Ukraine War Increases C Market Volatility, Worsens Supply Chain Crisis

Red Fox Coffee Merchants Q2 2022 Origin & Shipping Update

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As core issues from the last several quarters persist—snarled and effortful logistics, limited container availability, constrained shipping lines, domestic freight bottlenecks, elevated costs across the board, an elevated and extremely volatile C market, and the resulting global inflation hitting the most vulnerable the hardest—the Russian invasion of Ukraine has escalated all of those issues globally, adding more uncertainty, costs, and an increasingly unpredictable C market.

Combined with local shortages of coffee due to climate events, labor deficits, and cyclic down years for certain origins, price volatility has also created conflict between producers and larger traders as certain origins’ local market prices rise despite more recent C market drops. The market remains increasingly competitive as large players work to cover short positions, but our relationships are holding strong. We’re in the thick of Mexico season, final Peru shipments are almost here, first Rwanda and Kenya containers are here, and early Ethiopia shipments are on the water. As usual these days, the only constant is change, so stay flexible and read on to find out more. 

Logistics, Port, & Warehouse Updates 

The Russian invasion of Ukraine added new layers of complexity and volatility to global supply chains still reeling from pandemic disruptions, while another wave of Covid outbreaks in China threatens a cascade of new disruptions to the shipping industry. Port congestion and shipping delays remain an issue worldwide. Container shortages continue to cause delays and rolled and canceled bookings, especially in Brazil and East Africa. 

Congestion at West Coast ports has improved but remains seriously backlogged, while congestion at East and Gulf Coast ports has increased as shipping lines route cargo away from the West Coast. 

War in Ukraine and rising gas prices have caused spikes in bunker costs (charges added to steamships’ base ocean freight rates, protecting them from fuel cost increases). Those costs are passed on to shippers, increasing ocean freight rates across the board.

On land, domestic trucking capacity is still a bottleneck. Driver shortages continue causing delays transporting freight from ports to warehouses and hauling trailers from rail yards, while rising gas prices drive up trucking rates. Some freight lines have sold to larger companies to avoid folding, leading to fewer options. Less market competition allows for significant price hikes for LTL (less than truckload) freight.

Ongoing labor shortages across all sectors continue to hinder recovery from pandemic slowdowns. Trucking lines are particularly squeezed and are unable to invest time training new hires. Sheila at the Annex recommends that anyone relying on trucking companies for coffee delivery pay for the extra strap/wrap to protect the shipment from damage in transit. She also advises receiving freight with a camera ready—”take photos of pallets INSIDE the trailer before offload, and then again after the pallet is off the trailer. If there are any issues with the shipment, only sign documents to include acknowledgement of receipt with “requires further inspection” or “EXCEPTION/DAMAGE” noted on the paperwork.” She stresses that it’s not a good idea to refuse freight outright. “Freight lines respond better to a call asking for an inspection at the consignee location as part of a claim rather than a pallet sitting on their own dock.”

Supply, Demand, & The C Market 

Until the Russian invasion of Ukraine, the C market was headed towards $3/lb, hitting a high near $2.60/lb in early February with both supply and demand factors pushing the rise. The Brazilian real (currency) has strengthened against the USD since the beginning of the year, and while Red Fox doesn’t operate in Brazil, the origin is the largest supplier of coffee in the world and tips the scales whenever its factors affect price or supply. When the real strengthens, farmers’ motivation to export weakens. In Mexico, we felt this factor firsthand when the peso strengthened significantly during March, creating the same effect with Mexican domestic demand (among other supply factors) creating a highly competitive market for our sourcing team. Furthering demand woes and upward market pressure, the International Coffee Organization reduced its supply estimate to a deficit of over 3 million bags this season at the same time Minas Gerais in Brazil reported less than half its historical average production. All this comes after Colombia production and exports fell in February while US green inventories reported shrinkage in February.  

All those factors should underpin a bullish market, but on the day of the Ukraine invasion, the market dropped nearly 10c and continued to drop from around $2.50/lb to $2.10/lb over the course of two weeks. Institutional investors became bearish overnight, fearing a further stressed global logistics crisis and a derailed global economy. Analysts fear that consumer spending will shrink even though supply side economics suggest coffee prices should continue to strengthen. 

