AN AGRIMONEY REPORTSEPTEMBER 2020

S O F T C O M M O D I T I E S – W H AT D O E S 2 0 2 0 - 2 1 H O L D ?

2 Sufficient supply and disruptive demand shock - Casper Burgering, ABN AMRO

4 How long and how much will the coronavirus pandemic affect demand? - Dr Michaela

Helbing-Kuhl, Commerzbank

7 The world isn’t losing its sweet tooth - Mike Verdin, Agrimoney

9 Thriving days lie ahead for the coffee sector - Mike Verdin, Agrimoney

11 Agrimoney Live Forecasts

14 About Agrimoney

IntroductionThe coming of a new season - as starts next month for global cocoa, coffee and sugar markets - always brings uncertainty.

But particularly so this time, when there are not only assessments for production to ponder over, but with demand so difficult to forecast too, as the Covid-19 pandemic plays out.

To help its readers enter 2020-21 on the right foot, Agrimoney has asked experts from ABN Amro, Commerzbank, the International Sugar Organization and Tata Coffee to shine a bit of light into the darkness.

Also take a look at the Live forecasts at the end of the white paper, which show more on what investors are thinking on supply and demand (and are only a small selection of the data available at Agrimoney).

We hope you find this white paper informative and useful, and look forward to guiding you through 2020-21 as it unfurls.

Mike VerdinEditorAgrimoney

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CONTENTS

Sufficient supply and disruptive demand shock

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Author: Casper Burgering, Senior Cconomist Agricultural Commodities, ABN AMRO Group Economics

One word sums up the current condition of most agricultural markets - abundancy. And the burdensome supplies will dictate market trends in the near future.

Covid-19 is to blame. Demand for coffee and cocoa was strongly down early this year, mainly because the out-of-home consumption stopped abruptly during the lockdowns globally. And in sugar, the increase in home consumption was by far not sufficient to compensate for the decrease in driving (ethanol) and out-of-home consumption (sugar).

Covid-19 resulted in well-supplied markets and higher stocks of coffee, cocoa and sugar, with price erosion to follow.

Normally, the risks in the sugar, coffee and cocoa markets are greater on the supply side than on the demand side. Extreme weather, diseases, insects and government policies have a significant influence on supply.

There are generally few disruptions in the demand for sugar, coffee and cocoa. However, the effect of Covid-19 on demand was abnormal and very disruptive. In some markets, the drop in the wake of the closure of hotels, cafes, restaurants, airports and specialty stores was significant. This led to unusually high inventories, resulting in price pressure and higher price volatility.

Fundamentally, the situation remains worrisome. The sugar, coffee and cocoa markets continue to feel the pressure of greater availability in the second half of this year.

But more importantly, demand from end users (consumers) remains weaker for longer. We think that the out-of-home consumption will not recover any time soon to pre-Covid-19 levels, which will translate to relative low prices for sugar, coffee and cocoa going forward.

We think that sufficient supplies and high stocks will continue to chase relatively weak demand this and next season.

Low ethanol prices keep sugar production highLower sugar demand levels resulted in high stocks and pressure on prices.

The two main products derived from sugar cane are sugar and ethanol. The produced quantities of both depend heavily on the price level of sugar and ethanol. The price of ethanol is relatively low and strongly depends on the development of the oil price. Low ethanol prices generally mean that ethanol producers have little financial incentive to continue to produce ethanol.

The alternative is to produce sugar. The indirect link of the sugar market with energy markets means that the sugar market, in turn, is also sensitive to disruptions in energy markets. Brazilian ethanol production is down almost 6% compared to last season.

Ethanol inventories in Brazil increased strongly due to lower fuel demand. Mills prioritise the production of sugar and total cane crush is up almost 7%.

We expect higher production levels in Brazil, India, the EU and Thailand in the season 2020-21. Demand is also expected to rise but in a slower pace compared to output growth.

This means that global stocks will remain high.

