Supply & Demand Outlook for Washed and Semi-washed Arabica Coffee April 15, 2005 Judith Ganes Chase
Before Determining What the Supply is, One has to Define Specialty Coffee When prices for coffee were depressed, it was clear to see which coffees were trading at premium prices. Some defined Gourmet coffee as anything that traded to a premium to the C. Now that prices of Arabica coffee have rebounded, does a coffee trading at a small premium to the C contract still constitute a gourmet or Specialty coffee or does this just reflect more limited availability of that growth; be it a finer quality or not? How much over the C is Specialty? Will this standard hold the test of time?
Example: 1997 Differentials Fluctuated Wildly 60.0 Cents per Pound 50.0 40.0 Santos Colombian El Salvador 30.0 20.0 10.0 0.0-10.0-20.0-30.0 Oct-95 Feb-96 Jun-96 Oct-96 Feb-97 Jun-97 Oct-97 Feb-98 Jun-98 Oct-98 Feb-99 Jun-99 Source: Reuters
Costa Rican Average Differential Rose as Prices Fell US $/46 KG Bag 15 12 9 6 3 0 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Source: ICAFE
Panama s Price Approach to Determining Supply of Specialty Coffee--% over C Average Annual Price Per Pound 1.1 1 0.9 0.8 0.7 0.6 0.5 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Source: Hacienda La La Esmeralda
Internet Auction Results Auctions gaining in popularity and success Gives farmers opportunity to showcase their unique coffees Provides broad exposure Stimulates interest in that growth and perhaps other growths of that origin, benefiting even those not featured at auction Top prices rising buyers willing to pay more at upper end of the supply chain Auction High Bid Low Bid 2000 Brazil COE $3.04 $1.01 2002 Guatemala COE $8.45 $1.50 2002 Brazil COE $12.85 $2.05 2003 Best of Panama $3.06 $1.20 2003 CR Cup of Gold $7.35 $1.48 2004 CR Cup of Gold $3.93 $1.75 2004 El Salvador Q $$1.04 $0.90 2004 Best of Panama $21.00 $1.25 2005 CR Q Auction 1 $1.50 $1.42 2005 Colombia COE $19.10 $4.75
Specialty Coffee Defined by Netnographics? Netnography methodology = market research on the internet Tectonic shifts in the coffee market place Raised consciousness of coffee connoisseurship Specialty coffee drinkers are passionate, devoted, enthusiastic, innovative, and knowledgeable Most importantly consumers are willing to experimenthow do you measure usage of Specialty coffee with all these innovative new products?
Is Washed and Semi-Washed Arabica Output Keeping up with Demand? THREE-tiered market structure has become increasingly more pronounced. Global stocks of Arabica coffee are falling. Interest in gourmet/specialty coffee continues to grow.
Arabica Coffee Crisis is Over 290 Cents per Pound 240 190 140 90 40 Aug-73 Aug-76 Aug-79 Aug-82 Aug-85 Aug-88 Aug-91 Aug-94 Aug-97 Aug-00 Aug-03 Source: NYBOT
Arabica Premium over Robusta Swells 300 Cents per Pound 250 Arabicas Robustas 200 150 100 50 0 Jul-89 Jul-91 Jul-93 Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Monthly through end-march 2005
Cash Differentials Should Firm Again as Structure Tightens 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0-15.0-20.0 Cents per Pound Brazil 2/3, mtgb, ss Guatemala shb, ep Honduras hg, ep Colombian Excelso ep India Plantation A -25.0 Apr-01 Aug-01 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Source: Trade Sources
Growers Income on the Rise 200 Cents per Pound 150 Colombia El Salvador Guatemala Brazil 100 50 0 Sep-88 Sep-90 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Source: ICO
Producer Coffee Stocks at Minimal Levels Millions of 60-Kilo Bags 50 45 40 35 30 25 20 15 10 5 Other Brazil 0 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 Source: USDA.
