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Coffee Prices and the Ocean Freight Market

With recent extreme weather in Brazil causing a sudden surge in coffee prices – creating immediate uncertainty and speculation in the market – it’s easy to imagine that the price of coffee is affected by supply and demand of the product.  

But the coffee industry is complex. It is influenced by many different factors, all of which can have an impact on price.  

Although it may not seem significant, one factor underpinning the global coffee system is the movement of shipping containers – 10, 20 or 40-foot corrugate boxes – travelling between origin and destination across the globe. At any one time, there are 5 – 6 million shipping containers at sea, carrying goods across the world.  

Recently, shipping containers have been in very high demand. But supply has been limited. This imbalance has caused spot freight rates to hit historical all-time highs which, in turn, has had a direct impact on the sales price of coffee.  

But why is there such a scarcity of shipping containers? How has this affected the price of coffee? And what do things look like for the future? 

 Story of Supply & Demand

At the start of 2020, the Covid-19 pandemic created uncertainty for many businesses worldwide. A collapse in trade seemed imminent. Consumer spending was predicted to slow. In preparation for this, global shipping firms decommissioned many of their vessels – anticipating a drop in freight – idling their fleets by as much as 11%.   

Throughout 2020, however, trade held up. Contrary to belief, consumers continued to spend and, with a lack of available shipping containers on the water, freight rates rose as demand started to outpace supply.  

By early 2021, the cost of shipping had doubled and, in some instances, tripled.  

This year spending has continued to increase, placing heavier demands on an industry that was already stretched. In the first seven months of 2021, the demand for cargo was up by 27% compared to pre-pandemic levels. Capacity, however, has not been able to keep up with demand. In 2020, ongoing port and hinterland congestion lead to an effective capacity loss of 16%.  

As shipping companies direct their limited vessels to more lucrative transpacific trade routes and delays due to the pandemic creating backlogs in ports worldwide, the availability of shipping containers continues to dwindle. All available containers are either full, afloat, waiting to port, or located in the wrong parts of the world for coffee to move efficiently and affordably. Added to that, rolled and cancelled bookings, country lock downs, population displacement and port lockdowns are having a massive impact on the ability to load and unload ships in a timely manner. 

All of these factos have created an increase in shipping times of freight. In an article published on September 16th the Economist stated that the average door-to-door shipping time for ocean freight increased from 41 days to 70 days between 2020 to 2021. Other reports suggest that the increase in shipping times in 2021 was as much as 11.4%.  

Last month, there were over 40 containers ships anchored off Los Angeles and Long Beach waiting to port alone, with the equivalent of 8 million 20-foot containers in port or waiting to be unloaded around the world, a 10% volume increase on this time last year. 

What does this mean for coffee prices? 

With the perfect storm of increased demand, dwindling supply and delays in transport, shipping rates across the globe continue to soar. The average cost of shipping a standard 40-foot container has now surpassed $10,000 – four times higher than a year ago (Economist). This can increase the shipping cost of coffee by as much as 400 £/mt in some instances. 

A percentage of the coffee we contract is safeguarded by prior term agreements with shipping partners, which alleviates some of the increases in prices being experienced. Where congestion becomes unmanageable, we are sometimes forced to pay SPOT rates to get the coffee shipped. It is also prudent to expect prices to remain high for the foreseeable future and new contracts need to take that into consideration. 

This, in turn, has directly impacted the price of some of our coffees, a factor which is outside any market trends in producer prices for coffee.  

What does this mean for coffee prices in the future? 

As demand for freight continues to increase, capacity for shipping is also growing. 2021 marked a record for new orders for container-ship capacity. However, capacity building is a slow process, and much of the growth will not come into effect until 2023.  

The effective capacity for shipping is still around 20% less than actual demand, as many vessels are blocked at port. Market sources suggest that these port congestions and equipment shortages could last at least until Q1 2022, and we expect to see rates remaining high, with uncertainties and turmoil extending into next year.  

Although, historically, we would endeavour to contract shipping based on affordability, green coffee is seen as an unattractive cargo at present, due to the heavy weight and size, which is having an exacerbating impact on the industry. Therefore, our priority at present is to secure container space to safeguard against lack of supply.  

Due to the ongoing supply-chain disruptions, high container usage and low global schedule reliability, it is safe to assume current trends are more representative of the norm in global shipping, and we envisage rates in 2022 will continue to remain high or continue to climb.  

This will have an impact on the price of coffee moving forward. However, what that impact will be, we cannot say for sure.  

Much of our shipping rate contracts are due for renewal in the new year. Negotiations for these will begin in November, after which we will know a little more about what the future holds for the global shipping market.  

We will keep posting updates as and when we learn more. Until then, if you have any questions or concerns at all about shipping, then please don’t hesitate to get in touch with a member of the DRW trade team today.