Business Daily (Nairobi)
Dominique Patton
13 May 2008
Demand for Arabica coffee beans, the variety grown in Kenya, is expected to grow faster over the next three years than its cheaper rival robusta, according to analysts.
Demand will be driven by the continuing switch by Western consumers to higher quality coffee, said Morgan Stanley in a recent report. Prices will also rise as higher demand comes alongside tightening global supply of Arabica, the analysts predict.
Kenya's coffee sector is seeing a significant drop in output after a cold spell hit growing areas last year. The world's two largest Arabica producers, Brazil and Colombia, may also see only limited increase in output thanks to foreign exchange factors.
After their currencies appreciated significantly against the US dollar in recent months, farmers have seen coffee prices drop, in sharp contrast to the experiences of Vietnamese growers.
Vietnam is the world's biggest producer of Robusta, a coffee variety that has become increasingly popular in recent years -thanks to its lower prices. Prices have recently rallied and Vietnam's stable currency has allowed farmers there to enjoy high prices. But times are changing for Arabica producers.
The developed world is showing a growing preference for higher quality beans as consumers become more interested in the origin of their food products. This trend is being backed by leading names like McDonald's and Maxwell House, who have recently decided to use only Arabica beans in their coffee.
"Maxwell House's announcement to change their US coffee marks an important watershed, given they were one of the Big Four (Nescafe, Folgers, Yuban andMaxwell House) that drove the shift away from Arabica towards cheaper Robusta back in the late 1990s," noted the analysts.
Growers are responding to the change too. Several are implementing quality programmes or even entering organic production. In contrast, Vietnam has struggled to implement quality standards set out by the government last year.
Vietnamese coffee accounted for 43 per cent of rejected beans at European ports, with nine per cent of Vietnamese beans rated untenderable, according to Morgan Stanley.
"We do not expect dramatic improvements in the near-term, especially as Vietnamese farmers have been able to benefit from the full rally in Robusta prices," said the report.
Nor is slowing global growth likely to dent recent trends in demand, even though there has been a "temporary shift" away from higher-end coffee shops, they said.
Emerging markets like China and India will consume more Arabica beans too. Rich urbanites in India and China are swapping tea for coffee and flocking to trendy Western cafes. Growth in developing world demand has increased to 4.6 per cent, from an average of 3.8 per cent over the past four years.
According to the China Coffee Association, Chinese coffee consumption is projected to triple over the next 10 years to around 1.5 million 60kg bags per year. Indian coffee consumption is also growing, up 3.9 per cent annually between 1990-2005.
Many producer country governments are also working to increase domestic consumption as a way to lessen dependence on trade. Some coffee growing nations have seen double digit annual growth in demand over the past five years, according to Morgan Stanley.
"The trend towards higher-quality coffee should favour Arabica demand, while relatively higher production costs for Arabica and favourable Robusta prices should continue to support the expansion of Robusta production in traditionally.
Arabica-producing countries. As a result, we believe Arabica prices are likely to outperform Robusta," said the analysts.They did not reveal projected prices for the two varieties.
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