One of the more intriguing aspects of the Covid-19 global lockdowns is how it has brought into stark relief the dual nature of the coffee world.
One is the domestic, at-home market, which is largely instant coffee, made from robusta beans. The other is the out-of-home market, of cafes, bars and restaurants, largely serving coffee made from arabica beans.
The first is open and may be working overdrive. The second has been closed for a few months and only now is sporadically starting to get back to business.
Thus it’s no surprise that the world’s biggest coffee house chain, Starbucks, which serves arabica, is feeling the pinch. Starbucks says its operating income for the current quarter could plunge by as much as $2.2bn.
While arabica prices have been hammered by the economic paralysis - in New York the July futures’ contract for arabica close at 96 cents per pound yesterday, its lowest settling price since last October - those for robusta have held up quite well. In London the September-dated robusta price settled yesterday at £1,227 a tonne, 2.1% lower than the previous day.
Over the past 30 years Vietnam has made itself the world’s robusta king. Some 80% of its robusta comes from the country’s central highlands’ region.
This region has been suffering a severe, extended drought; rainfall in the last few weeks has been insufficient to replenish low water levels. Cumulative rainfall in the central highlands has been around 15-30% lower than average in the first five months of 2020. This lack of rain means that there is doubt hanging over the size of the 2020-21 harvest.
The US department of agriculture (USDA) this week reported that it estimates Vietnam’s 2020-21 coffee production (overwhelmingly robusta) at 30.2m 60-kilo bags, 3.5% lower than that of 2019-20.
The world will not run short of robusta. Farmers in Vietnam have held onto stocks in the context of relatively low prices - the USDA estimates that carryover stocks from the 2019-20 harvest will be 4.6m bags.
A new normal
Much depends on how quickly the world gets back to normal post Covid-19, and what that normal will be like. Will people flock back to cafes and restaurants, drinking more arabica? Or might they have acquired a taste for home-brewed instant robustas?
Covid-19’s consequences have yet to play out. What the new normal may be like is still up in the air. That we are returning to something like previous life is best illustrated by the Baltic Dry Index (BDI). This gives a view into global trade for commodities, base on 22 world shipping routes.
The BDI dropped to 393 in the darkest days of Covid-19, in mid-May, and has lost 21% since the start of the year. Yet as of today the BDI is at 839 and is up by more than 32% this week.
This sense of confidence slowly returning is evidenced by Starbucks’ plans. It may experience a big revenue hit this quarter; it says it will close some 400 stores in the Americas over the net 18 months; it will cut new store openings by half this fiscal year. But it still plans to open 300 new stores and expects net new store openings in the Americas to grow in 2021.
Robusta may not have it all its own way.