Arabica in 2050

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ADDIS ABABA, Ethiopia

By Dan Bolton   

Andrea Illy, one of the most respected and forward-thinking business executives in coffee, is worried: arabica is under siege.

By 2050 global demand will double while land suitable for growing arabica is reduced by half, he told delegates at the International Coffee Organization’s (ICO) 4th World Coffee Conference.

Scorched by rising temperatures, parched for water or alternately pounded by rain, arabica is “one of the crops which is severely affected by climate change, which is a threat both in terms of high temperature in the regions where it is produced and a threat in terms of water security,” said Illy, chairman and c.e.o. of the renowned Italian coffee company founded in Trieste by his grandfather in 1933.

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Illy explained that in much of the world the best acreage for cultivating arabica is located in climate zones that are the most vulnerable to excessive heat and drought. In some countries such as Colombia, Guatemala, and Ethiopia farms can be relocated or “upsloped” to cooler climate zones 500 to 1,000 meters higher up the mountain but in much of Central America, Asia and Brazil arabica farmers have nowhere else to grow.

Arabica production worldwide has stalled yet “we need to quadruple productivity in 35 years,” he said, adding, “We have a problem we need to fix.”

Severe shortfall

The severity of the shortfall varies year to year but arabica production appears to be at least 25 million 60-kilo bags less than demand. Coffee growth already has reached double-digits in countries with massive populations like India and China. Assuming a population increase of one billion by 2025, and accelerators that include the fact disposable incomes are rising globally, the shortfall could reach 45 million bags.

Consumption is four times the compound average growth rate of two decades ago, noted Illy. “I think that is quite a dramatic improvement triggered by the existence of a virtuous circle of well-being that coffee consumption gives to the consumer and the development opportunities that it creates for growers,” he said.

It also points to the “urgent need” for an “arabica global plan” in which all the gaps and needs are identified along with conditions necessary to solve them. “There needs to be private-public partnership with a map of what the major players are doing for funding and coordination of the transfer of know-how,” he said.

Global consumption exceeded production the past two harvests and there is another deficit looming in the coming year, according to the International Coffee Council (ICC). In its March 2016 report, ICC staff estimated arabica production declined .1% in 2014/15 compared to the previous harvest. Robusta, which thrives in heat, showed a 3.7% gain. The 2015/16 coffee crop is estimated at 143.4 million bags.

Consumption rose 1.2% to 152.1 million bags in 2015 (up sharply from 2012 when consumption was estimated at 143.3 million bags). “The biggest potential is emerging markets and exporting countries,” according to ICO, and there is still “strong demand in many countries, particularly some traditional markets” such as the US (up 3.2% since 2012) and Japan (up 2.4% since 2012).

Overall growth of consumption in the importing countries has averaged 2% per year, according to ICO. The organization predicts growth rates of at least 1.5% to 2.5% per year for the foreseeable future which means producers must come up with an additional 25 to 45 million extra bags by 2025.

The reasons for recent production declines are principally weather related. However this is compounded by the fact that prices continue to fall which makes it much more difficult for growers to finance best practices like increasing shade (which decreases yield) and to make capital improvements such as the installation of irrigation systems essential to mitigate the impact of diminished rainfall.

Traders say that doubling the price of green coffee to $3 a pound would make a huge difference in the ability of arabica growers to overcome the challenges they face.

Descending prices

Scott Merle is v.p. sales green coffee at Distant Lands Coffee. “I’m generally a doomsayer when it comes to where we’ll get coffee in the future, having a greater understanding of all the things that can go wrong that negatively impact volume,” says Merle.

“Everything in my opinion will depend on two factors – price and viability. I believe that if end coffee prices remain tied to NY commodity pricing, and do not dramatically increase and then remain above levels at or above the $3 mark, we will not see any significant increase in specialty coffee production,” he said.

“I don’t see any silver linings or silver bullets that will save the coffee world,” said Merle.

Julio Sera is senior risk management consultant at INTL FCStone. He offers a more optimistic view: “I personally believe in the economic principal of creative destruction.  I don’t feel that we will necessarily “need” a doubling of global coffee output to compensate for consumption increases.  The reason for that of course, is the advent of the single serve delivery mechanism (creativity).  Millennials especially, prefer a simple “one touch” solution that eliminates waste, keeps things clean and simple…and, even helps promote sustainability and traceability to a degree; the latter being a quality that Millennials are staunch supporters of.  Therefore, with a more efficient consumptive vehicle and substantially less inherent waste…I believe the jury is still out on just how much green demand has and will be reduced (destruction) as the world continues to embrace the single serve category.”