Source: ICO ICO Only Minimal Origin Stocks of Washed Arabica Coffee Millions of 60-Kilo Bags 25 20 Other Milds Colombian Milds 15 10 5 0 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05
Producer Coffee Consumption Climbing 29.0 28.0 27.0 26.0 25.0 24.0 23.0 22.0 21.0 million 60-kg bags 20.0 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 Source: USDA
2005-06 Supply Deficit Expected Millions of Bags 125 120 115 output use 110 105 100 95 1996/97 1998/99 2000/01 2002/03 2004/05
Importer s Stocks at Record Highs Millions of 60-Kilo Bags 21 18 15 12 9 6 3 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 End December
U.S Coffee Stocks Seeing Reduction Already Millions of 60-kg Bags 10 9 8 7 6 5 4 3 2 1 Jan-88 Jul-90 Jan-93 Jul-95 Jan-98 Jul-00 Jan-03 Source: Green Coffee Association
Certified & Non-Certified Coffee Stocks Could Fall Further Millions of 60-kg Bags 4 Certified Non-Certified 3 2 1 Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Jul-03 Dec-03 May-04 Oct-04 Mar-0 Source: NYBOT
Breakdown of US Certified Washed Arabica Stocks Millions of 60-kg Bags Mexico Peru El Salvador Honduras Guatemala Colombia Nicaragua Venezuela Costa Rica Tanzania Ecuador Burundi Kenya India Panama Rwanda Uganda Dom Rep 0.0 0.1 0.2 0.3 0.4 0.5 Source: NYBOT Does not include coffee in Antwerp and Hamburg/Bremen
Brazil Arabica Down; Robusta Up in 2005-06 Millions of 60-Kilo Bags 40 35 Robusta Arabica 30 25 20 15 10 5 0 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 Source: USDA, SAFRAS 2005-06 MAX crop estimate.
Price Recovery Aiding Output Outside Brazil Millions of 60-Kilo Bags 55 50 Robusta Arabica 45 40 35 30 25 20 15 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 Source: USDA
Vietnamese Output Impacted by Drought? Million 60-kg Bags 17.0 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 91/92 93/94 95/96 97/98 99/00 01/02 03/04 '05/06
Colombia Maintains Relatively Stable Output Millions of 60-Kilo Bags 15 14 13 12 11 10 9 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 '05/06 Source: USDA
North/Central American Output Rebounding Slightly Millions of 60-Kilo Bags 22 20 18 16 14 92/93 94/95 96/97 98/99 00/01 02/03 04/05 Source: USDA
African Coffee Production Also Improving Slightly 1,000 60-kg bags 22 20 18 16 14 12 60/61 64/65 68/69 72/73 76/77 80/81 84/85 88/89 92/93 96/97 00/01 04/05 Source: USDA
African Arabica Output Increasing Relative to Robustas 1,000 60-kg bags 18 Robusta Arabica 15 12 9 6 3 0 60/61 63/64 66/67 69/70 72/73 75/76 78/79 81/82 84/85 87/88 90/91 93/94 96/97 99/00 02/03 Source: USDA
Washed Arabica Production to See Slow Recovery Millions of 60-Kilo Bags 45 44 43 42 41 40 39 38 37 36 35 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 Source: USDA, J Ganes Consulting Forecasts
Washed Arabica Supplies to Increase Gradually Availability of Washed Arabica coffee slipped with falling world prices Production is showing signs of recovering already now that prices are improving. Production will take time to recover due to decline in tree population Minimal origin stocks exist to meet demand in the event of an unexpected supply shortfall
Estimated 2004-05 Specialty Coffee Output Compared to Other Arabica Production in the Region millions of 60-kg bags 45 40 35 30 25 20 15 10 5 0 N & C America S America Africa Asia Specialty 3.235 3.913 1.235 0.513 Other Arabica 12.745 38.125 6.027 3.535 Source: SCAA, USDA, Derived data for Specialty based on % of output
% of 2004-05 Specialty Coffee Output Compared to Other Arabica Production in the Region Percentage of Total Arabica Production Other Arabica Specialty 1.00 0.90 0.80 0.70 0.60 0.50 0.40 N & C America S America Africa Asia Source: SCAA, USDA, Derived data for Specialty based on % of output
