Coffee Memo | Rob Talks Tariffs Ep. 1

Episode Summary
In this inaugural episode of the Coffee Memo podcast, Covoya's Managing Director, Rob Stephen, delves into the critical topic of coffee tariffs and their impact on the coffee industry. He highlights the recent increases in tariffs on Brazilian coffee and discusses the implications for coffee businesses. Rob clarifies what coffee tariffs are, their intended effects, and the prevailing uncertainties in the market. He offers valuable strategies for coffee roasters to navigate these changes, stressing the importance of strategic planning and the exploration of alternative coffee sources.

Episode Notes

• Understanding coffee tariffs is essential for professionals in the coffee industry.
• The current landscape of coffee tariffs is broad and filled with uncertainty.
• New coffee tariffs have a significant effect on Brazilian coffee imports.
• Roasters must develop both short-term and long-term strategies in response to tariffs.
• Considering alternatives to Brazilian coffee is a strategic necessity.
• The coffee market is responding cautiously to updates regarding coffee tariffs.
• Making decisions based on unverified tariff rumors can harm business outcomes.
• Exploring diverse coffee blends can help reduce the negative effects of tariffs.
• Maintaining clear communication with customers about tariff-related changes is crucial.

MIKE FERGUSON: Welcome to Coffee Memo, a podcast where we talk about coffee industry news and current affairs. This is episode one, and we've invited Covoya’s managing director Rob Stephen into the studio to talk about, no surprise here: Tariffs. Rob sets aside the headlines and social media chatter to talk about potential consequences and what coffee roasters might do to be ready. 

So, Rob, you've known me for a long time…

ROB STEPHEN: I have.

MIKE: And you probably would guess that understanding tariffs and all their consequences and implications for the coffee industry is never going to be listed as a special skill on my resume. 

ROB: You have a lot of skills. 

MIKE: Yeah. So, there's this inaugural issue of Coffee Memo, we've invited you into the studio to talk about tariffs and knowing me as you do, explain it all to me as if I were me.

ROB: Okay, I know how to explain things to you as if you were you. So, that works. Yeah. Unfortunately, tariffs is something I've been forced to understand over, especially over the last few months. And so, it's the reality that we're all living in right now. And one of the things that I think is really important to understand in the current environment is that there's a lot of rumor masquerading as news, right? A tweet is not policy. What somebody said in an interview is not what's going to happen when Customs and Border Protection is filling out a bill.

MIKE: Right.

ROB: You know, those sorts of things... So, I think I was happy to come in and talk about tariffs today, just because I would love to dispel some of those sort of misinformation bits or rumors that people are thinking, because I wouldn't want them to be included in planning. Right? You don't plan on rumors. You plan on facts. Unfortunately, the business environment we find ourselves in is very sort of certainty-lite.

There's not a lot of predictability about the way that something this massive is being rolled out. Normally, you know, when governments negotiate tariffs that a lot of people spend a lot of time with economists and finance people and trade representatives, and they work on these things over a long period of time. They come to an agreement. It's well forecasted. It's rolled out in an orderly manner. None of those things are happening. So, we all find ourselves in this crazy environment where we're waking up to the news or reading something on social media and finding out that a fundamental piece of our business has changed. Which is super disconcerting. So, I would say, you know, let's start at the beginning with tariffs. Tariffs are supposed to be a tool in the toolbox for a government to protect an industry that they have either for national interest or because they perceive the current trade imbalance or trade practices to be unfair, and they're used all the time. All prior administrations had some level of tariffs on certain products, and other countries have tariffs on our products.

So, it's not something that was just newly invented, but normally they're low. And again, sort of they make sense. They're there to protect an industry that we have. So, when it comes to coffee it's not a political statement: tariffs don't make sense because we don't grow enough coffee to have an industry. We have we have an island you know or two that that make up less than 0.01% of our national consumption. So, we don't have an industry to protect. So, we shouldn't have tariffs on coffee. So, we do. And that's because the tariffs are being applied in a very broad manner. Whatever comes from this country is going to be tariffed. 

Now a lot of people have put a lot of stock into what the Secretary of Commerce, Lutnick, because what said on CNBC last week, which was that if a country grows something that we don't grow, it won't be tariffed. And that's an aspirational statement. Right?

MIKE: Right.

ROB: So, what he proceeded that with, and everyone's sort of looking at that video clip… What he said right before that was “when we do a deal, then anything that is grown that we don't grow will be excluded.” So, if coffee was grown in South Korea right now, their coffee would not be tariffed, that kind of thing because we have a deal, you know, that sort of thing. And so, right now the industry is sort of sitting on the edge of their seat waiting to see if that happens. But none of these coffee growing countries have a deal. And so, all of their coffee is being tariffed.

MIKE: Right.

ROB: Right. So, with this thing with Brazil, which is really what's on everyone's mind, where they've done what's called an ad valorem tariff increase. So, we had a 10% reciprocal tariff on every country. And So, Brazil was one of those. And so, they had 10%. And then they added 40% on top of that. And that goes into effect on August 7th, and that effectively doubles the price of any Brazil coffee that lands after that date, with some exceptions about transshipment, which are just really sort of window dressing.

It's going to affect a very, very small number of containers.

