1. IWCA – El Salvador, 27 October, 2011 A M ARKET I N D ENIAL -- THE WORLD IS RUNNING OUT OF COFFEE!!! B Y M AJA W ALLENGREN - I NDEPENDENT A NALYST 10 TH AFCA C ONVENTION – K AMPALA, F EB 15, 2013

2. IWCA – El Salvador, 27 October, 2011 Among the numerous luxuries of the table... coffee may be considered as one of the most valuable. It excites cheerfulness without intoxication; and the pleasing flow of spirits which it occasions... is never followed by sadness, languor or debility. -Benjamin Franklin In Times Of Economic Crisis The World Is Drinking More Coffee Than Ever GTEC – Brazl, 14 March, 2012 AFCA, Kampala – 15 Feb, 2013

3. IWCA – El Salvador, 27 October, 2011 World coffee consumption growth AFCA, Kampala – 15 Feb, 2013

4. IWCA – El Salvador, 27 October, 2011 Quality Coffee Has Boosted Demand GTEC – razil, 14 March, 2012 AFCA, Kampala – 15 Feb, 2013

5. IWCA – El Salvador, 27 October, 2011 Is The World Running Out Of Coffee? At conservative 1.5% growth that will add 10-12 million bags in next 5 years At 2.4% growth that will add 12-14 million bags by 2016-17 cycle “Under all these scenarios, relatively strong consumption growth is envisaged, which could well outpace production growth.” --ICO, Feb. 2012, market report AFCA, Kampala – 15 Feb, 2013

6. IWCA – El Salvador, 27 October, 2011 World coffee outlook 2012-13 AFCA, Kampala – 15 Feb, 2013

7. IWCA – El Salvador, 27 October, 2011 Brazil‘s big 53-55 million bag crop will after 20 M bags used for local consumption and 30-35 million bags used for exports leave nothing left to rebuild stocks ICE stocks are down at 2.64M bags (Feb 6, 2013) after reaching a high of 2.72 million bags, total U.S. green stocks are at 4.9M bags near 2-year lows (Nov 30) while European stocks are close to 5-year lows at 9.55M bags (Nov 30) and down 315,000 bags (Oct 31) Current stocks of 17.1 million bags provide for a little over 6 weeks of total world demand Five years of deficit have left the world depleted for stocks and the rust disaster in Latin America 2012-13 could as well end up with a deficit World coffee production has with only a handful of exemptions stagnated in most countries in the last 10 years World coffee market at glance in 2012-13 AFCA, Kampala – 15 Feb, 2013

8. IWCA – El Salvador, 27 October, 2011 Espirito Santo – The New Coffee Frontier? AFCA, Kampala – 15 Feb, 2013

9. IWCA – El Salvador, 27 October, 2011 Coffee production lost since crisis Colombia has gone to 7.5-8 mln bags in the last five years from 11.5-12.5M bags Only Brazil, Vietnam, Peru and Honduras have increased production at any significant scale while Tanzania slowly is improving But world consumption has continued to increase by min 2M-2.5M bags a year 2000-022009-102010-112011-12 2012-13 AFCA, Kampala – 15 Feb, 2013

10. IWCA – El Salvador, 27 October, 2011 Million 60-kilogram bags Source: International Coffee Organization, independent trade and analysts In the last 5 years 43M bags of stocks have been consumed Despite the big Brazil crop 2012-13 is likely to add to the world deficit With ongoing rust disaster world could be headed for 6th year of deficit The Stock vs Consumption Equation AFCA, Kampala – 15 Feb, 2013

11. IWCA – El Salvador, 27 October, 2011 Major challenges remain to the world’s coffee crops Financing and credit, outside market pressure, currencies devaluations in key producers Brazil and Colombia, a lack of policies to support renovation The increasing impact of worsening socio-economic conditions and poverty in the vast majority of coffee producing communities is not recognized, population vs land size Climate change resulting in drought, irregular temperatures, un- seasonal rains and crop pests will result in continuing reduction to world forecast of at least 5% every year from now on Between 70 to 75% of the cultivated area with coffee in the world is currently in a state which is considered “semi-abandoned” and won’t be rehabilitated without subsidized financing AFCA, Kampala – 15 Feb, 2013

12. IWCA – El Salvador, 27 October, 2011 Diminishing Returns – cutting into growers income Small-holder coffee producer across the world today has seen the average income per farm unit reduced to between 25-50% from 10 years ago due to the combination of smaller farm plots and lower productivity Small-holder coffee grower’s income in 2001 with 1.3 hectare of land and average yields of 10-14 qq of coffee per hectare Small-holder coffee grower’s income in 2012-13 further reduced by 50% because of average yields of 5-7 qq of coffee per hectare Small coffee grower’s income in 2012-13 now based on average 0.5 to 0.7 hectare of land 2000-02 2010-12 100% 50% 25% AFCA, Kampala – 15 Feb, 2013

