks will remain low for the foreseeable future. Ominously, the report goes on to conclude that ‘unfavourable weather conditions in major coffee producing regions continue to increase uncertainties.’

So what does all this mean for the retailer and customer at the other end of the supply chain?

For specialist independent coffee retailers who are dedicated to selling honestly priced freshly roasted coffee, this could spell difficult times ahead as they struggle to absorb the rising cost of the bean.

For global coffee chain giants such as the Seattle-based Starbucks – who recently announced a 44 percent increase in profits in the last quarter from a year-ago – the upward trend in the cost of coffee is, relatively speaking, small beer.

Just don’t be surprised when the price of their super-sized 31oz Trenta portion of skinny-latte soon goes up to inflict further damage to the wallet, and the bladder.

The price of coffee may be at a thirteen year high but right from the soil to the sip, it appears that a ‘perfect storm’ is brewing.