It’s only been a few months since COVID-19 was first officially identified. Since then it’s rapidly spread around the world, changing the way that millions of people live and millions of businesses operate.
Lee este artículo en español COVID-19: Lo Que Los Productores de Café Quieren Que Sepas
The coffee supply chain hasn’t been spared from this fallout. Government-mandated Stay At Home and social distancing orders mean that millions of coffee shops around the world have been forced to close their doors to the public. As a result, the sale of brewed, roast, and green coffee have been affected.
Here’s how the Coronavirus has impacted the coffee supply chain, what can be done to weather the uncertainty surrounding it, and how consumers can play their part in helping everyone from producers to roasters deal with the crisis.
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Credit: Nicole Motteux
It’s a Trickle-Down Effect
As of April 9th, 2.6 billion – or roughly a third of the world’s population – has been placed on lockdown or in quarantine. This means that a significant amount of cafés, restaurants, and places that serve coffee can no longer prepare and sell it directly to customers – or can only do so by following strict social distancing measures.
As a result, these businesses are buying less roasted coffee than usual, which has led to the roasters supplying them slowing down production and purchasing fewer beans for roasting. Karl Wienhold, Director of the Colombian Farmers’ Collective and Exporter Cedro Alto, reveals that some roasters don’t want to be stuck with stale stock if sales are down. If they over-purchase coffee now, it could result in them getting stuck with old crops. It means that many are reducing purchase commitments to decrease their risk and plan to buy more should they need it later.
Karl points out that while a green coffee’s lifespan and popularity with roasters will depend on its quality and how it’s stored, processed, dried and handled, it can be hard to sell green coffee that’s been in storage for even 4-5 months. It means that the importers who’d usually supply these roasters could be stuck with stock they can’t sell. This will put their coffee exporters under financial pressure, as importers and roasters will be reducing or delaying their purchasing commitments or purchasing and reserving less coffee altogether.
For smaller exporters, this can be a huge blow. Without prompt payments and adequate cash flow, financing even one container can be too expensive, regardless of whether they’re exporting to an importer or roaster. When exporters can’t purchase their usual amounts of coffee or are left in a financial lurch, the producers they work with will be affected. If many producers can’t sell their crops to those who’d usually buy them, they’ll no longer have a market for their coffee.
Rafael Silva is the Owner of Sicafe, an exporter and producer in El Salvador. He understands that the Coronavirus putting more pressure on an already stressed group. “Producers, both big and small, work hard all year to produce and process a crop that’s only sold one time a year. They do this dealing with many difficulties, [like]… rainfall, drought, cold and hot weather, hail, storms, wind… [a] reduced workforce due to migration to cities or outside the country, scarcity of resources… coffee prices falling… So now, producers around the world are wondering if they’ll be able to sell their crop or not, and if they do, at what prices?”
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Credit: De la Montaña Café
Exchange Rates Impact Incomes
COVID-19 could impact the exchange rate and C price, which will directly affect producers, exporters, and international buyers. Daniel Velasquez is the Founder of Campesino Coffee, an exporter based in Colombia. He reveals that current conditions “make it difficult for a small exporter to buy at a high price right now [as they] risk a weaker dollar, and most likely a lower coffee price when it comes time to sell.”
Karl explains that if an exporter buys coffee in one currency but sells it later in another, they could have to deal with a fluctuation in the value of their purchase currency versus the value of the currency they’re selling in, if unhedged. Since the currencies of many producing countries have weakened against the US dollar (the currency in which coffee is traded), exporters are paying producers more in local currencies than they did a month ago. This means that if the exporter gets paid in US dollars after conditions have normalised and local currencies have strengthened against the US dollar, the exporter could face a loss.
Daniel adds, “Closing [fixed price] forward contracts can help alleviate some of the risks, but with the uncertainty, roasters are hesitant to [do so]. This is… difficult for smaller exporters or farmers who export directly and don’t have the bank relationships to be able to lock forwards for currency exchange rates. Brazil is looking to have a very productive harvest, but the virus is expected to peak during its harvest time. This volatility adds to the confusion and uncertainty.”
Coffee farmers and those working on their farms are likely receiving the brunt of this change, which will be compounded by the fact that most already face significant challenges when it comes to coffee production.