Our biggest uncertainty is not the coffee quality and consistency that Red Fox will source, but the unknown costs that will continue to add volatility and uncertainty. The price of oil will continue to put pressure on how we think about moving coffee. What will ocean freight and trucking costs look like over the course of the upcoming Mexico season? We can’t use historical costing data in answering this question and have had to become much more conservative as we look at forward booking, especially as almost all signs point to the cost of coffee increasing.

Mexico 

As you read this, our lab in the Oaxaca centro is at peak season and buzzing with activity. Harvest is nearly complete in our sourcing regions, we’re constantly cupping offers as more arrive, and deliveries are hitting the warehouse and dry mills. Our first shipment from Veracruz is almost afloat.

This harvest has brought particular challenges, some like those facing the rest of the coffee-producing world (rising cost of production, lower harvest, shipping and container issues/delays, inflation, etc.) and some unique to Mexico. 

Oaxaca is enduring a disruptive season of protest blockades in the city and surrounding areas, limiting mobility. A new tax law implemented this year and designed to reduce the informal economy and limit cash usage created new difficulties in how producers not yet registered in the tax system with a formal bank account receive payment, something not yet accessible to many smallholder farmers. In terms of productivity, Oaxaca’s harvest is looking to be about 50-60% of average production. As a region with heavy planting of Bourbon and Typica (which typically have a biannual cycle with a lower yield every other year), lower production was expected but not nearly to this degree, frustrating producers who finally see ultra-high C market prices coinciding directly with their harvest after so many years of a lower market. 

In Chiapas, much like Guatemala, labor shortages have severely affected picking, normally performed by migrant laborers who enter Chiapas through the Guatemala border on temporary work visas. The border is increasingly dangerous and effectively closed to legal crossing of people and goods. Without laborers to harvest it, cherry is drying on trees. 

Local cherry prices in Veracruz started the season near double last year’s price, setting off a country-wide scramble to acquire coffee by larger commercial buyers seeking to cover undelivered contracts from losses in Brazil and Colombia. Internal demand also continues to grow with national roasters looking to meet their needs and further pushing prices up. The competition for coffee is so extreme that it threatens to roll back years of quality recognition gains for the region as a whole, since most coffee is being purchased right in the field with no consideration for physical and cup quality. 

That said, we are genuinely seeing some of the best quality we’ve ever seen. We’ve opened up new supply chains in Chiapas with several new quality-focused producer organizations, and against long odds, we’ve also acquired the most volume we ever have in Chiapas. We expect to have several early shipments leaving in April and are working through shipping line headaches to get the fastest possible routing to the US. 

Ethiopia

In terms of our Ethiopia sourcing, we now have 5 FCL (full container loads) of Agaro G1 coffees from all of our usual partners (Nano Genji, Nano Challa, Kolla Bolcha, Duromina, Yukro, Gore Dako, etc.) afloat with ETAs into Port of New Jersey between 4/16-5/1 as well as 4 FCL of Agaro with ETAs into Port of Houston from 5/8-5/25. Our first Guji G1 containers from Gogogu Wate have current ETAs into New Jersey and Houston in late April, though we actually expect them to be May arrivals. We’ll also see the first of 3 FCL of G1 naturals from Guji Uraga hit the water this week. Updates on those to come. 

Generally, Ethiopian offerings continue to be volatile with rising prices in the face of a C market that’s dropped 30c/lb over the course of the two week period prior to writing. Even with Grade 2 prices climbing above $3.50/lb FOB (with certified organic G2 from $3.80) and Grade 1 prices now well above $4.00/lb, FOB demand appears relatively strong, especially for spot and afloat lots. The Ethiopian trade’s confidence in their differentials remains high as we hit peak shipment period.  

Exporters also continue to hoard parchment in hopes of the Ethiopian Government’s reversal of the Forex Retention Rule, which would let them retain a higher percentage of inbound dollars on green coffee exports.  

