SIMON LUSHER: Good morning, Andy. Thank you very much for having me.
ANDY EDWARDS: No worries. Simon sits within our Direct and Fac team at Willis and specializes in risk transfer solutions throughout the food and beverage supply chain. He works across multiple lines of insurance, whether that be property, liability, contaminated products, including recall or supply chain disruption. The list goes on and on, and I'm sure we'll discover a lot more of his capabilities over the next few minutes. So that's a very brief intro about our guest.
And before we get talking, I'll give you a couple of facts about the specific subject matter we're going to be discussing. Each year globally we consume roughly 10 billion kilos of this. That's 2.25 billion cups a day. So with that, it will be no shock to you that this commodity is the second most traded in the world, behind crude oil. And finally, and most probably well-known in the insurance industry, is that Lloyd's is synonymous with this. As a result of the Great Fire of London in 1666, which saw much of the city destroyed, it was obviously a need for trade and commerce to continue.
So where better to meet than in one of these establishments to do business. Edward Lloyd's shop by the river became the center of marine intelligence and founded the modern insurance industry. If you've not worked it out yet, it's probably too early and you've not managed to get your hands on one. We are of course talking about the fascinating journey of one of the most well-known beverages in our daily lives, coffee.
So that's enough from me. Let's get into it and hear Jacob and Simon. So, Jacob, I'll go to you first. Let's take it back to the start before we even get onto the supply chain and any of the risks associated with that. And let me ask you a really basic question. What is coffee?
JACOB SHALKA: Thanks, Andy. I think working in insurance, like we all do, you can't escape coffee, it's absolutely everywhere. There's more and more coffee shops in London than ever before, but simply put, brewed drink basically from roasted coffee seeds, commonly called beans from the coffee plant. And there are many variations of that, most common being arabica, which you'll probably be most familiar with, makes up around 60% to 65% of the global production. It's got a much smoother, sweeter taste.
There's also robusta, which contributes another significant proportion of that market, or slightly stronger, a bit more bitter and higher in caffeine. And of that coffee supply chain globally, obviously, like I say, a lot of it's exported from Brazil being the main contributor. It's around 35% of the coffee seeds come from Brazil, but they're massive contributors, particularly in Asia as well, with Vietnam, Colombia making up quite a significant proportion, as I say, Asia. Obviously, Colombia is not in Asia.
Ethiopia and Honduras as well, being two other big contributors of that. And it can be quite a complex and quite drawn out supply chain, as I know Simon will touch on a bit more in a second, but from a risk perspective, lots of physical triggers, physical perils that the coffee beans will encounter along that supply chain journey. But like I said, I don't want to touch on that too much at the moment because I think Simon can provide a bit more about the wider supply chain and the current state of the supply chain for the coffee industry.
SIMON LUSHER: We'll do, Jacob. But I've got to congratulate you to start off with for saying seeds before you said beans. Because they're not beans. We call them beans but you're right, it's a coffee seed.
JACOB SHALKA: Yeah, I'll say that was on purpose.
SIMON LUSHER: I'm impressed.
JACOB SHALKA: So I've touched on some of the countries where the main exporters are but where does that coffee actually come from and what that supply chain actually look like?
SIMON LUSHER: OK, well, you mentioned the main producers and if you look at a map of the globe, you'll notice that they're all in roughly the same band around the equator in the tropics of Cancer and Capricorn and that's one of the issues we'll probably come to later. Is that how narrow that band is because coffee is a very fussy plant, it likes specific temperatures, it likes specific rainfall, it likes specific altitudes. It can't be grown everywhere and it's this band on either side of the equator.
It used to be said that it was grown by developing nations and drunk by industrialized nations and I think that's changed now as developing and industrialized nations are blending into each other and as Western tastes are being picked up by Southeast Asia, China, etc. So that's not quite as true as it was, but it's still broadly true. So that means we've got a long supply chain, and that the countries that are drinking the most coffee are not the countries that are producing it.
In terms of the actual supply chain then, we know where it's grown. Coffee plants take about seven years to start fruiting, so there's a fairly long process of cultivation before we even start getting a product out of them. They then fruit for about 25 years, and the coffee berries usually produce two beans or technically seeds, as we've discussed, which then need to be extracted from the fruit and that is quite a complicated process these days. I mean, you can dry them, but that takes time. So, what usually happens is they get fermented and milled and hulled and cleaned, and that produces a green coffee bean. Or, and this is a very specialized coffee bean, you can feed them to Indonesian palm civets or Thai elephants, and their digestive system does the processing for you and then hopefully they're cleaned after that and you can sell your coffee at a very, very high premium but that generally doesn't happen.
Generally speaking, we are producing green coffee from a wet fermenting process or drying them outand then hulling them and cleaning them. So we've got green coffee beans and green coffee beans store and travel much better than roasted beans. Once you roast a bean, the flavor starts disappearing and the aromatics start going quite quickly. So, you're better off moving the green beans to the roaster rather than roasting them, and then moving the roasted beans to the consumer.