The commodity markets are more hindrance then help when it comes to pricing arabica. “If the recent (5-10 year) history of volatility in commodities as an asset class is any indication, absolutely no one can judge what coffee prices may or may not do over time,” says Sera. “Moreover, the decreasing lifecycle of trends and patterns in financial markets makes it hard to gauge how speculative players (what we call managed money) will allocate their investments in coffee and other raw materials moving forward,” he said.

During panel discussions (and afterward in the hall) commodity specialist Judith Ganes-Chase said that historically the NY Coffee Exchange (ICE) price for arabica futures hovers around $1.40 per pound. The Coffee C contract prices physical delivery of 37,500 pounds of exchange-grade green coffee from one of 20 countries to one of several ports in the U.S. and Europe. In 2013 coffee futures fell below $1 a pound for the first time since 2006. Two years later coffee was the best performing of all commodities traded. Today it’s once again near the bottom.

Ganes-Chase predicted prices will likely to rise from the current low but she questioned whether the NY “C” market would sustain $3 or more a pound.

There is a fundamental disconnect in the commodity benchmark and how coffee is traded, observes Ric Rhinehart, executive director of the Specialty Coffee Association of America (SCAA). “New York has failed miserably at the task of price discovery,” said Rhinehart. All coffee is coffee with a small ‘c’ he explains. “The kinds of coffee used by the specialty category (quality arabica) represents less than 30% of the coffee grown,” he said.

Rhinehart said that the current benchmark is washed arabica, a type of coffee that no longer represents market demand. “Pricing washed is less and less meaningful,” he said. The quantity of washed coffee that is traded has remained at 30 to 35 million bags for 35 years, said Rhinehart.

Compounding that distortion is the fact that only 3% of the coffee is actually delivered. The remainder is traded by speculators. He noted that to avoid massive swings in the arabica market one large hedge fund recently switched to robusta traded on the London commodity market as the coffee segment of its commodity portfolio.

“Volatility is the enemy of farmers,” told delegates.

The bottom line is that consumers who paid 25-cents a cup 40 years ago now pay $4.50 for a cup of coffee while the farmgate price of coffee has not increased in relative terms since the 1970s.

“In a perfect world, where prices get high and stay there to motivate and reward producers we could see slight increases year on year. I’d say 2-5% per country per year,” says Merle.

“If we see another climate or nature-based event that negatively impacts coffee trees or the land on which they grow, we will see corresponding declines in coffee production in the countries affected,” observes Merle. “I think it is more likely we’ll have additional outbreaks like coffee leaf rust on a more frequent and possibly more damaging level, than not,” he said.

“Specialty producers will not have the appetite or ability to remain in coffee if it only allows them to barely make ends meet or keeps them trapped in a cycle of poverty,” according to Merle. “It would take some type of large-scale shortage to force NY commodity pricing up over the $3 level to stay,” he said.

That catastrophic event is unfolding.

Climate concerns

February 2016 shattered records as the warmest month ever compared to averages dating back to when record keeping began in 1880. It follows a record-breaking December 2015 and January 2016, an unprecedented three months in a row with temperatures at least 1C warmer than the 20th century average. El Niño is a major driver of the recent uptick in global temperatures, it is currently roasting the tropics, but El Niño alone cannot account for all the extra heat the planet has seen recently.

It an October 2015 report titled “Arabica Coffee Faces a Roasting” the International Center for Tropical Agriculture (CIAT) cites research indicating that 80% of the land currently used to grow arabica coffee will become unsuitable by 2050.

Even the safest areas with cooler temperatures “could suffer a one-third slump in suitability.” The findings are based on research published in the journal Plos One.

More alarming to the specialty coffee community is the fact that cupping scores over the entire crop fall significantly along with yield.

The CIAT scientists, and work by those at World Coffee Research and the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) expect rising temperatures to also trigger unpredictable rains, bring new threats from pests and lead to outbreaks of plant diseases.

There really is no global answer for coping with global warming, according to Aaron Davis, head of coffee research at the Kew Royal Botanic Gardens in Surry, England. It can only be addressed locally, taking into consideration unique micro climates and terroir.

