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Coffee in the time of Trump

From the July 2017 issue.

Seven months into Donald Trump’s presidency, there are some clear and not-so clear implications for how his policies will affect the US and global coffee industries.

Trump

With unconventional positions on trade, regulation, and climate change being proposed during the 2016 US Presidential campaign, it’s reasonable to assume that many players in the global coffee industry are apprehensive about what their industry might look like under a Trump administration.

While there are still a lot of unanswered questions and decisions yet to be made, there are some items on the agenda that have direct and indirect implications for the US and global coffee industries.

TRADE RENEGOTIATION
One of the biggest topics within the new administration and one that directly affects various links of the coffee chain is trade.
Throughout President Trump’s campaign he promised to take steps to improve the United States’ position in various trade activities, including renegotiating the North American Free Trade Agreement (NAFTA), withdrawing from the Trans-Pacific Partnership and renegotiating US trade agreements with China.

One of his main goals behind these steps is to bring business and jobs back to the United States.

“It is challenging to identify any clear upside for our industry in terms of trade policy changes,” admits Ric Rhinehart, Executive Director of the Specialty Coffee Association. “Coffee is naturally a global enterprise that benefits from the most liberal possible trade environment and, in fact, has thrived over the past two decades because of ever more open and multilateral trade policies.”

The steps to renegotiate both NAFTA (or completely withdraw from it) and trade agreements with China could involve imposing taxes or tariffs on exports of the goods from those countries into the United States, as well as make trade more difficult.

“This could have a tremendous impact in some markets, most notably Mexico,” Rhinehart tells Global Coffee Report. “Any application of this kind of policy would produce a series of winners and losers, and would almost certainly result in increased material costs for roasters and ultimately consumers.”

The Office of the US Trade Representative reports that trade between the United States and Mexico totalled US$579.7 billion in 2016. Mexico is the United States’ number-one supplier of agricultural imports (including coffee), which totalled $23 billion last year.
Mexico exports about three quarters of its annual coffee production, with the United States being the primary international market for its green coffee, according to the US Department of Agriculture’s Foreign Agricultural Service annual GAIN Report.

Earlier this year, the administration discussed imposing a 20 per cent tax on Mexican imports to pay for the wall President Trump proposed building along the border between the two countries. Also in discussions has been a “border adjustment tax” meant to encourage companies to make goods in the United States rather than abroad. As of April, the latter proposal had been shelved.

“The margins are so fine, so slapping a 20 per cent tax on [coffee] coming over the border is huge,” says Tim Schilling, founder of nonprofit World Coffee Research. “Here’s a farmer struggling to get any profit on his coffee and now he’s faced with a significant tax.”

While the share of coffee the United States imports from Mexico is small compared to what it buys from other producing countries, increased taxes and restricted trade that could result from renegotiations of or withdrawal from NAFTA would be felt throughout the coffee supply chain.

The United States imports slightly more goods and services from China than it does from Mexico, with total trade between the two countries estimated at $648.2 billion in 2016, according to the US Trade Office. China is the number-three supplier of agricultural goods to the United States.

According to the International Coffee Organization, about 70 per cent of China’s coffee exports go to only five countries, including its number-two customer, the United States at 9 per cent. Meanwhile, more than 80 per cent of China’s own coffee imports come from only five countries, including re-exports from the United States at 5 per cent.

The United States is the second-largest re-exporter of coffee, exporting hundreds of thousands of 60-kilogram bags of processed coffee annually that it first imports green.

Throughout his campaign, Trump proposed a 45 per cent tariff on imports from China. If approved, the move could incite a retaliatory tariff increase on US exports into China. Increased tariffs from either country mean increased costs for producers that would ultimately be spread out along the supply chain, all the way to the coffee drinker.

“I don’t foresee trade wars, but I do believe there will be a trade block. Asia is in the driver’s seat,” said G. Scott Clemons at the National Coffee Association Annual Convention in March, referring to the United States’ trillions in debt to China and dependence on its manufacturers for often cheaper goods. Clemons, a Chief Investment Strategist at Brown Brothers Harriman, presented “The Economy and Markets in the Time of Trump” at the three-day event.

Similar to Mexico, the share of total coffee that the United States buys from China is small, but any imposed taxes or tariffs or restrictions on trade with China could hamper business at many links of the supply chain. Again, if coffee becomes more expensive and difficult to export to the United States, producers will have to increase their prices, which will then flow onto roasters stateside and then onto the consumer.

Coffee in Mexico

REGULATORY REFORM
Another of Trump’s main platforms during his campaign was regulatory reform, with the goal of reducing regulatory costs and regulation that limits US business growth and, thus, the economy.

Shortly after entering office, Trump issued an executive order that would follow on his promise: “Unless prohibited by law, whenever an executive department or agency proposes […] a new regulation, it shall identify at least two existing regulations to be repealed. For fiscal year 2017 […] the total incremental cost of all new regulations to be finalized this year shall be no greater than zero.”

