The World Bank Coffee Markets

[Pages:150]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

v

Table 16 Illustrative production costs for a 10 hectare farm, Lam Dong Province .................................... 91 Table 17 Coffee year exports, 1994-2003................................................................................................... 91 Table 18 Soluble exports by origin ............................................................................................................. 94 Table 19 FLO international conditions for sustainable coffees (U.S. cents per pound) ........................... 102 Table 20 Comparison of conventional and differentiated markets ........................................................... 106 Table 21 Volume and share of sustainable coffees in key European markets, 2001 ................................ 120 Table 22 Organic coffee sales in select European countries..................................................................... 122 Table 23 Fair trade coffee in select European countries ........................................................................... 123 Table A1 Fifty-five coffee-producing countries by principal type and region ......................................... 128 Table A2 Share of export value of commodities represented by coffee ................................................... 129

List of Figures Figure 1 Arabica and robusta prices, 1970-2002 .......................................................................................... 1 Figure 2 Balance of Supply and Demand in Coffee years 1992/93-2003-2004, including forecast............. 2 Figure 3 Global Production Trends by Region ............................................................................................. 3 Figure 4 Global production: total production and production excluding Brazil, Colombia, and Vietnam... 5 Figure 5 Global usage by type 2002-2003 compared with 2001-2002 (July/June) ...................................... 9 Figure 6 Usage of coffee by U.S. industry by type, 1996 and 1999 ........................................................... 10 Figure 7 Usage of coffee by German industry by type, 2001 and 2002 ..................................................... 10 Figure 8 Arabica and robusta futures prices in U.S. cents per pound ......................................................... 16 Figure 9 Possible path of developments in producer and consumer stock levels ....................................... 17 Figure 10 Availability and prices................................................................................................................ 18 Figure 11 Monthly volatility of arabica and robusta prices ........................................................................ 21 Figure 12 Arabica futures prices and the level of speculative involvement ............................................... 23 Figure 13 Nicaragua: aggregate percent of producers willingness to pay for risk management ................ 31 Figure 14 India: willingness to pay five percent of strike for price protection ........................................... 32 Figure 15 Relative coffee values: CIF prices as a percent of retail price.................................................... 36 Figure 16 Indexed ICO prices and retail prices .......................................................................................... 37 Figure 17 Disappearance of coffee in importing countries in rolling 12 month totals ............................... 42 Figure 18 Share of types in global blends................................................................................................... 47 Figure 19 United States: usage of Brazilian coffee and price relative index .............................................. 47 Figure 20 U.S. consumption and retail prices ............................................................................................. 50 Figure 21 Northern country consumption and usage of natural arabicas.................................................... 51 Figure 22 Germany: per capita consumption and retail prices (nominal)................................................... 53 Figure 23 Germany: market share of mild arabicas, and the division between primary and secondary milds55 Figure 24 Brazil: consumption by type....................................................................................................... 61 Figure 25 Production has risen as prices have fallen .................................................................................. 64

vi

Figure 26 Arabica production changes vs. ranked production costs since 1994/95 ................................... 64 Figure 27 Arabica production changes and ranked cost of production....................................................... 65 Figure 28 Colombia: rolling 12 month production January 1956-October 2003........................................ 67 Figure 29 Mexico and Central American coffee production (60 kilogram bags) ....................................... 70 Figure 30 India: planted area ...................................................................................................................... 72 Figure 31 Brazil: tree stock and planted area estimates.............................................................................. 75 Figure 32 Brazilian production, 1882-2003 ................................................................................................ 76 Figure 33 Brazil--arabica coffee prices, September 1996 to October 2003 .............................................. 78 Figure 34 Brazil: tree stocks and densities, 1960-2003 .............................................................................. 79 Figure 35 Brazil: yields by state ................................................................................................................. 80 Figure 36 Green and soluble exports from Brazil: 12 month totals to December 2003.............................. 82 Figure 37 Vietnam: changes in planted area, area age, and coffee production........................................... 88 Figure 38 Derived data on yield of trees more than five years old and previous-season robusta prices .... 89 Figure 39 Exports from producing countries and export revenues ............................................................. 92 Figure 40 Exports to all destinations, total volume and by type................................................................. 92 Figure 41 Robusta exports: market share by region, 1989-2002 ................................................................ 93 Figure 42 One hundred years of commodity prices (Real price of a mixed basket excluding petroleum) . 96 Figure 43 Key factors for the expansion of sustainable coffees ............................................................... 115

List of Boxes Box 1 Coffee Producers in India................................................................................................................... 2 Box 2 Brazil's advantage .............................................................................................................................. 4 Box 3 The impacts of paradigm shifts on producers................................................................................... 11 Box 4 Colombia's National Federation of Coffee Growers (FNC) ............................................................ 68 Box 5 Selecting appropriate standards: some sample questions............................................................... 104 Box 6 Some useful shorthand definitions ................................................................................................. 105

Acknowledgements

The authors would like to acknowledge contributions and assistance with data and field work from the International Coffee Organization, United States Department of Agriculture, and coffee trade companies, including Louis Dreyfus Corporation, Neumann Kaffee Gruppe, Noble Resources and Volcafe, Starbucks, CECAF? (Brazil), National Federation of Coffee Growers (Colombia), and VICOFA (Vietnam).

Peer reviewers were Lynn Brown, Derek Byerlee and Martin Raine. Useful advice and comments on drafts came from Pauline Tiffen (World Bank CRMG), Pablo Dubois (ICO), Neil Rosser (NKG Statistical Unit), Hank Dunlop (Ecom Trading) Reto Ghilardi (Volcafe), Mark Lobering (Proctor and Gamble), Jens Nielsen (Noble Resources), Diego Pizano (Federacion Nacional de Cafeteleros) Ana Vorhinger (Armajaro Trading), Claude Barfield (American Enterprise Institute), Chris Wille (Rainforest Alliance), Liam Brody (Oxfam), Mary Williams (Starbucks Coffee) The authors would like to thank Adolfo Brizzi (SASRD), Martin Raine (LCSES), Mark Cackler (LCSER), Mathew McMahon (LCSER), Jock Anderson (ARD) and John Nash (RDVCG), whose support and encouragement made this study possible.

Weights and Measures

1 hectare (ha) = 10,000 m2 = 2.47 acres 1 quintal (qq) = 100 pounds = 46 kilogram

1 metric ton = 2,205 pounds 1 bag of coffee = 60 kilogram = 132.3 pounds

1 metric ton = 16.67 bags Million = 1,000,000

Prices

In October 2001, the International Coffee Organization introduced a new calculation method for the Composite Indicator. In order to keep long-term price series consistent, this report has maintained the previous calculation method.

Coffee and Crop Years

In this paper, references are made to production and demand quantities, and supply/demand balances using both crop years and Coffee Years. Each crop year covers an overlapping 18-month period, starting in April of one year with the Indonesian and Brazilian robusta crops, and finishing in September of the following year with the end of the crops in Central America, Colombia and Vietnam.

The Coffee Year is recognized as being the International Coffee Organization's accounting period of October to September. Where the coffee is harvested across this period, as in the United Republic of Tanzania, for example, the crop year is split according to the proportion harvested. In some cases, an entire crop gets moved back one year from its crop year. An example of this effect can be seen in Brazil, where the 2002-2003 Brazil Crop Year production is recorded in the 2001-2002 Coffee Year as it is assumed to have been harvested by the end of September.

This paper represents the views only of the authors and not the positions of the World Bank Group, its members, or its Board of Directors.

vii

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download