May 18, 2020

COVID-19 & The Coffee Trade: Exploring The Short- & Long-Term Impact

Containers, cash flow, and congestion: COVID-19 is causing unprecedented chaos in the coffee industry.

Lee este artículo en español COVID-19 & The Coffee Trade: Exploring The Short- & Long-Term Impact

While coffee shops and roasters are shutting shop or looking for innovative ways to remain profitable, traders and producers are faced with a different kind of problem: how to keep the coffee industry running so that next year’s coffees make it to the café and supermarket – and a year’s worth of income isn’t lost.

The yearly harvest dates and global nature of the supply chain pose particular challenges for the upstream sector of the coffee industry. I spoke with importers, exporters, and producers tied to Brazil and Colombia to get a snapshot of how COVID-19 is affecting their businesses as of May 2020. 

Prefer audio? Listen to the podcast below

Credit: Ally Coffee

Coffee Demand Is Shrinking

For years, economists have been warning us that global coffee demand is growing. And now, suddenly, people aren’t buying coffee.

Cafés and restaurants around the world have closed their doors, some permanently. Ricardo Pereira, COO of green coffee importer Ally Coffee, has felt the impact first hand. In Europe, he noticed that “There was a stop. Nobody was buying, nobody was doing anything.”

However, demand is likely to increase as strict lockdown periods end. Many countries in Europe are already relaxing restrictions, with even the hard-hit countries of Spain and Italy letting coffee shops re-open from mid-May. In the US, Starbucks plans to open 90% of its branches by early June.

Ricardo is cautiously optimistic. “In the last two weeks, we have seen a little bit more movement, especially in Scandinavia and Germany,” he says. “We are seeing our [European] clients coming back a little bit to somewhat more their normal routine.”

It will take a while for demand to reach pre-pandemic levels. Even as coffee shops and restaurants begin to open, many are forced to limit the number of customers they serve at a time. Low public confidence and health concerns could also result in fewer people choosing to visit cafés. “Consumption is going to be down, for sure. That’s [a] certainty,” Ricardo tells me. 

The ICO recently forecast that a one percent decrease in GDP growth could be associated with a 0.95 percent lower growth in coffee consumption, which adds up to 1.6 million 60-kilo bags.  “That’s something huge,” says Ricardo.

Yet if demand only drops by 1.6 million 60-kilo bags, we will be lucky. The International Monetary Fund has predicted that global GDP will, in fact, fall by 3% – and in advanced economies, such as the US, Europe, and Japan, 6.1%.

You might also like How COVID-19 Continues to Impact Coffee Shops Worldwide

Credit: Ally Coffee

Coffee Consumption Habits Change

As offices and schools close, more employees are working from home in a movement that could continue into the post-pandemic world. Facebook and Google have already announced that remote working will be in place for most employees until the end of 2020.

This may boost at-home consumption, reversing recent trends. According to NCA’s 2019 National Coffee Data Trends report into the US market, 22% of people who had drunk coffee in the last day hadn’t prepared it at home – an increase from 2012, when the figure stood at just 16%.

However, with fewer people commuting or eating out, consumption in hotels, restaurants, and cafés is set to shrink, along with a reduced office coffee market. 

Ricardo tells me, “Some of our clients, they have grown up to 10 times their e-commerce. Their sales to supermarkets have gone up… Some of the roasters are going to realise this is a stream of revenue that they were not tapping perhaps fully before the pandemic.”

It is unlikely that this will offset the decline in volume, however, and could result in reduced per-cup profits for café-roasteries. 

Meanwhile, some coffee producers are realising that the end-product is changing and so are their buyers’ wants. “We are working hard to understand the needs of the roasters and adapt our offers and coffees to those new interests,” says Vicente Mejia, Founder and Managing Director of specialty Colombian exporter Clearpath Coffee

Fourth-generation coffee farmer Rodrigo Sanchez Valencia of Finca Monteblanco, Colombia believes that communication is key. “We have started to talk to [our buyers] a lot, taking into account the market and trying to design coffees that can be tailored to the needs of customers who work from home,” he tells me. 

Credit: Ally Coffee 

Cash Flow Shortages Impact Trading Partners

When demand dropped, many roasters watched their cash reserves shrinking with grave concern. In this crisis, they rushed to shore up their working capital positions. 

“We started getting a lot of phone calls,” says Ricardo, explaining that roasters were hoping their importers could offer them more flexible payment terms. This, however, placed the financial burden on the importer – and in turn, the exporter and even the coffee producer. 

Many businesses were in the delicate situation of having to limit flexible payment options to protect their own finances. “We do our best to be able to provide some relief to [our customers],” says Ricardo, “but we also have to follow some guidelines and some protocols presented to us by our lenders as well.”

Many coffee producers and exporters are struggling as their green contracts are cancelled by importers and roasters. Because importers must honor their contracts with exporters and producers, they have limited flexibility in the payment options they can extend to roasters. But by honoring those contracts at origin, importers help coffee shipments move as quickly as possible. In some cases, Ricardo says, “we were encouraging them to get coffees prepared for export faster” so producers would receive payments sooner and there was less risk of coffee being stuck in ports. 

Governments around the world have put schemes in place to help businesses. However, the degree of support available varies greatly and information can be hard to uncover. Ally Coffee has compiled a list of resources and schemes that could provide economic relief for US roasters in different states.

Credit: Ally Coffee

Currency Fluctuations Affect Prices Producers Receive

As investors across the world rushed to buy safe-haven assets such as US Treasury notes, the US dollar appreciated dramatically. This helped shake up a decades-long trend of low coffee prices in Colombia.