Out-of-home coffee consumption will not recover quicklyThe price of arabica coffee fell 24% up to 20 July compared to the level of 1 January. The main reason for the drop was the worldwide decline in demand in cafes and restaurants - collectively accounting for approximately 25% of total demand for coffee - due to the Covid-19 lockdowns.

Upside price risks Downside price risksHigher fuel demand and recovery ethanol prices Emergence of new harvest areas (Peru, Chile, Brazil)Stronger pick-up in demand (esp. China) Export incentives by governmentsWeaker dollar until 2021 Second Covid-19 wave and lockdownsLimited labour migration due to Covid-19 Oil price shockFurther migration desert locust India and East Africa Pandemic vaccine

Source: ABN AMRO Group Economics

Table 1: Upside and downside price risks for sugar

Table 2: Upside and downside price risks for coffee

Table 3: Upside and downside price risks for cocoa

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However, the market situation changed from 20 July, when the price increased by 21% in just nine days. Rumours of adverse weather affecting the crop in Brazil, optimism about a vaccine for Covid-19, a stronger Brazilian real, the weaker dollar and declining supplies of coffee worldwide boosted prices.

The coffee market is on track for a record harvest in Brazil. Despite the recent decline in exchange stocks, the availability of coffee remains good for the time being.

Moreover, it appears that out-of-home consumption will not recover anytime soon. After all, as long as there is no vaccine for Covid-19, the growth potential of coffee demand will remain relatively low.

The outlook for global coffee consumption growth remains downbeat. A strong recovery of demand can only be expected when out-of-home consumption of coffee rebounds to pre-Covid-19 levels.

Chances of this happening any time soon are slim. Global economic slowdown is keeping a lid on demand growth. Output is expected to remain solid, with record crops in Brazil.

Upside price risks Downside price risksPandemic vaccine Continued high output Brazil (record crops)Stronger demand Emerging Asia (esp. China) Weakening demand growth in EU, USStronger Brazilian real towards end 2021 Second Covid-19 wave and lockdownsExtreme weather (La Niña) over Brazilian coffee fields Closure of retail coffee shopsFurther decline of certified exchange stocks Rise in certified exchange stocks

Source: ABN AMRO Group Economics

Upside price risks Downside price risksAgeing of cocoa trees Emergence of new harvest areas (Peru, Chile, Brazil)Political instability Relative slow recovery of demand EU, USWeaker dollar until 2021 Favourable weather conditionsLower investments in West Africa Expectations of large cropExtreme weather events

Source: ABN AMRO Group Economics

Outlook for cocoa supply remains positive Due to Covid-19, the demand for chocolate fell sharply in the beginning of 2020, resulting in significantly lower cocoa prices.

In July, currency movements brought some price recovery. Due to the economic support measures implemented by the US central bank (Fed), sufficient dollars became available on the financial markets again.

This resulted in a weaker dollar and made commodities in counter currencies cheaper. Cocoa was no exception. This set a buying spree in motion and pushed the cocoa price back to a higher level.

However, in our view this higher price will not last long. The demand for cocoa is still far from its previous level and stocks are relatively high. In the end, this will have a negative effect on the price trend of cocoa.

In addition, the outlook for the cocoa supply is very positive. A good harvest is expected for the 2020-21 season, which will add to price pressure.

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How long and how much will the coronavirus pandemic affect demand? Author: Dr Michaela Helbing-Kuhl, Analyst Agriculture, Commerzbank

How long and how much will the coronavirus pandemic affect demand?

This is the crucial question the players in the softs markets are worried about. The high level of uncertainty about the further course of the pandemic makes it difficult to form clear expectations.

On the supply side, everything currently points to a high production level, so that any weakness in demand increases the probability of the occurrence of noticeable surpluses and depressed prices.

As different as the sugar, coffee and cocoa markets we are looking at are, the expectation of a less tight supply situation is reflected in our forecast as we see only moderate upside potential in 2020-21.

SugarRaw sugar is currently trading at around 13 US cents per pound, its highest level since the beginning of March.

