On a mountaintop estate in the rugged coffee-making region of Quindio, Colombia, Juan Pablo Villota is at war with the weather.
For three years, abnormally wet conditions have caused massive flooding in the county's flatlands and damage to his crops. Even the road to his 40-hectare plantation gives testament to his fight: The swollen La Vieja river is a muddy torrent that has forced lane closings along the twisting two-lane highway.
For coffee producers like Mr. Villota, those three years have been a constant battle. Without enough sun, coffee plants don't grow the berries that are harvested for their beans. And too much humidity creates ideal conditions for coffee rust, a disease that stunts berry production. Some farmers have seen a 70-per-cent drop in yield, although his San Alberto estate has limited the damage to a 20-per-cent decline.
"It has been a disaster," said Mr. Villota, whose grandfather bought the picturesque estate in 1972. "Three years of heavy rains with very low quantity of sun hours has decreased Colombian production ... All the growers have been suffering."
The painful struggle of Colombia's coffee producers is part of a growing global challenge for the industry.
Changing weather patterns have wreaked havoc on coffee supply, particularly the Arabica strain, which is grown in the Americas and Africa and which makes the best coffee. Brazil and Colombia are the top two producers of Arabica, but experts say the crops are not keeping up with skyrocketing demand in emerging markets like China, India and South America, as well as among consumers in Europe and North America.
In the face of strong demand, coffee inventories have fallen to their lowest levels on record. A decade ago, coffee-making countries had stored some 55.1 million 60-kilogram bags. Last year, stocks fell to 13 million bags. The industry's supply-demand balance is so bleak, in fact, that a scientist rocked trade forums last year by warning that the world is veering toward "peak coffee" - the point at which producers can no longer increase production to meet the world's rising taste for the drink.
The squeeze is already being felt in grocery stores and cafés around the world. In North America this week, Starbucks Corp. raised the price of a one-pound bag of beans by 17 per cent at its U.S. stores and 6 per cent in Canada. And J.M. Smucker Co., which sells the Folgers and Dunkin' Donuts brands, announced its fourth increase in a year for a total hike of 38 per cent.
And while the weather hits inventories, some are blaming the rising cost of coffee on speculators - institutional investors who are pouring money into commodities such as coffee, oil and sugar in search of big returns. Starbucks president Howard Schultz has blamed speculation, rather than supply shortages, for the doubling of coffee commodity prices since last May.
Whatever the truth, the story of peak coffee is one that spans growers, sellers, traders and the global economy.
The problem begins with a coffee tree.
The supply problem
The typical Colombian coffee grower farms a 1.8-hectare plot with his family and belongs to a local co-operative that is allied with the national Coffee Growers Federation. Some market their production directly to middle men or even directly to foreign buyers, while the federation also sells coffee both domestically and internationally under Colombia's iconic Juan Valdez brand.
Farmers typically have to cut back their coffee trees every five years in order to rejuvenate the production of berries, and then replace the trees after 15 years as yields decline precipitously.
But many farmers, especially smaller growers, are extending those timelines to take advantage of the current price spike and because they don't have the resources to reinvest in their field, even at the prices, which have been offset by the rise in the Colombian peso.
"It's a poverty trap," the federation's communications director, Luis Fernando Samper, said in an interview at its headquarters in Bogota. "People are not willing to uproot their trees when they still get cherries from the trees, and so every year they get less cherries."
Largely because of the weather, Colombia's production has fallen to 9.5 million 60-kilogram bags last year from 12 million bags in 2007, the last year before the particularly nasty version of the weather pattern known as La Nina brought the rain.
At the same time, many farmers are encouraged to move out of coffee production as other agricultural products - from plantain in Colombia, to sugar cane in Brazil - soar in price, and land costs rise.
Colombia's production troubles are shared by other coffee-making countries, including Brazil. Production in Central America and East Africa has been stagnant or down in the past few years, while global demand keeps growing at a rate of about 2.5 per cent a year.
Agricultural experts are warning that the ability of growers to respond to higher prices by increasing supply will be limited by the continuation of poor growing conditions resulting from changing weather patterns and by competition for land use in exporting countries that could limit coffee production.
Growers need to be prepared to adapt to climate change, said Peter Baker, a senior scientist with CABI, a British agricultural institute.
"Is it climate change or not?" Mr. Baker asked of the changing weather patterns. "It's extremely difficult to say but this is exactly what you would expect to happen: That we're going to get more extremes in the weather like this."
Arabica coffee - which must be grown in equatorial zones between 1,200 metres and 1,800 metres of elevation - is particularly susceptible to bad weather, and the extremes of wet and dry lead to more infestations of rust and an insect known as the coffee borer.
Mr. Baker noted that there has been virtually no growth in the production of Arabica coffee in the past 20 years, while countries like Indonesia and Vietnam are boosting production of the Robusta variety. Robusta is favoured in some developing countries and for blends and instant coffee.
The agricultural scientist raised the spectre of peak coffee last year in a speech at a meeting of the International Coffee Organization, which prompted a broader discussion throughout the industry.
In an interview from London, he complained that it is difficult to known the exact status of production and yields because the industry has extremely poor data. But it is clear that growers are having trouble responding to challenges because they tend to be small farmers with little opportunity to invest in higher-yielding varieties.
It takes three years for a new coffee plant to produce a harvest, and many Third World farmers are unwilling to gamble that prices will remain high, especially when they can reap immediate returns from other crops.
"In principle, these prices should make planting more attractive but planting takes a long time to come on stream," said Jose Sette, executive director of the London-based International Coffee Organization.