“The internal price rose almost 30% in two months,” says Vicente Mejia. Many exporters in Colombia, such as Clearpath, were caught off-guard by this dramatic price swing. “We had to pay more for the coffee, so our budget and cash flow projections didn’t work as planned and we had to find extra cash very fast.”

Meanwhile, the increase in prices has been a welcome relief for many Colombian farmers who sell their coffee through the government’s coffee buying programme run by the FNC. 

As for farm workers, stockpiling food has led to a cash squeeze. “Many of us went to the grocery store to stock up on food for the next few months,” explains Leonardo Montesanto Tavares, CEO of Montesanto Tavares Group Farms, a company that runs coffee farms in Brazil. 

As coffee farm workers spent more on non-perishable food, their household savings began to disappear. “For workers that receive a base salary, this can put them in a delicate situation,” says Leonardo. 

In Brazil, employees typically receive twice their usual monthly payment in December. Grupo Montesanto Tavares brought this forward to support workers in these unprecedented times.

Credit: Ally Coffee

Labour Shortages Disrupt The Harvest

Social distancing protocols have made coffee picking more logistically challenging and expensive than normal. 

The pandemic began escalating just as Colombian coffee farms were readying themselves for harvest, a time when the farms would normally be filled with seasonal labourers picking cherries by hand. 

“We’ve changed our sanitation methods,” says Rodrigo Sanchez Valencia, who tells me that they sanitise hands and boots on entry and try to ensure social distancing. “We are more careful about how coffee pickers are distributed within our farms. We try to ensure they’re not physically close to one another.”

What this means for the size of Colombia’s current harvest is yet to be determined, but it will likely increase per-bag harvesting costs. 

In Guatemala, meanwhile, the virus hit at the tail-end of the harvest. “I spoke with some of our partners [in Guatemala] and they were having a hard time finding labour to finish the harvest,” says Ricardo. 

For many Central and South American specialty coffee producers facing cancelled contracts and labour shortages, commodity-grade coffee might become more attractive. It is hard to justify investments in farm maintenance and quality when there are cash flow shortages, but producers can nearly always sell lower-quality coffee on the internal market – especially when stockpiling is leading to increasing demand.

“Farmers get relaxed with quality,” says Vicente. “They no longer need to make an extra effort to have great quality coffee and sell it as specialty to make a profit.” This has the potential to set back the development of the specialty coffee growing sector in the coming years. 

In Brazil, where the harvest is just beginning, the impact may not be as severe thanks to the country’s terrain and its history of mechanical coffee-picking. “To avoid large groups of pickers, and thinking on the wellbeing of our workers, we decided to use only mechanised harvesters,” Leonardo Montesanto Tavares tells me.

Credit: Ally Coffee

Milling & Transportation Is Bottlenecked

Coffees are currently arriving at Colombian mills where, due to social distancing and shorter working hours, capacity is reduced. As the mills operate slower and less efficiently, the cost of processing coffee rises. 

COVID-19 is also causing increased transportation costs in Colombia. “Are they going to have enough truckers coming in and moving coffee from point A to point B, or moving coffee from mill to warehouse to port?” asks Ricardo. 

He adds that Colombian restaurants along the highways are closed, “so they need to feed the drivers in order for them to continue to drive the product from farm to mill and mill to port”.

Traders are also worried about container shortages. Ricardo tells me that he’s been receiving phone calls from worried partners, telling him “I don’t think we have containers to ship”.

As worldwide exports slow on the back of a sluggish economy and some Chinese cities impose fortnight-long quarantines on containers, coffee exporters might have to contend with longer shipping delays and increasing freight prices.

However, Leonardo tells me that Brazil is, for the time being, avoiding these challenges. “We export around 500 to 600 containers every month, and fortunately, we work closely with our exporting companies, and our trucks are operating as normal as before the pandemic and we aren’t experiencing any delays from farm to the port.”

With demand and supply fluctuating and businesses closing shop, warehouse space could soon become another issue. “Major coffee roasting companies are slowing down and losing a lot of their business, and therefore not moving as much coffee from the warehouses to their facilities,” says Ricardo.

If roasters are unable to accept their shipments, they could end up stuck in the importers’ facilities, at warehousing facilities, at port, or even in the origin country.

As a result of these challenges, this pandemic may soon adversely affect the variety, price, and freshness of the coffee that roasters can offer their customers. 

Credit: Ally Coffee

A Post-Pandemic Coffee Industry

COVID-19 started just as a health crisis, but the economic implications are increasingly evident. Actors along the coffee supply chain are supporting one another where possible to avoid bottlenecks, congestion, and financial losses.

In the coming months, we might see a reduced amount of specialty coffees, fewer specialty roasters, and a permanent shift in how coffee is consumed as a result of this crisis. Decreased demand caused by a global recession could hit producers and traders hard.

But, as dire as the situation is today, many are hopeful that we will soon see an upturn. Vicente Mejia tells me, “Coffee enthusiasts will always want those unique and top-notch coffees, and we’re going to keep focusing on providing some of those niche offerings for that kind of client.”

And, as Ricardo says, “We’re social beings. We want to be interacting with people, relating to people, going to coffee shops and going to restaurants, going to travel, visiting another country, or going and staying in a hotel.”

Found this interesting? Read COVID-19: What Coffee Farmers Want You to Know

Quotes from Rodrigo Sanchez Valencia translated from Spanish. Quotes from Leonardo Montesanto Tavares translated from Portuguese. Feature photo credit: Ally Coffee

Please note: This article has been sponsored by Ally Coffee.  

Want to read more articles like this? Sign up for our newsletter!