HILLSIDE AGRICULTURAL PROGRAM

Specialty Coffee Product Bulletin # 3 2001 – 2002

Introduction: The US coffee market is comprised of multiple segments and product formulations. The majority of sales consist of ground regular and instant/soluble coffee products, which are primarily sold under brand names such as Maxwell House, Folgers, and Nescafé. Whole bean and specialty coffee sales comprise a small but increasing share of the retail market. Each of these markets can be further subdivided into additional product formulations – e.g. caffeinated/decaffeinated, flavored/unflavored, Arabica/Robusta, dark roast/light roast, etc. Per capita consumption in 2002 is projected at 1.62 cups per day, an 8 percent decrease from the previous year. While per capita consumption is decreasing, demand is increasing for specialty/gourmet coffees that often pay premium prices to producers. With overall organic product sales approaching $5 billion in the $29 billion natural foods market, it is no surprise that organic coffee is the fastest growing niche in specialty coffee. According to a recent study, the US cities with the highest per capita consumption of natural and organic products include Portland OR, San Francisco CA, Seattle WA, Boston MA, Sacramento CA, new York NW, San Diego CA, Miami FL and Los Angeles CA. The specialty coffee market is highly differentiated, with no universally accepted definition as to what constitutes “specialty coffee.” For the purposes of this survey, “specialty coffee” is defined as coffee that is marketed in one of the following four categories: gourmet/rare origin/estate; organic; shade-grown (also called “bird friendly”); and “fair trade.”

Table 1: Specialty Coffee Categories Gourmet/Rare Coffee selling at premium prices because of the production location Origin/Estate (country, region, or estate) and perception of high quality. Examples include Jamaican Blue Mountain, Hawaiian Kona Fancy, Haitian Bleu, Papua New Guinea Sigri A, Ethiopia Yirgacheffe, and Kenya AA. Organic Coffee grown and processed without using chemicals (including chemical pesticides, herbicides, and fertilizers). Shade-Grown Coffee grown under a natural forest canopy, providing a habitat for birds (hence also referred to as “bird friendly”), insects, other animals, and plants. Fair Trade Coffee purchased from fair trade certified cooperatives’ members at generally higher prices than those offered by traditional marketing channels (i.e. middlemen).

Production: World coffee production in 2001/2002 is forecast to fall by around five percent compared to 2000/01. World green coffee production is estimated to reach 6.6 MTs in crop year (October-September) 2001/02, a 1 percent drop from 2000/2001. The majority of coffee is produced organically, but only a small portion is actually certified organic by independent organizations. Approximately 85 percent of Ethiopia’s production is thought to be organic, yet very little of that is actually certified. Although Mexico is the largest producer of organic coffee, only 2 percent of its production is currently certified. For 2002, registered organic coffee production in Guatemala is expected to still account for 5 percent of total production. Growth in this sector is expected to be seen in about 5 to 10 years.

This product bulletin was produced by Fintrac, Inc. under the auspices of the USAID-funded Haiti Hillside Agricultural Program (Contract # 521-C-00-00-00035-00) SO1 – “Sustainable Increased Income for the Poor” For additional information contact: DAI/HAP, 11 Bis Rue Lechaud, Bourdon, Port au Prince, Haiti Tel.: (509) 511-0397 Fax: (509) 245-2181 Web: http://www.haitihap.org

Prices: Prices for standard varieties of coffee fluctuate widely from year to year, mainly due to supply factors. Current high production and stock levels have continued to place downward pressure on prices. Over the short- term, prices are expected to remain at or under $0.90/lb. Between January and December 2001; international coffee prices fell by 15.2 percent. As of 2002, coffee prices have plummeted to Figure 2: US Imports of Coffee all-time lows in recent months and are currently less than $. 50/lb. 1,600,000 Imports: US coffee imports continued 1,200,000 to increase in terms of volume over the 800,000 period 1999-2000, with a slight drop in MTs 2001. During the same period value 400,000 also declined. In 2001, the US - imported 1.2 million MTs of coffee 1997 1998 1999 2000 2001 worth $1.5 billion, marking a 44 percent decrease from 1999 value Arabica Robusta Other levels. Green, unroasted, and Source: USITC caffeinated coffee accounts for the majority of US imports: 1.1 million MTs ($1.2 billion).

