Unquenchable thirst for specialty coffee

SURPLUS production of coffee has led to a decline in prices in 2013 but these rose again by 30% to 35% in the first quarter of this year. The fluctuation is largely due to an unusual drought in Brazil, the world’s largest coffee supplier. However, even with crop failure in Brazil, there should be enough stocks to supply the market until next year, according to International Coffee Organisation (ICO) head of operations, Mauricio Galindo.

ICO estimates the coffee industry’s aggregate consumption value at 173 billion dollars. Apart from Brazil, the world’s top coffee-producing countries are Viet Nam, Indonesia, Colombia, India and Ethiopia. Main markets include the European Union, United States, Brazil, and Japan.

Consumption has been largely influenced by the steady growth of the speciality coffee sector for the past 10 years. A rising number of independent micro roasters with single origin coffees are now competing with major chains. Mr Galindo says this development has brought forth a new type of consumer: one who knows about good quality coffee and who cares how it was sourced and produced.

Another market driver is a huge trend in North America and Europe for single serve, capsule pods. The novelty appeal, plus the consistent quality of these capsules ensuring that consumers get exactly the same cup of coffee every time, has contributed to its popularity.

A third factor changing the face of coffee consumption is certification, such as those from UTZ, Rainforest Alliance, Fairtrade, and Organic. Apart from allowing consumers to know that the coffee they are buying meet a certain set of environmental and social standards, these certifications help farmers achieve better agricultural practices.

Stirring up production

Another important development to do with coffee is the change in perception about its health aspects, adds Mr Galindo. The idea that coffee is unhealthy has been disproved and to the contrary, potential health benefits are now associated with moderate intake of coffee. He is confident that future demand is going to be buoyant. “Coffee consumption is growing and in fact, the challenge is more in terms of supply. Today when you look at the market, there is surplus – but that is now. In two years the market will be balanced again. From then on it is not clear what will happen…”

He says that it is vital for countries to reliably and consistently plan and implement policies that would help develop the coffee sector, responding to the needs of the markets and at the same time taking into account the best agronomic practices and current needs of farmers in the field.

Technical advice should be made available and delivered efficiently through extension services. He emphasises the importance of financial education. “We want to make sure that coffee farmers begin to see their farms as micro industries if we want to make sure there is an adequate supply of quantity and quality the industry wants to have in the future to be able to satisfy the increasing demand for coffee. We have to see that farmers see themselves as small entrepreneurs… guys who understand cash flows, who understand risk management and who know how to get access to finance.”

Mr Galindo stresses the importance of public and private partnerships to help realise the kind of action that needs to take place. ICO is currently working with 4C Association to develop a business verification scheme—a common code for the coffee community that can help address issues relating to sustainability, climate change, market access, and profitability.

The ICO would also like to increasingly play a role to help public and private sectors look at policies and strategies that could improve the efficiency and productivity of their coffee sector. “And certainly we are very willing to engage more with coffee growers in Asia,” he said.

From tea drinkers to coffee aficionados

China, India and Japan have traditionally been tea drinkers, but since the 1990s these countries and other parts of Asia have experienced the most dynamic growth in coffee consumption in the world. Coffee consumption in Asia has been growing at an average annual growth rate of 4%, says Mr Galindo. “It means that given the rising population in Asia the potential for coffee consumption to become much bigger is dynamic because in terms of per capita consumption they are still extremely low all over Asia.” This growth is partly due to the rising income, and the development of a niche market for specialty coffee as something trendy, modern and luxurious.

According to agribusiness experts Harm Oudenhoven and Arman Ginting of SNV Indonesia, there is a steady growing demand for coffee in China and many other upcoming economies. “Coffee-producing countries such as Brazil and Indonesia are prime examples (of places) where increasingly, coffee produced locally is consumed locally. Viet Nam, one of the biggest producers of Robusta coffee, is also becoming a major consumer.”

Indonesia plays catch-up

Indonesian consumption of coffee has grown almost 100% from 1989 to 2013, as a result of rapid urbanisation. Indonesian coffee companies are racing to tap this growing market. Coffee companies are one of the biggest spenders for TV and radio advertisements, according to a report from SNV.

A change in consumption patterns from soluble instant coffee to a growing appetite for speciality coffees has become evident in this market, according to Mr Galindo. “There is a proliferation of coffee shops, and people are beginning to appreciate other types of coffee that would drive the demand for the more expensive Arabicas as we have seen happening in other countries.”

