Morgan Stanley
  • Now, What's Next? Podcast
  • Feb 2, 2022

Trouble Brewing Along the Coffee Supply Chain

Transcript

Luiz Araripe:

The first thing about making coffee is this, okay? Don't use the ground stuff. Coffee must be whole bean coffee.

Sonari Glinton:

Luiz Araripe, he would know. He's been in the coffee business for 40 years and right now he is demonstrating how he makes an espresso at his home in Rio de Janeiro in Brazil, the country that produces the most coffee in the world.

Luiz Araripe:

What is a good coffee? What's the best coffee? What's the better coffee? Well, freshly roasted coffee. That's the best thing you can have. Put into the machine, the machine grinds the coffee and makes the coffee right away.

Luiz Araripe:

This specifically beans are from South Minas, which is about the center of the coffee in Brazil now.

Sonari Glinton:

Luiz is referring to the Minas Gerais region, where at least half of Brazil's coffee is grown. Now, traditionally it's been a perfect area for farming coffee, but that could be changing.

Luiz Araripe:

You need a very good rainfall from the spring throughout the end of the summer to have a good production. As you possibly heard, or know, Brazil have had a important drought two years in a row. On top of the drought, back in July, we have had a frost. That's another characteristic of the coffee tree. It does not support temperatures below zero degree Celsius.

Sonari Glinton:

That unexpected weather, it's impacting exports and how much you and I will pay for a cup of coffee in the next few years.

Luiz Araripe:

We are getting more disruption on the production because of climate change and that trigger the coffee prices to move extremely higher, but there is not much that the coffee farmer can do.

Sonari Glinton:

It's hard not to feel helpless in the face of the extreme and unpredictable weather that's wiping out crops and whole livelihoods. Climate change is not only hurting agriculture like coffee production in Brazil, it is disrupting every link in the supply chain around the globe. The pandemic-induced chaos over the last couple of years only hints at the problems to come, but it also might help us prepare for an increasingly complex future.

Sonari Glinton:

I'm Sonari Glinton and on this episode of Now, What's Next?, the final in the season, the impact of extreme weather on coffee's supply chain and how climate change could change the world's supply chains for good.

Luiz Araripe:

This is an excellent, natural, 100% Arabica coffee.

Sonari Glinton:

Now, have you been to the place where your coffee that you were drinking comes from?

Luiz Araripe:

Oh, yes. Several times. I know exactly the farm my coffee beans came from. Who is the owner? How has it been planted? What's the species?

Sonari Glinton:

As an economist and a coffee exporter, it's Luiz's job to know what's happening on plantations. But coffee has always been a big part of his life.

Luiz Araripe:

Oh, I'm born in Rio, and I had some relatives that are coffee farmers in the interior. In 1981 I start to work in a coffee company and never stopped. Coffee, coffee, coffee.

Sonari Glinton:

What do you love about it?

Luiz Araripe:

It's a very interesting industry. It's always changing. When I started, it was a roast and ground coffee in a can. Today, it's a very specialty and sophisticated product. Brazil produce about 70 million bags of coffee in two million hectares, while the rest of the world produces 90 million bags of coffee in eight million hectares. That's what make us unbeatable in coffee. So if you drink coffee or if you've ever drunk coffee, you surely is drinking some Brazilian coffee on it.

Sonari Glinton:

And that's a whole lot of us. About a third of the world's population drinks coffee. That's the preferred method of delivery for caffeine, the most consumed psychotropic drug in the world. Yes, caffeine. The global coffee industry is valued at over $400 billion and it's growing.

Luiz Araripe:

It's not only China, Indonesia, Bangladesh. You even have countries in Africa, like Nigeria and et cetera, where you can have explosions of coffee consumption.

Sonari Glinton:

We love this drink so much that many of us are willing to pay way more than ever before for a cup of coffee or a bag of beans. That price is only going to rise. Demand is set to outpace coffee supply for the first time in years and that has a lot more to do with the weather than with a bump in popularity.

