Climate trends make coffee a high risk, high reward play

Rising demand signals rising prices, but unpredictable weather puts growers at risk, according to an investor and former coffee trader.

Volatile weather is an increasing concern for coffee producers from Latin America to South-East Asia, former coffee trader and Pacific Agri Capital (PAC) associate Aaron Beydoun has told Agri Investor.

His comments, which follow the close of Starbucks’ $500 million bond to promote sustainability in global coffee production, highlight the crop’s susceptibility to climate change. That vulnerability, coming at a time when demand for coffee is expected to grow, means higher consumer prices, but more uncertainty for producers.

“If I were investing in coffee plantations, I would be much more cognisant of the impact that weather has on production and quality,” said Beydoun, whose firm focuses on agricultural investments, including coffee, in Latin America. Beydoun said erratic rain has recently driven up the share of inferior quality beans produced in Colombia, the world’s second-largest supplier of Arabica coffee after Brazil, according to the European Coffee Federation.

In Vietnam and Indonesia, the price gap between the more bitter, cheaper Robusta bean and Arabica has narrowed significantly as a result of extreme weather patterns. Prolonged droughts are raising fears for a disappointing 2016-17 harvest, as is the unpredictability of meteorological conditions.

Beydoun said the climate’s year-to-year and month-to-month volatility presented bigger challenges than trends toward warmer or drier weather. Rains that come too early or too late can disrupt flowering of the crop. Prolonged dry spells stress orchards, but heavy rains can knock cherries from tree limbs prematurely.

The supply volatility comes as 1.5 billion consumers are predicted to enter the global middle class in developing economies between 2005 and 2030, pushing up demand for coffee and other specialist permanent crops.

“Coffee is following a similar trajectory as wine in so far as quality and traceability are concerned,” said Beydoun, adding that demand for premium, regionally-defined blends is likely to increase.

For coffee producers, the result is a higher risk profile, but more reward potential. Investors looking for exposure now would be well served to target coffee varieties most resistant to fungus, drought and disease, warned Beydoun.

However, growers in some riskier geographies have started to move off coffee production all together.

“We have seen farmers in Central America and even Colombia substitute coffee for cacao, particularly on lower-lying plots within their plantations,” said Beydoun.

PAC is capitalising on this trend, recently raising $10 million to develop a high-density cacao project in Colombia. It has developed 30,000 hectares of palm and cacao production in Latin America and South-East Asia.

For growers at lower altitudes, the move makes sense. Cacao grows in warmer conditions but has a similar demand profile to coffee. That’s good news for growers threatened by changing climate trends, but a potentially bitter pill for the world’s caffeine junkies.