Brazil’s ‘natural’ coffee enters premium market, posing a challenge for small farmers.

Brazil's 'natural' coffee enters premium market, posing a challenge for small farmers.

Arabica Coffee Market Faces New Challenge from Brazilian Beans

Coffee Beans

London/TEGUCIGALPA, Honduras, Aug 7 – Arabica coffee from Brazil usually rated lower grade has arrived in big volumes on the world’s main price-setting market, traders said, in a fresh challenge for hand-picked premium beans from less efficient, smaller farms elsewhere in Latin America and Africa.

Brazilian Arabica Beans Gain Recognition

Agricultural powerhouse Brazil is responsible for growing almost half the world’s arabica coffee, much of which is harvested by machine on large plantations. However, some of Brazil’s beans, known as unwashed or ‘natural’ arabicas, have not previously been used for high-end benchmark coffee contracts around the world.

Now, global traders are including these increasingly tasty Brazilian beans in the bags used to settle these contracts, marking a previously unreported structural change that is set to weigh on world coffee prices in the long term. Brazil’s coffee exporters association Cecafe has confirmed that these beans are being included in exchange stocks, citing their improved taste and quality.

While this news may bring relief to taste-conscious consumers battling food price inflation, it spells more gloom for struggling Latin American and African farms. Coffee trees on these farms grow on steep, shaded slopes that are unsuitable for Brazilian-style harvesting vehicles.

“We are in danger,” said Dagoberto Suazo, president of the Central de Cooperativas Cafetaleras in Honduras. He warns that although producers in Honduras are primarily small-scale, they are essential to the local economy. The arrival of Brazilian beans could lead to increased poverty in these regions.

A Duck Amongst Beans

The Coffee C Futures contract on the Intercontinental Exchange (ICE) traditionally reflects premium grade coffee, specifically washed arabica. Washed arabica beans from regions such as Africa, Colombia, Central America, and Peru have long been valued for their superior flavor. However, Brazilian farmers have been improving the taste of their unwashed and semi-washed coffee over time.

Late last year, significant volumes of Brazil’s unwashed and semi-washed grades started to appear in bags sent to the ICE exchange for contract settlement. Currently, about 30% of ICE-approved stock comes from Brazil, with most of it being unwashed beans. These beans have been approved for settlement despite ICE’s rules stating that approved beans should be free from ‘unwashed flavors’. This poses a challenge for ICE officials, as it is difficult to distinguish between top-quality unwashed and semi-washed beans.

Marcio Ferreira, president of Brazil’s coffee exporters association Cecafe, argues that the quality and sustainability of all Brazilian coffees have been improving for years. He emphasizes that ICE has established standards for each origin, and each lot is subject to quality approval.

Most ICE-certified arabica coffee is owned by leading global trade houses such as Sucafina and Louis Dreyfus. While Sucafina claims to have only shipped 100% semi-washed coffee for certification, some traders suspect that a mix of semi-washed and unwashed beans has been certified.

The Latent Threat of Brazilian Beans

The large-scale arrival of Brazilian beans at ICE warehouses has been a latent threat to arabica producers since 2013, when the exchange first allowed semi-premium beans from Brazil to be used for settlement. However, this threat did not materialize initially due to a lack of premium coffee supply. Traders were able to fetch higher prices by selling even semi-premium beans in the physical markets.

Starting in 2020, Brazilian beans began to arrive en masse, even when semi-premium grades were fetching higher prices in physical markets. This raised suspicions that cheaper unwashed beans were being mixed in with the higher grade. The amount of stock that backs ICE contracts is visible to all, and when it increases, ICE contracts usually come under pressure.

“The market needs to realize that we could see years of surplus, with lots of mixed-grade Brazils coming to the exchange,” warns the Europe-based coffee market expert.

Struggles of Arabica Producers

While the world’s population has increasingly shown a preference for premium-grade arabica coffee, its production in Central America has stagnated since the turn of the century. The main reason for this stagnation is the pricing. In the early 1980s, coffee prices were significantly higher, both in nominal and inflation-adjusted terms. Today, small farmers in Central America struggle to turn a profit as they lack economies of scale for labor, seedlings, fertilizer, and pesticide.

Even in years where margins are positive, the volumes produced by these small farmers are insufficient to provide a living wage. This economic hardship compels coffee farmers in Central America to seek alternative opportunities, such as heading to the southern U.S. border.

According to Pedro Mendoza, president of the national coffee institute IHCAFE in Honduras, there is little that can be done to change the way global coffee is priced. As a result, he believes that ultimately, the coffee sector could be dominated by large producers.

In summary, the inclusion of Brazilian unwashed arabica beans in global coffee contracts poses a challenge to smaller, less efficient farms in Latin America and Africa. Despite their high-quality production, these farms may struggle to compete with the larger plantations in Brazil. This structural change in the market could have long-term implications for global coffee prices and the livelihoods of small-scale coffee producers worldwide.