Enjoy your morning espresso (while you still can).

Is coffee under threat?

Could you imagine a year without coffee? While this idea may seem far-fetched to the millions of individuals who rely on their morning espresso to fuel their day, it is certainly an area of concern for all the stakeholders in the global coffee value chain, including roasters such as Nespresso.

There are two major species of coffee: Arabica and Robusta. Arabica is typically associated with higher quality and better taste, while Robusta has a higher caffeine content and a stronger, harsher taste. Coffee is a particularly demanding crop, which grows only within certain temperatures and humidity ranges. This is particularly true for Arabica, which accounts for accounts for ~70% of the worldwide coffee production. Arabica coffee’s optimal temperature range is 64°–70°F (18°C–21°C) [1].

Projected reduction in areas suitable for production, ICO, 2017

If Earth’s climate continues to warm over the coming decades, obstacles to coffee cultivation will certainly arise. The International Coffee Organisation (ICO) estimates that by 2050, the proportion of current areas suitable for Arabica bean production will be reduced by 70% in South East Asia, 60% in Brazil, and 48% in Central America [2].

Perhaps more worrying, however, is the impact climate change is already having on the livelihoods of smallholder farmers globally. Smallholder farmers account for 95% of the coffee farming households, and for 80% of the total coffee production globally [3][4]. They typically operate under limited financial flexibility, lack access to capital, and rely on coffee as a cash crop to feed their family.
As rainfall patterns keep shifting across the world [5], and price volatility keeps increasing [6], the long-term sustainability of coffee farming is being tested: while one bad harvest could have a dramatic impact on a farming household income, multiple bad harvests in a row could lead a farmer to drop coffee altogether to focus on other crops [7].

Nespresso: the commitment to a “positive cup”.

Nespresso’s parent company, Nestle, has committed to reducing its greenhouse gas emissions by 2020. They are targeting a 35% reduction from manufacturing operations (vs 2010), a 10% reduction from distribution operations (vs 2014), and 10% reduction from their warehouses (vs 2014) [8]. Along these lines, in 2014 Nespresso set the objective to inset 100% of its operational carbon footprint by 2020 by actively investing in productive projects throughout its supply chain [9]. For example, Nespresso committed to plant 10 million trees in coffee farms by 2020; these trees will not only help with carbon sequestration, but also positively impact the quality of the soil and help protect coffee bushes from adverse weather events [10].

Nespresso also seeks to mitigate the social consequences of climate change for farmers. Through its Nespresso Sustainability Innovation Fund (NSIF), it has invested in a number of projects to reduce the uncertainty and risk to the livelihoods of smallholder farmers stemming from climate change and economic volatility. For example, Nespresso partnered with Fairtrade and invested 2.2m$ to develop an innovative savings plan for the retirement of coffee smallholders in Colombia [9].

Nespresso’s focus on quality also enables the company to pay its farmers ~30-40% above the standard market price [11]. This approach is particularly impactful in a context of increased uncertainty for coffee farmer (price volatility in the top 5 origins has increased by 56% between the 2004-2010 period and the 2011-2017 period) [12].

Price volatility by time period, standard deviation of prices paid to growers calculated based on historical data from ICO, 2017

 


Engaging all actors: a necessity.

Nespresso’s premium positioning has allowed the company to invest in climate change mitigation and to truly support its own supply chain.
However, as of 2017, only 70,000 farmers are part of Nespresso’s AAA Sustainable Quality program [9]. This is negligible compared to the 25 million smallholders globally [4]. If climate change is truly threatening the long-term sustainability of the coffee industry, it is crucial for coffee roasters to work together on developing structural joint solutions to improve farm resilience.

In addition to developing joint efforts with competitors, Nespresso could also consider developing more public-private partnerships. Coffee is a major source of revenue for producing countries, and the number one export for many of them. In order to maximize its impact, Nespresso could seek to partner with Governments to help shape local coffee strategies.

Questions going forward.

A number of questions remain: can we realistically expect competing firms to join forces on this issue? And if not, are Nespresso’s efforts enough to ensure the long-term sustainability on its own supply chain?

As we witness an inevitable reduction in the areas where high-quality coffee can grow, how can companies and governments mitigate the risk of deforestation (deforestation is the primary source of new coffee land [2])?