MIKE: So, if something left Brazil before the 7th and it's on the water, it's going to be tariffed, even though…

ROB: If its last trans ship… there's a date in October, I'd have to read the…

MIKE: Oh okay. 

ROB: Executive Order. There's a date in October where if it's if it's last… Because what happens with shipment is coffee containers do a hub and spoke system. So, it might go from from Santos to Manzanillo and/or Panama. And they tick container off the boat and they wait for another boat that's going to the place that's supposed to be going. So, that's a trans shipment. And if it's if it's left that last transshipment by a certain date, they won't tariff it. But again, you can't manipulate that. So, it's just if your container is one of the lucky ones that sort of meets that very limited criteria, it won't get tariffed, but let's just assume for the sake of the conversation…

MIKE: Don't count on it.

ROB: Don't count on it. Right. So, there's two things there and it's worth talking about each of them sort of individually. So, the 50% tariff is now policy because it's been signed by an Executive Order. But what we've seen with all of these Executive Orders is that is the opening gambit, right? 

So, what's happening? A lot of the industry participants are saying, “well, there's always another move. So, let's wait and see,” which I think is wise. That's what we're doing. there's lots of talk about delaying shipments to see what, you know, could happen. Maybe let's get let's buy ourselves a month or two and see. I don't think you're going to see a lot of Brazilian coffee coming in on time, paying a 50% tariff, because I don't think that there's a lot of assumption that people in the market want to pay double for Brazil's. And it's nothing against Brazilian coffees. Nobody wants to pay double for anything.

MIKE: Right. Right.

ROB: So, I would expect in the very short term that you've got these two things happening, you've got people not wanting to ship Brazil's new crop. Brazil's new crop starts in August and first shipments are late August and coffee start arriving in September. So, this couldn't be worse timing. Right. So, you've got people not wanting to bring in Brazil's and you've got it's the tail end of current crop. So, there's not a lot of Brazil's left. So, what's going to happen to the price on those. They're going to go up. They're going to go up. And it's just simple economics. The value of the remaining Brazil coffee just went up.  

So, roasters find themselves in a very difficult position. There's going to be an increase on the remaining spots, price. There's uncertainty about whether new crop will even arrive because most people want to won't want to bring it in at double the cost. 

So, there's going to be this two at least I you know, my opinion. It's just my opinion. Nobody knows what's going to happen and don't believe anyone who says they know what's going to happen. Right. They don't know what's going to happen, but there'll be a multi-month period where everyone waits to see what's going to happen. So, in the meantime, people need coffee. More coffee will come out of Colombia, more coffee will come out of Peru. Lots more coffee, I think will come out of Africa. And I think in the short term, roasters will need to get really good at making blends or finding substitutes for the Brazil.

MIKE: Right. Need to focus on profiles.

ROB: Yeah, yeah. And so, and it's not easy because Brazil is one of those coffees that has a cost component and a flavor component that's hard to replicate.

Yeah. So, everyone is, not just going to feel it economically, but they're going to feel it from there's a lot more work to do. So, I think you know that's not a rosy outlook. But those are the those are the facts on the ground as opposed to you know while I read this tweet or I you know I heard this on this show. These are the way things actually are. You know, you want to talk about world peace after this or…

MIKE: So, if you were a roaster, what would you be doing right now?

ROB: So, if I was a roaster, what I would be doing right now is, is looking very critically at what I use Brazil for, and deciding what short-term substitutions I could make, and then at least having a long term solution in my back pocket. I'm not sure I'd pull the trigger on that right now but I would maybe say at some point it's going to become apparent… in one scenario, it becomes apparent that these tariffs are here to stay. What's your plan? And you don't want to formulate your plan when everyone else is executing on theirs or you're back of the line.

MIKE: And what kind of questions are you receiving from our customers now?

ROB: What's going to happen? You know, which is this is my answer to that, right? 

But I think that more than that, the questions I'm getting are sort of what, what we just said, which is: what do I do instead? And so, you know, I'm encouraging customers that it depends what you're using the Brazil for is the short answer. Right. So, if it's a low cost component, I'm going to suggest that you look to Africans. 

And if it's more of a, you know, it's providing a body component or is doing that, then let's see what we can do in Central and South America. Unfortunately, the new crop for Central America, we won't see it until February at the earliest. So, we've got this long period of time of use to find the spots here and see how long you can make them last. And then, you know, let's hope that by the time Central crop comes in there's plenty to go around. You know, my main concern here is that… who uses the most Brazil’s in the United States? The big guys.

You know, the Folgers and Maxwell Houses of the world, right? And all that. So, Brazil is a major component because they're low-cost providers and Brazil is the lowest cost coffee. And so, and it's very useful in the blends. And the American palate likes it. So, they are going to have a lot of demand to fill. If these tariff sticks and they're going to come after the coffees that specialty market uses.

MIKE: Yeah.

ROB: So, that's the sort of the biggest concern. So, I think having a plan in mind where you can decide, you have multiple options for replacing this coffee in a short and long term is your best bet. So, it might be get a bunch of samples, get in the cupping room, start working it out. And it's probably the best thing you could be doing right now. And if they get lifted tomorrow and it's all clear and everyone goes back, at least you, you know, you got to do an experiment. 

MIKE: All right. Well. Thank you.

ROB: You're welcome.