For months, it has recovered with fluctuations from its 13-year low of less than 10 cents per pound at the end of April, to which it had fallen in the context of the corona crisis in view of the collapse of oil prices and out-of-home consumption.

Support initially came from rising oil prices and a stronger Brazilian real. In February, before the corona pandemic rocked the markets, the raw sugar price had risen to almost 16 cents per pound, its highest level in almost three years.

The background at the time was the prospect of a deficit on the sugar market in the 2019-20 season, for which estimates had been repeatedly raised.

The International Sugar Organization (ISO) expected a deficit of 9.3m tonnes, the highest in 11 years, before changing its forecasts earlier this month. It now expects a shortfall of 136,000 tonnes for 2019-20, and with a further deficit in 2020-21, of 724,000 tonnes, constrained by strong production in Brazil.

In the 2020-21 season, which started in Brazil in April, sugar production in the main Centre South production area is significantly higher than last year.

According to the sugar industry association Unica, Centre South processed a cumulative 6% more sugar cane up to the beginning of August than in the same period of the previous year and even produced nearly 50% more sugar from it. The reason for this is that a much higher proportion of sugar cane

(47%) was used in sugar production than last year (35%) when much more cane was processed into ethanol.

For the entire season and Brazil as a whole, the Conab forecast authority in its forecast from May expects sugar production to increase by 18.5% to 35.3m tonnes. The average proportion of cane processed into sugar is expected to rise from 35% last year to 42%.

Production is also likely to increase in India, where the sugar mills’ association, ISMA, believes an increase of 12% to 30.5m tonnes is possible due to better moisture supply. Thus, there are observers who do not share ISO’s expectation of a further deficit in 2020-21.

Above all, these are those who, unlike the ISO, try to include the effects of the corona pandemic. Some expect sugar demand to be reduced by 5m tonnes globally in the first 12 months of the corona crisis.

Respondents in a Reuters survey in early August envisaged a supply surplus of 3.5m tonnes in 2020-21, up from an expected deficit of over 1m tonnes in the last survey at the end of January. Such a surplus would make it difficult for prices to recover further.

While recent rainfall has increased chances for strong yields in the tail end of the Brazilian crop, the market is still concerned about poor crops in Thailand, the EU and Russia, which has helped prices to increase to a five-month-high recently.

Thai sugar production in the coming 2020-21 season looks unlikely increase from only 8.3m tonnes of sugar 2019-20 – a 10-year low – because of the drought, some even expect a further decline. In Russia, with 5.5m tonnes, 2020-21 would be Russia’s poorest sugar production in five years and down more than a quarter from last year’s record crop.

And the sugar beet harvest in the EU is likely to be rather meagre again this year, as a smaller area was planted and the excessively dry spring and high local pest infestation suggest that yields will be only moderate. The European Commission expects EU-27 sugar production at 16m tonnes, about level with last year. But all this has already been factored into the forecasts for the 2020-21 balance.

Much will also depend on how Brazil’s real evolves. Commerzbank’s forecast is for a continued weak real at R$5.3 BRL per $1 until corona risks recede which will likely only be sometime in 2021.

Our sugar price forecast is at 12 cents per pound in the fourth quarter of 2020 and 15 cents per pound in the fourth quarter of 2021, if corona hopefully recedes and the share of

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Brazilian sugar cane being processed into sugar will decline in 2021-22.

CoffeeAfter having recovered from a corona-related drop early 2020, the price for arabica coffee fell even further to below 100 US cent per pound in June and July.

In particular, the prospect of a record harvest in Brazil, which in the meantime is about be finished, weighed on the price. Although Brazilian statistics agency IBGE projects only 59m bags, estimates for the Brazilian crop 2020-21 often reach 68m bags, an increase of 15% over the previous year.

This is, for example, the estimate of consulting firm Safras & Mercado, which also reported that farmers already collected about 61.15m bags as of August 11. It is also the estimate of the US Department of Agriculture USDA (48m bags of arabica - close to the record of 2018 - and a record 20m bags of robusta).

