Happy new year, friends.
As we wrap Peru acquisition & shipping season, begin Ethiopia procurement, & prep the lab in Mexico, we’re seeing some distinct trends continue from 2022. For one, logistics challenges including prices & availability have continued to ease, although the situation is still more complex & expensive than it was pre-2020/21. Another key trend, which we noted in our last update & which has become more pronounced than ever, is the decoupling of the C market price (down substantially from its peak) from the prices we’re actually seeing at origin for top quality coffee in the tiers we purchase, which in many cases are higher than ever. More specifics & analysis on that, as well as origin detail, below. To listen, click here.
Logistics, Port, & Warehouse Updates
We’re seeing big improvements in domestic port congestion. NY/NJ & Oakland are still seeing slight delays & capacity issues, but are overall smooth with quicker turnaround times for unloading & delivery. Houston is still seeing congestion, but nothing like the delays of Q2/Q3 of last year. DuPuy Houston warehouse reports they are currently seeing no more than 2 days’ delay unloading & picking up containers from port.
Ocean freight is also improving. Most origin partners report good container availability for export. Freight rates are beginning to stabilize. They remain much higher than pre-pandemic levels, but the rate of increase is not as drastic as Q2/Q3 2022. Shippers can now book for vessels sailing within 2 weeks if needed. Transit times continue to improve.
Congress passed legislation in early December averting the impending rail strike by imposing an agreement on both rail companies & labor unions, though without the inclusion of the guaranteed paid sick leave that was a major demand of rail workers. On the west coast, ports & dock workers remain in negotiations over a new labor contract, with a deadline in February 2023. So far all west coast terminals are operating at expected capacities.
The domestic freight market seems to be slowly normalizing, with spot truckload rates falling from their highest rates in Q1 2022. Diesel prices have dropped over the past few months, though they remain significantly higher than this time last year.
Supply, Demand, & The C Market
The C market has taken a significant slide for various (mostly Brazil-related) reasons since our last update, closing around $1.60/lb around time of writing. As we discussed in Q4, there’s also a growing trend of global specialty coffee markets somewhat decoupling from the C market, especially in our quality segment. As we wrap Peru acquisition & shipping season, enter Ethiopia procurement full force, & begin to think about Mexico, it seems more & more that for high-end specialty coffee there is less price volatility than the C market. If anything, prices for 85+ coffee are higher than ever.
The C market is a hedging instrument that is used by many companies that operate both the purchase & sale side of contracts. In other words, if you are buying & selling coffee in volume of 37.5k lbs (1 future lot, about a 20ft container’s weight), it provides the ability to let final prices float with the market until time of invoice. This is traditionally most relevant in multi-container, single price & single lot per container transactions. (In contrast, we typically build containers of 10-20 lots with multiple prices per container.) When planning for 100k+ lb purchases of generic commercial grade coffee, using the C market to hedge physical positions offers pricing flexibility. It helps those companies acquire the volume they need to fulfill sales contracts even if the market fluctuates.
Red Fox trading practices are completely different. We have fluid discussions with producing partners before seasons start & check in constantly during the season to ensure our pricing is competitive enough for producers to exercise the additional rigor in order to acquire & separate Red Fox qualities.
We could go on & on about the price of the Brazilian Real, weather patterns in major producing countries, global coffee stocks, etc., that have an impact on the C market. But, the reality is that the price of coffee for the qualities & origins in which Red Fox operates does not seem to be directly correlated with the C market, this year & the last few months more than ever. While it certainly plays a role in some discussions, we still bought coffee for over $3/lb FOB out of Peru when the market was around $1.60/lb because that is just the price for the quality we’re purchasing in the places we’re sourcing.
After 2 seasons of both political & market instability in Ethiopia, we unfortunately enter 2023 expecting more price volatility than ever despite the declining C market & a signed peace agreement. The largest private exporters are holding virtually all of the cards this season. They’ve pushed cherry prices through the roof across the country in November, December, & now into January. As the C price declined, cherry prices charted their own course, increasing as much as 50% from last year in regions like Agaro, Uraga, & Yirgacheffe. Where high prices in 20/21 reached levels around 22-28 birr/kg cherry, they rose to 35-40 birr/kg in 21/22 to upwards of 60 birr/kg in Agaro this season & upwards of 72 birr/kg in Guji at the time of writing. This may represent the greatest schism between C market & differentials that we’ve witnessed.