During the signing of the executive order on January 30, Trump expressed how it is “almost impossible now to start a small business [or] expand your existing business because of regulations.”

According to The World Bank’s “Doing Business” project, the United States ranks eighth for ease of doing business (based on degree of “most business-friendly regulations”). For ease of starting a business, the ranking falls to number 51.

For the coffee industry, deregulation means the country’s growing number of producers, from roasters to shops, may have an easier time launching and expanding.

“Creeping overreach of regulation has gone too far,” said Clemons at the NCA convention; he sees the move toward deregulation as generally good for business spending and corporate earnings.

Adds SCA’s Rhinehart, “Reductions in regulatory enforcement are likely to deliver some benefits to roasters and importers, particularly in areas like FSMA.”

Last year’s Food Safety Modernization Act was designed to establish a “culture” of food safety in the United States and help reduce the incidence of foodborne illness. In August, the FDA outlined seven rules that require food companies to go to lengths to protect their products at every step of the supply chain.

Prior to FSMA, the coffee industry hadn’t previously been held to such strict standards, so in the months leading up to the official rollout the NCA dedicated significant resources to helping its members prepare for the looming deadlines.

Regulatory reform could mean some loosening of FSMA requirements, i.e. fewer hoops to jump through, but the goal toward a culture of food safety would remain intact.

Because coffee isn’t consumed raw and is also exposed to high, bacteria-killing temperatures during roasting, it is exempt from several of the rules. As such, any negative repercussions of a potentially more lax regulatory environment surrounding FSMA that could happen in the greater food business will likely be minimal within the coffee industry.

ENVIRONMENTAL POLICY
A downfall of the new administration’s deregulation plan is the negative effects it could have when big business is less closely regulated on the environmental front.

Trump’s “Energy Independence” executive order signed into effect in March is aimed at reversing a ban on coal leasing on federal lands, voiding previous rules to curb methane gas emission from oil and gas production, and dismantling the Clean Power Plan that requires states to reduce carbon emissions from power plants. This move follows through on his campaign promise to support the coal industry and fossil fuels in general.

Other initiatives with ultimate repercussions on the environment include proposed cuts of 31 per cent to the Environmental Protection Agency’s funding. While the decision still sat with Congress as of print, members of the administration were divided.

Many were also divided over Trump’s ongoing talks of pulling out of the Paris Agreement, a commitment by nearly 200 countries to work toward slashing greenhouse gas emissions to help limit global temperature increases to 1.5 degrees Celsius over the next century. Some members fully supported the agreement (which the US helped negotiate), some feared the United States would not be able to achieve its commitments, while others feared diplomatic fallout from a full withdrawal and  proposed “renegotiation”.

Nonetheless, on 1 June, President Trump confirmed that the United States would officially withdraw and “cease all implementation of the nonbinding agreement”. In the announcement, Trump added that the administration would begin negotiations to reenter the agreement or an entirely new one under terms and commitments that are more fair and advantageous to the United States. While the specifics are unknown (as of print), Trump plans to pursue an agreement that would be more favourable to the manufacturing and fossil fuels sectors (particularly coal).

“We can just say there is a question mark there,” admits WCR’s Schilling. “We don’t know how they’re going to handle it exactly, but I certainly hope that the US Government continues to support and be a leader in [environmental efforts].”

Opponents of the decision worry it could cause a domino effect of other countries pulling out. But even more so, they fear the longer-term effects of any countries withdrawing: continuation of global warming to devastating levels.

Coffee growers around the world have already felt the effects of global warming as extreme weather events over the past couple of decades have ravished their crops.

These volatile weather patterns have resulted in drought in some areas and disease in others, reducing coffee yield and quality, killing off crops altogether, and making it difficult for farmers to produce enough coffee to simply break even. Because most coffee-growing regions are in poor, remote areas that lack infrastructure, farmers are disproportionately affected by climate change.

Beyond the growers, other entities along the supply chain have experienced climate change’s effects on the global coffee industry.

In drought-stricken Brazil, a shortage of Robusta varieties had the lower-quality crop trading at Arabica prices earlier this year and instant coffee makers nervous about future supply so much that they were turning down customer orders.

As prices increase along the supply chain, the end consumer can expect to pay more for coffee beverages and other products.

Despite an administration that seems to have put the environment on the back burner, there is still uncertainty about the specifics behind some of its plans and how successfully they will be implemented. As mentioned, EPA budget cuts still sit with Congress and reentrance into the Paris Agreement is pending.

“I am very disappointed by the decision, but it doesn’t mean the US won’t support programs for the adaptation of coffee for climate change,” says Schilling.

“It doesn’t mean that the US will pull out of current coffee climate grants and contracts. Nor does it mean that the US won’t support efforts to help coffee producers [address] production constraints caused by climate change. There are ways to accomplish things without entering into a global agreement.” GCR

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