Surging production and modest consumption growth are increasing the pressure on the global coffee industry as the coronavirus pandemic continues to disrupt the supply chains of more than 50 bean growing and processing countries.
World coffee production is forecast to reach a six-year high of 176.1 million bags (each weighing 60 kilograms) in 2020-21, an increase of 9.1 million bags compared to the previous year, according to data published by the U.S. Department of Agriculture in June. The main driver is Brazil, whose Arabica bean output is forecast to rise 6.8 million bags above the previous season to 47.8 million bags. Global ending stocks are expected to jump to a six-year high as production outpaces consumption, the USDA said.
That could further pressurize bean prices, which fell 7.5% on average between January and May, as the rise in home consumption may not offset a massive loss in sales at coffee shops, restaurants and hotels that have been closed as a result of lockdowns.
"COVID-19 has come as an additional shock to what we've called the 'coffee crisis,'" said José Sette, executive director of the International Coffee Organization, or ICO, on a recent webinar on the subject of coffee and the pandemic. "Since 2016 we have experienced a broadly negative trend with coffee prices 30% lower than the average of the last 10 years."
A recent outbreak in China and a rise in coronavirus cases in several U.S. states has heightened fears that the gradual re-opening of economies could lead to a resurgence of the disease. Any renewed shutdowns could put many more independent coffee shops out of business and deal a blow to the recovery hopes of retail chains such as Starbucks Corp. and Britain's Costa Coffee, a unit of The Coca-Cola Co.
"Although the bulk of coffee is consumed at the home or office, coffee shop chains are very important," said Sette of ICO, in an interview. "In Europe and North America, about 25% of the volume of coffee consumption is out of home." According to research firm Euromonitor, retail sales at U.S. specialist coffee shops rose from $11.2 billion in 2005 to $17.4 billion in 2012 and $28.2 billion in 2019.
But consumers need their jolt of java and typically compensate by buying more coffee at stores and supermarkets, as they did in the first three months of the pandemic. It would benefit big suppliers such as Nestlé SA, maker of Nescafe instant coffee and Nespresso pods, which counts coffee as one of its most profitable and fast-growing food-and-drink items.
Another beneficiary of higher store sales would be JDE Peet's BV, which went public in Amsterdam in May and has emerged as Nestle's chief coffee rival. Partly owned by Mondelez International Inc., it is the world's biggest pure-play coffee and tea group with 50 brands including Peet's Coffee, Maxwell House and Jacobs. In fiscal 2019, JDE Peet's served about 130 billion cups of coffee and tea and reported revenue of €6.9 billion. JDE Peet's led the expansion in Brazilian exports to Europe in tonnage terms with an increase of 52.0% year over year in March.
"What we've seen is big brands made by big companies sold in big packages in big-box stores are generally doing the best right now," said James Watson, an analyst at Rabobank, who participated in the webinar. Quoting data from research firm IRI, he said that off-premise coffee sales in the U.S. rose 16% for the four weeks ended May 3, 2020.
In the first few weeks of lockdowns, demand surged as shoppers stockpiled coffee. In Brazil, the second-largest coffee-consuming country, supermarket sales jumped 30% in March alone. But that demand has now ebbed and producers face a longer-term challenge as consumers gravitate to cheaper, low-margin coffee products.
"We have our doubts that the increase in at-home consumption will fully compensate for the decline in out-of-home consumption," said Sette in the interview. "We'll only see the true impact of this next year."
Meanwhile, COVID-19's impact is also being felt in the plantations and processing facilities of many coffee exporting countries. Some have faced shipment delays, others have been hit by reduced foreign investment in their coffee industry. El Salvador, which has harvested its most recent coffee crop, exports between 85% and 90% of its production, of which 45% ends up in the U.S., 32% in Europe and 18% in Asia. The coronavirus has made some staff fearful of going to work and a suspension of public transport has reduced labor mobility.
"We are working on a sanitary and social distancing protocol for the whole chain of production, which includes farms, mills, roasters and cupping labs," where coffee is assessed by professional tasters, said Lily Pacas, executive director of the El Salvador Coffee Council, in an emailed response to the questions.
The pandemic could have a bigger impact on exporters such as Brazil, Colombia and Indonesia, which are only now starting their coffee harvest season. Brazil, the world's biggest producer, is struggling with the second-highest number of COVID-19 cases and deaths worldwide. About 70% of the coffee harvested there is picked by hand, generating 2 million seasonal jobs. Should infections keep rising, the impact on the supply chain could be devastating.
Said Maximo Torero Cullen, an economist at the U.N.'s Food and Agriculture Organization: "Looking at past pandemics, such as H1N1, Ebola and Zika, estimates show that coffee export earnings fall as much as 15% compared to a state with no pandemics."