What’s Behind the Coffee Supply Chain Disruption
Chris: The first question on everyone’s mind after hearing about this you know the ship was just freed up yesterday after a week being stopped, is this impacting us and the coffee coming to the U.S.?
Jodi: Considering that it was less than a week, I think it was six days that the ship was stuck and the closure happened, we’ve escaped the worst of it. If it had lasted weeks, we would certainly see some big impacts. About 10% of global traffic goes through the Suez Canal, so in the nature of this year, we’re already seeing container shortages and reduced sailings globally. Having 10% of global cargoes all locked up on vessels that are having to transit pass the Horn of Africa rather than going through the Suez would just add so much stress to the global system. The fact that we got it free in 6 days I think there’s going to be not much direct impact that we can say that specific delay is because of the Suez. There is going to be some ongoing stress as Djibouti is right there near the Suez and a lot of the vessels that would have stopped and brought our Ethiopian coffees during the past week are gonna be impacted by congestion in the zone but less direct impacts than you know we would have certainly seen is it lasted longer.
Chris: What I’m hearing is that in context we’re already experiencing sort of larger than normal delays and so a hiccup in the Suez Canal isn’t like that much bigger than what we’re already looking at or…
Jodi: As of now since it was freed. We are already in an unprecedented year and I think it surprises a lot of people considering that last year we saw closures due to the start of the pandemic. And to recap, last March when we saw the economies of Europe and the US just shut down there was immediately a drop in shipping, a big freeze on sailings but as soon as people transitioned into new working from home lives and reduced outings, consumer spending followed these incredibly new unknown patterns, and the Global Shipping has just been uncontained, and its own free thing that we’re all discovering.
Chris: So you’re saying my Amazon purchases are delaying our coffee shipments?
Jodi: It’s your Amazon purchases just like the toilet paper crisis. A small change of consumers buying toilet paper for their own homes rather than office places buying toilet paper for a large group of people changed the pattern of shipping in a way that led to a huge shortage. So we see similar things playing out all over the economy that you’re not going to a restaurant so you’re spending more online, you’re having it ordered to your house, and that’s putting stress on Global Shipping. The huge trade pattern that we’re seeing is between China and the West Coast of the U.S, pretty much Shanghai to LA. The trade-in between those ports and just that in general the whole West Coast and Asian ports, in my mind, I just picture this giant hurricane that’s sucking up the global capacity for trade, that is sucking up containers that would be in other places of the world shipping goods. Steamship lines have changed their schedules so that they’re sending fewer vessels to these lower demand areas and moving into this high demand, huge need for vessels and containers in the trans-pacific trade.
Chris: Interesting. In that regard, are the busiest ports getting busier? Do you think?
Jodi: It depends I think on what routes they are. I couldn’t stay specifically on coffee ports whether there’s a difference in the volume but certainly, you know Shangai all the consumer ports carrying consumer goods out of China and it’s the West Coast US. LA is infamous really for being a super congested, high-volume port seeing just epic import trade.
Chris: We’re not just looking at delays related to ports in origin, this is also like Stateside West Coast for us especially in Los Angeles.
Jodi: Yes, it does seem like we are through the worst of that. The fall is the holiday season in the US and is a high shipping period, and that remained true last year and then the height of congestion in LA this past year was due to consumer spending combined with a labor shortage due to people out of work on covid related quarantines led to a huge spike in congestion and huge delays in LA that peaked in January, kind of went down in February, and they’re still anticipated to be alleviated in the coming months.
Chris: So you’re saying at least in part due to the labor shortage kind of like what we’re seeing you know in the fields for picking coffee even where there weren’t as many personnel to do the work.
Jodi: Exactly, I mean safety concerns have reduced the amount of labor that is available, or at least safe working conditions have changed even how to port workers are working. LA was a huge hotspot for the coronavirus, and there were numerous port workers that were out of work while they were either on quarantine due to a covid exposure or ill. So there were labor shortages due to that but as a vaccine rolls out we think we’re past the worst of the labor shortages at the port. Labors freeing up as the vaccines come out.
Chris: Gotcha. So we got this so-called hurricane of Global Shipping especially related let’s say for us due to Shanghai LA traffic and we got a labor shortage of the port and then there’s also a Global Container shortage, is that true?
