World's largest coffee operator expects uptick next year

Tue Dec 15 03:30:37 2020 EDT

(Bloomberg) -- The world's largest coffee operator expects prices to go up next year as supply is reduced, but that all depends on how demand affected by the coronavirus 'imponderables' pandemic recovers.

In a rare interview, Neumann Kaffee Gruppe's chief executive David Neumann said the fate of the coffee market depends on the easing of restrictions that closed cafes from Paris to Los Angeles and reduced consumption for the first time in more than two decades. Demand will increase by 0.9% in the current season, after contracting 1.3% in the previous period, the operator forecasts.

There would be an uptick in consumption just as production from the main producer, Brazil, is expected to decline sharply. Softer ababic grain-producing trees, favored by Starbucks Corp., are entering the lowest half yield of a two-year cycle, and the dry climate is slowing the development of next year's harvest. That will reduce supplies after a surplus of 6.9 million sacks this season, Neumann estimates.

People drink more coffee at home in Europe and North America, which account for just over half of the world's consumption. While that was not enough to compensate for the closure of restaurants, cafes and offices, consumption has remained relatively well compared to other consumer goods, he said.

"I think coffee has everything to be a crisis winner because it's a comforting and comforting product, it's an affordable luxury," he says.

Coffee prices faced a wild hike this year, falling 27% from March to June after the confinements were first announced. Futures then recovered when consumers were supplied due to concerns that the virus would disrupt supply chains. Prices are now rising again, as drought hurts crops in Brazil, where arábica production will be "several million bags" below 38 million of the last two years out of cycle, says Ana Wilks, Neumann's head of research.

"Despite the much better rainfall pattern in the last 10 days in most areas of arábica, there has definitely been some irreversible damage," he said, adding that the grains were still developing and therefore Neumann will not issue a forecast until a thorough survey of all production areas is conducted.

Global consumption growth will continue to be below normal, expanding by only 0.5% in Europe and North America. In Asia, where restrictions on coronavirus have declined, demand could return to historical levels of growth, he says, adding that people in the region typically prefer tea when drinking at home.

There is still a wide offer on the market. Brazil has just harvested 70.1 million sacks, the hurricane that hit Honduras mainly affected infrastructure, and covid-19 restrictions have not severely affected coffee crops or fieldwork in most growing countries, according to Neumann and Wilks. Consumer countries also rushed to buy at the beginning of the pandemic.

"Stocks seem to have accumulated in the first half of the year because people were saying, 'I have to take coffee to the destination' again because we don't know how long the logistics chains will stay," he says. "Much of the large and medium-sized industry came out and covered more than it would normally cover."

While people drank more coffee at home, they did not go down to a lower quality, as during the 2009 financial crisis, when consumers had cash problems,Wilks points out. This time, consumers who saved by not buying their daily drink in a coffee shop have spent the cash on higher quality products at the supermarket, he said.

"We have seen in our business in the last six months, surprisingly, that very high-end coffees have not been adversely affected," Neumann said. "And the main and inexpensive cafes have done well. It's somewhere in the middle where they've felt the blow."

The coffee industry has been trying to satisfy the growing interest in uniquely sourced exotic coffees that can only be purchased in small quantities, and more and more consumers want to know where their grains come from and whether they are grown ethically. These trends are here to stay, according to Neumann, who marketed nearly 15 million bags of coffee last year and is present in 26 countries.

The operator, known as a traditional and private actor in the industry, is organizing its sustainability efforts into a division, he said.

"It's not about making it more attractive to the end consumer, that's already being done. The idea is to make it viable for the producer," Neumann says, adding that his company advertised its efforts less than its rivals. "What we're learning now, and it's not a lesson we enjoy, is that we need to talk more about these things."

Original Note:World's Top Coffee Trader Says Rally Hangs on Virus-Hit Demand