According to the European Coffee Federation (ECF) the French market has lost significant volume in recent years and the companies are trying to stimulate consumption and to compensate for lower volumes by increasing value through the introduction of new products such as the roast and ground coffee pods. As in Germany, the number of households in possession of equipment, such as espresso and 'pod machines', is expanding rapidly. Although sales of pods in volume are still small, there is increased added value and quality and convenience appreciated by their users. The other similarity with the German coffee market is that in spite of the overall slowdown of the coffee market, soluble coffee consumption still shows some progress.

In Italy industry sources report some increase in in-house coffee consumption while "out of home" consumption is stagnating or falling slightly. Coffee sales in bars were hit hard, falling by 20% between 1990 and 2004. The negative results affect some 700 small and medium sized enterprises and 240,000 bars that operate in Italy. Coffee consumption currently accounts for 31% of the bars' turnover, against 50% in 1990. Industry sources said that bad quality, mostly of Vietnamese origin, is to blame for the drop in consumption.

The largest traditional market is not in Europe but in North America. For the year 2004, consumption in the United States reached 20.7 Inln bags, the highest level in more than 30 years. It could be 21 mln in 2005/ 06, which is roughly the level estimated by the Pan-American Coffee Bureau (PACB) for 1946, nearly 60 years ago. Of course, 1946 may not be the best year for comparison, since it was the first post-war year following World War II. The next year consumption slipped to just under 19 mln bags, but then exceeded 20 min in the subsequent few years. In any event, current levels are not much higher than they were six decades ago. At the same time, the population of the United States has more than doubled. As a result, per capita consumption has drifted down from some 18 pounds per person in the earlier years to about half that in recent years. While the absolute decline seems to have come to a halt it may be difficult, if not impossible, to regain all the ground lost. However, there are some positive signs. The growth of coffee shops and an increased variety of coffee products is encouraging more young people to drink coffee. According to the National Coffee Association (NCA), 26% of 18 to 24 year olds drank coffee in 2005 compared to 22% in 2004 and 16% in 2003. New coffee drinks have a positive impact on coffee demand and, at the same time, have changed the seasonal pattern of coffee consumption. Consumers in general, but particularly young people, are drinking more chilled and flavored coffee beverages, altering the industry's former seasonal pattern, in which coffee demand was highest in the winter. Even though the negative trend in coffee demand seems to have been broken, future growth will be limited and will not be comparable to that in emerging markets and producing countries. Of especial interest in the group of emerging markets are two traditional tea-drinking countries namely Russia and China. Another, but more saturated, market in this group is Japan.

Coffee consumption in Russia, traditionally a tea-drinking nation, has gained significant ground in recent years with growth rates at between 10-15%. Even though growth has slowed down in recent years, the rates will remain far above those in traditional markets. Russian industry sources expect the market to grow by 3-5% up to 2007 even though there is no agreement on the volume of sales. Russian industry sources claim that consumption in 2004 was roughly 1.8 min bags, which seems too low, given net imports of roughly 3 mln. Instant coffee dominates the market, accounting for 90% of all sales. These reached almost 82 bin in 2004, with the market growing by some 13% on the previous year. The instant coffee market is dominated by majors like Swiss Nestle, and German Tchibo, which control about 70% of this sector. With growing per capita incomes there is a trend towards higher quality products. However, so far, with a few exceptions, instant coffee producers have held back plans to establish new facilities and the majority of companies just package coffee on site. One of those exceptions is Nestle which, to save on import tariffs, has invested S 120 mln in the construction of a plant to produce Nescafe Classic in the Krasnodar region despite the booming coffee shop culture.

