Our Nature Investing Team unpacks the impact of coffee on the US economy, how climate change impacts it, and what this could mean for investors.

By Amelia Sadler and David Sternlicht

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Key Takeaways:

• Coffee’s Economic Impact: The U.S. coffee industry supports 2.2 million jobs and contributes $100 billion in wages, but climate change threatens this vital economic driver.
• The Climate Crisis and Coffee: Rising temperatures, droughts, and deforestation in key coffee-producing regions like Brazil and Central America are causing yield declines, contributing to a 40% year-over-year increase in coffee prices.
• The Future Lies in Regenerative Agriculture: For investors, the shift towards regenerative agriculture presents a key opportunity. Sustainable farming practices not only help stabilize coffee production but also reduce supply chain risks, mitigate climate impacts, and create long-term value. Investing in companies adopting these practices could safeguard both financial returns and the future of coffee.

‍More Than a Cup o’ Joe

‍In our last Nature Insights article on the impact of nature degradation on food inflation, we began with America’s favorite fresh fruit: the banana. So how better to introduce part two than with one of the most popular beverages in America? Coffee is ubiquitous in the American diet and culture, with consumption hitting a two-decade high in 2024. Approximately two-thirds of respondents in a recent survey reported drinking coffee in the previous 24 hours, and while we acknowledge the limitations of survey responses compared with observed behavior, this was higher than the proportion of respondents who reported drinking water in the same period! Coffee not only fuels the U.S. economy as our chief caffeinator — what food author Michael Pollan calls its "gift to capitalism" — but also stands as a major domestic industry. Its economic impact has expanded with the growing popularity of the beverage. Research from the National Coffee Association suggests that the coffee industry supports an estimated 2.2 million U.S. jobs, generates $100 billion in wages (not including the wages it presumably generates by increasing worker productivity), and represents approximately 1.3% of the nation’s GDP.The size of the coffee industry is even more striking considering that nearly all coffee consumed in the U.S. is imported. In fact, the U.S. is the world’s largest coffee importer, with 2022 coffee imports reaching nearly $9 billion. According to the USDA, 66% of our raw coffee imports came from just five Latin American countries: Brazil, Colombia, Honduras, Guatemala, and Nicaragua. Such concentration of U.S. coffee sourcing is especially significant in light of the climate challenges these countries face. 

‍Rising Prices 

‍Climate change and local deforestation are jeopardizing coffee farming in Brazil, the world’s largest coffee producer and exporter. One farmer told Mongabay in a 2023 interview, “In recent years, we’ve had days with more extreme weather, more intense cold and more intense heat. We’re seeing a rain deficit in general. This is probably due to a lot of deforestation around us, in the Cerrado and the Amazon.” He was likely alluding to deforestation disrupting Brazil’s water cycle: much of the country’s rainfall is derived from inland evaporation from dense rainforests.That article was written nearly a year ago. Today, Brazil is in the midst of its worst drought in more than 40 years and wildfires, the worst in over two decades, spread throughout the country. This devastation is occurring at one of the most critical phases of coffee cultivation, when coffee buds typically flower and eventually produce the cherries that contain coffee beans. Central American coffee exports are down by over 10% as coffee crops have been ravaged by climate change in recent years. The markets have taken notice, and coffee prices — which have historically risen more slowly than inflation — are up 40% year over year as of mid-September 2024. 

‍The Human Impact

‍While global price implications are notable, the threat to local livelihoods in coffee-growing regions is an even larger crisis: roughly 10% of Central America’s population depends on coffee for their livelihood. That represents over 18 million people. The long-projected threat to these individuals feels more tangible after recent events. Recent research indicates climate change may reduce coffee yields in the Americas by up to 70%. In addition to projected yield reductions, the IPCC estimates that rising temperatures and changes in rainfall could reduce Central American areas suitable for coffee-growing by between 38% and 89% by 2050. This could have serious political ramifications for the United States as there’s evidence that such a reduction has been a major force behind the surge in migration to the U.S. As climate change accelerates, the region’s delicate Arabica crop is being subject to rising temperatures, higher humidity, disease, and more prevalent pest infestations. The optimal temperature range for Arabica coffee is 64°F-70°F and can only tolerate mean annual temperatures up to roughly 73°F. This detail underscores the practical implications of a 1.5°C (2.7°F) temperature rise, among which are likely to be even higher coffee prices, worsening coffee quality, and geopolitical instability — unless we begin to cultivate a more resilient crop.

‍Actionable Solutions

‍The vulnerability of coffee is a relatively recent phenomenon, and climate change is not the only culprit. Over the course of the 20th century, coffee production migrated from “rustic” operations where crops were grown under existing, diverse, natural forest cover to shaded monocultures  where a single species provided shade. By the 1980s, this had evolved  into chemically intensive coffee monocultures, especially in Central America, at the encouragement of forces from the Global North. The additional chemical fertilizer, pesticide, and herbicide application weakened soil health and decreased insect and mammal habitat, directly harming biodiversity in a region home to a remarkable richness and diversity of life. These industrialized practices also increased the vulnerability of coffee to diseases, which have plagued Central American coffee farmers in the last decade.

Recent events, the aforementioned IPCC projections, and forthcoming regulations like the EU Deforestation Regulation (to take effect at the end of 2024) have the coffee industry considering adaptation measures to secure supply. Chief among them is encouraging regenerative growing practices. As a shade-grown crop, coffee is well suited to agroforestry, the practice of growing a combination of trees and shrubs with crops and/or livestock. Coffee benefits from the leaf canopy of larger tree species, which reduces the temperature of shorter coffee shrubs, effectively creating a lower-temperature, higher humidity microclimate within a coffee plantation and simulating the environments in which they evolved.

Agroforestry can be both a climate adaptation and a climate mitigation mechanism. In terms of adaptation, research suggests that certain agroforestry techniques can protect coffee-growing territory from climate-driven degradation. On the mitigation front, a recent study suggested that agroforestry in coffee production can lead to higher economic productivity and nearly double the carbon storage versus coffee monocultures. Finally, it provides important benefits for biodiversity. A meta-analysis of shade-grown coffee literature suggested that species diversity was significantly greater for birds, mammals, and vegetation in high-shade coffee systems versus sun-exposed systems in Latin America.

Financing the transition to agroforestry requires a multi-stakeholder approach. While large corporate investments like Nestlé’s $1 billion+ commitment to regenerative coffee cultivation are a significant step, widespread agroforestry adoption will depend on private funding. Projects backed by long-term purchase agreements, which coffee buyers are eager to sign to secure supply, make such projects comparably more attractive to investors. Partnerships between farmers and agriculture technology companies further enhance the viability of agroforestry through innovations that improve coffee crop yield and resilience. By leveraging blended finance structures — including grants, concessional loans, and investments from development finance institutions — private investors can help scale agroforestry solutions across coffee-producing regions.

As 80% of global coffee is grown by 25 million smallholder farmers, this transition to regenerative agroforestry will occur on the front lines of climate change, driven by the world’s most vulnerable communities. And a de-risked coffee supply can help secure millions of American jobs, reduce forced migration, stabilize global coffee production, and improve the ecological health of several of the world’s most biodiverse regions.