13. IWCA – El Salvador, 27 October, 2011 Why is world production not recovering? 1. It is a myth that the market will correct itself! -NO, this this can only happen as long as the conditions for this is present but the market cannot control renovation by small holders 2. Producers will renovate and invest in farms with high prices! -NO, that did not happen at 5 hectares, nor at 3 or 2 and even less will happen at 1 or less than 0.5 hectare 3. Brazil can increase coffee production by 10M bags any time! -NO, this would cost $6.7 billion and won’t happen AFCA, Kampala – 15 Feb, 2013

14. IWCA – El Salvador, 27 October, 2011 Climate Change: Global Warming Or Global Cooling? Despite green house gases still contributing the global warming the world has for the past seen a pattern of natural cycles of warmer and cooler weather After a prolonged period of about 30 years of warmer global weather the world entered a prolonged period of global cooling in 2007 During the next 20-25 years this is expected to bring about a dominance of La Niña rather than El Niño For coffee, this means rather than warmer weather, less rain and more sun exposure (El Niño) a shifting trend toward lower temperature, more rainfall and a dramatic fall in sun-exposure (La Niña) In Colombia for instance sun exposure has since 2007 been reduced by over 30%, or less than 3-3.5 hours per day, causing significant yield loss AFCA, Kampala – 15 Feb, 2013

15. IWCA – El Salvador, 27 October, 2011 Climate Trigger 2012-13 – Central America Rust Disaster Rust has infested 20-70 percent of the entire coffee area in Central America Minimum damage estimates are estimated at 20% or 3M-4M bags If damage in the 2012-13 harvest rise to 30% this figure would rise to 5.5M bags In the next 2013-14 harvest crop losses are seen at 30% to 40% This will see the Central America-Mexico harvest reduced by an additional 3.5M-6M bags unless immediate action is taken AFCA, Kampala – 15 Feb, 2013

16. IWCA – El Salvador, 27 October, 2011 Climate trigger 2012-13 – CentAm Rust Disaster GUATEMALA – 27 July, 2012

17. IWCA – El Salvador, 27 October, 2011 Climate trigger 2012-13 – CentAm Rust Disaster GUATEMALA – 27 July, 2012

18. IWCA – El Salvador, 27 October, 2011 Climate trigger 2012-13 – CentAm Rust Disaster Rust has infested 20-70 percent of the entire coffee area in Central America Minimum damage estimates are estimated at 20% or 3M-4M bags If damage in the 2012-13 harvest rise to 30% this figure would rise to 5.5M bags In the next 2013-14 harvest crop losses are seen at 30% to 40% This will see the Central America-Mexico harvest reduced by an additional 3.5M-6M bags unless immediate action is taken Production from the region is unlikely to rise above 10M-12M bags in the next 3 to 4 years Huge social implications already from losses of 300K-500,000 jobs GUATEMALA – 27 July, 2012

19. IWCA – El Salvador, 27 October, 2011 Climate trigger 2012-13 – CentAm Rust Disaster GUATEMALA – 27 July, 2012

20. IWCA – El Salvador, 27 October, 2011 Climate trigger 2012-13 – CentAm Rust Disaster GUATEMALA – 27 July, 2012

21. IWCA – El Salvador, 27 October, 2011 Climate trigger 2012-13 – CentAm Rust Disaster GUATEMALA – 27 July, 2012 Production from the region is unlikely to rise above 10M-12M bags in the next 3 to 4 years Huge social implications already from losses of 300K-500,000 jobs affecting over 3 million people MASSIVE IMPACT ON WORLD PRODUCTION! Production from the region is unlikely to rise above 10M-12M bags in the next 3 to 4 years Huge social implications already from losses of 300K-500,000 jobs affecting over 3 million people

22. IWCA – El Salvador, 27 October, 2011 The Arabica-Robusta Balance In 2012-13 In 1978-79 as much as 75% of the world coffee was sourced from arabica beans Just 10 years ago between 65 and 70 per cent of the world’s total production was made up by arabica beans but by the end of the 2011-12 cycle robusta growers had raised their share to 40 percent This is NOT bad to coffee producers nor will it affect global demand or the quality of the coffee we are drinking The higher availability and demand for robusta coffee is actually BOOSTING world demand quicker than anticipated with figures showing world demand for instant coffee has more than DOUBLED in the last 7 years The new robusta demand has primarily been supporting rapid growth in emerging markets like China, Russia and South Korea, as even more in producing countries The coffee industries in these countries are primarily based on instant coffee and the soluble industry and the availability of cheaper robusta-based instant coffee has fueled the annual growth rates of 4-15 percent in these markets AFCA, Kampala – 15 Feb, 2013