Meanwhile, as production has failed to keep up with demand growth, the industry has been reducing its inventories of unroasted beans that sit in warehouses around the developing world.
With inventories falling to record lows this spring, the price was bound to climb. But many in the industry say coffee price fluctuations - like those of many other commodities - are compounded by speculators.
"Through financial speculation - hedge funds, index funds and other ways to manipulate the market - the commodities market is in a very unfortunate position," Starbucks' Mr. Schultz told reporters in London this spring. "This has resulted in every coffee company having to pay extraordinarily high prices for coffee."
Coffee prices - which went through a prolonged slump between 2000 and 2006 - have doubled since the middle of last year, with Arabica topping a 34-year high of $3.08 (U.S.) a pound earlier this month before selling off with the rest of the commodity market. Arabica now sells on future markets for $2.65 a pound, compared to less than 50 cents a pound at its nadir a decade ago.
"There are certainly fundamental issues - the problem with supply and demand is a real issue," said Ric Rhinehart, executive director of the Specialty Coffee Association of America. "But there is also a speculative component to it."
The coffee futures market is a critical tool for buyers and sellers to hedge their positions, particularly given the long supply lines that exists between equatorial growers and North American consumers. Growers can lock in prices even before they harvest the berries, while buyers can assure not only the price but the supply in an extremely volatile market.
But in recent years, the financial players have overwhelmed the industrial traders. As a result, the coffee market has behaved much as the broader commodity complex, driven by a combination of growing emerging market demand, a lower U.S. dollar and vast pools of capital looking for a home.
Like crude oil or silver, the trading pattern of coffee futures is closely linked to the U.S. dollar. When the greenback falls - as it has in the past year - the commodities priced in U.S. dollars rise, as producers seek to recoup their costs in revalued local currencies. This month's recent pullback in coffee prices was mirrored by a rally in the U.S. dollar.
Meanwhile, the U.S. financial system is awash in liquidity as a result of the Federal Reserve's extraordinary "quantitative easing," as much of that money has found a home in commodity markets.
"There is really next to no regulation any more in commodity markets, and that is a real issue," Mr. Rhinehart said. "A lot of money is pouring into commodities because it can't find a better risk/reward equation right now."
But he added that speculators are betting on commodities because of underlying factors, and in the coffee market, that means the inability of producers to keep up with demand growth.
Seeking a solution
The key to avoiding the peak coffee scenario is boosting productivity, and many growing countries are attempting to increase yields by replacing old coffee trees with disease- and pest-resistant varieties.
Brazil is one country that has succeeded in raising production in recent years, as its coffee production comes from larger, more mechanized flat-land farms. But in Africa and Central America, coffee producers remain under pressure.
In Colombia, the Coffee Growers Federation has established a loan program to encourage its 553,000 members to rejuvenate their fields by cutting back old plants and replanting with disease-resistant varieties.
Even as Colombian producers struggle to boost production, they are working to meet the changing demands of global coffee consumers, who increasingly want high-quality "specialty" grades and certifications like the "fair trade" socio-economic seal or the Rainforest Alliance environment program.
Overall demand is growing, but demand for high-end "specialty coffee" is climbing even faster, especially as growing countries like Brazil and Colombia develop a more refined taste for their own product.
Brazil is soon expected to overtake the United States as the largest buyer, consuming 23 million bags of their own coffee annually compared with 1.5 million bags 30 years ago. Colombians used to joke that you had to leave the country to have a good cup of Colombian coffee, but now Juan Valdez coffee shops are sprouting up in all its major cities.
Canadian coffee drinkers are considered among the more discriminating in the world, in terms of demanding high-quality coffee. Canadian consumption has continued to climb through the recession, while it has been stagnant in major markets like the U.S. and Europe.
Specialty coffee chains like Starbucks and Second Cup are competing with new arrivals like Ottawa's Bridgehead, which boasts that it sells "fairly traded, organic and shade-grown coffees from small-scale farmers," and Vancouver's Forty Ninth Parallel, which emphasizes a gourmet approach to coffee as an "experience for the senses."
But with prices so high, producers are less interested in jumping through the hoops to obtain "fair trade" or Rainforest certificates. Mr. Samper, of the Coffee Growers Federation, said such certifications can be extremely expensive for small growers to maintain and the premiums paid are not worth it when prices are high.
Even the higher prices haven't deterred Canadians from indulging in their morning "double double" or non-fat latte. In the past five years, Canadian coffee consumption has climbed 17 per cent, and 40 per cent in the past decade.
"That's significant and well out of step with the other traditional importing markets where you are seeing very low rates of growth," said Sandy McAlpine, president of the Coffee Association of Canada.
It's no wonder then that Mr. Villota is looking to expand his sales to Forty Ninth Parallel, which has recently began purchasing his "Quintuple Selection" San Alberto premium coffee. He is also exporting his branded product directly to buyers in South Korea and Sweden.
His family invests heavily in the business - to rejuvenate the crop with new disease-resistant plants, to maintain the use of fertilizers and pesticides, and to expand its marketing including attracting the growing tourist trade with guided visits and a terraced coffee bar with a spectacular view.
But while prices have climbed in U.S. dollar terms, the Colombian peso has climbed dramatically against the dollar, limiting the upside to farmers in their local currency, while yields are down and costs are skyrocketing. As a result, many small growers can't re-invest and Mr. Villota questioned the viability of the 1.8-hectare family farm.
"Even though the price is high in U.S. dollars, they are just surviving," he said. "In my opinion, it is not sustainable for them."
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