Financing woes for traders

Posted on: 2015-12-11 1:06 PM

The steady drip of additions to JAB Holding Co's coffee empire is threatening to leave a bitter taste for traders who supply its growing network of roasters with beans, who say they now have little choice but to wait unusually long to get paid.
 
After being purchased by JAB - the investment vehicle of the billionaire Reimann family - roasters ranging from U.S. specialty chain Peet's Coffee & Tea to European mass market conglomerate Jacobs Douwe Egberts (JDE) increased their net financing terms to 120 days or more, up from an industry standard of 30 days or less, more than a dozen industry sources told Reuters.
 
That means the middlemen who buy beans from places like Brazil and Colombia and sell them to Peet's, JDE and other JAB-owned roasters have to wait four months or more after delivering the beans to be paid for them. Other roasters that have been bought out by large funds, like Tim Hortons, have made similar moves.
 
On Monday, Luxembourg-based JAB announced it will lead a $13.9 billion buyout of Keurig Green Mountain, the biggest-ever coffee deal. Coffee bean traders are now wondering if the Waterbury, Vermont-based single-serve market leader will be the next roaster to extend credit terms.
 
Such a move would pose problems for trade houses that operate behind the scenes to move coffee beans around the world. It would heighten their risk of not being paid, and tie up capital they would rather use to buy coffee for other roaster clients.
 
Coffee roasters benefit from improved cash flow and access to cheaper capital, but traders find themselves essentially acting as inexpensive lenders for their customers, the sources said.
 
"Importers are not meant to be banks," said one source who had been involved with a credit term extension for a JAB-owned roaster. "The importer has to increase their line of credit in order to continue to buy more coffees for other clients."
 
HOBSON'S CHOICE
 
The new terms give importers a choice between paying more in interest payments on the additional credit, or losing the roaster as a customer, something they are reluctant to do in a world of shrinking margins.
 
The changes offer a hint as to how JAB, owned by Germany's secretive Reimann family - is disrupting traditional practices in the coffee market as its influence grows.
 
When JAB bought Peet's Coffee & Tea and Caribou Coffee in 2012, it increased its industry standard 30-day net financing terms, meaning traders had to wait between 120 and 280 days to receive payment after delivering beans.
 
"It was dictated," one importer said of the process of learning of Peet's new terms.
 
The trader still supplies Peet's, but said the cost of additional financing was roughly 1 cent per pound per month - a significant amount with coffee futures trading around $1.26 a lb and transactions regularly consisting of several thousands of pounds. Peet's declined to comment.
 
JDE, maker of several leading European brands including Tassimo and Senseo, changed its policy last July to allow credit terms "up to 180 days or more" for larger suppliers, it said in a statement. It added that small businesses qualify for a maximum payment term of 30 days.
 
It is not yet clear if Keurig Green Mountain will follow the same path, though industry sources said it was likely, as the company already extended its credit terms out to 60 days earlier this year, two traders said.
 
A Keurig spokesman declined to comment.
 
Tom Johnson, a spokesman for JAB, said there were no specific plans regarding Keurig's suppliers, and that JAB leaves its coffee companies' management teams in place and allows them to operate as standalone entities.
 
"Keurig will operate as an independent company post-close ... and will handle its relationships with suppliers as it sees fit," Johnson said.
 
TIM TOO
 
In addition to JAB-owned roasters, Tim Hortons, which sells eight out of every 10 cups of coffee sold in Canada, shifted this year to 120-day credit terms from 30 days, two sources said. That came after Brazilian fund 3G Capital purchased the chain and merged it with Burger King [BKCBK.UL] to create Restaurant Brands International.
 
Tim Hortons did not respond to requests for comment, and 3G declined to comment.
 
While increasing lines of credit to maintain business with these roasters does not necessarily mean paying higher interest rates, the overall amount of interest traders pay increases as a result of taking on more credit, said Lewis Hart, senior vice president at Brown Brothers Harriman, one of the leading merchant banks financing the coffee trade.
 
Traders say they pass along costs from additional interest payments to roasters through higher green coffee prices. And traders have made growing use of tools to mitigate risks and manage costs, including credit insurance and "accounts receivable purchasing," by which traders receive upfront payments from third parties who later collect from the roaster, Hart said.
 
But being paid more slowly still can lower traders' returns by limiting turnover, Hart said.
 
"Companies who buy green coffee and sell it to roasters are increasingly having to shoulder the burden with respect to financing these coffees."