Positive signs for Indian coffee market

By Priyanka Venkat 

India has always been proud of the coffee grown on its soil; the country is the sixth largest producer of coffee in the world. However, weak and erratic rainfall this year cast suspicion over whether India would be able to maintain its production levels. The low levels of rainfall especially impacted Karnataka, which produces 70% of the country’s coffee. This led market players to lower their expectations of coffee production for the year. This is probably why the Indian Coffee Board’s recent announcement took everyone by surprise.

The Board estimated that coffee production for 2017-18 would reach 350,400 tonnes, exceeding that of the previous year at 312,000 tonnes. This signifies a 12.3% increase from last year’s production. It would also exceed the output of 348,000 as seen in 2015-16. This forecast is contrary to that expressed by growers such as the Karnataka Planters Association, a grower’s group that estimated a fall in production to 300,000 tonnes this year. The last six weeks have seen an increase in rainfall in the state. The board has also factored into its estimate the increase in bearing area of 13,500 hectares in Karnataka, Tamil Nadu, and Kerala.

Predominantly two types of coffee crop are grown in the country—Arabica, and Robusta. Robusta forms 70% of total coffee output according to data released by the Coffee Board. The board estimated the Robusta crop to reach 247,300 tonnes this year, signifying an increase of 30,000 bags year on year. It also estimated an increase by 8,000 bags in Arabica crop output reaching close to 103,100 tonnes.

Global market prices for coffee

The recent announcement by the Board could be good news for Indian coffee growers and exporters. The global coffee market has seen a fall in supply with two of its major players being hit by harsh weather conditions. Brazil and Vietnam are the leading producers and exporters of coffee and dominate the global market. Brazil has however seen a downturn in production with poor weather conditions and pest infestations. A report released by the Agricultural Statistics Agency of Brazil showed a fall in total coffee production from 51.37 million bags in 2016 to 45.6 million bags by May 2017. Similarly, Vietnam, which is the second largest producer of coffee, has had it tough too. Severe drought and unseasonal rainfall brought down its coffee exports in June 2016-17 to 1.21 million tons, an 8.6% fall as per data released by the customs department.

The reduction in output by Brazil and Vietnam reduces overall supply in the global market, consequently increasing prices as well as demand for Indian coffee. The impact was seen with a rise in exports at the beginning of the year between Jan and Feb. Coffee exports from India rose by 6% in volume to 46,000 tonnes as compared to 43,436 tonnes during the same period in the previous year.

The diminished global supply coupled with the estimates released by the Board could prove to be beneficial for India. The estimates released by the board point towards an increase in domestic output. This would benefit coffee growers in the form of high volumes of sales. The reduced global supply allows Indian exporters to sell coffee at higher prices in the global market. Growers have been grappling with high labour costs and low prices over the last three years that have had a detrimental impact on their bottom line. However, in order to improve margins, the increase in price in the global market should adequately compensate for the costs incurred over the years. In the domestic market, a higher output is likely over time to push prices down, to benefitting those companies operating in the instant coffee segment.

Global consumption of coffee on the rise

While supply levels have fallen, increasing global consumption of coffee has played a large role in pushing prices up. The United States (US) is the world’s largest consumer of coffee. Therefore any change the country’s demand for the crop will hugely impact overall global demand. In 2016, coffee demand from the US alone grew by 1.5% with overall demand expected to grow by 1.2% in 2017. A large proportion of demand is attributable to millennials in the country. There has also been an increase in consumption from emerging markets such as China and India.

While 70% of the coffee produced in India is exported, there has been a brewing (pun intended) demand for coffee in the domestic market as well. What is surprising to note, is the increasing trend of individuals deviating from traditional freshly brewed coffee to instant and specialized coffee instead. Historically in India, the consumption of fresh coffee has been concentrated in southern regions. Over the last two decades, however, consumption of coffee (especially of the instant variety) has picked up in other parts of the country as well, predominantly in urban areas. This has a lot to with an increase in incomes, exposure to the west and introduction of new products by international and national companies who aim to serve the growing young population. The cultural shift and the mushrooming of cafes have facilitated the increasing consumption of coffee. The growing trends in coffee consumption are mostly limited to urban areas, as countries like China and India are still in the process of making the shift from tea to coffee.

India is the fifth largest exporter of coffee in the world and the third largest producer and exporter in Asia. In addition to contributing to the country’s rich heritage, the crop is also crucial to the economy and provides vast employment opportunities. The coffee industry has close to 300,000 growers and employs more than 600,000 people daily. A turnaround in coffee production would do wonders for our coffee growers and exporters, providing much-needed relief to the industry.

Featured Image Source: Pexels