- For the past decade, boutique coffee traders have relied on low interest rates
- Small traders often turned to large trading houses for access to cheaper commodity trade finance
- However, the current climate may be putting an end to those arrangements
FOR THE past decade, interest rates have consistently remained low and steady – providing support for boutique coffee traders. The rise in rates over the past year has revealed their dependency on favourable borrowing conditions.
Boutique coffee traders have emerged over the past ten years in response to the boom in micro roasters. These roasters have been willing to pay a premium for higher quality, ethically sourced coffee with greater transparency.
As such, boutique traders are small-scale coffee importers and exporters that trade in high-end, high-scoring coffees. At the same time, they generally move lower volumes of coffee than larger trading houses and operate at higher margins.
To buy coffee and organise supply logistics, traders need access to cash – something that is much more accessible for large trading houses.
“Coffee is a liquidity business, and a multinational that has a $3 or $4 billion a year turnover is going to have easier access to liquidity than a smaller operator,” says an anonymous coffee trader.
“The conversation about high interest rates has a backdrop of liquidity being concentrated in larger trade houses and multinationals over the last few years, and that has set the stage for a lot of the dynamics that are playing out now,” the trader says.
Getting financing from a bank is very expensive for boutique traders with significantly higher risk profiles. As a cheaper alternative, smaller traders without access to liquidity often use large trading companies to purchase coffee on their behalf. While remaining completely independent, it offers a way for them to access cheap commodity finance.
This situation is particularly prevalent among specialty coffee importers who operate on farmgate or FOB payment terms. In this context, there are multiple financial obligations such as shipping costs, farmer payments, and any loan repayments.
In order to avoid high-interest financing options, larger traders often step in to purchase the coffee and settle existing loans. This has benefited small traders as they can repay the borrowed money as and when they sell the coffee.
“It provides liquidity to the system to keep everything moving,” says the trader.
The cheapest shop in town
The large trading company’s involvement doesn’t stop there. Typically, they will then deliver and store the coffee for the smaller traders, and finance the warehousing cost.
Importers require liquidity to finance storage costs. Yet, borrowing from banks often entails higher interest rates on smaller credit amounts. Furthermore, banks will only offer a floating interest rate – and in a rising rates environment, that is a risk.
“A few years ago, importers could get financing at 4% from their credit line. If you’re selling that finance onto the roastery at 8%, you’re technically making a 50% margin on finance costs,” the trader says.
“If, at the end of the year, they are paying 12% on their credit line – which is the situation people are in – then they’re actually losing money on the finance.”
As such, boutique traders that need access to liquidity and want the contractual rights to store coffee often turn to large trading houses that can offer a fixed rate of interest. While rises in interest rates are accounted for in the cost of that financing, it is still a safer alternative to taking credit from a bank.
“If traders want to expand their credit, they can go to a bank that will ask for collateral and have other extensive requirements,” the trader says. “Or, they can go to a large trading house that can offer substantial credit without demanding anything in return – so they’re the cheapest shop in town in terms of getting actual access to liquidity.”
The impact of reduced roaster call-off
In general, many roasters enter into contracts for a certain amount of coffee for a certain period of time. They have the flexibility to “call-off” the coffee from the warehouse as and when they need it.
Currently, roasters are experiencing inflationary pressure and are either looking to defer their payments or looking for cheaper coffee altogether. As a result, the rate at which roasters are drawing down on their coffee is slowing down. This is causing a problem for importers as the liquidity that keeps everything moving becomes tied up.
“Importers are already having to deal with compounding storage costs and the higher cost of financing,” the trader says. “In a situation where roasters aren’t calling off the coffee, and they are slowing down on payments when they do – which is the case as the environment is getting much heavier – their liquidity is affected at a time when they need that finance elsewhere.
“For example, let’s say a trader is shipping a container every three months. They need that cash ready to buy the next container, but if they can’t get enough throughput on their credit line, forget about profit margins – they can’t buy more coffee and they can’t re-up their stock.”
A challenging time ahead
Fundamentally, the way that smaller traders operate depends on cheap credit. Yet, with roasters increasingly deferring their payments, compounded with rising interest rates, boutique traders find themselves unable to finance delivery spreads and receivables.
Furthermore, large trading companies are not unaffected by rising interest rates. Increasingly, they are enforcing credit and payment contract conditions in order to protect themselves from losses.
This leaves boutique trades in a difficult position, and some may find that the best path forward involves selling some equity in order to deleverage debt.
“It’s going to be a very challenging time for small importers generally,” the trader says. “There are two things going on. We’re seeing a lot of small traders getting acquired, and we’ve seen some go bust as well – with probably more to come.”
In the past four months, two prominent specialty coffee traders have sold either a majority or 100% stake of their equity shares to large multinational companies. This indicates the ongoing trend of consolidation within the segment – a trend that is likely to continue.
What remains to be seen is how smaller traders will integrate into larger trading houses. Often setting themselves apart with a clear social mission, some of the companies that are increasingly becoming acquired have been critical of multinationals and larger traders in the past.
As such, the future of the trading sector is far from certain. The social values of boutique traders could be sidelined as they integrate into larger trading houses. However, multinationals may leverage an acquisition as a way to develop their own specialised divisions and deliver greater impact.
At the same time, boutique traders still have a chance to innovate and find more creative ways to remain competitive.