On the demand side, the corona pandemic is fuelling uncertainty about the further development of demand, while on the supply side corona-related problems with the harvest appear to be manageable.

However, following reports of cold weather in Brazil and harvest problems in some Central American countries such as Costa Rica, arabica is trading above 120 cents per pound again. Robusta coffee has increased quite dramatically in recent weeks from April’s 14-year low and with $1,400 per tonne in the November contract has reached the same level as at the end of 2019. Robusta is considered to be less affected from the corona restrictions as it is more consumed at home.

In a recent study, the International Coffee Organization (ICO) described the corona pandemic as a supply and demand-side shock to the global coffee market.

The main supply shocks were delays in transport and loading caused by social distancing regulations and safety precautions, as well as shortages of containers. However, according to the ICO, there are no reports of dramatic restrictions or even a standstill in activities.

The corona pandemic was also accompanied by a devaluation of the currencies of many countries, particularly in Brazil, the world’s largest coffee producer. The fact that the use of seasonal labour is made more difficult by corona can lead to delays in harvesting and associated quality problems.

Nonetheless, many countries do not harvest until the fourth quarter. It will be crucial how corona evolves until and during the time of harvesting in important producer countries such as Vietnam.

On the demand side, after the initial positive impetus resulting from the desire to increase stocks, a negative impact is expected with increasingly noticeable losses in economic development, combined with a shift towards more simple coffee varieties and preparations.

However, the rather low elasticity of demand is dampening this effect, as do government transfer payments. Still, out-of-home coffee consumption is likely to suffer for some time, even if the restrictions are eased.

The fact that coffee exports in the first nine months of the 2019-20 season (October-June) are down 5% on the previous year may not only be due to the corona crisis, but also to lower stocks of coffee. This is especially true for arabica, reflecting the last harvest of a low yield year in Brazil.

A strong increase in exports is expected from there in particular in 2020-21, even though it may not necessarily set a new export record. This is because stocks there are very low, which means that no additional deliveries can be made from older stocks and part of the harvest might be used to build up inventories.

After a revision in April, in which it moved from the expectation of a small deficit to a surplus, the ICO has shifted the balance back to a small deficit of 486,000 bags for 2019-20 in its most recent report. While it still assumes at least a marginal increase in demand in 2019-20, others are more cautious and expect slight declines.

In 2020-21 production is not only higher in Brazil, but is also expected to increase in Colombia, India and Central America. In Vietnam, the second largest coffee producer, production is likely to fall, but this will be in comparison to last year’s record level and only by a good 1m bags to 30m bags. Lately monsoon showers have increased, easing temporary concern. The USDA expects global coffee production to increase by 5.5% to a record 176m bags.

Due to weak demand and an increase in supply, many observers expect a surplus on the coffee market in 2020-21. In a Reuters survey, the average estimate is for a surplus of 5m bags (after 1.85m bags in the current season). The USDA even estimates the surplus at 6.4m bags despite an assumed recovery in demand.

After the recent price recovery we hardly see short-term upward potential as high supply will meet with expectations of sluggish demand. Although it has recovered slightly from its April low, the still weak Brazilian currency, real, is an additional burden on prices and this is likely to remain so for some time.

However, coffee prices are likely to rise in 2021 with the low yield year in Brazil due in 2021-22 and – hopefully – receding corona effects on the demand side.

CocoaThe price of cocoa on the New York exchange in the September contract plummeted to $2,150 per tonne in the early days of July, even below the low following the corona-related crash in March. It now has recovered to $2,500 per tonne, still far from the $2,900 per tonne right before the corona crisis struck.

The price was weighed down by the fear that cocoa demand

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could suffer in the longer term as a result of the corona-related restrictions and the associated slump in the global economy.

Traders also expect that the premium on the exchange price of $ 400 per tonne to be paid for purchases in Ivory Coast and Ghana from the coming season onwards will further dampen demand. The so-called LID (Living Income Differential) is intended to help improve the living conditions of cocoa producers there. It remains to be seen to what extent firms can pass on the LID to consumers – although it makes up only a small part of total costs, this will be the easier the more costumers perceive it as a contribution to indeed support local farmers, making demand reacting less negatively than in the case of a “normal” tax.