It starts with best farm practices and layers reforestation, migration upslope, regeneration and new cultivars. Business as usual in Ethiopia, where Kew has conducted extensive research, puts in jeopardy the livelihood of 15 million coffee farmers. Globally that total rises to hundreds of millions. In his view the only choice is a complicated mix of actions that he calls “building climate resilience.”

The role of genetics

Tim Schilling c.e.o. at World Coffee Research is an agronomist, manager, and researcher with strong market orientation and experience in agribusiness and cooperative development. He puts a lot of faith in the resilience of growers. More critical is the resilience of their plants.

The existing mix of arabica is dangerously similar in its DNA. Virtually all of the plants globally are descended from the very few seeds that left Ethiopia and other African countries during the past two centuries. This makes coffee susceptible to blights like the outbreak of Hemileia vastatrix that in 1869 decimated the coffee industry in Sri Lanka killing 90% of its trees — the industry never recovered.

Schilling is “breeding the future” through the selection of super parents that are resistant to heat and disease while maintaining quality and productivity.

Researchers at the Texas A&M’s Norman Borlaug Institute, financed by industry donations to WCR are developing a “new generation of climate resilient, rust resistant, high quality Arabica,” according to Schilling. In the past few years WCR examined 249 million base pairs (DNA) from 947 strains of arabica to determine 50 winners which resulted in 10 super parents that are now being cross-bred with the best Central American arabica.

Illy and rival Guiseppe Lavaza are financing a related effort to map the arabica genome. The research is being conducted by the Universities of Padua and Trieste and by the Istituto di Genomica Applicata of Udine, coordinated by Professor Giorgio Graziosi of DNA Analytica Srl, a spin-off of the University of Trieste.

A genomic library of 175,000 clones enabled researchers to program computerized reconstructions of gene sequences to identify the origins of the plant and pinpoint genes that confer a particular resistance to disease or infection, as well as controlling the ripening time of the fruit, the size of the plant and adaptations to difficult conditions.

Knowing the plants’ genetics is a vital requirement for obtaining a high-quality product, according to Illy who explains that caffeine content, thickness and solubility of cell walls that affect the extraction are all aspects directly or indirectly controlled by the plant’s genes.

Schilling said the first of the new generation coffees will be sent to Kenya and Brazil for field trials this year, a process that will take a decade before there are sufficient numbers of trees to significantly increase production.

In the meantime “there are many improved varieties that already exist but aren’t widely accessible to farmers,” said Schilling. So WCR is proposing a simple solution, a coffee seed catalog like the seed catalogs used by corn and wheat, bean and grain farmers for generations. Each seed type will be verified by WCR at nurseries where their genetic purity will be controlled. The result will enable a professional coffee seed to emerge like those supporting other crops.

Countries with promise

During the coming year STiR Tea & Coffee will continue to explore global production of arabica country by country.

It seems fitting that Ethiopia holds great promise in meeting arabica demand.

Aaron Davis has studied Ethiopia more closely than the Surry suburbs that are home to Britain’s magnificent Kew gardens. Ethiopia likely holds the key to the future of arabica. It is after all the birthplace of arabica, the fifth largest exporter with as much as 70% qualifying as specialty grade. The country is fortunate to have climate mitigating options at a time when rainfall is decreasing and the average air temperature is steadily rising. The globe may be warming but Davis believes success will be at the farm level.

Multi-location variety trials of Metu, Agaro and Jimma cultivars are yielding excellent insights, with Metu showing the greatest resistance and yield. On-farm adaptations show promise. These include mulching, terracing, irrigation, pruning and shade.

Upslope planting is critical in many regions with the majority of coffee planted at 1500 to 1800 meters increasing in elevation to 1900 to 2300 meters.

Paul Stewart regional director of the TechnoServe’s coffee initiative offers an additional and potentially game-changing solution. TechnoServe develops business solutions to eradicate poverty. Stewart is upbeat about Ethiopia’s greatest natural resource — its people.

Ethiopia reports a very low yield per hectare due to inefficient farming practices. TechnoServe partnered with multi-national coffee companies to establish field-based classrooms and demonstration plots, locally recruited farmer trainers and self-selected “classes” of 30 to 40 men and women farmers.

The $9 million invested to date in digital technology and training 200,000 workers has yielded a significant return, said Stewart.

“An investment of $70 million in agricultural extension training in Ethiopia over the next decade could increase coffee exports by 3 million bags,” he said.