Jodi: It’s due again to that huge consumer demand. So that demand adds to build the containers especially in that trans-pacific trade and it’s left the supply of containers that other ports really thin and then again you look at those reduced sailing in less voluminous port that slows down the traffic of containers that are brought back. So all ports have a natural import-export balance so if you’re a net importer, you’re going to end up with a surplus of empty containers that are going to be shipped to another port that needs them. But all of that traffic is pretty much a manual adjustment and what we’re seeing in the past month even the coffee ports that have experienced shortages of containers are Santos, Puerto Cortes, Djibouti, we’re seeing it all over the place. It used to be something you know I might encounter with Santa Marta in Colombia, and a few other ports would come back and say what we can’t ship, we don’t have containers right now. It was something I rarely heard before this year but now I’m hearing it in multiple ports, in multiple station lines.
Chris: Alright. What’s this costing us in terms of time like what are these delays looking like right now compared to what may be used to be considered normal?
Jodi: It varies. I look at four different types of delays that I encounter on any given shipment. There’s a delay, a departure delay where the booking to get the coffee out of the origin we see a delay before it even gets afloat. There are delays in transshipment. We don’t have very many that direct routes that are straight from pick up to drop off in Oakland. Most containers have to discharge at one port and wait for a vessel that’s going in the right direction and hop on that vessel to get to their final port of destination. But delay in that transshipment port is a common cause of delay. And then we have an arrival or vessel delay – just the vessel itself is slow on its route, maybe it had to stop in LA and got delayed in its timing. So the container didn’t discharge the vessel but the vessel itself was delayed 8 days in LA. And then finally there is a port congestion delay on arrival. If there is congestion in Oakland then we could see an extra 10 to 12 days to get it from the port to the warehouse because they’re different delays there. In a normal year, it can be typical for a container, any container to have one or two of those delays, and nobody even notices. We wrap it into the normal kind of shipping time and you’re okay with it. This year we’re saying almost every single one of those delays. Again I really think we’re past the worst of the port delay but we’re still seeing vessel delays, we’re still seeing transshipment delays, and then booking delays, departure delays have been huge.
Chris: Well okay so in that sense like I’ve been watching incoming containers of coffees because I’m looking for Crown Jewels all the time, and some of them I have pre-booked. And I watch these ETAs kind of updated from time to time. The Burundi coffee that I worked with Jeanine on this year for example was pushed back a number of weeks from its original ETA and I was wondering if you could speak to like how we go about estimating that and like how accurate those estimates are, are they being updated with enough frequency to know anything.
Jodi: Yeah. It’s a tricky business. What we tell you is the ETA that the steamship line tells us which is the current plan for the container. We’re not wrapping in an anticipated delay into that ETA which sounds unusual but it really is not possible to put a negative idea in there like probably it’s going to be here so we stick with giving you the information that we have at a given time. The steamship line is planning to ship it this way and having it land here. What happens to the actual coffee for example a ship arrives in LA in routes to Oakland. And the port of LA decides due to all of these other vessels who are late or delayed that this one vessel needs to wait 8 days before it gets to birth. And they don’t decide that beforehand so that ETA change happens when it happens and then I update the ETA for all of us to see that now it’s driving then. What we do in the office every day is updating with new information as we receive it, and we are also going through every shipment that’s afloat, a vessel gets checked once a week and updated for any new changes that have come through in the system.
Chris: Okay. I want to hone in on transshipment a little bit because I think that this is something that doesn’t always get- I don’t fully understand that I guess maybe and I think that usually, I picture a container being loaded onto a boat then its sails but then I’m hearing about places like Cartagena.
Jodi: It’s a tricky, complicated situation. Cartagena is a classic example of a coffee transshipment port. Coffees from the East Coast, South America are going to transit to the West Coast of North America, and anything that needs to cross stops in Cartagena and it’s going to catch another vessel to go on to the other coast. What tends to happen at ports that are used as transshipment ports, for example, not every port is gonna be used as a transshipment port. We don’t use Paita in Peru as a transshipment port that is just a port of import-export right. But Cartagena is at a key location that works for vessels to stop and pick up and change position so you change the direction of the cargo at that port. What tends to happen is the steamship lines will try to ship a balance so that they’re not going to end up with congestion at that port. They want to schedule enough shipments that are going to be picking up the West Coast-bound cargo to keep Cartagena from becoming congested. But what’ll happen is you’ll have a normal schedule of pickups but slowly the demands, the supplies, the number of containers will be increasing that need to come to the West Coast. So they’ll have to add another vessel in to pick up access containers. So they’re just trying to maintain a balance. What you can also see is booking at origin will have to be denied because the port of transshipment is too crowded at the time so oh well we can’t send anything more to Cartagena right now until we get more containers shipped out of there.
