Into the new reality without espresso: will a pandemic cause a global coffee shortage

Bloomberg and many global media sources predict a shortage of coffee supplies due to the coronavirus pandemic. What is actually happening in the countries of coffee origin, what is the situation on the exchange, and how will this affect the supply to Portugal?

According to Bloomberg forecasts, the coronavirus pandemic and, in particular, the aggravation of the crisis in Latin American countries could result in a global coffee shortage. Experts fear that an unfavorable epidemiological situation in Brazil, Colombia, Peru, and other “coffee” countries will negatively affect harvesting. Is the situation so dramatic?

Coronavirus definitely made its adjustments to the production of green coffee – the cultivation and collection of beans, their processing, packaging, and transportation. The corrections affected not only the availability of labor but also disruptions in ports, lack of containers and bags for packaging of finished products, that is, failures in supply chains. Don’t forget about logistics inside the country: first, the beans are picked on farms, then they are transported to the primary processing station, then to the pre-export processing station, then to the port. Between these stages, coffee is kept in various warehouses. Many participants are involved in the coffee supply, and harvesting is not the only problematic place in the chain from the field to export.

If we talk about the harvest itself, then now we can’t expect a complete shortage of coffee. It must be understood that all countries supplying coffee beans are divided into those, where the bean ripens in the winter and those where it ripens in the summer. The entire crop of Arabica in the Northern Hemisphere at the time of the coronavirus impact was harvested and now lies in warehouses. Now a pandemic can only affect the fate of beans of the Southern Hemisphere, primarily Brazil, Peru, Indonesia, and Colombia, in which beans are picked twice a year. These countries have just begun harvesting.

Difficulties in harvesting beans could arise in Colombia since it uses the migrant pickers labor, but according to the Supremo coffee trading house, the collection goes without complications. Brazil is also unlikely to encounter difficulties harvesting beans. It is the only country that uses harvesters for harvesting because the plateau makes it possible, and the issue of free labor resources is less acute. Brazil is the largest producer of coffee, so if it successfully completes the harvest, there will be enough beans for everyone. According to the International Coffee Organization for the 2018/19 crop year, it accounts for about 37% of world production. Next is Vietnam (more than 90% of Robust) – 18%, Colombia – 8%, Indonesia – 5.5% and Ethiopia, Honduras – 4.3%. Together, this is almost three-quarters of the world’s coffee production. So far, we have not seen problems with the harvest. The big question is what happens with beans next.

The production of expensive breeds of coffee is unprofitable

Coffee consumption has declined everywhere. Coronavirus fell heavily on the service sector, including coffee shops that consumed a large number of beans. Consumers who are used to drinking good coffee in coffee shops are in no hurry to transfer these habits to domestic consumption, either considering it too complicated or expensive or simply deciding to take a break from coffee for the time of quarantine. As a result, large importers of green coffee in countries of consumption submit applications for postponement of delivery dates for previously concluded contracts, as their sales decreased and stocks of raw materials in stock exchange increased. All this leaves an imprint on the ratio of supply and demand. As a result, the price on the coffee exchange is quite low.

However, two points must be taken into account here. Firstly, Arabica quotes are influenced not only by the so-called fundamental factors but also by speculative games of various funds. So, the most recent peak, when arabica was trading at almost 300 cents per pound, which happened on April 1, 2011, was not due to any purely coffee factors.

Secondly, since the exchange has long been at an uncomfortably low level for the manufacturer, many manufacturers deviate from it further and further, making their pricing less connected with it. For two years now, world coffee stock prices have been at a low level – less than 120 cents per pound (not counting the peaks won back at the end of 2019). First, it began to affect the production of high-quality coffee of the upper price segment (the so-called fine Arabica). Often during the sale, manufacturers could not even cover the costs of its production. Already this year, production declined in countries such as Guatemala and Nicaragua.

A substantial increase in exchange prices was expected at the beginning of the year, however, given the widespread decline in demand for coffee, such a scenario seems unlikely. The funds available to manufacturers are declining, which will inevitably lead to a further drop in production. According to current forecasts, production will decline even more next year in Guatemala and Nicaragua. The largest decline – up to 25% – is expected in Honduras – the second largest producer of washed arabica after Colombia. However, Brazil, the main producer of dry-processed arabica, has no problems with the crop, however, as well as with its sale, especially given the accelerating devaluation of the national currency. A situation may arise when relatively cheap varieties – Brazilian Arabica, Robust – will be in abundance, and relatively expensive – washed arabica from Central American countries, Colombia, Peru, Mexico – in shortage.

Currently, manufacturers of washed Arabica are trying to resolve this contradiction, quietly moving away from stock prices. It cannot be ruled out that subsequently if exchange prices remain as low as they are now, this move will take on explicit forms. Ultimately, either exchange prices will remain low and price increases will continue only in the upper price segment (fine Arabica), or exchange prices as a whole will increase, which will affect all segments.

It’s too early to talk about the crisis

Coffee, which is imported to Portugal and roasted by local small and medium-sized producers, belongs both to the Arabica class of the upper price segment and to ordinary Brazilian Arabica (for example, Brazil Santos) and Robust, which is mainly mixed. Coffee pricing in Portugal is directly tied to the dollar, as green coffee is 100% imported.

The possible appreciation of the dollar value of green coffee due to the growth of the Arabica exchange is another factor that should be taken into account. However, this is a temporary factor.

As for the available assortment, in the next 3-6 months, you should not expect any significant changes: almost all breeds are already in stock at Portuguese importers of green coffee. It’s difficult to guess now, what will happen later. We will definitely see an increase in coffee prices in the next five years, but whether it will be next year or later, whether it affects all coffee or only the premium segment, it is difficult to predict now. Nevertheless, today it is still very early to talk about some irreparable coffee crisis.