C Market Volatility, Complex Logistics & Ethiopia Civil Unrest Spill Over Into Q1 2022

Red Fox Coffee Merchants Origin & Shipment Update: Q1 2022

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As we sail into Q1 of a new year, a lot of the issues we dealt with through the third and fourth quarters of 2021 persist. Logistics are as tangled as ever on a global level and still require extensive planning and constant management, with ever-rising costs at every level of the supply chain. The C market price is ever more volatile and elevated, with new heights reached in the month of December. Civil unrest in Ethiopia has placed us in the region—but not in-country as we would usually be this week—cupping early offers and making commitments and firm plans, and we’re excited for the upcoming season. Despite logistical challenges, Peru’s shipping season saw early containers landing at the onset of Q4 and is now wrapping up. We’re on the ground in Mexico connecting with producers as the season peaks, and in Kenya tasting and approving offerings with first shipment already on the water. Despite the surrounding chaos, we’re managing details, landing coffees within our expected windows, and staying constantly connected with supply chain partners at all levels. More detail on all of this, in general and origin by origin, below. 

Logistics, Port, & Warehouse Updates 

The state of global shipping continues to be extremely challenging as we round the corner into 2022. Securing space on vessels is a daunting task. Even once bookings are secured, departures are repeatedly rolled, delayed, or outright canceled. Rates for all routes continue to increase and shipping lines are adding fees for port congestion on top of the already inflated rates. 

On the import side, trucking capacity is becoming a major issue. Shipments arriving to US ports are frequently sitting at port incurring demurrage fees (fees charged by shipping lines to importers when a full container is not moved out of the port/terminal within the allowed free days offered by the shipping line) and extra days of chassis (a special trailer that allows ocean containers to be moved via truck, required for shipments transitioning from sea to road) because of difficulty securing trucks to unload and move cargo to the warehouses. Costs continue to increase across the board. All services—trucking, rail, warehouses—continue to experience employee shortages (and the knowledge deficits that come with them), increased costs, Covid issues, and delays. Rail services are seeing particularly long delays. 

The port of Oakland, though still experiencing delays and not operating at full capacity, has seen modest improvements in recent weeks. However, we do expect congestion in West Coast ports to persist well into 2022.

Warehouses are reporting a lot of LTL freight shipments to customers still being sorted out from the holidays. Freight carrier holiday closures and winter weather in some states has affected many freight deliveries—some shipments are still stranded at intermediate terminals while carriers sort through the backlog. Freight is moving, but slowly. 

Supply, Demand, & The C Market 

We continued to see a meteoric rise in the ever-volatile C market this past quarter, which spiked past 250 in early December. The days of 2-3 cent moves being considered “volatile” are behind us when 5 or more cent rises have become commonplace (we’ve seen an average daily change of 5.6 cents over the period between 9/21-12/20). Expectations of lower global supplies due to unfavorable weather and supply chain disruptions continue to prop up the price of arabica futures even though the market has settled closer back to around 230 at the time of writing. It’s been quite astonishing to watch the C market price rise to levels higher than what our baseline price for some qualities has been in prior years in Peru (as covered in the last quarterly update, we’ve of course adjusted our purchasing prices this season in Peru—producers deserve the benefit of elevated base prices in low C market years as well as in high C years). Reports anticipate the events of drought and frost in Brazil may curb growth potential for the country’s coffee crop for the next two years. USDA production estimates Brazil coffee exports to drop by over 15 million bags recently, also citing La Nina’s heavy rains in reducing Colombia export estimates. Supply chain disruptions continue to wreak havoc on transit times and port congestion continues. Bloomberg reports shipments out of Brazil are taking as long as 100 days where the old normal was 30. We’re fortunate to have exceeded our expectations on transit time out of Peru so far without much additional transit time from prior harvests.  