Luiz Araripe:

Climate change is making rainfall in Brazil a little more volatile, so we are suffering more relatively to the past with droughts.

Sonari Glinton:

In the meantime, the weather is having a big impact on Brazil's coffee exports right now.

Luiz Araripe:

For the coffee production this year, it has been very, very small, and for the production next year, it's also going to be very, very small. To give you a perspective, we're going to have a deficit of about 8% of the world consumption and maybe the same next year.

Sonari Glinton:

And that has a ripple effect.

Luiz Araripe:

The coffee prices in Brazil and all over the world, they are the highest we have seen since 1996.

Sonari Glinton:

Say that again.

Luiz Araripe:

Coffee prices today are the highest we have seen since 1996. To tell you exactly how high it's going to be, well, we have to go up to a point that we are going to reduce a little bit consumption for the next one and a half years.

Sonari Glinton:

In other words, the weather has created a coffee shortage big enough that prices have to go up to drive consumption down, and we got to be clear; the price increase that Luiz is talking about, that's for commodity coffee. That's the unroasted green beans that go into brands that you might buy in a large can at the grocery store or in a cup of coffee at a fast food restaurant. We're not talking about the specialty beans that you're getting at your local artisanal roastery or coffee shop. Those prices have always been higher, but they're creeping up there as well. Now, to get a sense of how these prices overall ripple out, let's follow the supply chain.

Sonari Glinton:

Coffee is grown in tropical regions in South and Central America, the Caribbean, Africa, and Asia. It can take years for a coffee tree to reach maturity after it's planted. When the berries are ripe, they're picked, sometimes by hand, sometimes by a machine. Next, they're processed to remove the outer bits and fruit. The seeds are then milled to clean off any of the leftovers and the green coffee bean emerges from this step. This is the important part.

Sonari Glinton:

Now, these can be packaged and shipped as is, or they'll be roasted, turning them into those flavorful and aromatic dark brown coffee beans that you and I are used to seeing. Now, roasting can happen close to where the beans are grown or can be done to the consumer. When they reach their destination, the beans are ground, which can happen at a facility, at a coffee shop or in your kitchen. Then the coffee gets brewed and then it's given to you. That is the coffee that I'm drinking, you're drinking, and it is going to be more expensive, especially as the price of those green coffee beans doubled.

Luiz Araripe:

The 50% increase on the raw material may increase the price for the final consumer about 20%.

Sonari Glinton:

Ouch. But there is another way that we can think about this. Farmers, mostly those in the global south, do so much of the heavy lifting when it comes to the coffee supply chain, but it's the buyers and brands in the U.S. and Europe who process and package the beans that make the most money. It goes all the way back to coffee's colonial roots. Until these recent price increases, the grower's share of this massive coffee market was actually going down. Now with commodity coffee prices at record highs, farmers are beginning to get a bigger piece of that market. Now we might actually be paying a fair ways for the work that goes into a cup of coffee.

Sonari Glinton:

But that doesn't mean that the work getting easier. Coffee farmers everywhere are facing challenges of all kinds. These days, I'm drinking Arabica from Ethiopia. Well, civil unrest in that region is hurting exports. Do you like your Robusta from Vietnam? Well, shipping issues, not to mention the rising temperatures and the unpredictable rainfalls that are hitting all of these regions.

Luiz Araripe:

It's more difficult to predict that the climate will be excellent for coffee production year after year.

Sonari Glinton:

The devastating impact of unpredictable weather on crops like coffee, well, that's undeniable. But it's only a part of the story. Scientists expect that a rise in average temperature could shrink the croplands that are devoted to growing coffee in regions like Brazil by almost 50% over the next 30 years. Cropland shrinking, extreme weather upending harvests, the impact begin to ripple throughout the supply chain. As climate scientists Anders Levermann well knows, this is not just happening in Brazil and certainly not just happening to coffee.

Anders Levermann:

Oh, I really love coffee. I mean, I think most of the scientific world is running on coffee, actually. Coffee and vanity, these are the two drivers of science.

