IWCA – El Salvador, 27 October, 2011 A M ARKET I N D ENIAL -- THE WORLD IS RUNNING OUT OF COFFEE!!! B Y M AJA W ALLENGREN - I NDEPENDENT A NALYST 10 TH

IWCA – El Salvador, 27 October, 2011

A MARKET IN DENIAL

-- THE WORLD IS RUNNING OUT OF COFFEE!!!

BY MAJA WALLENGREN - INDEPENDENT ANALYST

10TH AFCA CONVENTION – KAMPALA, FEB 15, 2013


Among the numerous luxuries of the table ... coffee may be considered as one of the most valuable.

It excites cheerfulness without intoxication; and the pleasing flow of spirits which it occasions... is never followed by sadness, languor or debility. -Benjamin Franklin

In Times Of Economic Crisis The World Is Drinking More Coffee Than Ever

GTEC – Brazl, 14 March , 2012 AFCA, Kampala – 15 Feb, 2013


World coffee consumption growth

125

130

135

140

145

150

155

2011 2012 2013 2014 2015 2016

1.50%

2.40%

AFCA, Kampala – 15 Feb, 2013


Quality Coffee Has Boosted Demand

GTEC – razil, 14 March , 2012 AFCA, Kampala – 15 Feb, 2013


Is The World Running Out Of Coffee?

125

130

135

140

145

150

155

160

2011 2012 2013 2014 2015 2016

1.50%

2.40%

• At conservative 1.5% growth that will add 10-12 million bags in next 5 years

• At 2.4% growth that will add 12-14 million bags by 2016-17 cycle

“Under all these scenarios, relatively strong consumption growth is envisaged, which could well

outpaceproduction growth.”

--ICO, Feb. 2012, market report



World coffee outlook 2012-13



• Brazil‘s big 53-55 million bag crop will after 20 M bags used for local consumption and 30-35 million bags used for exports leave nothing left to rebuild stocks

• ICE stocks are down at 2.64M bags (Feb 6, 2013) after reaching a high of 2.72 million bags, total U.S. green stocks are at 4.9M bags near 2-year lows (Nov 30) while European stocks are close to 5-year lows at 9.55M bags (Nov 30) and down 315,000 bags (Oct 31)

• Current stocks of 17.1 million bags provide for a little over 6 weeks of total world demand

• Five years of deficit have left the world depleted for stocks and the rust disaster in Latin America 2012-13 could as well end up with a deficit

• World coffee production has with only a handful of exemptions stagnated in most countries in the last 10 years

World coffee market at glance in 2012-13



Espirito Santo – The New Coffee Frontier?



Coffee production lost since crisis

0

2

4

6

8

10

12

14

East Africa

Central America

Mexico

Colombia

• Colombia has gone to 7.5-8 mln bags in the last five years from 11.5-12.5M bags• Only Brazil, Vietnam, Peru and Honduras have increased production at any significant scale while Tanzania slowly is improving • But world consumption has continued to increase by min 2M-2.5M bags a year

2000-02 2009-10 2010-11 2011-12 2012-13



105

110

115

120

125

130

135

140

145

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Production

Consumption

Consu 2)

Million 60-kilogram bags

Source: International Coffee Organization, independent trade and analysts

• In the last 5 years 43M bags of stocks have been consumed• Despite the big Brazil crop 2012-13 is likely to add to the world deficit• With ongoing rust disaster world could be headed for 6th year of deficit

The Stock vs Consumption Equation



Major challenges remain to the world’s coffee crops

• Financing and credit, outside market pressure, currencies devaluations in key producers Brazil and Colombia, a lack of policies to support renovation

• The increasing impact of worsening socio-economic conditions and poverty in the vast majority of coffee producing communities is not recognized, population vs land size

• Climate change resulting in drought, irregular temperatures, un-seasonal rains and crop pests will result in continuing reduction to world forecast of at least 5% every year from now on

• Between 70 to 75% of the cultivated area with coffee in the world is currently in a state which is considered “semi-abandoned” and won’t be rehabilitated without subsidized financing



Diminishing Returns – cutting into growers income

• Small-holder coffee producer across the world today has seen the average income per farm unit reduced to between 25-50% from 10 years ago due to the combination of smaller farm plots and lower productivity

Small-holder coffee grower’s income in 2001 with 1.3 hectare of land and average yields of 10-14 qq of coffee per hectare

Small-holder coffee grower’s income in 2012-13 further reduced by 50% because of average yields of 5-7 qq of coffee per hectare

Small coffee grower’s income in 2012-13 now based on average 0.5 to 0.7 hectare of land

2000-02 2010-12

100% 50% 25%



Why is world production not recovering?