Finally, could technology be the answer? What existing, or emerging, technologies could help mitigate the impact of climate change for all actors along the coffee value chain, from roasters to smallholder farmers?


Word count: 791


References:

[1] Scott, M., “Climate & Coffee”  Climate.gov https://www.climate.gov/news-features/climate-and/climate-coffee, last accessed on 12 November 2017

[2] Stylianou, N., “Coffee under threat”  BBC http://www.bbc.co.uk/news/resources/idt-fa38cb91-bdc0-4229-8cae-1d5c3b447337, last accessed on 13 November 2017

[3] Technoservehttp://www.technoserve.org/our-work/areas-of-focus/Coffee, last accessed on 13 November 2017

[4] Fairtrade, http://www.fairtrade.org.uk/Farmers-and-Workers/Coffee, last accessed on 13 November 2017

[5] Henderson, R. M., et al, Climate change in 2017: Implications for business (HBS No. 317-032)

[6] Terazono, E., “Coffee industry warned of volatile prices” Financial Times https://www.ft.com/content/e994faf8-1eb8-11e7-a454-ab04428977f9, last accessed on 12 November 2017

[7] Garcia-Navarro, L., “Coffee and climate change: in Brazil, a disaster is brewing” NPR https://www.npr.org/sections/thesalt/2016/10/12/497578413/coffee-and-climate-change-in-brazil-a-disaster-is-brewing, last accessed on 12 November 2017

[8] Nestle company website, http://www.nestle.com/csv/environmental-sustainability/climate-change, last accessed 13 November, 2017

[9] Nespresso, The Positive Cup report 2017, https://www.nestle-nespresso.com/asset-library/documents/nespresso-positive-cup-csv-report-interactive.pdf, last accessed 13 November 2017

[10] Smedley, T., “Forget carbon offsetting, insetting is the future” The Guardian https://www.theguardian.com/sustainable-business/2015/jan/09/carbon-offsetting-insetting-supply-chain, last accessed 13 November 2017

[11] Nespresso company websitehttps://www.nespresso.com/de/en/thepositivecup/initiatives/aaa-sustainable, last accessed 14 November 2017

[12] International Coffee Organisation, “Historical data on the global coffee trade”, http://www.ico.org/new_historical.asp, last accessed 12 November 2017

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18 thoughts on “Enjoy your morning espresso (while you still can).

  1. I definitely agree with you that climate change is not an issue that Nespresso can solve on its own. That said, I like your suggestion to partner with other interested parties to solve the problem. I wonder, however, if rather than partnering with competitors in the coffee space, Nespresso would be better off partnering with companies in complementary industries.

    Peanuts, for example, are another product category where yields are highly dependent on stable temperatures [1]. Growers, therefore, are facing the very real, near-term risk that climate change will make their supply “scarce” by 2030 [2].

    It could be beneficial for Nespresso to partner with a big player in the nut industry for several reasons. One, it could increase the overall amount of R&D investment poured into developing a breakthrough farming innovation. Two, it could broaden the funnel for innovation ideas, with growers from more than one industry identifying potential solutions. Three, it could allow Nespresso to be the sole first mover in their industry any new breakthrough technology developing, giving them a substantial competitive advantage in reward for their investment.

    [1] Michon Scott, “Climate and Peanut Butter,” National Oceanic and Atmospheric Administration, Climate.gov, November 1, 2012, [URL], accessed November 14, 2017

    [2] National Climate Assessment and Development Advisory Committee, “National Climate Assessment Report Draft,” U.S. Global Change Research Program, January 2014 [URL], accessed November 14, 2017

  2. What I learned about was that other players in the market also implemented sustainability practices. For example, Mr. Brown Cafe passed Rainforest Alliance Certificate for its retail coffee product. Rainforest Alliance Certificate focus on environmental sustainability, food safety and worker’s wellbeing. It is a very strict rule offered by NGO. It is a good news that key players in the market are concerned about the impact of climate change and manage to improve the status quo with Corporate Social Responsibility investment.

  3. The effect of climate change on agriculture in general and coffee beans more specifically has been studied for many years.
    This is a very interesting billion (maybe more) dollar market. As such, different “players” have been trying to come up with various kinds of solutions.
    Due to the huge market and world wide consumption, I do not feel that Nespresso’s efforts or even all coffee companies combined are sufficient enough to ensure the long-term sustainability on the industry’s supply chain. As you mentioned, I believe there is a need for both government support to mitigate the risk of deforestation AND advanced technologies (some already exist) to enable growth of the beans throughout the climate change.