Unfavourable weather conditions in West Africa with too little rain had repeatedly supported prices in recent months. However, more rain has now fallen in recent weeks, which has improved not only expectations for the current mid harvest but also the outlook for 2020-21.

At first glance, one might think that the International Cocoa Organization ICCO had not made any significant changes in its quarterly report at the end of May. It still expects a small deficit in the cocoa market in the current 2019-20 season, which it puts at 80,000 tonnes.

However, in February, the ICCO still forecasted a 1.7% increase in production for the season. It now expects a marginal decline. Compared to the last estimate, the ICCO mainly reduced its expectations for the Ghanaian harvest by 50,000 tonnes to 800,000 tonnes due to the strong spread of plant diseases.

Compared to last season, the harvest is now even expected to decrease slightly (-1.4%). The harvest for the 2018-19 season had already been disappointing and, at 812,000 tonnes, was far below the originally targeted 900,000 tonnes.

In Ivory Coast, the largest producer, production in 2019-20 is expected to stagnate at the previous year’s level of 2.15m tonnes instead of rising slightly. For weeks, low and irregular precipitation had worsened the prospects for the further so-called mid-harvest, which runs from April to September.

In the meantime, however, it has rained a lot and the cocoa producers surveyed by Reuters are satisfied with the weather. On the demand side, the ICCO only expects stagnation in 2019-20. However, given the many risks that, according to the ICCO, the corona pandemic poses for the cocoa market (recession, processing halts due to health protection, stop in the trend towards more snack consumption), it made only fairly minor cuts.

As a result of the sluggish demand development, the stocks-to-use ratio is now estimated to be 34% at the end of the 2019-20 season, higher than the estimate in February at

31.5%, despite the equally high deficit. And other observers disagree with the ICCO with regards to the balance 2019-20: Several firms engaged in cocoa trade or processing were quoted with expectations of a surplus on the cocoa market in 2019-20, albeit only a small one.

The latest demand data has been disappointing: In Europe – which remains the largest consumer region – only 314,000 tonnes of cocoa beans were ground in the second quarter, according to the European Cocoa Association (ECA).

This is nearly 9% down on the previous year, and the lowest figure for one quarter in five years.

The fact that the second quarter traditionally tends to be rather weak is of little comfort. In North America, where grinding was already down 5% year-on-year in the first quarter, the National Confectioners Association (NCA) reported a second quarter decline by almost 11%.

Ivory CoastFor Ivory Coast, which in recent years has been processing an increasing proportion of cocoa beans itself and is now competing with the Netherlands for the role of the largest processor, the exporters’ association GEPEX reported an increase in processing of 2.6% for the period between October and July.

However, the fact that between October and June (the most recent data point), exports of semi-finished products such as cocoa butter and cocoa powder fell by 5% year-on-year and raw cocoa exports were stagnating, is not encouraging. In the optimistic scenario, with a vaccine available by 2021, it might well take until late 2022 until global economic activity recovers to pre-pandemic levels and demand development on the cocoa market will turn back to “normal” patterns.

The supply of cocoa is estimated to be ample in 2020-21. Especially in the most important region of West Africa, recent rains have improved the prospects for the next main harvest from October onwards, giving hope for an early start and good yields.

In contrast, demand effects of corona and LID are both highly uncertain. Many observers see a high possibility for a (further) surplus in 2020-21 and most forecasts are currently for about 300,000 tonnes, close to the high surplus in 2016-17.

We therefore see only limited upside potential for prices. For the fourth quarter of 2020, we forecast a cocoa price in New York of $2,300 per tonne. We expect a further increase to $2,600 per tonne in the fourth quarter of 2021 if demand development normalises gradually.

Sugar hangs on to its deficit

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The world isn’t losing its sweeth tooth.

