By Cornelius Zeeman and Isaac Coetzee,
Fairtree Portfolio Manager and Equity Analyst
Coffee starts its journey as a green bean, the unroasted seed of the coffee cherry. These green beans are harvested, processed, and eventually roasted to become the coffee we know and love. While there are many varieties of coffee, two primary types dominate the global market: Arabica and Robusta.
Arabica vs. Robusta.
Arabica coffee, known for its smooth, complex flavour, characterised by mild acidity and a variety of aromatic notes, is preferred in speciality and premium markets. It’s the preferred choice for major coffee houses like Starbucks.
On the other hand, Robusta coffee delivers a bolder, more bitter flavour, with higher caffeine content and a fuller body. Often used in instant coffee and espresso blends, Robusta contributes richness and adds a creamy layer, known as crema, to espresso.
Robusta is generally more affordable than Arabica for several reasons. It thrives at lower altitudes and in warmer climates, requiring less intensive environmental management. Robusta plants also have higher yields and lower water needs, contributing to reduced production costs. Furthermore, it’s higher caffeine content makes it more resilient against pests, such as the coffee borer beetle, acting as a natural pesticide. In contrast, Arabica requires cooler, higher altitude growing conditions and more careful cultivation, making it a more costly option.
Image 1: Key differences between Arabica and Robusta
Source: International Coffee Organisation
Supply and Demand.
Arabica thrives at higher altitudes and is primarily produced in Brazil, which accounts for 48% of global Arabica production, followed by Colombia (12%), and Ethiopia (8%). Robusta, being more adaptable, is predominantly produced in Vietnam (36% of global Robusta production), Brazil (28%), and Indonesia (12%).
Brazil is the largest combined producer of both coffee types, accounting for 40% of global production, followed by Vietnam with 16% and Colombia with 7%, as shown in Graph 1.
On the consumption side, the European Union and the US together account for 40% of global coffee consumption. Both regions import most of their coffee, as their domestic production is insufficient to meet their consumption needs.
Graph 1: Coffee production vs. consumption by region
Source: USDA & Fairtree
Challenges in Global Coffee Production.
The coffee industry faces significant risks, including unpredictable weather patterns, pest issues and rising production costs. These challenges threaten both the quantity and quality of coffee. Major coffee-producing countries have each faced notable disruptions:
- In Brazil, a severe drought followed by frost in 2021/22 caused a 17% decline in coffee output, damaging crops extensively.
- Vietnam saw production declines in 2020/21 due to dry weather and low coffee prices, which led to reduced irrigation and fertilisation efforts, followed by another drop in 2022/23 driven by soaring fertiliser costs and adverse weather conditions. The high fertiliser costs and lack of price incentives diminished the use of essential inputs, resulting in decreased yields.
- Colombia, the second-largest Arabica producer, experienced a 31% drop in coffee production during 2008/09 due to heavy rains and coffee rust, a fungal disease that causes leaves to drop, reducing the yield and quality. The country’s production further declined by 12% in 2021/22, largely due to La Niña-related weather conditions and high fertiliser prices. This trend persisted into 2022/23.
Graph 2: Year-on-year growth rates of top coffee producers
Source: USDA & Fairtree
What’s Driving the Surge in Coffee Futures Prices?
In 2021/22, coffee consumption exceeded production, leading to a decline in ending stocks that continued through to 2023/24, as shown in Graph 3. This situation was exacerbated by soaring fertiliser prices in 2022, exacerbated by the Russia-Ukraine conflict, which increased production costs and reduced fertiliser use. Additionally, coffee production faced risks from unpredictable weather and other supply chain issues, such as rising freight rates and regional conflicts like the Red Sea conflict. These factors contributed to a sharp rise in future prices for both Arabica and Robusta coffee.
Graph 3: Global coffee production and consumption trends over time
Source: USDA & Fairtree
Futures pricing often reflects anticipated supply and demand imbalances, signalling potential future shortages or market disruptions. Consequently, the high futures prices we are currently seeing, as shown in Graph 4, indicate ongoing concerns about future supply constraints and production challenges.
Graph 4: Coffee future prices
Source: USDA & Fairtree
Conclusion.
The coffee industry, while deeply rooted in tradition, is facing evolving challenges that impact both production and pricing. Arabica and Robusta beans, with their distinct growing conditions and flavour profiles, highlight the complexity of the global coffee market. From shifting weather patterns to rising production costs and geopolitical tensions, these factors shape the supply and demand dynamics that ultimately influence the price of your daily cup of coffee.
Stay tuned for part two of our article, where we explore how Starbucks navigates these industry dynamics and maintains its market leadership.
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