Veronica Herlina of the Specialty Coffee Association of Indonesia agrees that the local coffee culture is changing. “Instant coffee will always have its market but young executives and upmarket consumers are showing a preference for speciality coffee,” says Ms. Herlina. “The taste for black coffee is growing and this will help encourage farmers to produce better coffee.” She hopes that producers can grow enough coffee to meet this growing demand.

Apart from the increasing quantity of speciality cafes, major coffee brands which used to produce only mixed coffee before are now selling pure coffee. Convenience stores and mini supermarkets are also now selling coffee, and Indonesian coffee producers are becoming more creative in producing flavoured instant coffee drinks for the domestic market.

Both Mr Oudenhoven and Mr Ginting believe that local demand will continue to rise. “As growth continues and demand for coffee expands, domestic buyers are willing to buy coffee at higher prices than international buyers, albeit still in lesser volumes,” says Mr Oudenhoven. Last year, about 748,000 tonnes of coffee were exported from Indonesia, with Robusta at 601,000 tonnes (80.4%) and Arabica at 147,000 tonnes (19.6%).

There are numerous opportunities to produce high-end speciality coffees, adds Mr Oudenhoven. “Many small plantations are exporting limited quantities to Japan, Australia, Korea and Europe. Speciality Indonesian coffee is bought directly by Starbucks. Volcafe and Bushtrading are major players when it comes to selling speciality Indonesian coffee from Sumatra, Java and Sulawesi. As for Robusta, companies such as Nestle, Kraft and Sarah Lee are major buyers. The biggest competitors are Brazil and Viet Nam, and they produce coffee much more efficiently than Indonesia.”

Areas for growth

But high-quality output has yet to catch up. One possible step forward for Indonesia is in securing ownership of geographical indications of their coffee, as what some Colombian and Ethiopian producers have done. According to Mr Galido Indonesia could still develop a more efficient, industrialised and centralised production in order to gain the benefits of a productive value chain.

He adds that the country could benefit from a comprehensive development plan for the coffee industry which ICO did for Nicaragua last year, in collaboration with other international agencies. “The ICO is ready to engage with any member country to offer our consultancy work, to put together a plan to improve efficiency and give a sense of direction to where they can go given the conditions they have.“

Furthermore, substantial investments are needed in the coffee sector if Indonesia is to remain a serious coffee producer, according to SNV’s Mr Ginting. Replanting programmes, national pest control systems, new varieties and training are important areas for development. Most coffee producers in Indonesia are smallholders with about 1-2 hectares of land, lacking in resources to invest in new varieties.

“Poor infractructure is also a big factor, decreasing the profits of all actors. Transport can make up about 20% of the coffee price in Indonesia, due to long delays and corruption. These costs are normally transferred to farmers who receive a far lower price than the price in the cities” says Mr van Oudenhoven.

Good agricultural practice in the coffee sector is needed to boost production. Many farmers still lack the knowledge and skills on husbandry and post harvesting techniques and often have a limited access to the market.

Together with other partners, SNV Indonesia is helping to train farmers, implement replanting, support research and accessibility for new and high yielding varieties, and link farmers and coffee companies together. By bringing multiple stakeholders together and working towards a national sustainable coffee platform, the problems facing the coffee sector in Indonesia may be addressed, says Mr. Oudenhoven.

SCAI for its part is working to improve the quality and quantity of speciality coffee in Indonesia through relevant activities, including farmer training on good agricultural practices to produce more and better cherries.

Marketing and product awareness are also very important, says Ms Herlina. SCAI is encouraging farmers to do coffee cupping—to observe and taste the aroma of their own coffee and compare it to beans from other farms—and she thinks they are getting results. “I am happy because a lot of farmers now care about the quality of coffee. Some of them are selling better quality coffee and are getting more money,” she says. –Cristina Douthwaite

References

Vietnam coffee farmers seen selling 55 of crop as prices rise. www.bloomberg.com/news/2014-03-10/vietnam-coffee-farmers-seen-selling-55-of-crop-as-prices-rise.html (Last accessed April 2014)

www.bloomberg.com/news/2014-02-19/coffee-exports-from-indonesia-falling-as-world-cup-boosts-demand.html (Last accessed April 2014)