The largest exporters also import other goods like computers, agricultural equipment, & medical supplies that allow them to 1) have a higher exchange rate at the time of export & 2) trade dollars for birr on the black market which is upwards of 50% higher than the national exchange rate. All signs indicate that power & mobility is in the hands of the largest, wealthiest traders who now have near-complete control of the marketplace.
Is this truly a move from the largest actors to increase market share? Will cooperatives & smaller washing station owners survive current conditions? Any answer would be speculation, though concerns remain as we move deeper into January. The silver lining is that small producers are seeing higher prices for their fruit than ever before & reaping the rewards in a way that was unimaginable just a few years back.
Basic back-of-the-envelope math suggests that washing station costs are close to $4.00/lb for G1 lots. We’ve seen initial offers indications in & upwards of the $4-$4.50/lb range for G1 qualities. We hope to see more reasonable rates for G2 offers. Where January usually brings big movements in the trade, buying has been extremely quiet to date.
Early prognosis on the quality front is very strong & early January cuppings have been very promising. Last year, poor flowering & lack of rainfall in the later stages of the harvest cycle led to lower quality washed coffee. Washed coffees should be a level up this season as those issues have resolved.
That said, we expect washed volumes to be lower this year as cherry competition squeezes supply. This will be a year to pay up for your stalwart relationships & better qualities while also finding values underneath.
We are on the ground again in Addis as well after having spent some field time out in Agaro in December. As always we look to get first shipments on the water by early February. Please stay tuned for several updates between now & early March.
We have our last couple containers’ worth of washed & natural coffees available between the 3 coasts. Quality is very solid & these lots are priced to move. Value proposition is high on these lots.
Harvest season is upon us once again in Mexico. As you read this many areas of Chiapas & Oaxaca are entering peak harvest season, which typically runs January through mid March. We expect to start cupping lots by the end of month through March & April. First shipments should be afloat by April.
According to our partner Ernesto Perez from APG Coffee, harvest in Veracruz is delayed significantly due to late rains/late flowering at the end of last spring, as well as a colder & wetter December, meaning harvest for higher altitude coffee won’t start until end of January. Also in Veracruz, cherry prices have remained relatively high even from lower altitude farms which have started picking already, despite the drop in C market prices. Uncertainty remains if prices will drop off after the main harvest kicks in.
In Chiapas, harvest looks strong from the outset, although labor issues similar to last year continue to hinder farmers’ ability to pick cherry & drive up production costs. Local parchment prices have come down some from last year, but inflation continues to push margins & cost of living & production for farmers.
In most regions of Oaxaca, harvest is shaping up to be the strongest in several years & is now full-on as of mid January. The exception is some of the remote, high altitude areas of Sierra Sur that bore the brunt of Hurricane Agatha last June, who saw some heavy losses mainly due to landslides on the steep coffee-growing slopes. Local prices for the top quality remain high, mostly buffered by Mexico’s internal roasting market growth.
A new government elected in Oaxaca is also starting the year by improving relations with local unions, communities, & activists, creating more freedom of movement & ease of doing business. The government continues to make strides to formalize the economy, pushing to have all transactions invoiced & taxed where it’s previously been more informal & cash-based.
We have current crop Mexico lots from Oaxaca, Chiapas, & Veracruz on all 3 coasts, many certified organic. These are a great choice for your winter menu, representing a variety of profiles.
Peru shipping season is nearly finalized with 7 containers currently en route to the US. After road closures due to political protests in Peru caused delays in milling & rolled shipments in December, we were able to bring the last of the coffees to Lima at the end of the month, & the final 3 containers are being milled to ship later in January.
Despite an incredibly competitive season where producers had many good options for selling their coffee (at the peak, local market prices reached the equivalent of $5.00 USD per kilo of clean, dry parchment), we were able to fulfill the volume we projected. There’s always a concern that quality will be negatively affected when the market is competitive & producers aren’t required to harvest & dry their coffee properly in order to obtain a good price, but coffees throughout the season consistently hit the mark both for physical evaluation & for cup quality.
