Persistently low coffee prices for producers across the globe are a serious threat to the commodity, said the chairman of Italian premium coffee maker illycaffe SpA, who expects prices to begin taking a toll on production in coming years.
To adapt, the industry should focus on premium bean production, illycaffe's chairman, Andrea Illy, told Reuters in an interview.
"You would never even imagine thinking about basing the price of a bottle of wineon the price of grapes," he said. "You would price upon the area in which it is produced, on the excellence of the grapes, on the reputation of the winery, upon the aging, upon the care of processing - all other factors than the cost of grapes."
Global Coffee Production
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Global coffee production is likely to rise to about 172 million bags in 2018/19, up from nearly 160 million bags this year, he said. That would represent a continuation of the current glut. Supply could, however, begin falling in 2019/20 as low prices force farmers to abandon coffee or reduce field investments increasingly necessary to cope with climate change, which is widely expected to damage global production.
Coffee futures sank last month to a 12-1/2-year low of 92 cents per pound amid a record Brazilian crop. Illy said that price was far too low.
"We could sustain a position of $1.50 [but] $1.00 is too low," he said, speaking on the sidelines of the Ernesto Illy International Coffee Award ceremony in New York.
At these levels, "there might be growers going out of business, there will be growers converting to other crops - we create the conditions for a deficit a few years down the road and another price spike," he said.
Avoiding The Soft Drink Example
Coffee companies, he said, should therefore avoid the example of the soft drink industry, which focuses on mass, cheap production. Such an approach would continue to drive down prices even further below the cost of production and eventually force farmers out of business.
Nestle SA is the largest global coffee company and in August closed a $7.2 billion licensing deal to market Starbucks Corp packaged coffees globally.
Runner-up is JAB Holding Co which owns companies including Peet's Coffee & Tea, Krispy Kreme Doughnuts and Keurig Green Mountain. In January, Keurig struck a $21 billion deal to combine with soda maker Dr. Pepper Snapple Group Inc.
Both Nestle and JAB have expressed interest in buying illycaffe, which Illy has rebuffed.