Coffee: a wake-up call

‘It is easy to forget that coffee is actually an agricultural product, a ‘soft’ commodity that is recently facing some challenges. Yet more than a billion people worldwide enjoy a cup of coffee every day. More than an energising potion, it is a global cultural force. Therfore coffee should not leave investors indifferent,’ says Dea Shehu, Thematic Portfolio Manager at KBC Asset Management.

The first encounter of coffee is believed to be around 700 AD in Ethiopia. It became immensely popular for its qualities of alertness and wakefulness. ‘It is believed that the first coffee house was opened in Constantinople (now known as Istanbul, eds.), in 1475. People visited the coffee house not only to drink coffee but to engage in conversation, listen to music, gossip and catch up news. More or less the same reasons why we visit coffee shops today. 'Some things never change’, opines Shehu. ‘All the more reason for investors to develop a ‘taste for coffee' as well.’ 

In the tropics, covering a distance of about 5000 km, lies the 'Coffee Belt'. The largest coffee producers are Brazil, Vietnam and Colombia, with Brazil being the largest producer for more than 150 years.

Coffee principally comes in two main varieties: Arabica and Robusta. There are notable differences between the two. Robusta beans have a higher caffeine content, offering a stronger, more bitter taste. Arabica beans, on the other hand, contain less caffeine, resulting in a softer, sweeter and more aromatic brew. Moreover, Arabica beans contain 60% more lipids and almost twice as much sugar as Robusta beans.

From a taste point of view, Arabica is generally considered to be superior and more desirable. This is also reflected in the price: Arabica beans are almost twice as expensive as Robusta beans. However, taste preferences can be subjective. Europeans, for example, often prefer Robusta for its powerful, robust flavour.

‘Prices for Arabica coffee have risen 80% over the past year to 7.7 USD per kilogramme, surpassing the previous record set in 1977. This price spike is largely attributed to the ongoing rainfall deficit in key coffee-producing regions such as Brazil and Vietnam. Experts predict that this will reduce the yield of the upcoming crop by at least 5%. If this prediction proves accurate, this will be the fifth consecutive year of crop shortages and is likely to lead to further rises in coffee prices,’ warns Shehu. ‘That will affect both the retail and wholesale trades. Large coffee companies may have to raise their prices by 20-30% to maintain their profit margins. That’s a challenge, given that they obviously don't want to be priced out of the market. Small-scale producers and large public corporations are most at risk, allowing medium-sized companies to benefit from these shifting market dynamics.’

Despite the challenges, global demand for coffee continues to rise. China, traditionally a tea-drinking nation, has seen a significant rise in coffee consumption, driven by Generation Z's growing interest in and openness to Western trends. This shift began with the arrival of Starbucks in the 1990s and accelerated with the launch of indigenous brands such as Luckin Coffee. Today, Shanghai has more coffee shops than anywhere else in the world, with around 10 000 in total.

‘Coffee culture is now part of life in China, and that is not going to change,’ says Shehu. ‘This trend is spreading to the Asia-Pacific region, where the taste for coffee is clearly increasing. Because of the tropical climate in these regions, they prefer iced coffees and have customised their own flavour profiles, which often incorporate tropical flavours. It is not uncommon to find an Americano made with coconut water instead of plain water. And it's delicious!’ 

A world without coffee is unlikely, but a world without an abundance of coffee could be a new reality owing to the numerous challenges faced by the coffee industry. The coming year is likely to be a challenging one due to high raw material costs. 

‘Although there are short-term uncertainties and some structural changes are evolving, we are optimistic about coffee in the longer term,’ says Shehu. ‘Salted Caramel Hazelnut Machiatto and Unicorn Frapuccino are here to stay. Gen Z likes coffee with its own particular twist, and sees coffee more as a refreshing treat than as a morning tradition. The younger generations see drinking coffee as an experience. Over the past ten years, the price of an average coffee in Starbucks has doubled. This is mainly because of the added flavours and variations. Given the demand for coffee, we closely monitor movements in coffee prices, the supply chain and other related commodities so that we can invest with confidence.