Vital That Coffee Industry Adapts to Climate Change, Illy Chairman Says
In a question-and-answer session, Andrea Illy discusses effects of climate change on coffee prices and challenges the sector faces
Coffee producers have to adapt to climate change in order for global prices to stabilize, said Andrea Illy, chairman of Illycaffè and third generation heir of the Italian company’s dynasty.
Coffee prices have reached record highs this year, and are unlikely to retreat any time soon as poor weather conditions in the world’s main growing regions—Vietnam and Brazil—squeeze global production. The price of arabica futures has risen nearly 70% over the past year, while robusta coffee futures have more than doubled.
Efforts to curb climate change include the European Union’s Deforestation Regulation—or EUDR—which aims to guarantee that consumer products don’t contribute to deforestation. The regulation was supposed to come into force by the end of the year, but the EU Commission proposed a one-year delay amid pressure from industries and governments.
Illy talked about the effects of climate change on coffee prices and the challenges the sector is facing. The following has been edited for length and clarity.
Q: What factors are driving coffee prices at the moment?
Climate change is heavily impacting coffee agriculture. Coffee grows in a very narrow climatic band, both in terms of temperature and moisture, and requires a circular, regular pattern. Climate change is giving us the exact opposite of regular climate conditions. The evil in the room is the so-called “ENSO cycle,” which is the alternation of the El Nino and the La Nina. El Nino causes heat waves with extreme drought, while La Nina is excessive rain and cold weather. What is increasing is the peak heat of El Nino.
Latin America, where two-thirds of coffee is grown, is the most impacted region. In Brazil, the effect of climate change is amplified as a result of the deforestation of the Atlantic Forest around a century ago. So we have twice as high global warming in the Minas Gerais regions where coffee is grown compared to other places in the world.
It’s unpredictable… we weren’t expecting such a mess this year. Extreme weather in Brazil and extreme drought in Vietnam triggered a rally in prices, which we didn’t foresee. With these weather patterns, we can expect lower output in the years to come, which is the perfect trigger for market speculation. The situation is getting more and more volatile.
Q: What conditions do we need for prices to normalize?
In the immediate term, we need rain in Brazil, and the price will fall immediately. But in the long term, we need countries to adapt to climate change. Brazil is an exception, as it’s the most competitive coffee-producing country with around 40% of global output and a substantial number of growers with good financing terms from the state. So Brazil can invest in adaptation, but most of the rest of the world is made up of small holders.
There are more or less 12 million hectares cultivated with coffee around the world, and around 12 and a half million growers. The average grower cultivates far below one hectare. How could they grow larger, or invest in adapting to climate change, if they are receiving just 5% of the wholesale value of [a cup of] coffee? There is absolutely not enough in terms of cash flow and margins to reinvest part of your income in adaptation. Price volatility makes it even more difficult. So we need improving economic practices.
What’s also needed is the renewal of plantations. In Brazil, they substitute plants every 12 to 15 years. In some countries, there are plants which are 80 years to a century old. You can guess how little productivity they have and how little resilience they have against pathogens or any kind of adverse factors. So what we have been advocating for many years is to create the conditions for consuming countries to invest in those plantations… even through a public-private fund.
Q: Has the company been able to absorb the cost increases itself?
We try to strike a balance. We try to absorb costs temporarily. Of course, from time to time we have windows where we adjust our pricing, but in general, we don’t adjust our pricing to cover temporary market cost increases. It’s a kind of an acrobatic gym exercise every time, but it’s something we’re starting to get used to.
Q: What are the main challenges that the EU deforestation law poses to the industry? Has Illy taken any steps to prepare for when this regulation comes into force?
The EUDR is motivated by good intentions. We have to stop deforesting for agriculture… But in the timeframe considered by the regulation, coffee didn’t undergo substantial deforestation.
We pioneer direct sourcing and we have a team of agronomists checking that there’s no deforestation or unsustainable labor conditions. We now have traceability for each and every coffee plantation, each and every coffee lot, each and every coffee bean. So we did prepare ourselves for any possible consequences [of the EUDR], including replacing some components of our blends with some from other countries. But imagine a company that buys through traders, and traders buy through cooperatives… you completely lose traceability.
The concern is more for the weakest part of the coffee chain, which are coffee growers in producing countries, particularly the less fortunate ones. Take for example Ethiopia. 40% of the coffee grown in Ethiopia is exported to Europe, which is by far the largest consuming region. Should they not be in the capacity to export to Europe any longer, they could redirect some of the coffee to other countries like the U.S. or in Asia, but not 40%. You would have 20% of people left jobless and forced to leave their land, which translates into a potential humanitarian crisis.
Q: What would you like the EU to change or amend when it comes to this regulation?
To simplify the procedure. For instance, a mechanism that requires producers to ensure that a coffee region or plantation is deforestation free. Some kind of self-certification mechanism. And also to give time to adjust. If you have deforested land, you can set a road map for restoring what has been deforested, with some time and some funds. There also needs to be more of a carrot and stick approach to companies, rather than just the stick. [The EU] helps you improve your sustainability with targets and regulation. Then if you don’t comply, you get punished. This would be ideal, because it could also create some complicity.