    [1]Brendan Borrell, “Plant biotechnology: Make it a decaf”, Nature, March 14, 2012
    [2] Rachel Feltman, “Genetically modified coffee could be just around the corner”, The Washington Post, Sep 4th, 2014

  4. Good article and catchy title which I enjoyed reading over a cup of coffee. Really liked the breadth covered by your questions at the end. As some of the other commentators have mentioned, most coffee companies are aligned with some sort of sustainability policies but this is not slowing the problem – most likely a combination of innovation from the companies, good practices, and technology are likely needed in tandem to solve the issue.

    One thing you did not mention is Nestle’s environmental impact on the tail end of the supply chain with their pod packaging. Recently, Green Mountain (Keurig) has been scrutinized by the environmental waste from their products and the K-cup inventor has been vocally against the negative impact his product has on the world: https://www.theatlantic.com/technology/archive/2015/03/the-abominable-k-cup-coffee-pod-environment-problem/386501/

    Just like IKEA’s issue with old/recycled furniture disposal, dealing with waste on the tail end of their supply chain is less visible, not profitable, and very expensive. But the waste product cycle could lead to additional sustainability issues that negatively impact the environment.

  5. I found the note about how we will see a decrease in the amount of land suitable for coffee growing to be quite interesting. This immediately brought up the question is that if suitable land in some geographies is decreasing, then we should expect that suitable land in other geographies should increase as temperatures in different areas change in step with climate change.

    I did a quick search on this idea and as we expect to see a decrease in suitable land in Nicaragua, Honduras, and Venezuela, we should alternatively see an expansion in Mexico, Guatemala, Colombia, and Costa Rica [1].

    From a supply chain point of view, it would be interesting to know if the latter countries listed above are preparing their supply chains to increase future supply and exports due to an increase in suitable land. Perhaps some countries are looking to invest in coffee-growing land in these countries to anticipate future demand.

    On a side note: Pollinators, such as bees, are important to coffee growing, and the effect of climate change will impact the extent at which pollinators can help improve yields. Research and modeling so far shows that there will be a reduction in the number of bee species, but at the same time, some areas will see an increase in diversity of bee species, which should offset each other [2].

    Both footnotes are attributed to this article:

    [1][2] National Public Radio, “Coffee, Bees and Climate Change Are Linked In Ways You May Not Have Expected.” https://www.npr.org/sections/thetwo-way/2017/09/11/550169720/coffee-bees-and-climate-change-are-linked-in-ways-you-may-not-have-expected Accessed November 27, 2017.

  6. As a thought experiment, I found it helpful to compare and contrast this to the IKEA case, in which we considered the possibility of IKEA further verticalizing their supply chain by investing in more forests. As your article pointed out, smallhold coffee farms are an important source of livelihood for some of the world’s most marginalized communities. It was interesting for me to consider what would produce the most net social good in the context of sustainable coffee farming — Nespresso developing it’s own coffee farmlands (providing complete control over sustainability issues, but displacing the role of small farmers) vs. supporting existing farms with the above-average wages referenced in your case. I wonder if this is indeed a tradeoff that must be made, or if there are ways to optimize for both objectives?

  7. The effect of climate change on the coffee industry is widely understood, but I found it incredibly enlightening to learn about the strides Nespresso has made to minimize their environmental footprint. I know that Nespresso has tried to encourage users to recycle capsules in an attempt to minimize their trash production and would have loved to hear about this as well as other steps Nespresso has taken to become a more environmentally sound company. As mentioned in the comment above, the comparison to IKEA is very interesting because they are both companies that have detrimental impacts on the environment yet are simultaneously impacted by global warming as well. Thus, they have to solve the problem not just for the greater good but for themselves as well.

  8. Yohann, as a fellow caffeinated connoisseur, I was very troubled to read your essay on global warming’s impact on the coffee supply chain. While I was aware that global warming would have an impact generally on arable land, I was not aware of the magnitude of the problem for coffee. I was also pleasantly surprised to learn about the efforts that Nespresso is going through to shore up its own supply chain and reduce its environmental footprint. That being said, I am skeptical that their efforts or the recommendations you mentioned would do enough to shore up future coffee supply. While honorable, providing financial stability to low income coffee growers does nothing help them utilize their land when it is no longer suitable for coffee. Additionally, Nespresso reducing its own emissions on its own will not change the course of environmental change.