What does this mean for you? It certainly feels like the days of sub $2/lb C market are behind us for the foreseeable future and some analysts feel bullish that we could see the market rise closer to $3/lb. We’re thinking about this daily as we begin to enter Mexico acquisition season to ensure we continue to pay the highest prices and quality premiums to our partners. We are well positioned with the communities/producer groups we work with due to strong relationships developed over the years from our base in Oaxaca that we continue to grow year over year.

Mexico 

As Mexico enters peak harvest season, a number of challenges face producers and traders alike. Our team at origin has already been busy for a few months making pre-harvest visits to producing communities across the country and getting a sense of how the harvest will shake out this year. 

Harvest at lower and mid elevations began in mid December and peak harvest of higher altitude coffees will be mid to late January and into February. Late rains have delayed the start of harvest in some regions. In areas of heavy Bourbon and Typica production (like Oaxaca) the bi-annual cyclical nature of these varieties is in a down year, which should bode well for quality but less well for total yield from these already lower-yield varieties. Strong rains and gains in farm renovations in the offseason and past few years appear to have boosted the predicted crops from Veracruz and Chiapas. 

A high C price in the outset of the harvest has created very high local prices for lower elevation coffee in Veracruz and Chiapas and led to strip and underripe picking to get coffees into the mills and sold quickly. Milling and exports of top quality coffee are expected to begin the second half of March/first half of April with first arrivals to the US in late May/early June. As always, we’ll keep you informed of any changes on that front. Port congestion and container availability are expected to be challenges again this year, but we are developing strategies early to thwart significant delays. On the positive side, costs for ocean freight out of Mexico don’t seem to be increasing much over last year. 

Economically, inflation is hitting Mexico very hard and is at its highest level in 20+ years, with gas and other basic goods (mainly food) prices increasing exponentially. Coupled with a rise in the national minimum wage scheduled to go in effect in January, costs of production are necessarily much higher all around compared with the 2021 harvest. Coupled with the rising C market, prices for quality and specialty coffee will be significantly higher this season and we expect to continue to pay substantially higher prices than other buyers for the qualities we’ve been working closely with producers to develop. Pepe Arguello of Finca Santa Cruz and manager of Cafeco is reporting increases of at least around 40%-50% over last year for both labor and parchment prices in Chiapas, where much of the labor for picking cherry has historically come from Guatemalan temporary migrant workers, but the compounding border issues (including refugees coming from Haiti and Honduras, among other countries, being stuck at the Guatemala/Mexico border in Chiapas due to disastrous US policy), and lack of visa permits are preventing many from coming for work.  

On the Covid side, Mexico is experiencing another surge in confirmed cases after a downturn last fall when the vaccine became widely available to adults and young adults across the country (children under 15 have not yet received vaccines, despite increases in pediatric hospitalizations). Only just over half of the population have received their vaccines, although they are widely accepted among adults and haven’t been politicized as in the US (for example, 95% of adults in Mexico City have received their first round of vaccines). The booster campaign just launched for senior citizens, teachers, medical workers, and other essential workers. The government has so far resisted any restrictions on foreign travelers or internal mandates.  

Ethiopia

We are wading into the great unknown this season in Ethiopia. The political situation, and contradictory reporting within the country, keeps us just over the border at the moment. While we would typically be on the ground in Addis by the beginning of January we are currently outside of the country, though in the region, working to execute our first half shipments from Agaro and Guji. As you read this we have our spoons in 15+ containers’ worth of offerings from Nano Challa, Nano Genji, Kolla Bolcha, Duromina and more from the Kata Muduga Union. We also expect to see our first G2 offerings and the first Uraga arrivals to Addis before we leave.  

Fortunately, our Ethiopian supply chain is older than Red Fox itself at this point. We have confidence in our small handful of trusted partners who are still working from the capital. While the global shipping crisis may keep us from our standard Feb/March arrivals in North America, we don’t expect delays past April at this point. More to come on that over the next few months.  