Dry mills are operating at full capacity even with limited overseas interest as larger roasters work to cover their positions short-term rather than taking positions in an expensive market (in some cases playing chicken with prices they don’t want to pay). In the trade at large, early season contracts are now somewhere between Addis and afloat en route to their destinations.   

Last quarter, we reported on how civil unrest pushed us into sourcing from just over the border. Now, a unilateral truce has been declared between the Ethiopian government and the TPLF as of March 25th. All hopes are that this leads to the end of the civil war.

Kenya 

Red Fox saw phenomenal quality out of Kenya this year. We’re finished contracting there for the year (Kenya’s main crop officially ended prior to Q2) and have 4 containers on the water, the first having just arrived into Port of NJ. We expect all of our Kenyan coffee stateside by May/June.

Outside of Red Fox, buying continues at an active pace into spring, especially on the top lot front. Larger buyers seem to be active in their own spot markets (eg. European roasters covering shorts from European spot markets) causing stocks in Kenya to remain strong and prices beginning to turn downwards. The fly crop has a strong outlook as long as rains arrive soon to activate cherry ripening.

Shipping woes continue to be a central theme with container availability very thin and shipping lines not offering much in terms of vessel bookings.  

Guatemala 

Guatemala harvest is in full swing and we’ve been cupping offers from both the San Jose Poaquil community in Chimaltenango and Finca Los Arroyos in Huehuetenango. Despite migrant labor shortages due to pandemic restrictions, quality is exceptional this year. Container shortages continue to be an issue. We expect first containers to go afloat in April with May arrivals to both NJ and TX. 

Peru 

We’ve concluded our current Peru shipment season with the last containers of the season arriving to US ports now.  

For next season, the coffee harvest has begun at lower altitudes, while the producers we purchase from are still a month away from the start of their harvest. While they wait for cherry to ripen, producers are preparing for the upcoming season: calibrating depulping machines, maintaining and upgrading wet milling and drying infrastructure, and participating in internal inspections conducted by producer groups to prepare for certification audits. Meanwhile, producer groups are meeting with banks and other lenders to line-up financing for the upcoming harvest and undergoing Fair Trade and organic certification audits. Many of the producer groups also held general assemblies in the month of March to review the prior year’s financial performance and accomplishments, receive their final payments and quality premiums, and elect new board members to replace those whose terms are up. 

Rwanda 

Our final Kanzu lots have arrived on the East Coast and we expect warehouse availability in the next couple weeks. Lots are also now available in the Annex for West Coast customers.

As for next season, this year’s harvest began in late January with peak cherry picking occurring in mid-to-late March. Cherry prices are high following the increased C market; competition is already intense. We expect to start seeing offer samples in late May/early June. 

Earlier this month, the Rwandan government fully reopened the country’s land borders two years after closing them in an effort to curb the spread of COVID-19. We’ll have to see how this impacts export logistics for the upcoming shipping season. Bookings for ocean freight routes from East African ports continue to be challenging. 

Colombia 

Expectations for an extended rainy season through the La Niña year persist, and with them expectation for reduced production for both 2022 harvests. Sufficient ripening come June/July requires extended periods of sunlight and warmth through spring.  

Differentials continue to rise as larger trade actors continue to cover their short positions through a lack of available coffee on the production side.  

Ports continue to see limited container availability and service from shipping lines. Buenaventura remains the most congested of the three ports while Cartagena faces the largest struggles finding efficient routes to Oakland and Charleston. Santa Marta shows increased container availability, but doesn’t have the infrastructure to handle a high volume of shipments.  

Primary Southern producing regions like Nariño, Cauca, Huila, and Tolima begin harvest in late April. We’ll have a much better sense of what to expect from the 1st Semester harvest from supply chain partners in Inzá and Tablon de Gomez as we get closer to summer.  

From Geovanny Liscano in Inzá: “The December 2021-January 2022 harvest was inconvenient due to heavy winter conditions/heavy rainfall. A lack of flowering creates concern for the harvest beginning May 2022. Prices remain high across Inzá for any parchment available.”

From Gildardo Chincunque in Tablon de Gomez: “The initial outlook for the coming season is weak due to heavy rainfall. We look forward to working together come July/August regardless.”

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