1. It is a myth that the market will correct itself! -NO, this this can only happen as long as the conditions for this is present but the market cannot control renovation by small holders

2. Producers will renovate and invest in farms with high prices! -NO, that did not happen at 5 hectares, nor at 3 or 2 and even less will happen at 1 or less than 0.5 hectare

3. Brazil can increase coffee production by 10M bags any time! -NO, this would cost $6.7 billion and won’t happen



Climate Change: Global Warming Or Global Cooling?

• Despite green house gases still contributing the global warming the world has for the past seen a pattern of natural cycles of warmer and cooler weather

• After a prolonged period of about 30 years of warmer global weather the world entered a prolonged period of global cooling in 2007

• During the next 20-25 years this is expected to bring about a dominance of La Niña rather than El Niño

• For coffee, this means rather than warmer weather, less rain and more sun exposure (El Niño) a shifting trend toward lower temperature, more rainfall and a dramatic fall in sun-exposure (La Niña)

• In Colombia for instance sun exposure has since 2007 been reduced by over 30%, or less than 3-3.5 hours per day, causing significant yield loss



Climate Trigger 2012-13 – Central America Rust Disaster

• Rust has infested 20-70 percent of the entire coffee area in Central America

• Minimum damage estimates are estimated at 20% or 3M-4M bags

• If damage in the 2012-13 harvest rise to 30% this figure would rise to 5.5M bags

• In the next 2013-14 harvest crop losses are seen at 30% to 40%

• This will see the Central America-Mexico harvest reduced by an additional 3.5M-6M bags unless immediate action is taken



Climate trigger 2012-13 – CentAm Rust Disaster

GUATEMALA – 27 July, 2012






•Rust has infested 20-70 percent of the entire coffee area in Central America

•Minimum damage estimates are estimated at 20% or 3M-4M bags

•If damage in the 2012-13 harvest rise to 30% this figure would rise to 5.5M bags

•In the next 2013-14 harvest crop losses are seen at 30% to 40%

•This will see the Central America-Mexico harvest reduced by an additional 3.5M-6M bags unless immediate action is taken

•Production from the region is unlikely to rise above 10M-12M bags in the next 3 to 4 years

• Huge social implications already from losses of 300K-500,000 jobs












• Huge social implications already from losses of 300K-500,000 jobs affecting over 3 million people

MASSIVE IMPACT ON WORLD PRODUCTION!


• Huge social implications already from losses of 300K-500,000 jobs affecting over 3 million people


The Arabica-Robusta Balance In 2012-13

• In 1978-79 as much as 75% of the world coffee was sourced from arabica beans

• Just 10 years ago between 65 and 70 per cent of the world’s total production was made up by arabica beans but by the end of the 2011-12 cycle robusta growers had raised their share to 40 percent

• This is NOT bad to coffee producers nor will it affect global demand or the quality of the coffee we are drinking

• The higher availability and demand for robusta coffee is actually BOOSTING world demand quicker than anticipated with figures showing world demand for instant coffee has more than DOUBLED in the last 7 years

• The new robusta demand has primarily been supporting rapid growth in emerging markets like China, Russia and South Korea, as even more in producing countries

• The coffee industries in these countries are primarily based on instant coffee and the soluble industry and the availability of cheaper robusta-based instant coffee has fueled the annual growth rates of 4-15 percent in these markets



Positive Impact Of The Arabica-Robusta Balance

•But robusta coffee has also helped not only maintain coffee demand in traditional markets but even helped keep demand growing in most markets despite the crisis

• Italy, for instant, has moved from a market of 55 per cent Arabica and 45 per cent Robusta to a market today of 55 and 60 per cent Robusta and 40 to 45 per cent Arabica