The consumption of roast and ground is still in its infancy. However, value growth is estimated at 10% in 2004. This growth has been strongly supported by the dynamism of the chained coffee shop sector. This boom in coffee shops has exposed Russians to the coffee-drinking culture, which is expected to stimulate sales of roast and ground coffee, as consumers look to create the coffee shop experience at home. One obstacle to growth is that Russians still consider instant coffee to be a prestigious product, which means that many consumers see no need to switch to fresh coffee. Further, the penetration rate of filter coffee machines in Russian households is still extremely low, which deters consumers from buying fresh coffee for the home. However, the increasing western influence on the Russian market and rising levels of disposable income mean that consumers are becoming more and more aware of fresh coffee and are likely to be able to afford filter coffee machines in the future. Russia may follow the pattern of the United States, where in the 1980s people preferred instant coffee, while currently over 50% of all coffee consumed there is roast and ground.

China has always been known as a tea-drinking nation, and coffee has until recently not been on most menus in the nation. However, the influx of foreign investment and expatriates from around the world, coupled with an increasingly affluent and western-oriented youth culture burgeoning in its increasingly prosperous cities, has seen tremendous growth over the past few years in the demand and availability of coffee. According to industry sources consumption has almost doubled to half a mln bags from not even 200,000 in 2001. Soluble coffee accounts for 90% of all sales and roasted coffee for the remaining 10%. Most experts believe that coffee's penetration in China, currently confined to a few developed coastal regions and consumed by between 0.1% and 0.5% of the population, will increase significantly over the next 5 to 10 years. The ICO, for example, regards China as a focal point in the organization's strategy to raise global coffee consumption. It hopes that 200-250 mln Chinese out of a total population of 1.2 bln can be convinced to become coffee consumers, which would make the market as big as that of the United States, the largest coffee consuming nation. Starbucks of the US regards China as its biggest opportunity and believes it could even grow to its biggest market. The Seattle-based chain has expanded to around 200 stores in China since it first came to Beijing in September 1998. Even though current consumption is still minuscule, China is the great hope of coffee producers around the world.

Japan, traditionally a tea-consuming nation, is the major player in Asia/ Oceania, accounting for about 7% of global coffee consumption in 2005/06. There have been impressive gains in recent years although per caput offtake of 3.3 kg in 2004 remains below the EU's 5.17 kg. Possible reasons for this include the abundance of other beverages available and the role played by green tea. But coffee is nowadays not only more popular in both volume and value terms, overall tea sales are continuing to lose ground to coffee. Coffee offtake in 2005/06 is estimated at nearly 8 mln bags up from 6.9 mln in 2000/01. The country has seen the number of coffee shops mushroom in recent years. Different types of coffee shops have been developed rapidly. Apart from the no-frills local coffee shops, chain coffee operators from America and Europe have filtered into urban areas. Although instant coffee still dominates the market, fresh coffee has been the main driver of coffee sales as a whole. The boom in sales was further fuelled by Japanese manufacturers launching new products, as well as repackaging existing brands, especially in the fresh ground coffee category that tapped into the trend for authentic coffee. Although coffee consumption is forecast to continue to grow steadily over the next few years, growth rates will be less than during coffee's boom period given heavy competition from other beverages and the limited consumer base.

Producers also put great hope on convincing their own population to drink more coffee, with Brazil representing some sort of a showcase. Brazil is by far the most important consumer of coffee representing roughly half of the producer total. With consumption running at nearly 16 mln bags per year, Brazil is second only to the United States in market size. This is a large step from the 12.2 mln bags consumed in 1998/99 with growth forecast to remain steady over the next few years. The Brazilian Coffee Industry Association (Able) explains new facilities and the majority of companies just package coffee on site. One of those exceptions is Nestle which, to save on import tariffs, has invested S 120 mln in the construction of a plant to produce Nescafe Classic in the Krasnodar region despite the booming coffee shop culture.

The consumption of roast and ground is still in its infancy. However, value growth is estimated at 10% in 2004. This growth has been strongly supported by the dynamism of the chained coffee shop sector. This boom in coffee shops has exposed Russians to the coffee-drinking culture, which is expected to stimulate sales of roast and ground coffee, as consumers look to create the coffee shop experience at home. One obstacle to growth is that Russians still consider instant coffee to be a prestigious product, which means that many consumers see no need to switch to fresh coffee. Further, the penetration rate of filter coffee machines in Russian households is still extremely low, which deters consumers from buying fresh coffee for the home. However, the increasing western influence on the Russian market and rising levels of disposable income mean that consumers are becoming more and more aware of fresh coffee and are likely to be able to afford filter coffee machines in the future. Russia may follow the pattern of the United States, where in the 1980s people preferred instant coffee, while currently over 50% of all coffee consumed there is roast and ground.