Sugar - facing press over health concerns which spurred sugar taxes, in particular in Western countries - faced tests to consumption even before squaring up to Covid-19.

The pandemic, and its lockdowns, cut demand for the likes of soft drinks - while at the same time boosting sugar production prospects in the likes of Brazil, as marked weakness in fuel prices prompted mills where they could to turn extra cane into sweetener rather than ethanol.

Yet still the world is facing a sugar production deficit in 2019-20, if one reduced to a modest 136,000 tones from a previous expectation of 9.3m tonnes, the International Sugar Organization says. After including a 2.723m-tonne reduction in its consumption estimate due to Covid-19 lockdowns.

And 2020-21 will see a, small, shortfall too. In its first forecast for the new season, on the October-to-September timeframe the ISO uses, the intergovernmental organisation forecasts production falling 724,000 tonnes short of demand.

‘Creatures of habit’That factors in a return to consumption growth, of 2.6% in 2020-21 to a record 174.2m tonnes, after a 0.5% fall in the soon-to-close 2019-20 season.

“While it is broadly perceived that the pandemic will not end until a vaccine is found, the impact on global sugar consumption has so far been defined as a function of a restriction in movement and out-of-home consumption, rather than a change in personal consumption habits,” the ISO says in its quarterly briefing.

Peter de Klerk, the ISO senior economist, adds: “We are all creatures of habit. We tend to put the same things in our shopping baskets every week.”

The “consumption of sugar in confectionary and through home-baking is perceived to have increased, on a net-basis”.

Furthermore, while many Western countries may be seeking to curtail sugar consumption, developing nations can have different priorities, particularly when lockdowns and restrictions may be hampering broader food access.

Humans vs machinesWorld sugar production growth in 2020-21, meanwhile, will lag a touch behind that in consumption, at 2.3%, taking it to 173.5m tonnes. That is a historically elevated number but short of record highs, ranking for instance behind output in the likes of 2017-18 and 2018-19.

This despite a sharp recovery seen in India, where helped by decent monsoon rains, production will recover to 31.5m tonnes in 2020-21, after being depressed by dryness to less than 27.2m tonnes this season.

In fact, water availability should be a “peripheral issue” for India this time, the ISO says, placing more stress on the threat of “continued restrictions on labour” which could curtail cane harvesting in the new season, besides hampering cane plantings for 2020-21.

“Mills and local authorities have been anticipating this contingency through the purchase of mechanical harvesters, suitable for the small plots on which cane is grown in India.

“While this might be a remedy for some of the producers, the size of the harvest expected as well as the number of people employed by the industry makes it difficult to envisage that this could be a wholesale solution.”

Brazil prospectsHowever, production in Brazil is seen easing back 2.7m tonnes year on year in 2020-21 on an October-to-September basis (rather than the April-to-March year the South American country uses itself) – albeit, at 34.7m tonnes, retaining the country at top rank in world output.

“The larger-than-expected switch from ethanol to sugar in the Centre South Brazil region this year is not expected to be repeated next season,” the ISO says, factoring the prospect of energy market revival.

Post-Covid market dynamics will “result in a more modest preference for sugar production, as domestic demand for ethanol will have rebounded”.

Furthermore, the ISO is factoring in the potential for some retreat in cane yields from the “very elevated” levels of this season.

“The shorter raining-season around year-end of 2019, and the near-absence of rain during the harvest period since May, are expected to be detrimental to cane development ahead of the 2021 harvest.”

Cane vs cassavaRetreats are seen in output from the likes too of Russia, the biggest beet-sugar producing nation, where volumes are seen falling by 2.45m tonnes to 5.45m tonnes, while the European Union bloc (including the UK) will see an increase of a modest 223,000 tonnes to 16.8m tonnes.

Meanwhile, Thailand, historically the world’s second-ranked

Author: Mike Verdin, Editor, Agrimoney

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sugar exporter, will see only small recovery in output in 2020-21, of 416,000 tonnes to 8.70m tonnes, well behind historic levels with, for example, 14.4m tonnes produced in 2018-19.