So that tends to get transported usually bulk so ships rather than planes go to the roaster. The roasting process basically produce the coffee you're going to drink. So that causes chemical and physical changes to the coffee. The flavor changes depending on the roasting time, so you then get grades of roast, dark roast, lighter roast, arabica beans. That's probably going to be sold as ground coffee or whole beans. Robusta the same but robusta is also further processed into instant coffee and that's mainly because robusta is cheaper to produce so it makes sense to turn that into instant coffee.
ANDY EDWARDS: Is that also stronger, Simon, in terms of caffeine, robusta?
SIMON LUSHER: It's about 50% stronger. Yeah, you often see in the Indonesian Lava Java type coffee brands, the high caffeine, strong espressos. That's robusta rather than arabica.
ANDY EDWARDS: So just on that, you talked about how concentrated the production is globally. What risk does that pose? You can talk about physical loss or damage here or really like climate specifically and have you seen any massive climate impacts in any of these countries in recent times?
SIMON LUSHER: Well, if you're buying coffee at the moment, you've probably noticed it's a lot more expensive than it was five years ago. And that's because in 2024, we had both drought problems in Brazil, so the coffee harvest was much lower. We had erratic weather, high rainfall, low rainfall in Vietnam, which also disrupted their harvest. So you've got a commodity shortfall, which obviously increases the pricing and as a subject, you know a lot more about than I do but you also had quite a lot of trade disruption in 2024 as well, which meant freight costs went up.
ANDY EDWARDS: On the flip side of what you said in Brazil, they actually had some frost in 2021, which I wouldn't really think about, but I gather that caused some huge damage to some plantations and, again, impacted pricing.
SIMON LUSHER: Yep, that is true and that's the problem when you've got a concentrated production, it's not spread out and weather events, and you've got that equator band as well. So that is where the erratic weather is, which is affecting all of us in terms of the storms that come from that area and the ocean warming, etc. So yeah, we've got our coffee in a very erratic, to repeat that word, weather system and that's going to affect pricing. It's a very sensitive crop, as I said already.
Of course, as I mentioned, also it's not growing where it tends to be drunk so then you've got to ship it and then you've got the cargo risks because it's a sensitive crop, but it's also a sensitive commodity. So, it is vulnerable to light temperature, moisture, and oxygen, all can lead to deterioration during transit. So you've got to make sure it's suitably packed and you've got to make sure you've got the right sort of containers for it and it's also time sensitive. So, any delay in transit and your green beans are going to start degrading over time, losing flavor and freshness even when the storage conditions are optimal.
ANDY EDWARDS: OK, interesting. So, you've talked a little bit about the climate there and the transportation of it. What are some of the other industry challenges that are being impacted? So, you're looking at tariffs. I think just two days ago more tariffs introduced for Brazilian coffee, there is obviously geopolitics at the moment and it’s massive and as I said we've touched upon climate change. But what is the impact of that US tariff on Brazil? And are you seeing those transits moving elsewhere or predicted to move elsewhere?
SIMON LUSHER: So the tariffs are interesting because coffee is in such high demand in the US, you think it's still going to get there. Now, whether it goes straight from Brazil and your average American spends more on their cup of coffee, that's quite likely. But I think you're also going to see a more complicated supply chain as exports from Brazil and other countries are rerouted via countries that have got a better tariff regime with Trump's government. So that adds more complexity and in another way, of course, it's going to add more expense as well, though perhaps not 30%.
JACOB SHALKA: I've got a question. It's a slightly different tangent on that. But when we purchase our coffee in the supermarket or in a coffee shop, we see a lot of the time the term fair trade. Can you just give me a bit more context as someone a bit more of a novice when it comes to the coffee industry, into what that fair trade actually means for a coffee producer and the industry as a whole?
SIMON LUSHER: Yeah, well, we've just been talking about coffee crops shortfall because of droughts or erratic weather. But going back a bit further, I think it was 1988, we had the opposite effect. We had a bumper harvests, and that led to a bit of a price collapse in coffee and the ones that suffered the most from that was the farmer. So, coffee production isn't highly, well, coffee growing isn't highly industrialized. It's about a 100 million people worldwide that rely on it as their primary source of income, and they tend to be because of the areas we've already talked about where coffee is grown and they tend to be in developing nations and quite poor.
So, when the coffee price collapsed, obviously, they were getting paid less by the big coffee traders and that led to some very difficult conditions for the individual farming families. So, somebody came up with this great idea and at the time, well, it still is a great idea that if people would pay a premium for that coffee, if they knew that the farmer was getting the benefit of that additional price. So that's where the fair trade movement came from and that's still going relatively strong but the pricing and coffee purchasing at the moment is changing.
And we've got this, it's described as the third wave, a movement, if you like, of specialty coffee retailers buying direct from single farms. So perhaps fair trade isn't as important as it used to be. But you're right, you'll still see that on packaging when you go into the supermarket.