Price-wise, the state of the C market has pushed cherry prices upwards of twice their 2018/19 levels and 30-40% higher than last year. We are being quoted roughly 40-50c/lb FOB from last season’s levels. Top Ethiopia will be pricey in 2022.

From our trade partner in London, Scarlett Fishburn:

“In terms of updates, cherry prices continue to rise (now looking at 53/55 etb/kg) due to the higher NY and farmers’ speculation on the extent of the damage of extreme weather in Brazil last year. With little cash/tight liquidity, this is preventing big players coming to the market aggressively and so only really small guys are buying at these levels (which probably elevates the price outlook more than if the big players were factored in).

The National Bank announced last week that they are using their reserves to loan 12 billion birr to players in the coffee industry in an attempt to increase the amount of finance available during the harvest period.

Security seems to have improved since we last spoke. You will have seen that the US removed Ethiopia (and Mali and Guinea) from the AGOA program.”

In addition to Scarlett’s note, we are hearing that cherry in coveted producing areas of the south, specifically Uraga, are now upwards of 56 birr/kg as we head down the home stretch of the harvest. While the harvest is delayed in the south this season we do expect the first G1 stocklots to hit Addis by end January.  

Kenya 

As we wade into some unknowns with the Ethiopia season, things are off to a quicker start than ever in Kenya. Our first containers have left Mombasa and are now en route to New Jersey. We’ll be cupping through swaths of samples on the ground in Nairobi over the course of January to add reinforcements to our offerings.  

From our partner Kennedy Keya in Nairobi:

“Main crop cherry picking started earlier than usual. This was due to the early flowering that started in January 2021. Cherry picking usually starts at the end of October in areas near Nairobi (Kiambu and Thika)—but this season cherry picking for the main crop started at end of September and continued into December. Grade retention is fantastic and quality is great. We are seeing more bold beans with AA and AB grade making up 80 to 85% of outturns. We attribute this to proper use of farm inputs by farmers leading to well-fed trees and good weather conditions throughout from flowering to final fruit maturation.  

Prices have remained high and the high NY market is resulting in high historical prices for farmers.

Logistics remain slow. Shipping lines are constrained. Connecting vessels are full so bookings for nearby shipments are declined in most cases. Another struggle is getting empty containers. It takes a lot of advance planning to reduce the struggle to get empty containers.”

Guatemala 

The Guatemala harvest is underway in the lower elevations with picking of higher grown coffees just beginning. Overall, ANACAFE reported an expected 3% higher yield over last harvest, with regions such as Huehuetenango seeing slightly more gains than that. 

An anchor in Red Fox’s Guatemala sourcing for the past three years, Felipe Martinez of Finca Los Arroyos in La Libertad, Huehuetenango confirms early December pickings and expects to continue in earnest as the new year gets underway.

A trusted supply chain partner told us that despite the ongoing pandemic, he is expecting fewer disruptions this harvest and is already seeing an increase in their overall ability to collect and receive coffee, mainly through growth in projects in more remote areas such as Santa Barbara, Huehuetenango. We anticipate continued success in these investments, bringing in more volume from these small holders. 

Look for more updates as we get into the harvest. Currently we anticipate the usual May shipments for peak harvest Guatemalan coffees. 

Peru

The Peru shipping season is wrapping up with 17 containers currently en route to the US and the final handful of containers being milled to ship later this month. We will have warehouses in NJ, CA, and TX flush with fresh coffees soon and through spring.  

Peruvian ports, specifically Callao and Lima, have been some of the most affected during this global shipping crisis with general lack of container availability paired with shipments rolled on a weekly or monthly basis.  

Despite challenges with parchment competition in the early months of the harvest, container availability and the shipping crisis, we managed to increase our purchase volume almost 30% from 2019 and 2020. Our relationships across the country, though most specifically Cusco and Amazonas, continue to grow and be the backbone of Red Fox Sourcing Company Peru.   