Source: USDA, SCAA Central American Coffee Output by Type Millions of 60-kg bags 2.10 1.80 1.50 1.20 0.90 0.60 0.30 0.00 Costa Rica Guatemala El Salvador Nicaragua* Honduras Specialty 0.88 1.47 0.193 0.15 0.14 Other Arabica 0.98 2.02 1.03 1.28 2.48
Growth of Guatemalan Specialty Coffee 1,000 60-kg bags 4,500 4,000 1998-99 2002-03 2003-04 3,500 3,000 2,500 2,000 1,500 1,000 500 0 SHB HB & SemiHB Prime/Extra Prime Others Total 1998-99 1,945.63 1,262.83 1,104.22 278.54 4,595.60 2002-03 2,125.79 925.88 658.47 242.39 3,952.53 2003-04 1,883.35 744.68 450.39 227.29 3,305.66 Source: Anacafe
Guatemala % Share of Exports by Type % Share of Annual Exports 60.0 50.0 40.0 1998-99 2002-03 2003-04 30.0 20.0 10.0 0.0 SHB HB & SemiHB Prime/Extra Prime Others 1998-99 42 28 24 6 2002-03 54 23 17 6 2003-04 57 23 14 7 Source: Anacafe
El Salvador Sees Growing Sales of Specialty Coffee Million 60 kg bags 1.20 1.00 0.80 2002/03 2003/04 2004/05 0.60 0.40 0.20 0.00 Commercial Specialty Source: Salvadoran Coffee Council
El Salvador s Gourmet Coffee Exports on the Rise 90 80 70 60 50 40 30 20 10 1,000 60-kg bags 0 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Source: Salvadoran Coffee Council
Source: Salvadoran Coffee Council; Fine sells at 15 cents or higher differential. Other includes Organic, Source: Salvadoran Coffee Council; Fine sells at 15 cents or higher differential. Other includes Organic, Certified Rainforest/Eco-Friendly, Fair Trade, Fair Trade/Organic El Salvador Gourmet & Fine Coffee Sales Increase Million 60 kg bags 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2002/03 2003/04 Gourmet Fine Other
Peru s Growth of Gourmet/Premium Coffees 1,000 quintal's 550 500 450 400 350 300 250 200 150 100 50 0 Sustainable Gourmet/Premium Fair Trade Organic 2000 2001 2002 2003 2004 Source: Camara Peruana de Cafe
Indian Exports of Specialty & Value Added Coffee 60-kg bags 2,000 Monsooned Malabar AA Mysore Nuggets EB 1,600 1,200 800 400 0 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 Source: Coffeelab Private Limited
Key Variables Influencing Mild Coffee Output Producers continued drive to add value to production Consumers preference for perceived better quality coffee Higher Market Prices Inability to compete against lower cost producers Geographic considerations; soil conditions, climate
A Look at Shifts in Demand Roasters became extremely price sensitive Some roasters switched blends due to price The use of Specialty/Gourmet products continues to expand not only regionally but internationally This has resulted in the market becoming polarized
Roasters Have Become Dependant on Brazilians and Robustas Replacing Other Milds Supplies 12.0 Millions of 60-Kilo Bags 10.0 8.0 6.0 4.0 Colombian Milds Other Milds Brazilians Robustas 95/96 96/97 00/01 04/05 5.85 10.36 4.40 9.58 6.09 10.45 7.56 11.58 5.46 8.92 6.89 13.35 5.83 7.25 11.80 11.21 Source: ICO Note: October-Feb cumulative exports
Percentage Share of Total Exports by Type % Share of Oct-Feb Exports 35.0 30.0 1998-99 2004-05 25.0 20.0 15.0 10.0 Colombian Milds Other Milds Brazilians Robustas 1998-99 17.43 26.31 24.79 31.46 2004-05 16.15 20.09 32.70 31.04 Source: ICO
US Usage of Other Milds Slips % Share 50 45 40 35 30 25 20 15 10 Colombian Milds Other Milds Natural Arabicas Robustas 5 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: ICO, F.O. Licht
Source: ICAFE Costa Rica Shipping More to US to Meet Growing Demand for Better Coffee % Share 50 1999-00 2003-04 40 30 20 10 0 Germany USA Japan Italy Others
Source: ICO ICO US Importing Fewer Mexicans; More CR & Guatemalan Coffees 4 Millions of 60-kg Bags Costa Rica Guatemala Mexico 3 2 1 0 1998 1999 2000 2001 2002 2003
Java Joints in the USA Shops per 10,000 Folks 1. Anchorage, Ak 2.8 2. Seattle, WA Vicinity 2.5 3. San Francisco, CA 2.2 4. Bellingham, WA 2.1 5. Portland, OR 2.0 6. Bremerton, WA 1.9 7. Boulder, CO 1.8 8. Olympia, WA 1.8 9. San Luis Obispo, CA Vicinity 1.6 10. Santa Rosa, CA 1.5 Source: NPD Group
