Any idea where they get their coffee beans? While working in that industry for traders in UK it was common to lend money to African farmers for them to buy crops and tools (from the same firm) and then agree on a market price per pound produced. The trading firm would then pay the farmer months or years after. It really opened me on the work culture and conditions over there. By conditions I don't mean work hours or life balance, but price/cost and work/reward conditions imposed by the billion dollar firms. Side note, they often used umbrella non-profit organization that are "active" in the community to conduct business. I could go on and on on this topic.
Not specific to JAB, but there's a podcast episode of Containers [0] following the end-to-end movement of coffee and the surprising amount of middlemen.
The incentive is not starving. People stuck in situations like this often had some kind of hardship befall them. Combine that with unscrupulous traders, and you get something like this.
Not paying suppliers for 300 days sounds extremely exploitative, especially since most of the suppliers are from 3rd world countries. Supporting companies that have such draconian payment contacts is immoral, there should be a push for more fair payment terms.
> “Our extended payment terms have been in place for many years,” said Becht, JDE’s chairman. “JDE as buyers have paid for the extra costs that go along with the extended pay periods, so this cannot be used as an argument for the alleged extra pressure some trading houses might now be experiencing.”
It's just a different way of financing. The interest is built into the higher prices JAB pays.
It's tax avoidance and balance sheet optimisation. No short term debt on the balance sheet, meaning you can borrow more long term debt. Access to debt is important to these multinational companies, because they generally only grow through large M&A deals. They're rolling companies up into one behemoth. The higher rated the debt is, the cheaper (and more) they can borrow.
A lot of developed countries are also introducing caps on interest deductions (e.g. at most 30% of EBITDA per tax year). Since you're paying more to your supplier, which tends to be an at arms length market rate transaction, the entire acquisition cost can just be tax deducted and thus falls outside of the application of said laws.
I would expect deferred payment for goods already received to show up on the balance sheet as accounts payable, and would put that in the "short term liabilities" bucket along with short term debt for modeling purpose. I'm skeptical this technique would have any influence on debt ratings or pricing. Am I missing something?
Neither of that hurts the 'poor exploited little suppliers' pfarnsworth is concerned about, though - balance sheet optimization is irrelevant to them or beneficial in helping JAB & thus increasing demand for their supplies, and likewise the tax thing is neutral or helps them.
Most of those businesses however would probably prefer to get their capital back sooner. Unlike large corporations, for a smaller business working capital is generally worth more than the 2-4% interest they can collect on an outstanding delivery for 7 months.
The suppliers are often themselves exploitative middlemen in third world countries who use the farmers’ poor price information and lack of capital against them.
Exactly. From the article, "Frees up cash flow" simply means frees up funds for company use that would otherwise have been given to the suppliers. What happens when that money gets invested and returns are not made within the year pay back the suppliers? They are playing a dangerous game.
It's very clearly "heads I win, tails you lose", and I wouldn't be surprised if the individual contracts were structured to leave no liability to JAB Holding in case they decide to default.
Struggling for food was always the default world wide. Compare any time in human history to now, nothing comes close. I understand flipping the sanctimonious "bird" may make you feel like some kind of intellectual gangster. Humanity made progress in the right direction in spite of its many mistakes and especially Post WWII world had made mind numbing progress that is undeniable across the board.
Hunter gathers actually tended to have very 'casual' lifestyles with easy access to food. Infectious disease was less of an issue due to low populations making them harder to transmit. Violence however was the major issue keeping populations down.
Farming allowed for better defense though increased population density and critically by limiting migration limited contact with outside groups. But, historically farming involved vastly more work.
However, due to are vastly longer history as hunter gathers the average person throughout history probably worked ~2-4 hours per day and had plentiful access to food.
The majority of people worldwide are still eking out survival with perhaps a few indulgences that people have always had (decorative arts, celebrations, etc).
In medieval times, I think they worked all day essentially for food. But this is also due to automation, farming in US especially is basically run by a few % of the population.
They aren’t great to their own employees either. Several departments didn’t get bonuses this year despite meeting goals. They don’t seem like a generous employer.
So they negotiate 300 days of credit and cajoled you into becoming a kind of banker. But hey, why complain? You're being "rewarded" for the waiting while they grow even bigger (and more fragile) on the acquisitions you helped to fund. It's win-win!
This article is yet another example of how not just the financial economy but also the world of "real stuff" has become calibrated on policies of extremely low interest rates. The financialization of everything is complete.
And here's the important bit of the article:
"Sharply higher interest rates or a sudden spike in futures prices could leave traders with losses or stretch their financing needs as hedging costs go up."
The priests have spent a decade praying and sacrificing central bank balance sheets to the gods of inflation. Some day their prayers will be heard but we may not like it when that happens.
Thank you. I wish there is an automated way to get a "TL; DR" version of a page. These bloomberg, wsj, nytimes articles are lengthy with very little useful information.
Any idea where they get their coffee beans? While working in that industry for traders in UK it was common to lend money to African farmers for them to buy crops and tools (from the same firm) and then agree on a market price per pound produced. The trading firm would then pay the farmer months or years after. It really opened me on the work culture and conditions over there. By conditions I don't mean work hours or life balance, but price/cost and work/reward conditions imposed by the billion dollar firms. Side note, they often used umbrella non-profit organization that are "active" in the community to conduct business. I could go on and on on this topic.
Please do, or point to some illuminating resources. Thanks!
Not specific to JAB, but there's a podcast episode of Containers [0] following the end-to-end movement of coffee and the surprising amount of middlemen.
[0]: https://medium.com/containers/episode-4-coffee-78ac6571caea
>The trading firm would then pay the farmer months or years after.
