Reuters US Business
By Marcelo Teixeira and May Angel
NEW YORK (Reuters) -Coffee roasters in the United States are plowing through their stockpiles as they await the outcome of ongoing U.S.-Brazil trade negotiations, talks that could determine whether they have to pay much higher prices for alternative sources of coffee.
Brazilian coffee, which accounts for a third of the beans consumed by the world's largest coffee consumer, has been priced out of the American market since August when the administration of U.S. President Donald Trump imposed a 50% import tariff on Brazil's beans, in a case that mixed trade with politics.
Trump has accused Brazil's Supreme Court of unfair treatment of his ally, former President Jair Bolsonaro.
The trade tariff on coffee among other Brazilian goods was widely viewed as punishment of the government of leftist Brazilian President Luiz Inacio Lula da Silva, Bolsonaro's successor. Bolsonaro was later found guilty of organizing a coup plot.
So far, the steep duty has caused havoc in the $340 billion U.S. coffee industry, leaving importers with stranded cargoes of Brazilian coffee, roasters paying a fee to cancel deliveries and consumers spending as much as 40% more for their morning brew.
Stockpiles are expected to be at minimal levels by December, increasing the pressure on roasters and coffee chains to find replacements at prices that would still allow them some profit.
Some roasters had to pay the 50% tariff on shipments of Brazilian coffee that were already booked when the new import tax was announced. Others are shipping coffee meant for the United States to other countries to avoid the tariffs.
"The thing about this tariff is that it is not about reciprocity or trade, it is punitive, it is political, and personal. It is between Trump and Lula," said Steven Walter Thomas, the owner of U.S. importer Lucatelli Coffee. "Brazil is not paying it, I am - me and my clients."
REDIRECTING SUPPLIES TO CANADA TO AVOID US TARIFFS
Lucatelli Coffee loaded $720,000 worth of Brazilian coffee when the new tariff was already in effect.
When the coffee arrived, the company stored it in Jacksonville, Florida, in a bonded warehouse, where cargo can be kept temporarily without incurring import taxes. But if Lucatelli decides to sell it in the U.S., the 50% import tax will be due.
Thomas, whose clients include mid-sized restaurant chains including Florida's Brooklyn Water Bagel Company, said he is sending some of that Brazilian coffee to Canada, paying heavy additional transport costs but avoiding the 50% U.S. tariff.
"It is a catch-22: wait and hope for a trade agreement or take a blood bath on the logistics to redirect the coffee outside the United States," he said.
The surge in costs is also affecting the nation's largest coffee chain, Starbucks; the company's margins sharply contracted in its most recent quarter due in part to high coffee costs, which CEO Cathy Smith said would "continue to be a headwind at least through half a year."
PRICEY ALTERNATIVES
Several U.S. roasters came to agreements to cancel orders for Brazilian coffee, said a trader in Brazil working for a German coffee merchant, who asked not to be named citing a privacy clause in his business contract.
The fee they had to pay to cancel those deals, he said, was around $20 to $25 per 60-kg (132 lb) bag of coffee, which is currently worth around $515.00, not including tariffs.
With that, the roasters avoided the hefty 50% import tax on a cargo that costs about $250,000 per container, but ended up with no coffee.
"We have stocks, but they are going fast," said Michael Kapos, a sales and marketing executive at Downeast Coffee Roasters in Rhode Island, who supplies small and mid-sized coffee chains and grocery stores in the U.S. East Coast.
Downeast Coffee Roasters was among those who managed to cancel some orders, but not all.
Contract terms say the buyer is responsible for any additional costs, such as tariffs, that have been imposed after a deal was made. Both sides need to agree before a contract can be canceled, which can be difficult if a cargo has already been loaded.
The company is tasting other coffees that could replace Brazilian beans in their blends, Kapos said, but that would cost more.
Prices for alternatives to Brazilian coffee including Colombian, Mexican or Central American beans have gone up by as much as 10% since the U.S. first announced the tariff on July 9 due to increased demand while prices for Brazilian beans have fallen around 5%.
U.S. roasters are avoiding Brazilian beans as much as they can, said a European coffee dealer working for a large international trade house, who also requested not to be named.
"We see, of course, less coffee leaving Brazil and going to the U.S., it is very clear, and roasters are using up every bag they have," the trader said.
COFFEE BOOSTING U.S. INFLATION
Retail coffee prices in the U.S. have been rising steadily since last year when global coffee prices gained 70%, and are set to rise further due to the supply tightness.
Ground and roasted coffee prices at grocery stores in the U.S. rose 41% in September from a year ago to an average $9.14 per pound, according to Bureau of Labor Statistics data, helping to fuel local food inflation.
Part of that price increase has to do with benchmark coffee prices going up due to a supply tightness caused by smaller production after weather woes, and part is due to the tariffs.
Arabica coffee futures on the ICE exchange recently traded near an all-time high.
Consumers have taken notice.
"I'm not looking too much into the brands anymore. I'm going for the deals," said Sherryl Legyin, 52, a cashier from North Bergen, New Jersey, while perusing a supermarket coffee aisle on a recent October day.
"I like this one," said travel agent Yasmin Vazquez, 40, showing a small package of Nescafe instant coffee. "It used to be $6 or $7, but now it is selling for $11. And it seems it has gotten smaller," she said.
Traders believe the level of stocks in the U.S. will get critical around December.
"I think they have around 4 million bags of stocks right now. By December it will be 2.5-3 million, which is close to minimal levels," the European trader said.
The U.S. uses around 25 million 60-kilo bags per year, and Brazil typically supplies about 8 million of those bags.
Brazil's President Lula said this week he was optimistic about prospects for a trade deal with the U.S., adding it could happen "faster than anyone thinks."
Trump, however, said: "I don't know if anything's going to happen, but we'll see".
In the meantime, the price of a cup of coffee in the U.S. is likely to stay high.
(Reporting by Marcelo Teixeira in New York and May Angel in London. Editing by Emily Schmall and Anna Driver)
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