Economy

Tea Or Coffee? China Produces (and Drinks) Both

China has quietly become a major coffee producer — mostly for export. But its people are developing a taste for the beverage as well, much to the delight of vendors like Starbucks.

Coffee growers pick fresh coffee fruits in a plantation in Pu'er, southwest China's Yunnan Province
Frédéric Schaeffer

PU'ER — His basket slung over his shoulder, Fu Xiufang plunges his hands into the branches. Beneath the leaves of shrubs planted on mountainsides in the middle of the tropical forest, he picks the fleshy red fruits, leaving behind those that are still too green for later. His movements are fast and relentless, repeated for hours on end.

"I can gather up to 30 kilos a day, but it's a tough job. Look how dirty and damaged my hands are," says the 42-year-old Hani peasant, one of the minorities in the Yunnan province in southwest China.

The picker's shoulder begins to bend as his basket fills with coffee cherries. Most of them will be sold to Starbucks, before being shipped to the four corners of the planet. For six years now, Fu Xiufang has been working in the plantations of the Aini agricultural company, of which the American coffee chain is a partner. And yet, his own hot beverage of choice is tea.

Starbucks in China Photo: Dawn Huczek

"I've never had coffee in my life!" he says. "I just put a few berries in the baijiu (Chinese rice alcohol) to give it a sweeter taste and a red color like wine."

Crop substitution

For all the investment in coffee production, the region around Pu'er — a "small" town of 2.6 million inhabitants in the heart of Yunnan — is very much tea country still. Long before it became the Chinese coffee capital, the town, named after the famous fermented tea, was an important marketplace on the ancient "tea and horse route" linking Yunnan to Tibet. To this day, Pu'er still derives a large part of its worldwide activity and reputation from tea.

But over the past 30 years, coffee trees have been intruding into the landscape, between rice fields and terraced tea plantations, banana and citrus fields. Although coffee was introduced in Yunnan by a French missionary in the late 19th-century, there was not much left of it when Nestlé showed up in this poor and remote province in 1988.

In association with the World Bank and the United Nations Development Programme, "the Chinese government was looking to revive production and asked us to help," says Wouter De Smet, in charge of relations with farmers for the Swiss multinational in Asia.

After roaming the province, Nestlé chose the Pu'er region, with its mild temperatures all year round (19 °C on average), heavy rainfall (between 1,100 and 2,800 millimeters per year) and moderate altitude (between 700 and 1,700 meters). "Located just beneath the Tropic of Cancer, it has ideal conditions for arabica," the agricultural engineer explains.

For Nestlé, this demand also met a need. At the time, the food giant was looking for local suppliers for its brand new Nescafé factory near Guangzhou. Agronomists met with farmers and helped them introduce catimor, a hybrid arabica known for its resistance and high output.

Coffee trees have been intruding into the landscape.

This led some farmers to abandon other crops — sugar cane, corn, rice, oranges and even tea — and focus on the more profitable coffee shrubs. The movement gained pace in the mid-2000s, encouraged by the fall in tea prices, while the price of coffee soared to record highs. By switching from tea to coffee, farmers were able to double their income. "Coffee farmers like me were able to build a new house and buy a car," says Huang Dabao, who switched from oranges to coffee 11 years ago.

Galloping growth

Coffee production is booming. In the past decade it quadrupled to reach 2.2 million bags in 2017. A bag, the unit of measure for coffee, weighs 60 kilos. Invisible only 20 years ago, China is now the world's 13th leading producer, with output equaling that of Costa Rica and Kenya combined. For arabica, its specialty, China is the ninth largest producer.

China is still far behind its neighbor Vietnam, the second largest coffee producer after Brazil, but can no longer be ignored by the major players. "Now every company is there: Nestlé, Starbucks and commodity traders like Ecom, Louis Dreyfus and us," says Shirley Liu, managing director of Yunnan Volcafe, a joint venture with ED&F Man.

"Most of the coffee produced in Pu'er" is exported to more than 30 countries, including the U.S., Germany, and France," says Lu Han, head of the region's coffee and tea development administration.

But it's not just coffee growing that has taken off in China. More and more people are drinking it too. There have been double-digit growth levels in demand over the past two decades, according to the International Coffee Organization (ICO). Coffee has become a trendy drink for a young, urban middle class that is sensitive to Western influences. And even if China remains a nation of tea drinkers (tea consumption is still 10 times higher than coffee), coffee's growth curve makes industrialists drool. And for good reason! It is perfectly comparable to that of Japan 50 years ago.

Coffee culture is gaining ground.

With an average per capita consumption of 3.7 kilos of coffee per year, Japan maintained strong growth until the mid-2000s, becoming the world's fourth-largest coffee consumer. If China, a country of 1.4 billion potential drinkers, continues on a similar growth path, the market promises to be huge. For now, the Chinese only drink on average 100 grams of coffee (6 or 7 cups) per year.

Inevitably, all players are trying to elbow their way through to reap the benefits from this still burgeoning enthusiasm. In a market where the "3-in-1" soluble solution (coffee, milk, and sugar) is extremely popular, Nestlé largely dominates, with two-thirds of sales, according to Euromonitor. "In many cities, people still know nothing else than Nescafé," says Fu Jingya, from the China Coffee Association.

Quality controls

This creates a paradoxical situation, to say the least: although China consumes about as much coffee as it produces, it's not the same coffee. Robusta, widely used in instant solutions, is favored by the Chinese. But the country only produces arabica. As a result, Chinese-produced coffee is shipped West whereas coffee for the Chinese comes, in large part, from Vietnam.

Nestlé is not the only company to see China as potentially one of the world's biggest coffee consumers in the years to come. Unlike tea, coffee is consumed mainly outside the home, so coffee shops abound, even in medium-sized towns. In a country where the home is often small and uncomfortable, coffee shops are a haven where people can work or meet friends.

In China, a new Starbucks opens every 15 hours. This winter, the chain opened its largest shop yet in the heart of Shanghai. Starbucks now boasts more than 3,000 cafés in 136 cities across the country. And China could well become the company's biggest market, ahead of the U.S., within the next 10 years. Another sign that the coffee culture is gaining ground among young, well-off city dwellers is the fact that small independent shops are now challenging Starbucks, McCafé, Costa Coffee and other large chains with an emphasis on high-end beans.

It is impossible for them to earn money.

But this upmarket move is also a major challenge for Chinese producers because it depresses the price of Pu'er coffee. While there's plenty of money to be made at the consumption end, growers are struggling. Based on the New York index, the reference for the Arabica market, the price of Pu'er coffee is now just one-third of what it was five years ago.

"At current prices, it is impossible for them to earn money," laments Samuel Gurel, the American founder of Torch Coffee, which seeks to promote a so-called "specialty" coffee among producers. "Some farmers no longer even bother to pick the cherries and prefer to return to other crops."

Production costs, on the other hand, are rising. A picker in China is paid three times more than a Vietnamese. "The advantage of a high-quality coffee is not only higher prices but also more stable prices," says Gurel, one of the few Westerners based in Pu'er. And yet, for all the quality improvements, most Chinese coffee still doesn't qualify as top-grade. "Only a tiny portion of the coffee here is really fantastic," the American entreprenuer explains.

Still, Gurel remains optimistic. Falling prices can be a unique opportunity, he says, to convince producers to move upmarket. "In high-tech, China is succeeding at a phenomenal rate," he adds. "Why wouldn't it do the same in the coffee business?"

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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Angela Merkel at a campaign event of CDU party, Stralsund, Sep 2021

Tobias Kaiser, Virginia Kirst, Martina Meister


-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.

France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

Europe's north-south divide lives on

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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