Coffee Industry
Industry Introduction
From the discovery of small, brightly colored red berries on trees in Ethiopia came the
largest imported commodity in the world, second only to oil. The coffee bean provides a
livelihood for over 20 million people worldwide with an estimated worldwide retail sales
expected to grow by a compounded rate of 6.9% from 2005-2010, reaching $48.2 billion
by 2010, according to The U.S. Market for Coffee and Ready-to-Drink Coffee. [1]
The two main species of coffee beans are Arabica and Robusta. Arabica is a high-quality
coffee typically grown at higher elevations where the optimal climatic conditions
necessary to grow this specialty grade of coffee are found. Arabica coffee is traded in two
ways:
On the highly volatile New York “C” market where the “C” price is affected by the global
supply as it rises and falls. The average “C” price for a pound of coffee during fiscal 2005
was $1.04.
Higher-quality Arabica beans are used in specialty coffee. Specialty coffee represents 10
percent of the total worldwide coffee market. Prices for specialty coffee are higher than the
“C” offers in order to provide better rates payable to producing farmers for quality. [2]
According to the National Coffee Association in Volume 2005.4 of Coffee Trax, as of
December 2005, forecasts for the world coffee production for 2005-2006 will be 113.1
million bags. Production is down 5.5% over the actual 2004-2005 yields of 119.8 million
bags.
Domestic consumption in producing countries in 2005-2006 is forecast to increase to 31.2
million bags, indicating domestic use should be 9.9% higher in 2005/06 than in 2004/05.
Using the most current data, world coffee consumption for 2003/04 was 96.5 million bags,
up by 1.8% over 2002/03s production.
“In 1999 there were 108,000,000 coffee consumers in the United States spending an
approximated 9.2 billion dollars in the retail sector and 8.7 billion dollars in the
foodservice sector every year (SCAA 1999 Market Report). It can be inferred, therefore,
that coffee drinkers spend on average $164.71 per year on coffee. The National Coffee
Association found in 2000 that 54% of the adult population of the United States drinks
coffee daily (NCA Coffee Drinking Trends Survey, 2000). They also reported that 18.12%
of the coffee drinkers in the United States drink gourmet coffee beverages daily (NCA). In
addition to the 54% who drink coffee everyday, 25% of Americans drink coffee
occasionally (NCA). The average consumption per capita in the United States is around
4.4 Kg. Among coffee drinkers (i.e. not per capita) the average consumption in the United
States is 3.1 cups of coffee per day (NCA). Per capita men drink approximately 1.9 cups
per day, whereas women drink an average of 1.4 cups of coffee a day (NCA).
The USDAs 2005/2006 December estimate for world exportable production is 82.0 million
bags which is 10.2% lower than 2004/05. Total U.S. imports were down 15% for the
second to third quarter of 2005. Estimated roastings for the third quarter of 2005 were up
to 4.7 million bags compared to the second quarter but down by 5.8% for the year-ago
quarter. [3] Retail prices were up from $3.33 to $3.40 for the average quarterly retail price
of a pound of roast-and-ground coffee or 2.1% after comparing the third-quarter 2005 to
the second quarter. Compared to the year-ago quarter, average retail prices were up by
18.1%, moving to $3.40 from $2.88. The average monthly retail price continues to be
20.8% below its seven-year high of $4.67 in August 1997. [1]
Fair Trade coffee is beginning to affect the economics of the coffee industry. Coffee
retailers to help maintain a sustainable supply of coffee are increasingly adopting the Fair
Trade movement. Over the years a coffee crisis has developed as supply has greatly
exceeded demand. This paradox of continued growth of retail pricing at the expense of the
small coffee farmers has driven retailers like Starbucks to create their own methods of
providing higher profits to producing farms so that supply can be maintained. Under a Fair
Trade agreement producers are guaranteed a fair price consisting of a floor price of $1.26
per pound and $1.41 for certified organic coffee. [2] From 2002 to 2004, USAID invested
over $57 million on coffee projects in over 18 countries in Latin America, East Africa and
Asia in an effort to create sustainable supplies of coffee. Other movements such as Organic
and Shade Tree coffee have had similar goals to help with environmental and quality
concerns on the producing farms. [4]
Coffee consumers are continuing to show a preference for premium coffees. While most
brands have declined in sales during the past year, premium coffees have managed growth,
according to data from Information Resources Inc., which measures sales through
supermarkets; drug stores and mass merchandise outlets. Ground coffees lost 1.8 percent
of sales for a category total of $1.6 billion, but whole bean coffees were up 2.2 percent.
Starbucks grew in both segments, with a 13.2 percent increase in ground coffee sales and
6.4 percent in whole bean sales. [5] Retailers such as Starbucks in the specialty coffees use
the highest-quality Arabica. Specialty coffee is a broad category of coffee positioned as the
highest quality and/or roasted with the ideal techniques or even coffee from particular
plantations. “Even though the overall U.S. coffee market has been sluggish lately, the
specialty component has seen significant growth, with retail dollar sales approaching $9
billion in 2003. The segments sales in 2003 represented growth of 6.7 percent over 2002s
$8.4 billion. In 2003, coffee cafes – the approximately 11,240 retail locations including
