It’s estimated that around 90% of global goods are transported by sea at some point. Over half of these goods – including, fruit, vegetables, and coffee – are shipped in large stainless steel containers on cargo ships.
Market analysts predicted that approximately 5.2 million containers (otherwise referred to as twenty-foot equivalent units, or TEUS) would be manufactured in 2021. However, in spite of this, there have been mounting reports of container shortages since the beginning of the year.
These shortages don’t just lead to lost or delayed shipments, however; they also cause freight prices to soar because of increasing competition for container space. But how does this affect the coffee sector?
To learn more, I spoke to Sam MacCuaig, a trader at Keynote Coffee in Bristol, UK and a Perfect Daily Grind contributor. He provided us with some insights as to how the freight crisis is disrupting the coffee supply chain. Read on to learn more.
SHIPPING CONTAINER SHORTAGES & THE PANDEMIC
The pandemic has had a devastating impact on global trade. There are reports that over 97,000 businesses in the US have permanently closed due to the economic challenges of the past two years.
When stay-at-home orders forced businesses to temporarily cease operating and consumers to remain indoors, both supply and demand fell dramatically.
“Thanks to Covid-19, the freight industry collapsed and shipping companies reduced their capacities,” Sam explains.
“Let’s say that you needed a million units of shipping capacity prior to Covid-19. At the start of the pandemic, everything closed down, so global capacity shifted to around half of the demand, which would be 500,000 units.”
However, with global vaccination rollouts bolstering economic growth, both supply and demand are steadily increasing to near pre-pandemic levels.
Sam tells me: “When the economy bounced back from Covid-19, businesses needed to replenish stocks that they allowed to run down.
“They haven’t been stocking the inventory or shipping anything because industries halted, so they reduced their inventories,” he states. “Now that supply chains are moving again, they need to order three times as much as they normally would to build up their stock levels.”
This has resulted in significantly more competition for container space on cargo ships. Stronger demand means there is less available space on the ships, as well as fewer containers themselves.
HOW DOES THIS AFFECT GLOBAL INDUSTRY?
Shipping delays have a range of devastating effects on global supply chains – including in the coffee sector.
In late March 2021, a 400 metre-long cargo ship by the name of Ever Given blocked the Suez Canal for almost a week. It was carrying some 18,300 containers at the time. However, its unintentional blockade also delayed the movement of 369 other ships, which were unable to pass through the canal.
Around 12% of global trade passes along the Suez Canal each day. This led experts to estimate that businesses operating via the canal were collectively losing up to US $15 million per day because of the blockage.
The combination of increasing shipping demand and reduced freight capacity has resulted in numerous reports of shipment delays and bottlenecks.
In the US, it is estimated that 4 out of 10 shipping containers enter the country via two ports in California, before being distributed across the country.
The BBC reported that in September 2021, some 73 ships were waiting to unload in Los Angeles – one of the highest waiting figures ever recorded. The article goes on to add that before the pandemic, no more than one ship would typically be waiting to unload at any given time.
Sam explains that because social distancing measures forced ports to close, significant delays are now not uncommon.
“It can take up to two weeks longer to unload a ship and to get haulage out of the port,” he says. “In Brazil, you would normally be able to get a booking on a ship within a week. Now it takes a minimum of six weeks.”
There are also continuous reports of empty containers stockpiling at ports in some countries.
“It’s more cost-effective for companies to send empty containers back to Asia to fill up with goods and send them back than it is to just do the normal route,” he says. “As a result, the containers aren’t where people need them to be.”
WHY DOES THIS LEAD TO HIGHER PRICES?
Coffee prices hit a seven-year high in July and October this year. Just a few weeks ago, they topped that to hit the highest price since 2012.
This actually began earlier in the year with a sudden frost in major coffee-producing regions of Brazil, the world’s largest coffee producer. In Brazil, temperatures dropped as low as -1.2°C (29°F) in July – causing irreversible damage to coffee plants which could affect the global supply for years to come.
Estimates of the losses range from 2.5 to 5.5 million bags, a significant volume for the global market. This, alongside the forecasted long-term impact, resulted in prices closing above US $2/lb at the end of July 2021.