China has always been known as a tea-drinking nation, and coffee has until recently not been on most menus in the nation. However, the influx of foreign investment and expatriates from around the world, coupled with an increasingly affluent and western-oriented youth culture burgeoning in its increasingly prosperous cities, has seen tremendous growth over the past few years in the demand and availability of coffee. According to industry sources consumption has almost doubled to half a mln bags from not even 200,000 in 2001. Soluble coffee accounts for 90% of all sales and roasted coffee for the remaining 10%. Most experts believe that coffee's penetration in China, currently confined to a few developed coastal regions and consumed by between 0.1% and 0.5% of the population, will increase significantly over the next 5 to 10 years. The ICO, for example, regards China as a focal point in the organization's strategy to raise global coffee consumption. It hopes that 200-250 mln Chinese out of a total population of 1.2 bln can be convinced to become coffee consumers, which would make the market as big as that of the United States, the largest coffee consuming nation. Starbucks of the US regards China as its biggest opportunity and believes it could even grow to its biggest market. The Seattle-based chain has expanded to around 200 stores in China since it first came to Beijing in September 1998. Even though current consumption is still minuscule, China is the great hope of coffee producers around the world.

Japan, traditionally a tea-consuming nation, is the major player in Asia/ Oceania, accounting for about 7% of global coffee consumption in 2005/06. There have been impressive gains in recent years although per caput offtake of 3.3 kg in 2004 remains below the EU's 5.17 kg. Possible reasons for this include the abundance of other beverages available and the role played by green tea. But coffee is nowadays not only more popular in both volume and value terms, overall tea sales are continuing to lose ground to coffee. Coffee offtake in 2005/06 is estimated at nearly 8 mln bags up from 6.9 mln in 2000/01. The country has seen the number of coffee shops mushroom in recent years. Different types of coffee shops have been developed rapidly. Apart from the no-frills local coffee shops, chain coffee operators from America and Europe have filtered into urban areas. Although instant coffee still dominates the market, fresh coffee has been the main driver of coffee sales as a whole. The boom in sales was further fuelled by Japanese manufacturers launching new products, as well as repackaging existing brands, especially in the fresh ground coffee category that tapped into the trend for authentic coffee. Although coffee consumption is forecast to continue to grow steadily over the next few years, growth rates will be less than during coffee's boom period given heavy competition from other beverages and the limited consumer base

Producers also put great hope on convincing their own population to drink more coffee, with Brazil representing some sort of a showcase. Brazil is by far the most important consumer of coffee representing roughly half of the producer total. With consumption running at nearly 16 mln bags per year, Brazil is second only to the United States in market size. This is a large step from the 12.2 mln bags consumed in 1998/99 with growth forecast to remain steady over the next few years. The Brazilian Coffee Industry Association (Able) explains the steady growth of coffee consumption by:

Improved purchasing power of the Brazilian population coupled with the relatively stable economy and reduction of unemployment rates;

Improved interest in the product. Brazilians are rediscovering their taste for coffee, encouraged by promotional campaigns and events;

· Improved quality of the product with a broader offer of gourmet, specialty and high quality coffees and a continuous release of new coffee brands in several Brazilian regions;

The Coffee Quality Program (PQC). According to the PQC, coffee brands are eligible for the "Quality Stamp" only if they comply with three basic conditions: l. products with minimal quality recognition; 2. sustainable standard flavor in the long term; and 3. good manufacturing practices.

Press releases relating coffee consumption, up to certain volumes, to a healthy lifestyle.