The US imported 537,917 MTs ($721 million) of unroasted Arabica coffee in 2001. More than ninety different countries have exported unground Arabica coffee to the US market over the last four years. Colombia is the largest supplier, with an import market share of 22 percent by volume in 2001. Other major suppliers include Brazil (15%), Guatemala (14%), Mexico (3%) and Costa Rica (7%). It should be noted that in 2001, Haiti exported roughly 16 MTs of Arabica coffee, a 72 percent decrease from the previous year. Imports of unground Robusta coffee reached 521,546 MTs ($ 454 million) in 2001. The US imported Robusta coffee from ninety-two different countries the previous year. Vietnam, with an import volume share of 33 percent in 2001, was the largest exporter of Robusta coffee to the US. Other major suppliers include Brazil (15%), Colombia (9%), Guatemala (8%), and Mexico (6%). In 2001 Haiti only exported 2 MTs of unground Robusta coffee, a decrease of nearly 100 percent from 1999 level.

Figure 3: US Import Market Share Arabica Figure 4: US Import Market Share Robusta Coffee,2001 (MTs) Coffee, 2001 (MTs) Other El Salvador 13% Colombia Indonesia Guatemala 3% Colombia 9% 4% 8% Mexico 22% Brazil 6% 15% Indonesia Honduras 6% 4% Vietnam Thailand Brazil 4% Peru 33% 15% 5% Costa Rica Peru Mexico Guatemala 7% 3% 13% 14% Other El Salvador 13% 3%

Source: US Census Source: US Census

The Specialty Coffee Market

Because the definition of specialty coffee is vague, it is difficult to estimate the exact size of the US market. The Specialty Coffee Association of America (SCAA) defines specialty coffee simply as “quality coffee.” Specialty coffee may be marketed by country of origin, by method of production (organic, shade grown, etc.), by region, estate, roast color, and/or flavor. In reality, there are many niche varieties that would fall under the specialty category – the primary characteristics shared by specialty coffee are: (1) particularly high quality; (2) differentiated in some way from other coffees; and (3) higher prices than the more common commercial blends. Specialty coffee is also usually of the Arabica variety, known for its better flavor, overall quality, and lower caffeine content.

According to the SCAA, gourmet/specialty coffee sales exceeded $6 billion in 2001. This figure is up from other estimates of gourmet coffee sales at $1 billion in 1990 and $2.5 billion in 1995 and $5 billion in 1999.

Despite the lack of detailed sales figures, what is clear is that the specialty/gourmet/quality coffee market is growing rapidly. Furthermore, its share of the market will continue to increase with the expansion of the retail coffee house sector.

Gourmet / Rare Origin / Estate Coffees: Imports of rare origin coffee remain low. This is mainly due to the fact that available volumes are so small. In 1999, the US imported only 47 MTs of coffee from Jamaica (the majority of Blue Mountain coffee is sold to Japan) and only 16 MTs from Haiti, a decrease of 56 percent from 1999 levels. Estate volumes vary depending on the size of the estates, although the number of estate brands marketed continues to increase. Gourmet, rare origin, and estate coffees generally retail at prices above $9.00 per pound. For the rarest coffees, such as Jamaican Blue Mountain, prices can reach $40 per pound or more.

Organic Coffee: Although some estimates are much higher, organic coffee is thought to comprise only 1 percent of all US coffee sales and only 5 percent of the gourmet market,. According to a survey conducted by the Specialty Coffee Association of America and Gourmet Retailer magazine, specialty coffee shop owners report that 10 percent of sales are organic. Some of the higher estimates of 7-10 percent of the market may be justified considering that much of the organically grown coffee is not sold as such since it has not been certified (also called “passive organic”).