The continued downturn reflects relative weakness in sugar price levels.

The country’s cane industry, “even after having invested significantly in capacity in recent years, has struggled to maintain its cane base as returns from cassava and a resurgent rice market provide more remunerative prospects for farmers”.

“World market prices seem to offer little scope for sugarcane price improvements this year,” the ISO says, although adding that a 2.2 cents-a-pound premium paid for Thai sugar in a recent tender “does add to the aggregate base for the annual cane price assessment”.

Brazil, India dominateThe upshot of the forecasts is that Brazil and India between them will account for more than 66m tonnes of production in 2020-21, equivalent to 38.2% of the world total.

“The dominance of these two countries is at a 10-year high.”

Mr de Klerk notes the supportive structure for Indian output, and adds that “it is a help having a big domestic market” to

support consumption, highlighting that domestic commodity values are typically higher than export ones.

‘Not good for anyone’Not that this is stopping Brazil shipping sugar en masse, with the country seen by the ISO as responsible alone for 44% of world exports in 2020-21, up from 31% two seasons before.

“It is not something I am losing sleep over, but it is important when we get to the situation where Brazil is responsible for meeting so much of the world’s import demand,” Mr de Klerk says.

Besides the overarching issue of dependence on one origin, a concern in some other ag markets too, he notes the port congestion is leaving some vessels “waiting for a berth for weeks” to load up with Brazilian sugar.

“That’s not good for anyone.”

According to separate data from Czarnikow, waits have approached 40 days in July and August for the Rumo terminal at the port of Santos, although delays have been around 10 days for other facilities.

But as to whether markets will incentivise a shift in output away from Brazil, and India, to other countries, well, that’s a question for 2021-22 and beyond.

Brazil is seen by the ISO as responsible alone for 44% of world exports in 2020-21, up from 31% two seasons before.

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Thriving days lie ahead for the coffee sectorAuthor: Mike Verdin, Editor, Agrimoney

Thriving days lie ahead for the coffee sector. The question is - when, in terms of its recovery from the blow dealt by the Covid-19 pandemic to some areas of demand.

“Coffee is a very good space to be in,” says Amit Pant, senior vice-president, sales and marketing at India-based Tata Coffee, Asia’s largest integrated coffee company, growing coffee on some 8,500 hectares, besides owning roasting and instant coffee facilities.

Demand growth has, after all, been averaging 2-2.5% a year, and looks clear of pressures which have dogged some other drink sectors.

“The problems in sodas,” for instance, under fire over their large use of sweeteners – “we do not have those sort of concerns. Coffee is very, very clean,” Mr Pant tells Agrimoney.

‘Coffee will thrive’Indeed, “in the medium term and long term, we can be quite hopeful,” over industry prospects, when the pandemic shows in the rear view mirror and “we get back to life as we knew it, and we get back to seeing coffee as what it was.

“As long as people can eat out, we have this social demand, coffee will thrive.”

But as to when the market is again running on all cylinders, “key for this is the return of out-of-home consumption”.

This has historically accounted for roughly one-quarter of coffee consumption, but has been particularly vulnerable to the demand shifts fostered by coronavirus lockdowns and the move to at-home working.

When the likes of cafes, hotels, restaurants return to business “holds the key to answering the question” of how significantly the pandemic will end up affecting the demand side of the world coffee balance sheet.

‘Noticeable shift’Not that out-of-home versus at-home coffee drinking is the only prism through which to view the pandemic’s impact on coffee demand.

Mr Pant flags too a broader setback to “premium-differentiated coffee” - as, on top of eschewing the cafes which prize high-quality coffee, many consumers have also opted for lower-market brands for their at-home drinking.

“People have tended to downtrade. There has been a noticeable shift.”

“These has been a big challenge for Tata Coffee and for the industry worldwide.”

‘Premium sector in soluble’Not that Tata Coffee, with a large interest in the soluble coffee market, which has gained overall from the shift to at-home brewing, has felt as much pressure as some other companies.