One a Corner US Cities with Most Coffee Shops 1. Los Angeles-Long Beach 801 2. Seattle, WA Vicinity 628 3. Chicago, IL 568 4. New York, NY 525 5. Portland, OR 419 6. Minneapolis-St Paul, MN 384 7. Washington, DC Vicinity 379 8. San Francisco, CA 373 9. San Diego, CA Vicinity 344 10. Orange County, CA 326 Source: NPD Group
Germany Increasing Reliance on Brazil Million 60-kg Bags 5 Colombian Milds Other Milds Natural Arabicas Robustas 4 3 2 1 0 1998 1999 2000 2001 2002 2003 Source: ICO, F.O. Licht
EU (Less Germany) Imports Stagnant; But Greater Imports of Brazilian Naturals Million 60-kg Bags 9.5 Colombian Milds Other Milds Natural Arabicas Robustas 8.5 7.5 6.5 5.5 4.5 3.5 2.5 1998 1999 2000 2001 2002 2003 Source: ICO ICO
Source: ICO ICO Recurring Theme: Japan Imports More Brazilians 2.2 Millions of 60-kg Bags Colombian Milds Other Milds Natural Arabicas Robustas 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: SCAJ Based on on 2003 imports that that were purchased over $1.00 pound Japan Imports of Specialty Coffee by Origin Thousands of 60-kg Bags Ethiopia 534.4 30.0 Tanzania 143.0 30.0 Jamaica 22.3 22.3 Cuba 21.1 21.1 Colombia 1,222.1 15.0 Guatemala 453.6 11.0 Yemen 8.3 8.3 Kenya 13.2 8.0 Brazil 1,655.3 7.0 Indonesia 967.3 6.5 Total 6,294.1 190.4
Source: ICO ICO Russian Imports Rising 250 Thousands of 60-kg Bags Other Milds Robustas Other 200 150 100 50 0 1997 1998 1999 2000 2001 2002
Source: ICO ICO Singapore Coffee Imports Decline? Thousands of 60-kg Bags 500 450 400 350 300 250 200 150 100 50 0 1998 1999 2000 2001 2002 2003
Source: ICO ICO Chinese Coffee Imports Rising; Mostly Robusta Thousands of 60-kg Bags 250 200 150 100 50 0 1997 1998 1999 2000 2001 2002
Starbuck Sees Continued Growth Opportunities Millions of bags Roasted data converted to green bean equivalent 6.0 FY95 FY04 are based on historical roasted coffee volumes. 5.0 4.0 FY05 is estimated roasted coffee volume. FY08, FY10 are 3 and 5 year estimates based on 20% growth. 3.0 2.0 1.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2008 2010 Source: Starbucks Note: 1996 is when Starbucks went international.
Most Likely Production Scenario for Mild Coffees Fundamental Variables Impacting this outlook Production of non-washed Arabica and Robusta coffee Substitution, availability of Brazilian naturals Two-tier pricing becomes even more pronounced Second level Milds replaced by Naturals
Summary: Large Expansion of Washed Arabica Supplies Not Expected Any Time Soon Availability of Washed Arabica coffee slipped with falling world prices Production appears to recovering Minimal origin stocks exist to meet demand in the event of an unexpected supply shortfall There remains no margin for error
Key Influences on Consumption of Better Quality Washed Mild Coffees US consumption patterns catching on elsewhere Has the market reached saturation? Differentiated coffees going mainstream Ease of use increasingly more important Can growth be sustained? Number of new coffee houses globally on the rise; US still growing strong; Available in more nontraditional outlets McCafes, gas stations, banks
Roasters Need to Be Creative to Fill Expected Gap Roasters will need to remain creative in finding unique blends, flavorings to satisfy growing demand for specialty, gourmet, and premium coffees. Roasters will need to continue to work hand in hand with producers to assure sufficient supplies of quality coffee in the future. Roasters will need to be visionaries and look outside the box to satisfy demand and to keep demand growing find alternate locations to keep coffee in front of consumers Demand rising by late comers to the party jumping on the bandwagon
www.jganesconsulting.com