    I believe, as you said, that the worlds coffee producers must all take action in concert to deal with this issue. One thing that should be on the table is funding research on how to genetically modify coffee plants to exists in warmer/dryer climates. I would also love to see more public/private partnerships addressing this issue. Coffee is important not only to the individual consumers and growers, but also to society as a whole.

    Another issue which was not brought up was the impact of Coffee Rust[1], a fungus that kills coffee plants which spreads in warmer weather. Coffee rust has decimated plantations in the Dominican Republic, to the point where the country is now a net coffee importer instead of exporter. This disease, coupled with the reduction is usable farmland would likely make things even worse for us coffee lovers.

    [1] https://www.apsnet.org/edcenter/intropp/lessons/fungi/Basidiomycetes/Pages/CoffeeRust.aspx

  9. I agree that the climate change brought threat to the existing coffee plantation. While I also think the future for coffee business is still positive because the place which gets too warm might not be suitable for growing coffee trees, but then new places which are too cold now will become a good place for growing coffee trees. Besides, I believe the technology can solve the problem. For instance, the genetic modified coffee which adapts to new climate will be invented.

    The impact of the global warming is quite easy to imagine, while your point about the concern for small farmers enlightened me a lot. It made me think of the social responsibility of companies, which of course at the end of day leads to economic benefit for companies. I agree Nestle should play a big role in helping farmers cope with this climate change. While besides making effort on improve the living condition of the farmers and making commitment about reducing carbon emission, I also think Nestle should take bolder steps by actively involving in developing new coffee species. As these big multinational companies normally have very strong research center, Nestle should invest in this long term research and development project to explore the opportunity of inventing new coffee species that can fight against changing climate.

  10. I agree with you that Nespresso should join force with other large coffee roasters to mitigate the current situations for coffee. Starbucks’ business also relies heavily on the sustainability of coffee. I would suggest Nespresso to partner up with big players such as Starbucks. Deforestation is a universal problem, not just for coffee. Nespresso can also partner up with government, who will be concerned if the countries coffee growers are running out of jobs. To your last question, I believe technology can help the coffee production system and supply chain become more efficient. I’m not sure to what extend can technology help mitigate the effect of climate change though. Again, it is not enough impact if only Nespresso is adapting to the green technology. Moreover, I even think it would be possible that soon there will be some man-made ingredients that can replicate the taste and the function of coffee beans.

  11. I found the writing both entertaining (clear structure, catchy title) and highly data-driven, analytical. It is very disturbing how climate change has a strong and increasing impact on our everyday life, such as coffee drinking.

    My takeaway from this writing is that Nestle itself is not enough not make significant impact, due to the very low concentration of the market. Based on this, I started thinking about what would be the actions Nestle can take to make a difference. I believe that teaming with other major manufacturing companies could have faster impact that trying to influence regulation through government lobby. This is driven by the fact that there is significantly higher concentration on the manufacturing side than the farmer side, that give strong negotiation power to Nestle and the companies alike. Furthermore, the majority of coffee plants are located in countries where lobby and the involvement of for profit companies into the regulatory process has limited or no history, making it difficult for Nestle to contribute.

  12. This was all really well laid out, and this is certainly a problem that Nespresso and Nestle will need to pay attention to. As alluded to above, multiple stakeholders will be needed to address a problem like this. Whenever we encounter these collective action problems, I usually fall on the side of believing that the government has a huge role to play in the solution. The question is what solutions they implement and how.

    From Nespresso’s point of view, working to minimize their own environmental impact (e.g, by planting trees on coffee farms) is great, but unlikely to move the needle on global climate change. The other option is to invest in technologies or innovations to reduce the impact of climate change on coffee production unilaterally. This is not particularly attractive, given that Nespresso makes the investment, but everyone benefits (including their competitors). This leaves us with the option to work with competition – e.g., through industry groups or lobbying groups – to influence government regulation in a way that benefits the whole industry (and hopefully smallholder farmers in particular). One additional possibility is to work with the non-profit sector: many philanthropies, like the Bill & Melinda Gates Foundation, invest significant amounts of money to benefit smallholder farmers.

