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Coffee growers struggle to meet demand.

The coffee business is booming. Demand is rising each year as more people in China and India add a cup to their daily routine and, even in the saturated Western markets, the increasing popularity of espresso, cappuccino and single-serve coffeemakers is fueling growth in the once-stagnant sector.

This is great news for growers, retailers and cafes. Starbucks reported $12.7 billion in sales last year, surpassing Subway to become the second-largest chain in the United States after McDonald's, and the company plans to double its number of stores in China by 2020. Vermont-based coffee roaster Keurig Green Mountain has seen its stock price more than quadruple in the past five years thanks to its single-cup coffee brewing machines that are now virtually ubiquitous in offices nationwide.

But producers are struggling to supply the number of beans the world needs to stay caffeinated. Last year was particularly difficult as droughts in Brazil and a fungus in Central America cut output to its lowest level since 2011, according to the International Coffee Organization (ICO).

The result was a coffee deficit--consumption exceeding production--and this scarcity pushed up the trading price of Arabica coffee (the most popular variety of bean) to nearly $5 per kilogram (2.2 pounds) last October after almost three years of steady decline.

The solution is obvious: make more coffee. But since beans only grow in tropical climates and the best-tasting coffee must be farmed at elevations above 3,000 feet, it is not so simple. Four nations--Brazil, Vietnam, Colombia and Indonesia--produce two-thirds of the world's coffee, and only 14 countries had the proper mixture of geography, expertise and investment to hit the one million bag mark in 2014. While these countries and others with lower output could benefit from having more farmland, the challenges are too big for any single company to overcome.

Industry players have pushed to increase production for decades. Starbucks, for example, began to build "farmer support centers" in 2004 in areas where output could be improved, including Costa Rica, Rwanda and Tanzania. In 2009, it started an international loan program for small farms that has now grown to $20 million. The fragmented efforts of individual companies have not translated to collaborative benefits for the coffee industry as a whole, however. But this is changing. "There has never been a global effort to increase production--until now," said Vicente Partida of ICO. "Public-private partnerships like the World Coffee Research program promise to revolurionize our scientific knowledge of coffee and produce hybrids for both higher quality and yield."

World Coffee Research (WCR) is an industry-funded program that seeks "to grow, protect and enhance supplies of quality coffee while improving the livelihoods of the families who produce it." Overseen by experts at Texas A&M University, one of its largest undertakings is to breed more resilient seeds and test existing disease-resistant crop varieties. This year, Starbucks will work with WCR on 30 new coffee varieties. "Ultimately, all the research we conduct goes back to increasing the production of high-quality coffee," said Leo Lombardi, deputy director of WCR and a horticultural sciences professor at Texas A&M.

The goal is to help farmers avoid the blights that plague the industry, like leaf rust fungus. Large portions of the 2014 crop in Guatemala, El Salvador and Panama were lost to the rust, leaving both local farmers and corporate purchasers short. "Coffee leaf rust is a huge concern for the entire coffee industry because it affects everyone," Partida said.

Only recently have there been any breakthroughs in fighting the fungus, with Colombia, in particular, taking the lead. "Since the first rust outbreak of the 1970s, Colombia has been very proactive in training the farmers about good agricultural practices," Lombardi said.

Through crossbreeding, the country's National Coffee Research Center (Cenicafe) developed a leaf-rust-resistant coffee variety called Castillo. It was introduced in Colombia in 2005, but many of the country's farmers were reluctant to switch. Among a local federation of 500,000 registered producers, tradition is hard to break, and some roasters consider Castillo an inferior type of coffee.

But many became convinced after the rust returned in 2008 and cut production by some 40% over three years. As the outbreak grew worse, the federation worked with farmers to replace their crops with Castillo. Their efforts were successful: The 2014 crop was back to what the ICO calls "pre-crisis" levels, reaching 12.5 million bags after a low of 7.7 million in 2011. The move to a hybrid bean helped ensure that the country could remain the third-highest-producing nation in the world, and the turnaround has only given the industry more reason to invest in better science.

Developing coffee varieties with better drought resistance is another priority, as one of the main reasons for recent declines in global production has been the lack of rain in Brazil. Although not as well marketed as Colombia, which is famous for its fictional advertising representative Juan Valdez, Brazil pumps out almost four times as many beans as its northern neighbor, making it the world's leading producer, responsible for nearly one-third of the global coffee crop.

Due to ongoing drought conditions in the region where much of its coffee is produced, however, Brazil came up almost five million bags short of its 2013 total in 2014. According to a survey from the local newspaper, Folha de S. Paulo, output could drop even further, as more than 140 cities in Brazilian coffee states were forced to ration water in February--the time when beans are usually maturing. Early estimates from the ICO and the commodities trading arm of ED&F Man predict that the 2015 crop is unlikely to rebound to pre-drought levels. Even coffee producer Volcafe, which expects an output increase over last year, hedged its bets in a statement, saying, "the dry and warmer-than-average conditions in January in the northern coffee areas are a concern."

Although it has an outsized impact, Brazil is not the only country that has seen its crop dry up in recent years. In Nicaragua, up to half of the country's output was cut by an El Nino-induced drought in 2005. The United Nations Intergovernmental Panel on Climate Change (IPCC) believes that the effects of unpredictable rainfall patterns, erratic weather, and rising temperatures will only further derail the industry in the decades to come.

"Although some local areas may experience improved conditions for coffee production, e.g. high altitude areas of Guatemala, the overall predictions are for a reduction in area suitable for coffee production by 2050 in all countries studied," the IPCC stated in its latest report.

According to Starbucks, helping smaller growers becomes "even more important when farmers experience fluctuating weather conditions that are the result of a warmer climate." Thus, the company is looking long-term, prioritizing research and investment now to ensure all its current and future stores will never be short on supply.

"I do not think anybody is really prepared for climate change," Lombardi said. "But the industry is well aware that coffee as we know it might be totally different 50 years from now."

Jared Wade is a freelance writer currently working and traveling in Latin America.

by Jared Wade
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Title Annotation:Fore front
Comment:Coffee growers struggle to meet demand.(Fore front)
Author:Wade, Jared
Publication:Risk Management
Geographic Code:9CHIN
Date:Jun 1, 2015
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