• QA 063
    How does piracy on the high seas affect coffee shipping and insurance costs, and who is responsible to pay any increases?
    We are producers/exporters in East Africa. You may know that of late there have been pirate attacks on shipping off the Somali coast. We were surprised to read recently that producers and exporters must expect lower prices as a result of higher shipping and insurance costs these events may bring. We sell all our coffee free on board so surely we have nothing to do with such charges?
    Asked by:
    Producer/exporter East Africa

    Your interpretation of 'free on board' as meaning that increases in ocean freight and/or marine insurance charges do not affect exporters is correct, but only for contracts that already are in existence when such increases are introduced.

    If you have an existing fob contract and freight/insurance charges go up then you are indeed not responsible but, you appear to overlook the fact that coffee roasters price all coffee 'basis landed cost'. Simply put, the cost 'delivered to my premises'.

    Assume for example that freight and insurance charges from your area rise whereas those from other producing countries do not. If those coffees are comparable to yours then, all things being equal, in the longer term the landed cost of your coffee cannot be higher than that of those competing origins. This is so because the market compares 'like with like'.

    Therefore, if the events you refer to were to result in substantial increases in both freight and insurance (war risk) costs, then it will only be a matter of time before buyers add this to the cost of 'landing' coffee from your region. The result is of course that the fob price they are willing to pay is reduced… See also 04.02.05. 

    This may not be immediately obvious in a bullish market, or for high-priced coffees. But in a sluggish market especially producers of mainstream coffees (often easily substitutable) will feel the effects. Mostly indirectly because many charges are paid by different parties along the value chain and not all cost increases are always immediately 'visible'. But this does not mean they are not there! 

    It is unfortunate but true that almost each and every cost increase (or new cost item) that is introduced between 'production' and 'landing' in the end falls on the producer in the form of lower farm gate prices. In this case it would be as a consequence of actions beyond the borders of your own region but there are of course also other causes. For example when governments insist on unnecessarily complicated regulations, inefficient export procedures, port congestion….. All mean extra costs that, in the end, the producer pays for.

    Posted 18 December 2005

    Related chapter(s):
    Related Q & A:
    QA 025 QA 034