  13. Like many of the others commenters, I am a fan of Nespresso’s efforts to reduce their climate impact and I think they should continue those types of programs. But unfortunately those actions wont be able to fully slow the effects of climate change and I wonder if a proactive measure to adjust to a changing climate could be a technology assisted innovation for farmers and seed providers. I know GMO can be an evil world in some circles, but could deliberate efforts be taken to help develop a plant that is more resistant to temperature fluctuation? By providing a crop that can be grown in existing farms despite increased climate variability, perhaps they could avoid further deforestation and help farmers maintain their livelihood. The US National Coffee association hasn’t documented any use of GMO Coffee [1], but the Washington Post seems to think this is coming [2]. I think it is definitely worth looking at.

    [1] http://www.ncausa.org/About-Coffee/GMO-Legislation
    [2] https://www.washingtonpost.com/news/speaking-of-science/wp/2014/09/04/genetically-modified-coffee-could-be-just-around-the-corner/?utm_term=.36611110137c

  14. The issue of coffee production is similar to that of wine producers. It is great the efforts Nespresso is making, but I’m concerned they won’t be able to create enough of an impact to prevent coffee farms from disappearing completely in certain locations. Helping local producers financially can help in the short term, but with the given trends, it may be impossible to grow beans in certain locations altogether. My concern will be that going forward, the only farms that will survive, will be those with significant enough money to be able to move their production to new locations with more desirable climates, like what wine makers have done. So the question is, what do the displaced farmers do now? Are there other crops they can plant to replace coffee? I don’t think we’ll ever run out of coffee because those with money will continually move around the globe to wherever they can produce, but it will squeeze out the farmers with less fortunate financial positions. Nespresso in addition to their current efforts will need to do their best to work with governments to make larger steps to help slow climate change altogether. Or, to your point, work to create GMO beans that can survive in hotter, drier climates.

  15. Regarding your first question, I believe that the steps for further collaboration among the major coffee roasters (such as Nestle, JDE) can be taken through their support of and active participation in independent bodies such as Rainforest alliance, Utz, Fairtrade (similar to IKEA’s involvement in founding and shaping the FSC certification).

    You mention in your essay that Nespresso’s premium positioning is what enables them to drive their sustainability agenda and support their own supply chain. When reading this, another question springs to mind: are smaller players aware of the impact of climate change and, most importantly, can they afford to invest in a sustainability agenda. This is where major coffee roasters such as Nestlé and JDE need to drive their sustainability agendas in a way that not only benefits their own supply chain, but also educates coffee bean producers as well as smaller coffee roasters on sustainable practices.

  16. I agree with many of the comment above and worry about “greenwashing”. You state: “If climate change is truly threatening the long-term sustainability of the coffee industry, it is crucial for coffee roasters to work together on developing structural joint solutions to improve farm resilience.”. I agree with this. Another avenue to explore is we as a society may opt to reduce consumption of individually wrapped packages. I think the demand side of the equation could also be interesting to explore especially as it impacts the supply chain.

  17. Similar to one of the comments above, I was not aware of how acute the effects of climate change are on the coffee industry specifically. As a small player in a large market with a deep supply chain, I think that Nespresso is certainly punching above its weight. Not only is its approach to lobbying government for wholesale change appropriate, but it should also partner with larger players. Some of the comments have mentioned partnering with other coffee companies. I agree with them. I also believe that they should partner with other kinds of agricultural businesses (wheat, corn, etc. that are also affected by climate change to a similar degree) and other FMCG companies further up the value chain, including of course its parent company, Nestle. I think that a well orchestrated programme being driven by Nestle, Unilever, P&G, PepsiCo would be incredibly powerful to effect policy and standard operating procedures in the industry.

  18. Interesting to learn more about how demanding coffee is as a crop. Arabica, which accounts for roughly 70% of the world coffee production, will be difficult to grow if by 2050 there will be substantial reduction in suitable land.

    Given the impact that climate change is already having on small farmers, I wonder if there are financial and micro-investing instruments we could build to promote a transition in livelihood.

    It will be interesting to see how partnerships emerge between the large coffee organizations to combat the effect of climate change on their industry. Nestle seems to be at the forefront of this innovation but without comprehensive and general, widespread buy-in, it will be hard to manage downstream externalities of this global trend.

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