NOT everyone appreciates the pungent smell of roasting coffee. Just
ask the authorities in Brazil, who have been faced with farmers burning
bags of beans and chanting slogans borrowed from recent nationwide
protests to demand fatter state subsidies. The farmers are upset by
falling prices: their beans now fetch around $106 a 60kg bag, a
four-year low and less than half what they could get a couple of years
ago. A reversal looks unlikely soon.
A third of the world’s coffee is grown in Brazil. Along with other
countries that mainly cultivate the tastier and pricier arabica-bean
variety, it faces two problems. First, the traditional markets for their
wares are saturated. Growth in Europe, America and Japan, which between
them glug over half the world’s coffee, is flat. Second, in places like
China, Indonesia and Brazil itself, where coffee is an affordable
luxury for the middle class, the market is growing by around 5% a year.
But these drinkers are filling their pots with cheaper robusta
beans—what Kona Haque of Macquarie dubs the “emerging-market coffee”.
Strong demand for entry-level coffee—40% of the world’s coffee crop
is now robusta beans—has enabled Vietnam to go from almost nothing a
decade ago to producing 25m bags today (see chart). Worse still for
arabica producers, the recession in Europe has hit demand and squeezed
profits for roasters. These processors, including big food firms such as
Nestlé and Kraft, have responded by blending cheaper robusta with
arabica. As a result robusta prices have not fallen as fast as arabica.
Even so, the narrowing gap between them has not yet prompted
beancounters to reintroduce the costlier variety.
Nor is the supply of arabica beans likely to fall. In response to the
high prices of 2011 Brazilian farmers invested heavily in new acreage
and improved yields with better husbandry and more fertiliser. High
prices also convinced Colombian farmers to replant many coffee
plantations with more productive bushes. What’s more, the bumper harvest
of 2012, an “on” year for Brazilian coffee bushes, should be followed
by an “off” year as the bushes’ yields naturally fall after their
exertions. Yet good weather means that even this year’s “off” crop is a
bumper one, with the prospect of another “on” year to come.
Low arabica prices are accompanied by rising costs. Coffee is a
labour-intensive crop; picking is still largely done by hand. Wages in
Brazil and Colombia are rising fast and production costs are above
prices. Planting other sorts of crops, the usual response to
agricultural boom and bust, is not an option. Prices for sugar cane, a
potential alternative, are low. Coffee is mainly grown on small plots by
farmers who have known nothing else.
Consumers ought to benefit from low prices, but discerning drinkers
will still be disappointed. Demand for the fanciest arabica beans is
healthy, as the global proliferation of coffee chains shows. Much of the
finest coffee is grown in Central America in places such as Guatemala,
Nicaragua and El Salvador. That region has been hit by leaf rust, a
fungal disease, which could destroy 30% of the crop this year. Cutting
back plants to deal with it is set to hit production next year, too. For
the tastiest coffee, there is no chance of a cheap shot.