The World Bank Coffee Markets

Public Disclosure Authorized

The World Bank

Agriculture and Rural Development Discussion Paper 3

Coffee Markets

New Paradigms in Global Supply and Demand

Public Disclosure Authorized

Public Disclosure Authorized

Public Disclosure Authorized

Agrigulture & Rural Development Department World Bank 1818 H Street, N.W. Washington, D.C. 20433

Bryan Lewin Daniele Giovannucci Panayotis Varangis

The World Bank

Agriculture and Rural Development Discussion Paper 3

Coffee Markets

New Paradigms in Global Supply and Demand

Bryan Lewin Daniele Giovannucci Panos Varangis

First printing or Web posting: March 2004 ?The International Bank for Reconstruction and Development Agriculture and Rural Development Department 1818 H Street, N.W. Washington, DC 20433

Agriculture and Rural Development Discussion Papers is an informal series produced by the Agriculture and Rural Development Department of the World Bank. These papers raise concepts and issues for discussion in the broader development community and describe ongoing research and/or implementation experiences from the Bank.

The findings, interpretations, and conclusions are the authors' and should not be attributed to the World Bank, its management, its Board of Executive Directors, or the countries they represent. Some of the numbers quoted are estimates or approximations and may be revised at a later stage.

About the authors Bryan Lewin was previously the Economist of the Association of Coffee Producing Countries and now works in the Agriculture and Rural Development department of the World Bank on commodities and risk management. Daniele Giovannucci is a former corporate executive and market strategies expert. He advises international agencies and governments and is a senior consultant for The World Bank Group. Panos Varangis is a Lead Economist in the Agricultural and Rural Development department of the World Bank, dealing with issues related to commodities and commodity risk management.

Cover graphic Alex Baluyut, 2002. A farmer tending to coffee cherries. Country unknown.

Contents

Acknowledgements ..................................................................................................................... vii

Acronyms and Abbreviations ..................................................................................................... ix

Executive Summary ..................................................................................................................... xi

1. Introduction................................................................................................................................1

Historical Background .................................................................................................................................. 2 Paradigm Shifts in Supply and Demand ....................................................................................................... 6 Paradigm Shifts--Some Broader Trends.................................................................................................... 13 Looking Forward: The Current and Forthcoming Crop Years ................................................................... 14

2. Prices .........................................................................................................................................19

Introduction................................................................................................................................................. 19 Prices and Farmers Problems of Information Access ................................................................................. 20 Price Volatility ............................................................................................................................................ 20 Approaches to Managing Risk.................................................................................................................... 23 Retail Prices, Concentration, and Shifts in the International Marketing Chain .......................................... 33

3. Demand: Volumes and Trends ...............................................................................................38

Overall Demand Picture.............................................................................................................................. 38 The Change in Consumer Drinking Habits................................................................................................. 39 Volume Trends............................................................................................................................................ 41 Regional Consumption Patterns.................................................................................................................. 49 Consumption in Coffee-Producing Countries............................................................................................. 59 Soluble Trends ............................................................................................................................................ 62

4. Supply: Volumes and Trends..................................................................................................63

Colombian Milds ........................................................................................................................................ 65 Other Milds (washed arabicas) ................................................................................................................... 68 Natural Arabicas (Unwashed)..................................................................................................................... 74 Robustas...................................................................................................................................................... 83 Exports From Producing Countries............................................................................................................. 91

5. Outside The Commodity Box: The Differentiated Markets ................................................94

Commodities Systems and Other Options: Differentiation or Diversification ........................................... 94 Definition of Differentiated Coffees ........................................................................................................... 99

iii

iv

The Nature of Differentiated Markets....................................................................................................... 105 Sustainability............................................................................................................................................. 107 Certification .............................................................................................................................................. 108 Market Awareness .................................................................................................................................... 111 Availability ............................................................................................................................................... 112 Price Premiums ......................................................................................................................................... 113 Critical Competitive Factors ..................................................................................................................... 114 Source Countries....................................................................................................................................... 115

6. Differentiated Markets: Size and Outlook ..........................................................................116

Appellation Coffees .................................................................................................................................. 117 Specialty and Gourmet.............................................................................................................................. 117 Sustainable Coffee Overview.................................................................................................................... 118 Organic...................................................................................................................................................... 121 Fair Trade.................................................................................................................................................. 123 Eco-Friendly or Shade .............................................................................................................................. 125 Sustainable Coffees: Helping Producers to Capture Diverse Forms of Value.......................................... 125

Appendix Quick Reference on Coffee Production..................................................................128

7. References...............................................................................................................................129

List of Tables Table 1 Global production, 1997 to 2004 ..................................................................................................... 6 Table 2 World Bank Forecasts of Arabica and Robusta Prices, 2004-2015 ............................................... 15 Table 3 India: producer risk perceptions by farm size (acres) .................................................................... 29 Table 4 Nicaragua: producer risk perceptions by farm size........................................................................ 29 Table 5 Risks faced by coffee producing households in India (number and percent of people reporting risk as very important) ....................................................................................................................................... 30 Table 6 Risks faced by coffee producing households in the Dominican Republic (percent reporting risk as very important)............................................................................................................................................ 30 Table 7 Per capita consumption of coffee in selected importing countries (kilograms)............................. 43 Table 8 Shares of offtake by importing region ........................................................................................... 44 Table 9 Market share of producing origins in Western European imports ................................................. 52 Table 10 Consumption breakdown in Germany, 1999-2001 (metric tons)................................................. 53 Table 11 Scandinavia: imports from origin and market share .................................................................... 55 Table 12 Poland, Hungary, Czech Republic, and Slovakia: imports from origin by share ........................ 57 Table 13 Imports into South Korea from producing countries: quantities and market share ..................... 59 Table 14 Receiving station returns in El Salvador for crop years 1997-2003 ............................................ 70 Table 15 Illustrative basic production costs of a farm yielding two tons/hectare....................................... 90

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