Sonari Glinton:

Anders studies the economic impacts of climate change, but he started out as a theoretical physicist working on the theory of complexity, a theory, he says, that governs our increasingly, well, complex world.

Anders Levermann:

It also governs the supply chains of the planet. But when I went to climate research, I wanted to do something that's more closely helping society on its path into the future.

Sonari Glinton:

Well, that's a path he fears could be knocked off course by climate change in more ways than we may realize. Anders created an economic shock model to demonstrate how weather extremes in one place will ripple across the supply chain.

Sonari Glinton:

For example, imagine a flood in a region where computer chips are made. Those factories go dark.

Anders Levermann:

And that also sends a shock wave in the other direction.

Sonari Glinton:

Shutting down facilities in other parts of the world that provide material for the chips and affecting the supply chain of any products that rely on those same chips. Businesses, even whole economies, could be affected. When it comes to coffee, the droughts and frost that Brazil coffee farmers experience will likely have an impact on the price of your latte. But Anders says it can get a lot more complex than that.

Anders Levermann:

Coffee is actually relatively simple because it is harvested in one place, and then with relatively little extra effort, it reaches the consumer. Other products are much more complicated. If you produce a mobile phone, you need different production sites and you need parts from all different places on the planet.

Sonari Glinton:

While coffee may be simple compared to, say, a computer, getting beans from the field to the grocery store shelf involves up to 20 transaction points. That's work that we've been undervaluing when prices were low and any product that has more inputs along the supply chain is going to be much more vulnerable to extreme weather events.

Anders Levermann:

What we can say as physicists is quite astonishing. Weather extremes are going to become more intense and more frequent under global warming.

Sonari Glinton:

So a hotter planet means more intense and more frequent rainfalls, floods, hurricanes, tropical cyclones. Those are only some of the shorter term effects of climate change. Longer term effects like rising sea levels will happen over centuries and as catastrophic as they may be, think ports and cities underwater. We'll have time to prepare for that.

Sonari Glinton:

So what could affect the relatively simple supply chain route of a bag of coffee from South Minas in Brazil to a coffee shop, say, in Shanghai? Well, we've already heard about how weather extremes can hurt the harvest. Now it's got to be shipped.

Anders Levermann:

What we know with respect to the export of coffee from Brazil is that tropical cyclones become more intense under global warming. Now, in order to disrupt a supply chain, you don't have to hurricane to make landfall. It can simply perturb the shipping route. This actually happens quite frequently. The same is then true for Asia. If you want to transport the coffee to Shanghai, for example, then you might again impacted by tropical cyclones on the way.

Sonari Glinton:

Harbors, roads and highways everywhere are vulnerable to storm surges. The Pacific Northwest, well, they know that all too well.

Anders Levermann:

Then there's landslides. Specifically in Asia, landslides are very frequent and very disastrous event. They can disrupt supply chains quite strongly and for a long time.

Sonari Glinton:

Anders says these events will become even more common. They may coincide, and that could be bad news.

Anders Levermann:

What if Hurricane Sandy had happened in the same season as Hurricane Katrina that hit New Orleans? What if this was the same year where the Midwest had a huge drought and agricultural production was strongly reduced? What if this was the same year in which in January, there was a snow event that stopped economic life in New York and Chicago. What if this had all occurred in one year? What would be the effects within the U.S. society?

Sonari Glinton:

Anders is concerned about the economic impact of these overlapping extreme weather events, but also he knows these stresses affect us socially. When life becomes more unpredictable and systems fail, human behavior is liable to change.

Anders Levermann:

If you change the quality of life from a relatively high level to a slightly lower level, people become unhappy and they go to the streets and society starts to discuss and argue whose fault this was and what can be done about it. I'm worried about climate change because I'm worried that if we don't combat it, the weather extremes will become so intense that eventually we won't have a democracy anymore in the country that I live in, and I don't want that for my children.

