Marcy Nicholson
June 11, 2012
NEW YORK (Reuters) - Coffee roasters quietly pulled off a financial feat last year that went unnoticed by most customers: Adding a higher proportion of cheaper, lower-grade robusta to their grounds as the price of top-notch arabica beans surged.
As new data reveals the surprising
extent of that substitution, which appears to have been far more widespread
than experts had thought possible, the industry faces a vexing question: As the
price premium for arabica beans returns to historically normal levels, will
roasters switch back?
The short answer seems to be no.
The "swing" in demand was surprisingly decisive and
swift. U.S. robusta imports rose by almost 80 percent in the first quarter of
this year versus a year ago, while arabica fell by close to a third,
International Coffee Organization data shows, likely reflecting purchases made
during last year's rally.
"What we're realizing is that everybody underestimated
the amount of demand in robusta because everybody thought ... that there was
just a (certain) amount of robusta people could add to their blends," said
Ernesto Alvarez, chief executive of U.S.-based coffee merchant COEX Coffee
International.
Part of the increase in robusta demand can be explained by
changing tastes as some U.S. consumers sought out lower-priced brands due to
soaring prices. Lower-cost makes Folgers, owned by U.S. roasters J.M. Smucker, and Kraft Foods' Maxwell House both won market
share last year, research shows.
The data are beginning to provide some credibility to
widespread market speculation that some U.S. roasters have raised the robusta
content to a higher level in their top-secret blends than many thought - in
effect sacrificing quality in order to keep their profit margins.
The trend started last year, with U.S. robusta purchases from
Brazil, the world's second-biggest robusta grower, tripling to 813,000 60-kg
bags in 2011. While the total was still much less than the 5.84 million bags of
arabica brought into the country, the rate of growth outpaced the premium
grade's 3-percent rise year-on-year, ICO data
showed.
Now, however, market forces have reversed. The arabica
premium has shrunk by almost 70 percent from its 2011 high of nearly $1.90 per
lb to around 60 cents, making it far less financially advantageous to buy the
lower-quality blends.
Experts say roasters have likely reached the limit of how far
they can push the fine balance between robusta and arabica in their blends, but
they may be able to maintain that ratio if it is economic and there is no
consumer backlash.
"If the consumer has accepted the product well, and it's
selling well, I don't see them going back to a higher arabica content, unless
something's triggering it," said Carlos DeAldecoa, president of Maximus
Coffee Group in Houston, which roasts coffee for 11 roasters, buys green
coffee, and processes instant and decaffeinated coffees.
Smucker declined to comment on any changes in its green
coffee purchases for proprietary reasons. Kraft said it could not share
specifics about its blends.
ROBUST ROBUSTA DEMAND
Not all roasters can introduce lower quality beans to their
blends. Those with premium taste and aroma profiles may not have the
flexibility to use robusta beans, which typically have a less appealing taste
described as earthy and bitter.
But those that can dabble according to price and bean
availability - typically the national retail brands sold in supermarkets - set
their sights on robusta beans in 2011 to help lower the cost of their brewed
blends as arabica prices soared.
A steep and steady 11-month rally more than doubled the ICE
benchmark arabica coffee futures price, lifting the market above $3 per lb to a
34-year high in May 2011 and pushing the arabica premium over robusta futures
to nearly $1.90 per lb.
"We're certainly seeing a change in the blends to
include a higher percentage of robusta than they did in the past," said
DeAldecoa.
Victor Garcez, chief executive of Italian-based Cafeco, which
steams robusta beans on behalf of roasters to improve their quality, says
demand for steamed robustas doubling at Cofaco's Vietnamese facility during the
coffee rally as roasters tried to squeeze more out of lower-quality beans.
Massimo Zanetti USA, a mid-sized roaster that makes brands
including Chock full o'Nuts and Hills Bros., was one of the only companies to
discuss the blending issue publicly.