Credit: Ana Valencia
Shipping Delays Are Leading to Penalties
Many producers and traders are dealing with their coffees being stuck at the country’s port, unable to move due to closed borders and other restrictions being imposed regarding trade between countries. Additional delays could lead to the coffee ageing, and as Rafael mentions, if a ship or container is detained at port, it will incur penalties, with the incoterms determining who’s responsible for paying these penalties.
The Keys to the Shop podcast recently interviewed green coffee importer Ally Coffee’s COO Ricardo Pereira on how COVID-19 is impacting the business’s coffee supply chain. He revealed that they’re currently focusing on helping producers who have coffee that’s processed, dry milled, and ready to be shipped get their coffee out of origin as soon as possible.
It’s something that all parties involved need to consider, as it will impact exporters, importers, shipping companies, and those who work on these ships. Rafael mentions that “Both importers and exporters have to do their due diligence and investigate… route options for their containers. Shipping companies have to be a lot more careful about their workers; there are several ships that have been detained due to the crew testing positive for the virus.”
Maintaining good relationships with the ports and those involved in shipping can help here. Daniel has witnessed some ports and ocean-liners working with clients to waive fees and rerouting shipments free of charge if required. “Fortunately, this situation has also brought the good out [in] people and companies.”
Credit: Paulo Henrique
Delayed Payments Mean Less Cash Flow
For coffee producing farms, delayed payments and shipping from buyers mean less cash in pocket. Some producers like Rafael are already racing the repercussions and are taking on significant risk. “[In] Central America, we’re seeing the effects of the crisis right now. We’ve barely finished picking coffee and this is the time when we usually start selling and preparing our coffees for exports. Because of the Coronavirus, most buyers and importers have shut down, suspended their buying for now or declined orders. We as producers are scared, we have 100% of the risk at hand now.”
It’s something that could impact producers and farm workers long after the COVID-19 crisis is over, as many depend on harvest sales to meet their immediate and future personal and production-related needs. As Rafael says, “Producers depend on these sales to be able to pay their loans, work the farms, pay all farm and mill collaborators…[and]… provide food for their families, to live, to eat. What happens to all farmers and the people that depend on them for income for the rest of the year?”
It’s something that the rest of the supply chain can’t ignore, as if producers can’t keep producing coffee, the entire supply chain will suffer. Rafael points out that “without producers, all exporters, importers, roasters and coffee shops can’t exist. If producers are left out of the equation, the domino effect will start taking its effect on the rest of the chain”.
Because producers have the most to lose, Karl emphasises that supply chain members need to find a way to minimise their exposure to risk while also before being aware of where the risk is being passed to, as a roaster will pass it to an importer, who will pass it to an exporter, who will pass it to the producer.
Specialty Lots Sold at Commercial Prices
Some producers are finding that they aren’t able to sell their coffee, as their usual buyers are delaying payments or cancelling commitments. Daniel explains that this could mean that “the farmer will have to sell their coffee to a co-operative for a lower market price. The reduction in demand that is expected for the second and third quarters will also have an effect on the quantity of coffee being purchased at specialty coffee prices.”
According to Karl, some micro lot quality coffee might need to be sold at regional prices if there’s no demand for it, and that the premiums usually paid for high-end specialty coffee could suffer. This may mean lower prices and less demand for natural and honey processed coffees as well as low-yielding varieties. A struggle to sell these lots while they’re fresh and worthy of a price premium might result in lower prices later on – when and if the coffee gets sold.
Another side effect of roasters reducing their costs is that some might cut back on their social responsibility and sustainability projects involving producers and their farms. With no clear end in sight for COVID-19, this could only resume next year. Daniel says, “[Campesino Coffee] was getting ready to launch [its] coffee school in May, with international invites, local and state government involvement… This has come to a temporary halt for obvious reasons. Although the school will be able to function as planned with the funding that has already been allocated, any future projects will have to be put on hold until the world gets back on its feet.”
Credit: Angie Molina
Credit Is (More) Expensive at Origin
Another consequence of a money shortage is that producers might struggle to meet their financial obligations to banks and lenders now and in the future, as many producers rely on future sales commitments to guarantee their income for the year. Many producers are already in significant debt due to fluctuating prices, unpredictable farming conditions, and other uncertainties. According to Karl, when supply commitments are difficult to come by, this passes on a large risk premium to farmers.