JACOB SHALKA: Yeah, I just think it's interesting because from a cargo insurance perspective, obviously we have to be fair, it might be the same in the property insurance programs as well. But we have seen the growing implementation of the forced labor clause, particularly as insurers and syndicates focus on their ESG overall as a wider initiative, which is obviously a good thing. So that essentially discourages insureds or buyers from benefiting or from utilizing forced labor on any of their products throughout their supply chain.
Otherwise, it could potentially not so much invalidate an insurance claim, but could lead to a scenario where insurers will withdraw their capacity in the event that forced labor has been found to be used in the production of the coffee or whatever commodity is applicable.
SIMON LUSHER: Yeah, well, that's an interesting one and I mean, you're right to bring that up in relation to fair trade as well because fair trade has expanded out to be sustainable and ethical sourcing as well. But as a certain major coffee chain is discovering, that's quite difficult to manage sometimes, and that they are actually in the process of being sued by a consumer advocacy group for misleading advertising, actually, because they're making 100% ethical claims. They ordered a certificate to a certain coffee farmer in Brazil, and then the Brazilian inspectors turned up two months, six months later, and found children working there under the age of 13, very bad working conditions, etc. So yeah, I mean, it's on everyone's agenda, it's difficult to police and maintain.
ANDY EDWARDS: Yeah, and I think just on that 70% of that child labor is in agriculture, so not just coffee.
SIMON LUSHER: Yeah.
ANDY EDWARDS: So unfortunately for the world, it is everywhere and like you say, drilling down on that is incredibly difficult to do, especially from here. Look, we've talked about the landscape of coffee, where it comes from, what impacts it, not to go into really detailed insurance conversation here. But parametric products are fairly relevant to farmers and exporters. So, Simon, are there any emerging insurance solutions specifically designed for the small holder farmers? What is a parametric solution probably as well?
SIMON LUSHER: So parametric insurance, I mean, it works very well for coffee because as I mentioned before, coffee is sensitive to temperature and rainfall. So, a parametric solution would be something that you're not insuring the coffee plant. What you are insuring against is rainfall, so whether that be too much rainfall or too little, that is the metric that you're measuring. So, you set a limit on the amount of rainfall you need and the amount of rainfall you get is a trigger there and the policy will pay the difference.
So, if you've got a drought season and your coffee's dying, you're not being paid for the coffee loss, but you are being paid for the usually on a per millimeter basis per millimeter of rainfall that you were expecting, but that you didn't get. So, if you've got a coffee commodity trader that wants to protect its smallholder producers, they can take out a policy for the farmers that they buy their coffee from and those farmers will then get the benefit of the insurance when the rainfall isn't enough to grow the crop properly and that could also be for temperature in terms of degrees. So, it's quite versatile. You don't need to go to the farm, you can measure most of this by satellite. So, the parametric that Willis has set up is satellite based. So, they can tell without having to do any loss adjusting or investigation that these farmers have suffered from a shortage of rain.
ANDY EDWARDS: This is all quite high tech, isn't it?
SIMON LUSHER: All very high tech. So yeah, the payout is triggered automatically as soon as the policy period is over, and the farmers benefit from a cash injection that they wouldn't get because they weren't able to sell their crop because they couldn't produce it. So that keeps them going for another year and hopefully, the harvest is better the next year.
ANDY EDWARDS: I think we've covered a fair amount here, we could probably talk for hours on this subject and things are changing every day. I'm going to wrap this up by asking you what your personal go to coffee drinks are and has an understanding or a better understanding of the supply chain and what's going on in it changed how you appreciate your cup. I work with Jacob regularly, I know his answer here and for some reason he always whispers it. So, Jacob, should I start with you, and just tell me what you like to order.
JACOB SHALKA: Yeah, I think the context is I never used to drink coffee much when I was younger. I was more of a hot chocolate person, but I am currently in the transition towards more coffee, so I do like a latte. But at the moment my go to is a mocha, which still counts.
ANDY EDWARDS: You know that mocha was the originally the name of a Yemenis port and those beans had a chocolatey quality. So yeah.
JACOB SHALKA: I did not, no, I did not. So ,it's a very topical historical choice, actually. I'll remember that next time.
ANDY EDWARDS: You look to me to be sophisticated cappuccino drinker. So, are we still correct there or?
SIMON LUSHER: No, you've got me completely wrong. I am basic, I am black espresso. And if I'm decadent, I put some water in it and make it a long black.
ANDY EDWARDS: Very good.
SIMON LUSHER: Not an Americano, an Americano is too watery. So yeah, strong and bitter.
ANDY EDWARDS: Well, I've recently discovered cold brew, which is actually rocket fuel, so you can feel the palpitations the minute you sip that and that's getting me going every day at the moment. So just to wrap up, Simon and Jacob, truly appreciate your insights and contributions to today's discussions. Thank you to our listeners for tuning in. We're glad you joined us for this episode of Waves, our marine podcast series. See you next time.
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