Sonari Glinton:

Oh, brother. We're going to need a lot of coffee to get through that. While I hope and we should hope that it won't ever come to that, it's not hard to draw the line from disruptive weather to disrupted supply chains to disrupted economies in societies, but there are other kinds of disruptors, ones that come with a lot more hope.

Mariana Vasconcelos:

Well, it's very beautiful. The sky is always blue. When you ride, there is a big lake that you can see the reflection of the trees and the water. There is huge eucalyptus trees that my great-grandfather sowed when he arrived to that place, and you can see lots of horses, some cows.

Sonari Glinton:

Mariana Vasconcelos is describing the farm where she grew up in Minas Gerais, the same area of Brazil where Luiz's coffee beans were grown. Her father raised horses and grew corn. Mariana ran the family bakery and cafe, and her brother now runs an organic coffee and vegetable farm in the same area.

Mariana Vasconcelos:

Our region has the most specialty coffees. The income of many, many families come from coffee and we are always trying to take the advantage of our climate conditions, the altitude, to produce the best coffee. It's quite complex because it responds a lot to the climate, so you have to pay attention and someone has to go there and harvest with their hands.

Sonari Glinton:

It's outdoor work and heavy lifting, work that Mariana's farmer parents wanted her to avoid.

Mariana Vasconcelos:

Even though I grew up in a farm, there was this constant incentive for leaving the fields, right? Looking for better life conditions, and that happened to launch my generation. All the parents said, "I want something better for you." So staying in the fields was something not considered good because it's too risky.

Sonari Glinton:

So Mariana got a degree in technology and studied at Harvard and the London School of Economics, but she kept returning to the problems that she knows the best; coffee production and agriculture.

Mariana Vasconcelos:

I worked in corporations and in startups, and at some point I said, "Why we are not doing this for agriculture?"

Sonari Glinton:

So she did. Marianna is now the co-founder and CEO of Agrosmart, a tech company that helps farmers of coffee and other crops make their operations more resilient and more sustainable. Mariana says climate changes affects the quantity and quality of coffee beans farmers can grow and makes the crops more vulnerable to disease.

Mariana Vasconcelos:

All of this results in farmer producing less or producing lower quality coffee that they will receive less money for it, so it directly impacts in their income streams.

Sonari Glinton:

If farming coffee becomes less profitable, even more risky, more small farmers will leave the business. We may see a drop in the variety and the quality of the coffee being grown. Now, Mariana wants to keep coffee farmers in the business, but sustainably. Bad farming practices like using too much fertilizer, overwatering or using machinery that's unnecessary can actually hurt the soil and create more carbon emissions. However ...

Mariana Vasconcelos:

If you adopt good practices, you can contribute to reduce global warming and climate change. So farming can contribute the problem, but it can mitigate the risk and actually contribute to the solution.

Sonari Glinton:

But a lot of farmers need help getting to that point.

Mariana Vasconcelos:

Growing up, I saw that farmers always relied in their intuition and their neighbors in order to decide what to do. There's lots of knowledge that has been past through generations, but the challenge is that things keep changing, climate is changing, that the requirements of consumers are changing. So we need to shift the way we decide and for that, data is very important.

Sonari Glinton:

Agrosmart tries to tap into that generational knowledge and builds on it.

Mariana Vasconcelos:

We collect real time data with sensors in the field. Data from the weather, the rain, the soil. So we understand the local climatic conditions. We aggregate other sorts of data, such as satellite data, public data from radars, from other applications that farmers are using, and then we help farmers to use that data into actionable insights. We have a tool that is called Alerts. So we understand the current and future weather conditions and we can trigger messages to the farms in the app or in the WhatsApp message to know what is going to come ahead. So in a frost alert, for example, they would receive an SMS or WhatsApp that there is a high risk of frost. Sometimes it's possible to mitigate that risk depending on the kind of frost by adding water and so on. Sometimes it's not. But it still gives them time to make decisions regarding other stuff that might reduce their losses.

Sonari Glinton:

In one coffee growing region that's been deeply affected by drought, Agrosmart helped by assessing each farmer's individual conditions.