However, these extreme weather events are compounded by logistical issues and container shortages, which have also affected the frequency of exports. According to the Brazilian exports association, Cecafé, the country’s coffee production in May 2021 fell by 20%.
The most expensive routes are the ones that are the most in demand: generally from Asia or increasingly Brazil,” Sam explains.
Bloomberg reported in July that the price of a single shipping container travelling from Brazil to the US had hit figures around US $4,000. In contrast, before the pandemic, one container would cost around US $2,000.
Other reports suggest that containers travelling from Shanghai to the Netherlands were being sold for US $10,000 – more than a 540% increase.
“Essentially, companies are hiking up prices,” Sam explains. “They’re prioritising the lines where they receive the most cash. It’s a bidding war.
“It means that shipping lines often roll over on contracts. You might have a booking for a container to leave Brazil at a certain date, but if another company comes along and offers an extra US $2,000 per container, your shipment will just be pushed back.”
HOW DOES THIS AFFECT THE WIDER COFFEE SUPPLY CHAIN?
Those buying and importing coffee in major consuming countries are among those directly affected by these rising freight costs.
“Ultimately, the price has to get passed along the supply chain,” Sam says. “The roaster pays in the end.”
However, consumers also have to be prepared for increased costs. A recent article by Reuters said that consumer prices may not increase at large chains, such as Starbucks, but prices of supermarket coffee may start to rise if logistical problems persist.
This is because large-scale chains tend to buy coffee much further in advance, which means their stocks are less likely to run out in the short term. However, for smaller specialty coffee roasters with less of a capacity for logistics, this is shaping up to be a serious concern.
According to Bloomberg, reports in March 2021 indicated that US coffee stockpiles had reached six-year lows in the face of rising demand.
However, it’s not just major consuming countries that are feeling the impact. Sam says that container shortages and delays are also preventing producers from shipping coffee and receiving payment.
“If these logistics issues do prove to be long-term problems, it’s going to put price pressure on at origin level as well,” he says. “This is because it’s another variable to control through risk management.
“For instance, in Vietnam, there are cheap coffee offers with plenty of demand, but spots are expensive. Their coffee is massively in demand, but producers are struggling to sell it.”
WHAT ARE THE LONG-TERM IMPLICATIONS?
This freight crisis isn’t expected to end anytime soon, with market analysts anticipating that shipping prices will remain high throughout 2022.
In the long term, delays will reduce coffee quality, which could have a serious impact for specialty coffee.
“It’s problematic for the specialty coffee supply chain because the green coffee needs to stay fresh,” Sam explains. “The longer it takes to get coffee out of the country, the more concern there will be about maintaining quality.”
In general, green coffee can stay fresh for up to a year, but roasters should ideally receive green coffee within a few months to maximise freshness.
Sam adds that if shipping problems persist, larger coffee companies will also start to feel more of the financial repercussions.
“Logistics issues present a real problem for commercial coffee traders. The more commercial your coffee business is, the more problematic logistics issues are, because margins are slimmer.”
He adds that the uncertainty surrounding when shipments will arrive may also drastically affect stock levels, and lead to more spot buying (where roasters purchase coffee with no prior commitments).
“You can’t plan for the timings of shipments, which is a real issue for consistency. If you’re a medium-sized specialty coffee roaster, you might plan to have one shipment arrive in December, one in May, and one in September, spread out evenly through the year.
“But if you’re not holding enough inventory to cover your stock for another three or four months while you wait for coffee to arrive, you will have to spot buy coffee.”
At scale, spot buying can be disadvantageous for both roasters and producers. Spot coffee tends to be less fresh, but costs more. Furthermore, without contractual agreements, farmers are in a weaker position. For a financially sustainable coffee industry, the stability provided by prearranged contracts is key.
These ever-growing logistics problems are a concern for the coffee industry, but there are ways for the entire supply chain to handle them effectively.
Continuous communication from everyone across the supply chain is essential. It’s more difficult than ever to provide a timescale for your customers, but constant updates go a long way towards maintaining healthy trade relationships.
While it seems that these container shortages and shipping delays will be persistent for another few months at least, staying as prepared as possible will help the coffee industry remain resilient and adaptable across the board.