Colombia 

Colombia has been the heart of the coffee sourcing struggle since entering the first semester harvest late spring 2021. Early pandemic lockdowns, violent political protests, prolonged port closures, the volatile C market, and intensive rains brought on by La Niña all equaled a massively decreased specialty coffee production. We brought in four containers from the peak summer season at FOB price levels near 50% above 2020 levels. As local prices continued to increase into the second semester harvest, producers across the country rushed to strip pick green fruit in order to deliver unselected parchment at exorbitant prices. Predictions for the coming summer crop also call for more intense rains as the ‘22 La Niña season peaks in the next 6-8 weeks. Availability for top quality Colombia may suffer until Q3 2022, but we’ll have a better assessment in our Q2 report come April.  

From our dry mill and export partner Frederic Boppe in Popayan:

“Production has decreased from last year, mostly due to excessive rains during the last semester. This affected flowering and maturation of the cherries, thus affecting quality and yields in certain areas. Drastic increase in price of fertilizers has also caused a serious impact in production, as producers tend to apply less. The harvest period was shorter than usual and production is over. Parchment is tight, with very few offerings from this area at this time.

This has been a very unusual year. Due to the drastic price increase of over 100%, several producers defaulted in their previous commitments on their deliveries to cooperatives and exporters. The spot market has ruled the trade, and most of the coffee which came out in the last semester was immediately purchased by companies who were short, driving the internal market even higher. All parchment was purchased for immediate delivery and paid to producers upon delivery at the mill. Future commitments are no longer being accepted and cash advances have become very unusual. Today, there is still very high demand with base prices around 2,250,000/carga for standard coffee, but exporters must pay a premium of at least 100,000/carga to secure decent quality. In the internal market, no transactions for future deliveries are taking place and all coffee is sold at the spot market. Longer-term offerings from exporters are very limited. The recent ICE market levels (reaching 2.50/lb) and record US/COL peso level transactions (breaching the 4,000 level), have undoubtedly generated a higher income for coffee producers, strengthening the coffee producing sector.

Logistics: Currently we expect that everything will be back to normal by Q3 2022. Shipping lines are calling off vessels and the lack of containers is dramatic. In general we expect an average delay of 45 days for upcoming contracts. The flow is normal for almost all destinations. In November, the US was the main destination for Colombian green coffee exports with a participation of 42%. Finally, we estimate freight costs have increased by 60% over the last year to the US.

Rwanda 

We’re eagerly awaiting the arrival of our Kanzu lots from Rwanda. Ocean freight routes from East Africa continue to be beset by delays in transhipment ports and lack of space on vessels, resulting in very long transit times. We currently expect US East Coast warehouse availability for Kanzu in the second half of February. 

Looking ahead to the upcoming harvest, the crop is developing well and weather conditions have been favorable. Cherry picking in lower altitudes is expected to begin in late January/early February with higher elevations ripening later in the season. Last season’s good prices are motivating farmers and the outlook for quality and volumes is good. 

Export logistics are expected to be challenging again this year. Landlocked Rwanda relies on its neighbors—Uganda and Kenya—for the transport of all imports and exports to and from ports. Covid testing requirements at border crossings have contributed to long trucking delays, sometimes as long as three weeks between Kigali and Mombasa. Low volumes of imports into the country have also made empty containers scarce. 

Ecuador 

After a few unexpected challenges, we have chosen to air freight all of our Ecuador coffee this year and it should be arriving in the states very soon. We’re expecting great lots from our long-term partners Hernán Zúñiga and Andrés Dávalos, Mateo Patino, and Gilda Carrascal from 1600 Estate. We’ll also have some stunners from newer producer partners Galo Davilos and Yesenia Murillo.  

On the Covid front, like much of the world, Covid cases are on the rise due to new variants. Fortunately, Ecuador has a high vaccination rate with over 77% of the population vaccinated. However, due to the rising case numbers, the government just put out a mandate that all eligible residents over the age of 5 get vaccinated.  

Get in Touch

As always, if you have any questions, concerns, or thoughts, let us know. We’re here to help.