Martin Mayorga is Founder of Mayorga Organics and in a recent podcast episode on how the Coronavirus is impacting producers, he says that many banks aren’t assisting farmers in their predicament and that some social lenders are starting to request that farmers pay them back for loans they have received.
While access to additional funding might help tide producers over, this isn’t always available or comes with exorbitant interest rates for farmers in producing countries. In Rafael’s experience, “farm credits are usually [between] 6% and 9%. There is [access to] credit right now for [those needing] quick cash.. [but]… with a 12% rate against a mortgage”.
While the financial challenges being faced by producers are significant, Ricardo believes that most governments are aware of what is happening and that producing countries are watching each other and are aware of what’s going on.
Farm Workers Are Unable to Work
Coffee pickers are a critical, yet marginalised part of the coffee supply chain. COVID-19 has resulted in many being unable or unwilling to cross borders to work, which means that some coffee could rot before it’s picked, or that the harvest’s overall quality could deteriorate before picking. Martin explains that because of this, many farmworkers won’t be able to get the income they live on – as most travel from community to community, living from harvest to harvest.
Ricardo says that many producers are struggling to attract pickers as people are being told to stay home and are afraid of leaving the house. He mentions that he knows one producer that usually has 400 workers at peak harvest, but now only has 150 people to do their work.
For the producers who already have farmworkers on their farms, it becomes an issue of managing their needs at a time when there might not be work to do on the farm itself. Al Lopez is the Owner of Finca Terrerito in Honduras, which is a business that specialises in direct trade. In his case, the workers he employs can’t go home to Guatemala as the borders have been closed. This means he has to house, feed, and keep them busy when there’s no work, which can be challenging.
A possible solution to this could be encouraging local governments to employ local workers in their respective countries to work on coffee farms without having to cross borders. Daniel says, “Pickers don’t want to leave home and risk getting infected … local governments don’t want pickers from other regions coming into their regions potentially carrying the virus. This has prompted some local governments to start campaigns to hire locals to pick coffee, offering guaranteed medical coverage against the virus and other subsidies.”
Credit: Virginia Coffee Roasters
What Can We do to Support Producers?
While there are no doubt many innovative solutions that could help members of the supply chain deal with their challenges, only one solution will benefit everyone and keep the coffee supply chain functioning. Consumers need to keep buying and drinking coffee. With no clear end in sight to the lockdowns that are slowing the spread of the Coronavirus, this means encouraging people to safely and responsibly enjoy specialty coffee at home.
Doing this will allow green coffee buyers to keep up with their existing and future purchasing commitments and share some of the risks that producers have taken on. And when roasters experience an increase in sales due to increased home consumption of their coffee, they could allocate extra price premiums to producers – which is something that will benefit everyone.
For Al, developing direct trade relationships and passing on premiums to farmers will help them better and maintain their farms, which will help them better their coffee.
Rafael has a similar opinion. “Some roasters [ask] if they can find an NGO to support [to] have a positive impact in the face of adversity, but the answer is simpler. Just maintain your relationships with your producers and suppliers, and pay price premiums to go direct to the producer. Wherever possible, ask for transparency beyond FOB.”
He adds, “Price is always negotiable. Talk with your producers and seek a happy medium for all. Be straightforward and transparent about quantities [as] this way producers can seek other options if you are not committing to all coffees they are offering you. The best thing roasters can do is not to leave producers with coffees in their warehouses.”
Credit: Nathaniel Soque
The coffee supply chain has undoubtedly been impacted by the fallout of COVID-19. This has had a significant effect on those producing and picking the coffee, as they remain most vulnerable. As Karl tells me, they’re the shock absorbers of the supply chain. However, everyone is being influenced by the uncertainty it’s created.
With certain members of the coffee supply chain already under significant pressure, it’s up to everyone to work within their means and do what they can to alleviate the pressure being placed on the entire supply chain.
Max Perez is a producer and President of the Cooperativa La Hermosa in Guatemala and tells me that the majority of roasters are completing their contractual obligations and only a small minority are cancelling them – which is a good sign.
As long as this continues happening – and consumers keep playing their part by enjoying coffee – the coffee industry will be able to keep moving forward with as little disruption as possible.
Enjoyed this? Then Read How To Support Your Local Roaster During Social Distancing
Written by Janice Kanniah. Featured photo credit: Paulo Henrique
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