To maintain demand growth, Brazilian roasters need to persuade poorer and older consumers that coffee is a healthy and energetic drink. Abic says that many doctors have been won over but a lot of consumers remain skeptical. It was added that roasters must also continue to improve coffee quality and offer new value-added, readyto-drink products such as mint and chocolate flavored iced coffee to win new, especially young, consumers. The industry remains optimistic that this can be achieved and aims for 21 mln bags in 2010.

i Of course, there are specific conditions in each and every coffee producing country and not all will be able to follow Brazil's example. However, a lot could be done to improve coffee consumption.

In Colombia, for example, there has been hardly any growth in recent years. Despite marketing efforts to shore up coffee consumption as a whole, the main competition has been among coffee brands. There has been a small shift from lower to higher quality and specialty coffees but this was all. The industry ascribes the sluggish demand development to the phasing out of consumer subsidies for coffee.

The situation in Mexico is more promising with demand from consumers with mid- to high-level incomes increasing, due to their access to fashionable value-added coffee chain stores. However, despite growing demand, per caput consumption is not even 1 kg, compared with more than 5 in Brazil, although the country is the second largest market worldwide for soft drinks, which invariably cost more than a cup of coffee. This has apparently convinced the industry to increase marketing efforts to expand coffee's market share.

A challenge of a different order is presented by India, where only 1.2 mln bags of coffee are consumed each year, implying an average per capita consumption of about 90 grams. Obstacles are the high price of coffee and competition from tea. Coffee is virtually unknown in much of the country, while the presence of tea is ubiquitous. Coffee almost always costs more than tea, so the main challenge in India is to bring the cost of coffee down, as well as making it better known. Moreover, quality has to be improved to lure consumers away from tea.

In Vietnam, on the other hand, coffee has always been fairly popular because of the historical links with France. Per caput consumption is around 750 grams, far above India's 90 grains. Much of the consumption is arabica, which has to be imported as very little is produced domestically. The Vietnamese have traditionally taken their coffee

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By and large many coffee producing countries are making great efforts to expand domestic demand. These efforts are aided by the fast growth in the number of coffee shops, even in countries with very low per caput incomes. Although such outlets use very few bags of coffee each year, they serve to raise the image of coffee, fostering overall demand. Hence, hopes for higher coffee demand in producing countries as well as in emerging markets are not unrealistic with global growth forecast to be in excess of 1% in coming years.

Trade and Stocks Exportable production in 2005/06 is forecast to fall to 80.3 mln bags from 90.6 mln the previous season, or by roughly 10 mln bags. This, coupled with the expectation that origins would hold back supplies in anticipation of significantly higher prices later in the year, prompted some to predict a substantial fall in exports, lower consumer stocks and noticeably higher world market prices. However, cash strapped producers decided not to hold back supplies but to run down stocks to minimal levels. Apparently, the rise in global coffee prices was sufficient incentive to export. The high level of shipments also reveals that producers apparently had little faith in higher prices given a large Brazilian 2006/07 crop looming on the horizon. Exports in 2005/06 are estimated to reach 87.8 mln bags, below last season's figure of 92.4 mln but considerably above exportable production of 80.3 mln. As a result, producer stocks could fall to just above 23 mln bags, the lowest figure for quite some time. The low level of stocks means that there is practically no safety cushion left in exporting countries and any weather induced production shortfall next season will translate directly into lower exports as stocks cannot be drawn down much further even if producers were to sweep their warehouses and export everything that is left.

These figures are in line with recent ICO data suggesting that opening stocks in crop year 2004/05 in exporting countries fell to 28.7 mln bags from 40.27 mln the previous year and 55.66 mln bags in 1990/ 91. Compared with 2003/04, initial stocks in 2004/05 fell by 26.57% for Colombian Milds, by 33.95% for Brazilian Naturals and 23.11% for robustas. Only stocks for other milds increased by 7.27%.