“Soluble coffee has stayed up very well. You can see that in the results of the big soluble coffee groups in the first and second quarters – they performed very well.”

The other trend is the growing differentiation even in the instant coffee market where consumers in UK, Europe, Russia have shown a switch to more upmarket products.

“There is a premium sector in soluble as well.”

Arabica vs robustaBesides, the company’s own production - of some 8,000-10,000 tonnes (130,000-170,000 bags) a year from its 19 plantations in India - is aimed largely at premium markets too.

Tata Coffee, which operates as a business-to-business operation, rather than selling directly to the consumer, supplies arabica beans to the likes of Starbucks in India.

And while roughly two-thirds of Tata’s output is of robusta coffee, historically seen as of lower quality to arabica, the group is finding premium markets for these too, thanks to the process championed in India of wet milling, to produce washed robusta beans.

“This mellows down the robusta beans” to see them taken up by “some of the most marquee roasters”, and used in blends with arabica, as well as for more traditional markets such as in Continental European expressos.

“Robusta is not likely to replace arabica, but soft robustas are increasingly finding a pride of place in many roasters’ blends.”

‘We need diversity’The shift upmarket, and earning of a premium price, will prove critical as more conventional market conditions return, if the industry is to maintain much-needed diversity of origin, at a time when cheaper production costs in the likes of Brazil are keeping a lid on exchange prices.

“We need diversity, from a coffee production point of view,” Mr Pant says.

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“Coffee is one agricultural commodity which is all about the origin,” with beans from separate countries, and even from regions within countries, “bringing something very different” to consumers.

Yet without adherence to premium prices, growers of high-quality beans in the likes of Central America, and India, will find themselves marginalised in a world market increasingly dominated by the top two growers, Brazil and Vietnam, which now account for some 55-60% of world output.

While Brazil is “almost flat” in major coffee-growing areas, allowing the mechanisation which keeps output costs low, “it is different in countries where coffee is grown on hills, and often with shade trees,” and intercropped with fruit trees and spices, which means cherries must be manually harvested.

40:40:40How the sector has changed since 2005, when Mr Pant got into coffee trading with Olam International, which drilled into him “the rule of 40:40:40.

“That is 40m bags from Brazil, 40m bags of milds, and 40m bags of robusta,” when total output was some 120m bags, rather than 170m bags or so today.

“That rule is now completely redundant,” with Brazil, expected by many analysts to record a crop this year approaching 70m bags.

Inside outBut then, so much has else has changed for the industry too.

“The stuff you used to have to worry about was more intrinsic risk – about counterparties, about contracts going bad, financial exposures, etc.

“Now your major worries are about rainfall, climate, which were down the pecking order 15 years ago.

“You have to worry about trade risk too. You wouldn’t have thought then about the position of, say, China-US relations on coffee.

“And then comes out of nowhere, a completely new risk, Covid, too,” says Mr Pant.

“As long as people can eat out, we have this social demand, coffee will thrive,” says Amit Pant, senior vice-president, sales and marketing at Tata Coffee.

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Futures prices are based, as their name suggests, on expectations of how consumption and demand for a commodity will play out over the weeks, months and years ahead.

But how do investors gauge what expectations prices are actually factoring in?

Agrimoney’s unique live forecasts record production and

consumption estimates from major commentators to show what kind of numbers markets are accounting for.

This allows readers to easily see whether a new estimate is in line with figures already in the price – or a game-changer.

The tables also show the direction of travel – whether forecasts are being raised, or shrinking – which can have a substantial impact on thinking.

Agrimoney Live Forecasts

COCOA

World Cocoa 2019-20

World Cocoa 2020-21

VIEW ONLINE

VIEW ONLINE

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WORLD COFFEE

World Coffee 2020-21

World Coffee 2019-20

VIEW ONLINE

VIEW ONLINE

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WORLD SUGARWorld Sugar 2020-21

World Sugar 2019-20

VIEW ONLINE

VIEW ONLINE

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