What is clear is that organic coffee is one of the fastest growing niches in the overall specialty coffee market, with growth estimated at roughly 20 percent per year according to industry sources. Indicative of this was the announcement in April 2000 by Seattle’s Best Coffee, one of the largest specialty coffee companies in the US, that it was expanding its organic line from 4 to 6 blends because its organic sales had increased from 55,687 lbs in 1998 to 74,881 lbs in 1999.

Certified organic coffee fetches a premium of 10-15 percent above standard gourmet coffee. The main constraint to smallholders entering the organic market is obtaining, paying for, and maintaining organic certification. Producers need to obtain certification from independent third-party organizations, have a three-year history of not using chemicals, write a five-year farm plan, keep written records for an audit trial, and agree to annual inspections. Furthermore, the product must be maintained organic throughout the marketing chain. As of 1999, only 10 percent of US roasters were certified organic according to Tea and Coffee Trade Journal. Shade-Grown Coffee: The shade-grown coffee “movement” is a result of the increased production of technified (sun-grown) coffee in Mexico and Latin America. Through the early 1990s, an estimated 40-50 percent of coffee production in the region was transformed from shade-grown to sun-grown. Increased sun-grown production has resulted in the clear-cutting of natural forests, increased use of agrochemicals, and a decrease in bird habitat. Latin American production regions are habitats for a large number of wintering US bird species, and advocates point to coffee technification as the main reason for a sharp drop in the number of US songbirds. For this reason, shade-grown coffee is also referred to as “bird friendly.”

No reliable market information is available on the current US sales volumes of shade-grown coffee. However, based on the increased number of offerings by coffee roasters and retailers, sales are certainly expanding.

Fair Trade Coffee: The “fair trade “coffee market has evolved as part of a worldwide movement to better the terms of trade for producers in developing countries. For coffee, this typically means removing the middleman from the transaction by having certified cooperatives sell directly to importers/roasters at or above a “fair” Fair Trade Criteria minimum price. Some advocates point to the In order for an importer to become certified as “fair common example of producers receiving just $0.30- trade,” it must meet the following requirements: $0.50/lb for coffee that retails for $8/lb or more. Pay a minimum price to small farmers included in An estimated 85 percent of fair trade certified coffee the International Fair Trade Coffee Register. is shade grown and either passive or certified organic. ($1.26/lb fob for washed Arabica coffee, or $0.05/lb Currently, over half of all organic coffee is produced above the world price if it exceeds $1.26/lb); by fair trade certified cooperatives. While US-based Pay an additional $0.15/lb fob premium to farmers organizations such as Equal Exchange (sales of $5.5 for certified organic coffee; million in 1998) followed fair trade standards as far Purchase beans from democratically organized back as 1986, there was no national fair trade small growers; Provide pre-harvest credit to growers; organization until 1996 when TransFair USA was Agree to purchase on long-term and not one-time founded. TransFair USA estimates that, while US basis. fair trade coffee sales totaled only 1.5 million lbs in 1999, this figure should reach 12 million lbs per year by 2002.

The fair trade coffee movement in the US got a big boost in 2000 when Starbucks Coffee began offering the product in its 2,300 company-owned retail stores (under pressure of protests organized by Global Exchange). It is being offered alongside Starbuck’s Shade Grown Mexico (sold in partnership with Conservation International) and Organic Costa Rica coffees (certified by the Costa Rica agency, Eco-LOGICA). Other large roasters/retailers are also entering into licensing agreements with TransFair USA, such as Peete’s Coffee (57 stores), Green Mountain Coffee, and Dean’s Beans.

Research by TransFair USA shows, that about, Table 2: Retail Selling Prices of Fair Trade Coffee 50 percent of US consumers, are willing to pay Roaster/Retailer Retail Price (per lb) $1.00-$2.00 more per pound for fair trade coffee. Starbucks $11.45 It estimates that fair trade coffee should be Peete’s $10.95 feasible if retailing in the range of $8.00- Tully’s (certified organic) $10.45 $10.00/lb, although most of the larger Kaffe MagumOpus (certified organic) $ 6.75 roasters/retailers are in fact pricing their fair trade Equal Exchange $8.95 coffee higher than this in anticipation of increased demand. Source: Fintrac survey conducted in June 2002