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La Niña’s Return Threatens Coffee Crop
Though last year was a huge year for the global coffee crop, driven primarily by a huge uptick in Brazilian exports. A surge in supply drove down prices for the beans though early 2020, but the return of the La Niña weather phenomenon may upend that pattern.
During the last big La Niña, arabica bean prices surged as much as 127% between 2010 and 2012. Prices for robusta gained as much as 105% over that same period.
As Bloomberg writes, La Niña occurs when the surface of the Pacific Ocean cools, triggering an atmospheric chain reaction that stands to roil weather around the globe. In Brazil, an agricultural powerhouse, very dry and hot weather is clouding the outlook for everything from arabica coffee to oranges, sugar and soybeans.
Though Safras and Mercado report that Brazilian coffee farmers sold 64% of the 2020 crop by October 13, more than at this time last year and exceeding the five-year average for the period, Gro Intelligence’s Drought Index now shows that the top coffee producing regions of Minas Gerais, Espirito Santo, São Paulo, and Parana are all experiencing drought. The drought in 36% of the districts in those regions is moderate, severe in 20%, and exceptional in 22%. Minas Gerais, which accounts for 70% of Brazil’s Arabica coffee output, is experiencing drought in all but 3% of its districts.
Last month, Procafe, the main coffee research institute in Minas Gerais, said in a study that some farms had a moisture deficit of around 100 millimeters (3.94 inches) compared to historical levels.
In Vietnam, the world’s largest producer of robusta beans (used in espresso and instant coffee), they have the opposite problem: too much moisture.
Rains from La Niña (plus tropical storms) have put harvesting on hold, according to the Buon Ma Thuot Coffee Association. Delays could cut shipments in coming months as increased humidity from storm belts prevents the fruit from ripening and delays harvest. Moisture also creates quality concerns and increases the chance that beans will be damaged in harvest.
Total output for Vietnam’s coffee industry is forecast at 1.7 million tons, a 6% decline from the 2019-20 season, according to 13 traders and analysts surveyed by Bloomberg.
Persistent offseason rains, brought on by La Niña, could negatively impact the 2021-2022 harvest as well.
Elsewhere in southeast Asia, Indonesian President Joko Widodo said reports from the country’s weather agency indicated monthly rain volumes in the country could increase by between 20%-40% over normal levels. Wetter than usual weather patterns are expected to last until around March-April 2021. Indonesia is the world’s 4th largest producer of coffee.
In Colombia, another major coffee-growing country, La Niña tends to bring adverse rains as well.
Coffee Faces Retail Revamp in COVID-Era
At the same time, another major shift is occurring on the retail side of the coffee market. The number of coffee shops in the US is shrinking for the first time in nine years as sales plunge and COVID-19 forces the industry to rethink its business. The country will have 25,307 outlets specializing in coffee or tea by the end of 2020, down 7.3% from a year earlier in the first decline since 2011, according to estimates by research firm Euromonitor International. Annual sales will plunge 12% to $24.7 billion.
However, most are still drinking just as much coffee during the pandemic as they had been before. The difference is that many more cups are now being consumed at home instead of in coffee shops and restaurants. Consumer habits for the period in Aug. 26 to Sept. 3 were similar to those in a January poll, with six in 10 Americans drinking coffee everyday, at an average of 2.9 cups per day. Around half of the survey respondents said they stopped having coffee in restaurants, while 22% have not drunk it in the workplace.
Packaged food has been one of the areas to benefit in the wake of COVID-19 and coffee was no exception to this trend. JM Smucker Co.’s coffee products, for example, have now entered 1.3 million new households over a three-month period, with the iconic Folgers making a huge comeback.
Though some of the loss in retail traffic has been picked up by app-based ordering from coffee chain franchise locations, a sizable chunk of coffee demand has also shifted toward grocery stores or online subscriptions for periodic delivery. Online sales rose 57% as many roasters started to sell ‘coffee subscriptions’ to consumers willing to cut trips to grocery stores.
Though a number of small, niche brands were the first to really hop on the growing subscription coffee trend, the business model has shown that it can be lucrative for restaurant franchises – particularly if they can succeed with an in-store subscription. Panera Bread launched an in-store coffee subscription program earlier this year that guarantees customers a coffee of any size, any flavor as often as every 2 hours for just $8.99 per month. The company said in July that the program had boosted guest frequency by more than 200% and food attachment to coffee orders was up 70%.
This accelerating transformation of the retail coffee market has hit at an already uncertain time for major chains like Starbucks and Dunkin’. While each of those companies do have their products on grocery shelves across the country, this pandemic-induced shift to at-home coffee comes just as two new European competitors are rolling out and expanding operations in the US.
Italy’s Illycaffe and Germany’s Tchibo are two roasters with an expertise in grocery sales of their high-end roasts. As consumers spend more time at home and save money by not going out for coffee, Matthew Barry, beverage consultant for market researcher Euromonitor International, recently told Bloomberg that there’s good reason to think that a significant amount of drinkers will look to splurge more on coffee than they did before COVID as long as the pandemic is around.
With decreased foot traffic and rising competition in grocery aisles and via ecommerce, café chains may face short term headwinds as they adjust to new trends in the market.
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