State of Coffee Update...And What's the Deal With Tariffs?
Back in February I shared some of the challenges we are facing this year as coffee prices have suddenly soared and what we were preparing to do to address them. As it is now July, I thought I should update you. Here goes.
In our industry, a lot of roasters talk about their direct relationship coffees and their partner producers in glowing terms. We like to cite how we are paying “above market” prices and investing in those producers’ communities, etc. But what happens when the market inverts, i.e. when conventional grade coffees like what we find in Folgers suddenly become more expensive than the previous year’s specialty coffees? Will those direct relationships stay intact when producers can suddenly make significantly more money while doing less work by delivering conventional quality to the market at blockbuster prices? Will they reward the roasters for their years of loyalty and for consistently paying elevated prices? This moment is a genuine test of those relationships, and I am happy to say that the key relationships in our supply chain are coming through for us this year. Here are a few ways in which we are working within our supply chain to find win-win scenarios for everyone.
The most significant win for us has been with Luis Alberto Balladarez and Joaquin Lovo in Nicaragua. Back in December they agreed to write contracts for the bulk blender coffees we buy from them at the current conventional grade coffee price. This saved us tens of thousands of dollars because we are paying conventional grade prices but receiving specialty grade coffees. And, while the prices we are paying are still higher than we have paid previously, they are not nearly as high as they could have been given the surge in the market.
According to our import trader Todd Mackey, this is the ONLY example he has seen this year of producers writing contracts for their coffees below their market value. When our Lead Roaster Shannon and I visited Luis and Joaquin back in March, they made it clear that they deeply value the 13 years we have worked together, and that they view this moment as an opportunity for them to help us so that we can continue buying their coffee for many years to come. Wow! This is such a healthy perspective for us all as we navigate a historically volatile time in coffee. If we honor one another and play the long game, seeking to keep the relationships intact and find ways for everyone to win as changes come, we will have a fabulous story to tell the world.
Another major win has been with our bank, Heritage Bank. Let me explain. If you were a coffee importer with $100 million dollars back in the middle of 2024 when the coffee market was trading at $1.79 per pound, your money was suddenly cut in half as the price of coffee on the market crossed $4 per pound in early January. This put incredible pressure on importers to get their money back as fast as possible, leading them to increase the financing charge roasters pay to store coffee upon arrival from origin countries.
In our industry, I do not pay for coffee until I receive it. In a typical year, we keep a few months worth of inventory on hand and store the majority of our coffee in warehouses on the East Coast. This allows us to control our cash flow—the cost of storing and moving coffee in this way has never been financially prohibitive. That is, until now. Suddenly the cost of that financing soared, and our fractional Chief Financial Officer Ray suggested we go talk to the bank about expanding our line of credit. We did just that.
Heritage Bank was amazing. They allowed us to increase our line of credit enough to find some real savings on freight and storage fees by taking much larger orders and warehousing much more inventory than we had previously. We received our first full truckload of coffee in April and a second one in May. We now have three times the amount of inventory in our building. And since our monthly rent is a fixed cost, we are not paying anything on top of the financing of the line of credit to store the coffee. And shipping coffee a truckload at a time really drives down the per pound cost, which has further helped lower the impact of the higher prices.
One more example of a win. As many of you know, we supply all Crossroads Church locations with their coffees. As we looked ahead to revealing our Nicaraguan coffees in August, we realized that we could not fit any more coffee into our building, which would work against us saving money. I knew Crossroads had a central warehouse, so I reached out to our contact Wes—who has made several trips to Nicaragua with me—and asked if there was any way we could store 280 bags of coffee in their warehouse when it landed. I explained our situation and said we could split the savings I would gain, and I would be able to lower the price of the Nicaraguan coffee they buy from us accordingly. We would win by having somewhere to put the coffee, and they would win by us being able to lower their price as we captured some storage fee savings. We took a look at the space and they saw they could fit everything in without any issues, so we agreed to give it a go. Amazing!
As wonderful as all of this has been, and it has been wonderful, there are still some challenges. Tariffs. Ugh! We paid our first tariffs (10%) on coffee we received from Costa Rica this past month and are set to pay a 19% tariff on the Nicaraguan coffee we are receiving in August. Add to that a 55% tariff on a paper cup order we placed back in March before any of this was even known—and further tariffs on packaging we have in the works—and we are looking at further cost increases in the months to come.
Whether or not this current approach to solving our trade deficit is going to work—none of us knows—I want you to at least understand how this is impacting small businesses like ours. When a tariff is placed on a product, the company in the USA that is buying that product pays the tariff—not the company selling it, not the company importing it—the company who buys it. It is all passed along to the end of the supply chain. In the case of the examples above, that is us. When coffee in Nicaragua is hit with a tariff, Luis does not pay it, I pay it.
These examples are unfortunate on several accounts. For one, we do not grow coffee in the USA and cannot outside of Hawaii. So, I cannot buy “made in the USA coffee” and avoid the minimum 10% tariffs that are now on all coffee grown everywhere. This is a tax in another form, plain and simple, as there is no way for me to avoid it by changing suppliers. Secondly, for many of the supplies we buy, there is no easy way for us to suddenly switch to a US-based supplier. For many products, there are none, and it would take years for that to change. For others, there are options, but now those companies are raising their prices as they know their foreign competitors’ products have the tariffs slapped on them. In the meantime, we pay more either way.
In the words of one of my advisors, “I don’t know any coffee business that can sustain a 10% increase on the cost of their coffee without serious long-term negative impact.” So, please celebrate the wins we have experienced this year. They are truly amazing! And, please continue to pray for us and cheer us on as we endeavor to find new solutions for the challenges that continue to emerge.
[Edited/Formatted by Sarah Cooney]