Mariana Vasconcelos:

We generate their recommendations daily on how much water they need to use. With that, we were able to re dues around 70% of water usage and energy costs, which also means less carbon emissions, and we help them to increase yield. The return on investment in that project has been 400%.

Sonari Glinton:

Mariana and her generation know solutions of new ways of looking at old problems, experimentation and risk. Like the risk her father was willing to take on her ideas.

Mariana Vasconcelos:

He was always like, "Okay, I give you one hectare and you try it out. Are you sure you're going to do that? Are you sure it's not dangerous?" It's like, "I don't know, but I have to try. If we don't try, we don't learn." Right? But that's why we need innovators in the world, people who are willing to take the risk to try something. So my dad was our first farmer and then some of his friends and then some people in our region, and that's how we went growing until we reached now nine countries in Latin America.

Sonari Glinton:

Mariana thinks that consumers, they have a role in this as well.

Mariana Vasconcelos:

I would say that coffee is probably the first supply chain where you can see that happening in scale. Everyone wants to know where is this coffee from? This comes from Brazil or from Columbia, or from Vietnam. You know where it comes from and then you want to know from which farmer it came from and how did this farmer was remunerated by doing it? Was it fair trade? Consumer has a powerful way to change agriculture. When you make a sustainable choice, then you make the whole supply chain change.

Sonari Glinton:

For Anders Levermann, people like Mariana, those folks who grew up in a hyper-connected digital world, those folks can act as a bridge, and they're also critical to supply chain and climate resiliency.

Anders Levermann:

It might be that this will help us when the generation that really is completely trained in complexity will start to think about our problems. We'll see. I don't know. That's a very hopeful idea, but I think it might be true.

Sonari Glinton:

Hope, complexity, resilience, relationships, innovation, and yes, coffee. They're all going to fuel the future of the supply chain. Now, if we've taken anything from this season, it's that we're all connected. Yes, we're connected through this incredibly vast network of wants and needs, the give, the take and how, when something goes wrong on the other side of the world, it really can affect us all.

Sonari Glinton:

I recently took the ferry from Los Angeles to Catalina Island and I got to say, I was astounded to be traveling through literally a traffic jam of container ships, to feel how infinitesimally small you feel beside stacks and stacks of, well, our stuff. Then to think about the farmers, the truck drivers, all the seafarers, the entrepreneurs, the shop owners, the factory workers, all those people involved in getting all this stuff this far. After all, this vast network, this thing, the supply chain, isn't a thing separate from us. It is us. It's about us.

Sonari Glinton:

This has been Now, What's Next?, an original podcast from Morgan Stanley. This season was brought to you by our great producer, Erin MacIndoe Sproule, writer Sarah [Mehin-Sirke 00:25:11], sound designers Mark Angley, Robin Edgar. Our show runner is Tori Allen. The executive producers of the show, Christopher Boyce and the folks at Morgan Stanley. Me? Well, I'm Sonari Glinton. I want to thank you so very much for listening.

Luiz Araripe:

Matter of the fact, I have a small espresso before I go to bed every day.

Sonari Glinton:

You have an espresso before you go to bed?

Luiz Araripe:

An espresso.

Sonari Glinton:

When was the last time you slept? 1978?

Luiz Araripe:

No, no. I slept very well every night. Not a problem at all.

 

Host Sonari Glinton finds out how changing climates and unpredictable weather will continue to impact coffee crops, create shipping delays, and raise the price of a cup of joe, and what some are doing to help create resilience in the face of these challenges.

In this episode we meet Luiz Araripe, a Brazilian coffee exporter who’s been in the business for over 40 years. He describes how recent droughts and frost have devastated many farmers. Climate scientist Anders Levermann explains how changing weather will impact the global supply chain for coffee and even more complicated goods. Finally, we hear from Mariana Vasconcelos who grew up on a farm in Brazil and co-founded Agrosmart, a tech company that helps farmers become more sustainable and resilient to climate change. 

  

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