An Era of Unreliability: Post-Pandemic Green Coffee Logistics
By Susan Heller Evenson
On December 6, 2023, the CEO of Mercon Coffee Group, Oscar Sevilla, wrote a letter to partners addressing why Mercon was filing for Chapter 11 bankruptcy: “Over the past three years, logistical disruptions stemming from the pandemic, coupled with the effects of the frost and drought in Brazil, prolonged market backwardation, sustained price volatility, and rapid increases in interest rates have all combined to form an exceptionally challenging operating environment for Mercon.”
Tom Minogue, the recently retired CFO of the U.S. holding company of Neumann Kaffee Gruppe (NKG), Neumann Gruppe USA, Inc., expressed a similar sentiment earlier this year in the company’s newsletter: “I’ve been through high interest rates, a logistics crisis, an inverted market, drought, and frost. But until recently, I never had to manage them all at once!” When I shared Minogue’s quote with Phyllis Johnson, president of BD Imports, she replied, “I think you can add piracy to the list.”
For coffee roasters and importers, managing coffee inventory effectively is usually a logistical high-wire act, given coffee’s long value chain. But in the past few years, it has become harder than ever to create a coffee purchasing plan and attendant timescale because coffee prices, transportation prices and shipment timeframes have fluctuated at unprecedented levels. How did the shipping and logistics situation in the coffee industry turn so dire? What were the factors that got us here and how are they related? And what in the heck is market backwardation? The way to weather any storm is to understand which way the winds are blowing and act accordingly. Knowing a little background about the conditions that caused the storm doesn’t hurt either.
AN ONGOING CRISIS
When global shipping logistics are predictable, timely and efficient, they are, by design, unremarkable. Reporters aren’t clamoring to write stories about intact container arrivals or perfectly stacked and wrapped pallet deliveries. But when disruptions break out, they not only make headlines, they also reveal and often compound larger economic, geopolitical and environmental issues in the global shipping infrastructure.
Take Ethiopia and the current Red Sea situation as an example. In October 2023, in response to the conflict in Gaza, Houthi rebels from Yemen started attacking and hijacking ships passing through the Red Sea en route to and from the Suez Canal, which handles about 15 percent of international maritime trade.
Due to the risk, global container shipping companies, or steam ship lines (SSLs), either cut back or avoided shipping through the Suez Canal altogether, rerouting via South Africa’s Cape of Good Hope, adding two to three weeks of transit time. They also began imposing a war risk surcharge (WRS) of $1,200 to $1,500 per container to cover the longer transit. We’ve even started seeing maritime insurance companies raise premiums or refuse to cover ships crossing the Red Sea for issues related to “War, Strikes and Civil Commotions Risks.”
The reverberations caused by the Red Sea shipping conflict became especially real for Ethiopia earlier this year. On January 26, 2024, Danish shipping conglomerate Maersk posted a customer advisory in response to the ship attacks in the Red Sea, announcing a full suspension of new bookings to and from the port of Djibouti, cutting off Ethiopia—one of Africa’s biggest economies and the world’s most populous landlocked country—from one of its major supply lines.
MODERN LOGISTICS: THE CONTAINER, A REVOLUTION
While logistical concepts date back to antiquity, our collective notion of modern-day logistics—large ship-to-shore cranes stacking block-shaped receptacles onto the hulls of huge cargo ships—begins in 1956, when Malcom Mclean invented and patented the first standard shipping container, and the concept of “containerization” was born. Before 1956, shipping companies consigned their cargo through “breakbulk” shipping, a system where items were counted either individually or in bulk by unit. If you were in the shipping business in the early- to mid-1900s when breakbulk shipping was the norm, you’d experience the joy of trying to load and unload bags of wheat next to drums of oil. What you’d end up with on the hull of your ship was a hodgepodge of commodities of different shapes, sizes, grades and fragilities, which would make your bill of lading a nightmare to fill out and severely limit the cargo capacity of your ship, costing you both money and time—which is actually just more money.
Containerization standardized cargo units, which standardized cargo cranes, cargo ships and cargo manifests. All this standardization meant ships could be loaded and unloaded faster, more securely and at a higher capacity. It’s not overstating to call the adoption of container shipping an economic revolution, perhaps the biggest of the 20th century. In his book, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, author Marc Levinson puts it this way: “The container is at the core of a highly automated system for moving goods from anywhere, to anywhere, with a minimum of cost and complication on the way. The container made shipping cheap, and by doing so changed the shape of the world economy.”
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