However, extreme caution must be exercised when looking at producers' stocks, as the numbers involved do not necessarily reflect true availability. In some cases official estimates will underestimate the amount held, as it is often impossible to record the total volume held in private hands in a country, while in other cases the figures will exaggerate the amount available. Moreover, verification of stocks ceased in 1989 with the suspension of the ICO export quota system. Although the figures produced from the stock verification system were questionable, they were the product of a reasonably rigorous procedure. Today, the figures are based on national estimates, sometimes of dubious nature.

How much coffee is stored in producing countries will only be known if prices should make a sharp upward jump, prompting producers to sweep their warehouses. Given all reservations, stocks in producer countries should be extremely low, a fact that has to be taken into account by importing countries.

Stocks in importing countries are usually referred to as inventories in order to distinguish them from stocks held in producer countries. Inventories tend to grow when prices are low and deplete when prices arc higher, although the relationship is far from linear. Inventories fell in response to the price hike in 1994 but began to expand again with the collapse in prices from 1999 to 2003. Even though prices have recovered from 2004, stocks in importing countries must still be ample. After the build up of stocks in importing countries in 2004/05 there will apparently be not much of a draw down in 2005/06, given current export and demand projections. The ICO recently calculated that stocks of green coffee in importing countries, including free ports, were 21.5 mln bags at the end of September 2005. This would be practically unchanged from the same month in 2003 and far above the 17.2 mIn seen at the end of September 2000. However, there are the first signs of a draw down of consumer stocks with LIFFE and NYBOT certified stocks on the decline. US green coffee stocks at the end of November 2005 were 4.9 mln bags down from 5.2 mln last year and 5.7 mln at the end of November 2003. All the same, the situation is far from critical given the high level of exports in 2005/06. However, if something were to go wrong with production in 2006/07 any potential supply gap would have to be covered from consumer stocks.

Outlook Despite a production shortfall of around 7 mln bags in 2005/06, mainly due to lower production in Brazil and Vietnam, roasters reacted coolly to tightening supplies with prices far below producers' expectations. In fact, there is so far little sign of any shortage developing as producers have decided not to hold back in the hope of higher prices with exports almost the same as in the previous year despite significantly lower production. This has prevented any major draw down of consumers' stocks, allowing roasters to adopt a wait-and-see attitude. Producers have not yet thrown in the towel, hoping that tightening supplies, notably for robustas, will inevitably have a positive effect on global coffee prices. Roasters on the other hand are reluctant to drive prices higher, given ample stocks and expectations of higher production in 2006/07. The foremost question for producers and consumers alike is whether there is a chance of another deficit next season or whether anticipated higher production will push the market back into surplus. On the assumption that global coffee demand will rise by 1.5% in 2006/07 the total quantity needed could be around 118-119 mln bags, or 8-9 mln more than estimated production in 2005/06. Barring any major weather calamities, raising production above 120 mln bags next season should not pose any major problem as both Brazil and Vietnam are expected to produce more. These two countries alone could raise global production in 2006/07 by more than 10 mln bags. Production elsewhere could also be higher, given the rise in global prices, although it could be restrained by higher input costs given the sharp rise in energy prices. But the anticipated increase in Brazil and Vietnam alone will help prevent any major supply deficit, especially given ample inventories in importing countries. Therefore, at first sight, it seems to be plain sailing for coffee importers while producers' hopes for higher prices may not materialize. But that must not be the last word.

There is always the danger of weather induced production shortfalls. In that case, exports would have to be curtailed drastically as the level of producer stocks is presumably extremely low. Admittedly, part of any gap could be covered by a draw down of consumer inventories, which are still at around 22 mln bags. The situation could become precarious if there should be a gap of more than 5 mln bags. The ball is therefore still rolling although there is as yet no reason for roasters to be overly nervous. However, 2007/08 could be a different kettle of fish. Any surplus in 2006/07 may not be high enough to allow producers to replenish stocks. However, this would be crucial ahead of another down-year in the 2007/08 Brazilian production cycle. This could entail some risks for roasters if there should be any additional weather induced production problems. While there is no need for roasters to be overly nervous right now, complacency seems also out of place.