Fresh Peru lots continue to strip & will continue to arrive into February. We’ll be flush with fresh, high-quality coffees for all menu positions through the spring.
Following William Ruto’s election, the Kenyan shilling has stabilized after a brief period of volatility. Paired with the market continuing to come off, prices for the first top lot arrivals will represent a great value for those looking to grab some early fresh crop Kenya.
Drought & lower fertilizer application have harvest projections down around 10% from 2022, though quality is high & top lots are beginning to arrive for cupping following the holiday break. From our partner Kennedy Keya: “Weather in November & December was good for cherry picking & parchment drying—good balance of light rains & sunshine. Dry mills are now running nonstop.”
Our first container is booked from this harvest to be shipped later this month, & our team will be cupping with export partners to conclude acquisitions in Nairobi throughout mid January. Keep an eye out for opportunities to book first arrivals Kamwangi AA, AB, & PB through our forward booking channels.
Both coasts have limited amounts of some of the last top lots to arrive that are holding up exceptionally well. There’s also a limited amount of FAQ in New Jersey for those looking for a good blending option.
We’ve concluded purchasing until the 1st semester harvest begins late spring/early summer as prices continue to rise across the country. Local prices have now reached 2,200,000CP/carga in Inzá. Prices have reached ceilings of 2.5m CP/carga in other areas of the south. The forecast for 2023 still feels gray as production estimates appear low after 2022’s harsh La Niña conditions. Competition for parchment should be fierce yet again which could lead to another clear instance of differentials decoupling from the C market. According to producer partner Johan Penna the Inzá harvest could begin as early as April.
A port update from our friends at Coffee Resources: “The port situation remains tight especially in the port of Buenaventura where congestion & rollovers are more frequent compared to the ports of the Atlantic. Shipping from Cartagena may be most reliable if the cargo may be moved through hazardous roads which have suffered closures due to the frequent mudslides & heavy traffic during the year-end holidays.”
An interesting note from Coffee Resources on government intersecting with the coffee sector: “The government called for the resignation of FNC’s CEO early in December, a political move which adds additional uncertainty to the coffee sector & the governance of the FNC. A slate of candidates for CEO replacement should be presented soon by the regional committees, but ultimately the government & the Minister of Finance will have the last vote.”
We will deliver a strong update on what to expect via our Q2 report in April as we expect to have more confidence in the season’s expectations as we get closer to harvest.
We have a strong supply of top producer ID & community lots from both Inzá & Nariño on all 3 coasts.
Our 2022 Rwanda harvest lots arrived in December & we are thrilled to have these fresh coffees to start the new year.
Our partners in Rwanda are looking ahead to a promising upcoming season. So far rainfall has been normal with good weather in the forecast. In Nyamasheke in the Western District, where Kanzu is produced, this year is expected to be a lower volume cycle of production.
In the coffee sector & in general throughout Rwanda, costs are increasing as inflation drives up the price of gas, fertilizer, food, & goods & services across the board. Our export partners are focused on training farmers in good agricultural practices, supporting with fertilizer application, & repairing & improving infrastructure at washing stations for the upcoming season.
Fresh Kanzu arrivals are available on both coasts. A range of outturns are available in both Continental NJ & The Annex in CA. These lots are variations on a bright yet balanced profile with dark fruit notes, dried fruit, baking spices, caramelized sugar, toffee, & creme brulee. Please reach out for samples if you’re interested in these beautiful coffees.
Sources project overall coffee production to drop this year by as much as 17%. Production costs remain high with fertilizer prices at record levels. Labor shortages continue & are expected to add challenges to the harvest.
“The harvest is looking good this year, though we are running about 4-5 weeks late. The perceived labor shortage is now becoming a reality,” a sourcing partner told us.
We will focus our sourcing in Huehuetenango again this year while exploring opportunities in other regions. Stay tuned for upcoming lots.
There are currently 29 bags Huehuetenango Los Arroyos & 4 bags Chimaltenango San Jose Poaquil available at The Annex in CA now.
|Interested in sourcing coffee with us? Reach out at firstname.lastname@example.org. To learn more about our work, check out our journal and follow us on Instagram @redfoxcoffeemerchants, Twitter @redfoxcoffee, Spotify, and YouTube.|