23. IWCA – El Salvador, 27 October, 2011 Positive Impact Of The Arabica-Robusta Balance But robusta coffee has also helped not only maintain coffee demand in traditional markets but even helped keep demand growing in most markets despite the crisis Italy, for instant, has moved from a market of 55 per cent Arabica and 45 per cent Robusta to a market today of 55 and 60 per cent Robusta and 40 to 45 per cent Arabica In a market like Japan the leading market share has always been for instant coffee which in 2012 still stood at 43 percent The improvement of the quality of robusta cannot be denied and specialty and gourmet robustas is a trend growing rapidly Demand in the few countries been negatively affected by the crisis is minimal, i.e. Spain, the U.K. and Italy down 337K, 141K and 203K each BUT France and US up 811K and 391K each, Germany and Japan stable and largely unchanged AFCA, Kampala – 15 Feb, 2013

24. IWCA – El Salvador, 27 October, 2011 Africa AFCA, Kampala – 15 Feb, 2013

25. IWCA – El Salvador, 27 October, 2011 Global Cooling’s Positive Contribution To African Coffee Contrary to public belief the current weather changes can actually benefit Africa’s coffee producers and improve their marketing policies A cycle of 20-25 years with cooler weather and higher rainfall could provide a significant boost to African coffee farmers and allowing for important changes to production practices with increased shade and reforestation Countries in Central America already growing mostly heavy shade coffee will need to make adaptions in order to allow for adequate sun-exposure and disease control But Colombia’s 2-crop cycle will once more mean that country is likely to become the most adversely affected by these changes This could increasingly turn Colombia’s mid-crop, or mitaca, into the country’s main crop and reduce competition for East African crops AFCA, Kampala – 15 Feb, 2013

26. IWCA – El Salvador, 27 October, 2011 Opportunities and Challenges for Producers Quality, quality, quality is the key to keep the equation in favor of producers Consumer demand will continue to grow by at least 2 million bags a year if the quality of the end-product is maintained for at least another 5-10 years The only producing countries with potential to significantly increase production by expanding the area are Brazil, Vietnam, Tanzania, Peru, Honduras and Nicaragua But coffee will have to compete with cocoa, other commodities and industrial development Whatever increased production will barely be enough to meet rising demand and won’t replenish stocks AFCA, Kampala – 15 Feb, 2013

27. IWCA – El Salvador, 27 October, 2011 The World IS Running Out Of Coffee! At conservative 1.5% growth that will add 18 million bags by 2020 At 2.4% growth that will add 31 million bags by 2020 USDA currently forecasts 2% growth per year in world demand “Under all these scenarios, relatively strong consumption growth is envisaged, which could well outpace production growth.” --ICO, Feb. 2012 158.9M bags 172.1M bags AFCA, Kampala – 15 Feb, 2013

28. IWCA – El Salvador, 27 October, 2011 Where is all that coffee going to come from??? World Production2008-2015 potential2015-2025 potentialProduction Increase Tanzania11002000900 Ethiopia500060001000 Kenya8001400600 Uganda32004000800 Ivory Coast24003000600 Cameroun14002000600 Other Africa--500 El Salvador14002000600 Honduras380060002200 Costa Rica16002100500 Guatemala400050001000 Nicaragua15002200700 Mexico400050001000 Peru350060002500 Colombia900011002000 Caribbean--1000 Other Islands--500 Brazil Arabica38000430005000 Brazil Robusta12000190007000 Vietnam Arabica800700 Vietnam Robusta--3000 Indonesia Arabica15002000300 Indonesia Robusta100001500 India Arabica--300 India Robusta1000 Other Asia 200 All figures in 000 60-kg bags World Production2020-2025 potential growth Africa A3000 R2000 Asia A2000 R5000 Latin America A12000 R Brazil A5000 R7000 TOTAL36000 A22000 R14000 AFCA, Kampala – 15 Feb, 2013

29. IWCA – El Salvador, 27 October, 2011 World demand-supply 2011-2050 Current land cultivated with coffee has a potential to produce 400 mln bags With average yields of 25-30 bags/ha and sold at average prices of $3/lb This will give the producer an average gross income of $11,905 per hectare AFCA, Kampala – 15 Feb, 2013

30. IWCA – El Salvador, 27 October, 2011 © M AJA W ALLENGREN - I NDEPENDENT A NALYST AND R EPORTER Email: mwallengren@hotmail.com – Twitter: SpillingTheBean A M ARKET I N D ENIAL -- THE WORLD IS RUNNING OUT OF COFFEE! AFCA, Kampala – 15 Feb, 2013