Chris: Great, so we know Cartagena is kind of a choke point. Are there any other particular ports?
Jodi: We see congestion in Cartagena every year. This year, the big impact is in Asia, and Belawan specifically. Belewan is not a transshipment port but it is being affected by transshipment ports.
Chris: That’s in Indonesia, right?
Jodi: Yes, Belawan is the main port of export for all of our Sumatran coffees. And Surabaya is also an Indonesian port for Sulawesi coffees and both of them, freight rates have been super high, availability of bookings to get your shipment scheduled has been extremely difficult. It is the most difficult port to ship from right now, and that is because of the transshipment port that is using so anything that picks up in Belawan is going to transship from Port Klang or another Asian port that is right in the center of this huge transpacific volume. So they are competing with all of these shipments from China and what this transshipment port is saying is well we’re full, we’re congested. So they’re putting a limit on how much Belawan can ship out and that’s the volume limit that we’re facing in Belawan that’s making it difficult to get the crop out this season.
Chris: And then what’s Central America like sort of at large? Is there anything there that we’re worried about too?
Jodi: The main concern in Central America and South America like Brazil shipping now is the container shortage. Each steamship line manages its own supply of containers, and there are not many steamship lines in the world. Every single port we deal with hopefully has at least two steamship lines that are offering particular services that we need but at most, we have five or six. If you’re looking for suppliers for free, that’s not very many. Every time you ship from port to port, you have a maximum of 6 supplies like never more than that, so then when we look at container shortages and all of a sudden, you know one or two of those steamship lines have no containers, and cannot ship during a certain week. What happens then is the entire volume from the country will all go to these other steamship lines and immediately you face delays because all this volume that could have been spread between six different steamship lines is hitting 4 steamship lines, so immediately as soon as you have a delay due to a container shortage, then you’re putting a lot more pressure on these other suppliers, and you have delays and high cost just immediately.
Chris: So all these delays are adding up to the financial stuff, yeah? This is causing problems on the money side, right?
Jodi: Yeah, for sure. Freight costs really don’t make up a huge percentage of your coffee value, so maybe you’re looking at 3 to 4% of the value of your coffee most goes into that the cost of Ocean Freight. Compared to a change in the coffee market this change in freight is negligible but we’re not used to seeing it, we are not used to accounting for a big change year to year. It can catch you by surprise along with these delays. Last year what we saw was the trans-pacific trade brought the spot market for freight rates up really high so in real terms where we might expect Belawan to ship to Oakland at $2,000 a container last year it rose to 4 thousand, 5 thousand dollars a container and that’s a spot rate. And then what happened normal importers and exporters work with service contracts that have a year validity and the steamship line agrees to ship this quantity that you both agree to have a quantity that you’re going to ship at this rate but the excess demand meant that people were shipping above their quantity and then using a spot rate to do so and those spot rates skyrocketed so when the service contracts got renewed this year a lot of those price increases were applied into the service contracts which makes the longevity, you’re not just looking at it right now situation with those high prices now we have higher increases baked into the whole next year of freight cost.
Chris: In perspective, that’s maybe like five or six cents a pound for green coffee that we are talking about an increase, maybe not even that?
Jodi: Maybe not even that. More like one or two cents.
Chris: Not hugely significant in that sense. But it’s also like when Royal books a coffee let’s say we book a coffee at the FOB, we’re paying the exporter that FOB price, and then you know we’re also paying for the logistics and insurance and so that costs are our expenses, yeah? It’s not like it’s being rolled together into the exporter’s FOB cost.
Jodi: No, that comes into our expenses, not the exporters.