• In a market like Japan the leading market share has always been for instant coffee which in 2012 still stood at 43 percent

• The improvement of the quality of robusta cannot be denied and specialty and gourmet robustas is a trend growing rapidly

• Demand in the few countries been negatively affected by the crisis is minimal, i.e. Spain, the U.K. and Italy down 337K, 141K and 203K each BUT France and US up 811K and 391K each, Germany and Japan stable and largely unchanged



Africa



Global Cooling’s Positive Contribution To African Coffee

• Contrary to public belief the current weather changes can actually benefit Africa’s coffee producers and improve their marketing policies

• A cycle of 20-25 years with cooler weather and higher rainfall could provide a significant boost to African coffee farmers and allowing for important changes to production practices with increased shade and reforestation

• Countries in Central America already growing mostly heavy shade coffee will need to make adaptions in order to allow for adequate sun-exposure and disease control

• But Colombia’s 2-crop cycle will once more mean that country is likely to become the most adversely affected by these changes

• This could increasingly turn Colombia’s mid-crop, or mitaca, into the country’s main crop and reduce competition for East African crops



Opportunities and Challenges for Producers

• Quality, quality, quality is the key to keep the equation in favor of producers

• Consumer demand will continue to grow by at least 2 million bags a year if the quality of the end-product is maintained for at least another 5-10 years

• The only producing countries with potential to significantly increase production by expanding the area are Brazil, Vietnam, Tanzania, Peru, Honduras and Nicaragua

• But coffee will have to compete with cocoa, other commodities and industrial development

• Whatever increased production will barely be enough to meet rising demand and won’t replenish stocks



The World IS Running Out Of Coffee!

020406080

100120140160180200

2012

2013

2014

2015

2016

2017

2018

2019

2020

1.50%

2.40%

• At conservative 1.5% growth that will add 18 million bags by 2020• At 2.4% growth that will add 31 million bags by 2020• USDA currently forecasts 2% growth per year in world demand

“Under all these scenarios, relatively strong consumption growth is envisaged, which could well

outpaceproduction growth.”

--ICO, Feb. 2012

158.9M bags

172.1M bags



Where is all that coffee going to come from???World Production 2008-2015 potential 2015-2025 potential Production Increase

Tanzania 1100 2000 900

Ethiopia 5000 6000 1000

Kenya 800 1400 600

Uganda 3200 4000 800

Ivory Coast 2400 3000 600

Cameroun 1400 2000 600

Other Africa -- 500 500

El Salvador 1400 2000 600

Honduras 3800 6000 2200

Costa Rica 1600 2100 500

Guatemala 4000 5000 1000

Nicaragua 1500 2200 700

Mexico 4000 5000 1000

Peru 3500 6000 2500

Colombia 9000 1100 2000

Caribbean -- 1000 1000

Other Islands -- 500 500

Brazil Arabica 38000 43000 5000

Brazil Robusta 12000 19000 7000

Vietnam Arabica 800 700

Vietnam Robusta -- 3000

Indonesia Arabica 1500 2000 300

Indonesia Robusta 10000 1500

India Arabica -- 300

India Robusta 1000

Other Asia 200

All figures in 000 60-kg bags

World Production 2020-2025 potential growth

Africa A 3000

R 2000

Asia A 2000

R 5000

Latin America A 12000

R

Brazil A 5000

R 7000

TOTAL 36000

A 22000

R 14000



World demand-supply 2011-2050

0

50

100

150

200

250

300

350

1.5% growth

2.4% growth

Production

• Current land cultivated with coffee has a potential to produce 400 mln bags• With average yields of 25-30 bags/ha and sold at average prices of $3/lb • This will give the producer an average gross income of $11,905 per hectare



© MAJA WALLENGREN - INDEPENDENT ANALYST AND REPORTER

Email: [email protected] – Twitter: SpillingTheBean

A MARKET IN DENIAL

-- THE WORLD IS RUNNING OUT OF COFFEE!


Documents

IWCA – El Salvador, 27 October, 2011 A M ARKET I N D ENIAL -- THE WORLD IS RUNNING OUT OF COFFEE!!! B Y M AJA W ALLENGREN - I NDEPENDENT A NALYST 10 TH