Chris: Right. Exactly. What is your team doing to stay on top of all things? It sounds complicated
Jodi: We are super busy. Troubleshooting is exhausting but it’s exciting, too. It’s different. We’re facing a challenge and staying busy. When I described the types of delays and see the booking delays, delays in transshipment, the delays in the vessel, and the delays upon arrival. There are only two of those that we can do anything about honestly. That is facing those delays at departure and troubleshooting the bookings and then upon arrival. So what we do to troubleshoot bookings, we try to keep many service contracts in place so we can offer our suppliers as many options as they can. We’ve even had a few cases to troubleshoot that a supplier says, “I got a spot quote from the steamship line and I’ll pay the freight and you can pay me back and we’ll do it that way because you know this is the way we’re going to get coffee out of India,” which has been super difficult to find a booking. So we’re kind of going off the book in some cases and just doing whatever we can to get that booking affected as soon as we can and get the coffee on the water. Once on the water, it’s waiting and see what happens you know. There are a few alternatives to Ocean Freight. If you’d like to Air Freight your goods, that comes at an 800% cost increase to Ocean Freight. So there is your alternative but otherwise, we’re at the mercy of these giant steamship lines and their schedules. Once the coffee arrives at Port, we have excellent relationships with our truckers who are giving us on the ground information on what potential challenges we might be seeing. I think that’s been critical managing this past year and looking at the labor shortages at the port. It’s been amazing having our partner Mutual Express Trucking Company. They are providing us this great information on how we get these containers and get them on time. It’s really been valuable in the Port of Oakland. The other thing is communication is key. I try to be really realistic about these delays. I cannot anticipate and tell oh I really estimated it’s gonna be 45 days after. I just don’t know that but to be communicating with you and tell you the state of things, this is how we’re doing it. I’m trying to keep our sales team up to date so they can give you realistic ideas. But this is not a year for just-in-time inventory. To be prepared for the delays coming down the road and just the continued impact of COVID on your supply chain is critical.
Chris: Yeah, it’s tough, kind of a new reality though I guess. Taking away for a roaster what to do it’s like if your pre-booking your coffee, you just got to anticipate it, it’s probably going to be later than expected. I’ve been talking to our trading team a lot, and the phrase ‘Spot is King’ keeps coming up. It’s like if there’s coffee that’s here already that’s kind of what we’re working with right now because it’s a little unpredictable otherwise. The same could probably be said for a roaster if you have the ability to carry a little extra inventory that’s here already right now that’s going to certainly help you out in a few weeks or months down the road when those “just-in-time deliveries” are not coming in time you know.
Jodi: Yeah, to add in a few months padding, to plan your special that’s supposed to arrive in April, um maybe May, June, July might be safe or something like that – just to be safe and to really have your marketing all worked out without chewing your fingernails.
Chris: Well, is there anything else you wanted to talk about this time? Any other final points you want to make?
Jodi: Yeah. I was thinking about mentioning how even though freight costs are rising a couple of cents but the other side of that is because so much new crop has been delayed, spot market pricing is likely to raise because inventories are lowering without arrivals. When you’re saying 5 to $0.10, you’re probably thinking of the larger impact that spot market prices are rising because arrivals are delayed.
Chris: Because of high demand and low supply, yeah. I saw something in the news recently about U.S. coffee stocks being at their lowest quantity in years.
Jodi: Yeah. So even though we’re talking about the freight cost itself is only a couple cents increase year on year, the larger impacts that are getting rolled into the system with lower supplies are leading to cost increases of more, and then certain lanes are also incredibly more expensive. Latin American freight rate might have increased the cost of coffee by one or two cents. India to New York, Indonesia to New York or Chicago, anything inland, those freight costs have risen another percentage where it could be 4 or 5 cents.
Chris: Here is a cynical question. Could that raise at spot prices be construed as taking advantage of a situation on our side or on an importer side? Or is that just normal market activity? What’s your take on that?
Jodi: I think it’s just normal. We don’t want to run out of coffee. So at some point, raise the price to make sure we can stay in stock and wait for our next containers to arrive.
Chris: Conceivably that can be also construed as a way for us to cover the cost that we’re incurring in terms of delays of future shipments and all that stuff which is indeed costing us more money than it used to.
Jodi: But it’s true though. If all of the suppliers you know the stock market of Brazil is going to raise if Brazil stocks are low across the board. If we ourselves are low, we’re going to raise the price. At some point, everybody gets low and the price really does go up quite a bit because the demand is more than the supply, and there’s competition for it.
Chris: Right, the same reason that the prices for avocados are lower when they’re in a season when they’re not in season. Well, Jodi thanks again for your expertise and for spending some time today to kind of talk about this stuff that’s often behind the curtain. It’s really good to hear you speak so eloquently about it. I appreciate it
Jodi: Thank you for having me, Chris!