What is the incentive here for the farmer though? Why would they go along with this rather than just sell their beans at the market price?
The incentive is not starving. People stuck in situations like this often had some kind of hardship befall them. Combine that with unscrupulous traders, and you get something like this.
It sounds like a variant of sharecropping to me.
They pay them more for waiting, effectively moving the working capital up the supply chain where it accumulates to where it can be used.
I'm interested in hearing more.
Not paying suppliers for 300 days sounds extremely exploitative, especially since most of the suppliers are from 3rd world countries. Supporting companies that have such draconian payment contacts is immoral, there should be a push for more fair payment terms.
> “Our extended payment terms have been in place for many years,” said Becht, JDE’s chairman. “JDE as buyers have paid for the extra costs that go along with the extended pay periods, so this cannot be used as an argument for the alleged extra pressure some trading houses might now be experiencing.”
It's just a different way of financing. The interest is built into the higher prices JAB pays.
It's tax avoidance and balance sheet optimisation. No short term debt on the balance sheet, meaning you can borrow more long term debt. Access to debt is important to these multinational companies, because they generally only grow through large M&A deals. They're rolling companies up into one behemoth. The higher rated the debt is, the cheaper (and more) they can borrow.
A lot of developed countries are also introducing caps on interest deductions (e.g. at most 30% of EBITDA per tax year). Since you're paying more to your supplier, which tends to be an at arms length market rate transaction, the entire acquisition cost can just be tax deducted and thus falls outside of the application of said laws.
I would expect deferred payment for goods already received to show up on the balance sheet as accounts payable, and would put that in the "short term liabilities" bucket along with short term debt for modeling purpose. I'm skeptical this technique would have any influence on debt ratings or pricing. Am I missing something?
Neither of that hurts the 'poor exploited little suppliers' pfarnsworth is concerned about, though - balance sheet optimization is irrelevant to them or beneficial in helping JAB & thus increasing demand for their supplies, and likewise the tax thing is neutral or helps them.
Most of those businesses however would probably prefer to get their capital back sooner. Unlike large corporations, for a smaller business working capital is generally worth more than the 2-4% interest they can collect on an outstanding delivery for 7 months.
The suppliers are often themselves exploitative middlemen in third world countries who use the farmers’ poor price information and lack of capital against them.
Exactly. From the article, "Frees up cash flow" simply means frees up funds for company use that would otherwise have been given to the suppliers. What happens when that money gets invested and returns are not made within the year pay back the suppliers? They are playing a dangerous game.
It's very clearly "heads I win, tails you lose", and I wouldn't be surprised if the individual contracts were structured to leave no liability to JAB Holding in case they decide to default.
What I love about these stories is the demonstration of how absurdly rich (as a civilization) we have become.
Things that in no way, shape or form are needed for bare survival account for, i don't know, 95% of our expenses?
We've always been pretty profligate, but I'd say that for many centuries we did not break 50%. Does anyone have hard data?
Yet somehow a large fraction of our population still has to spend a large fraction of their time struggling to secure food and shelter for themselves.
Struggling for food was always the default world wide. Compare any time in human history to now, nothing comes close. I understand flipping the sanctimonious "bird" may make you feel like some kind of intellectual gangster. Humanity made progress in the right direction in spite of its many mistakes and especially Post WWII world had made mind numbing progress that is undeniable across the board.
No doubt. The point is that there's work to be done -- and it's not the type of work we've collectively gotten so good at.
> I understand flipping the sanctimonious "bird" may make you feel like some kind of intellectual gangster.
Really? You think I primarily care about the single most severe caveat to the success of our industrial economy in order to look cool?
Hunter gathers actually tended to have very 'casual' lifestyles with easy access to food. Infectious disease was less of an issue due to low populations making them harder to transmit. Violence however was the major issue keeping populations down.
Farming allowed for better defense though increased population density and critically by limiting migration limited contact with outside groups. But, historically farming involved vastly more work.
However, due to are vastly longer history as hunter gathers the average person throughout history probably worked ~2-4 hours per day and had plentiful access to food.
douchiest comment I've ever read on HN
(note that at the time I made this comment, the parent had positive karma)
Talk about sanctimonious.
Your argument makes things sound even worse today.
We're far more capable, but still playing the same game.
The majority of people worldwide are still eking out survival with perhaps a few indulgences that people have always had (decorative arts, celebrations, etc).
Maybe you are rich personally but for the average human this has never been true.
Do you know of any middle income person that owns or rents a dozen apartments? Do you even know a single person that has two?
In medieval times, I think they worked all day essentially for food. But this is also due to automation, farming in US especially is basically run by a few % of the population.
They aren’t great to their own employees either. Several departments didn’t get bonuses this year despite meeting goals. They don’t seem like a generous employer.
So they negotiate 300 days of credit and cajoled you into becoming a kind of banker. But hey, why complain? You're being "rewarded" for the waiting while they grow even bigger (and more fragile) on the acquisitions you helped to fund. It's win-win!
This article is yet another example of how not just the financial economy but also the world of "real stuff" has become calibrated on policies of extremely low interest rates. The financialization of everything is complete.
And here's the important bit of the article:
"Sharply higher interest rates or a sudden spike in futures prices could leave traders with losses or stretch their financing needs as hedging costs go up."
The priests have spent a decade praying and sacrificing central bank balance sheets to the gods of inflation. Some day their prayers will be heard but we may not like it when that happens.
Does Fair Trade certified coffee and similar impose immediate payment terms?
TL;DR After nestle they are the largest buyers of coffee beans so they act like Walmart. But they pay interest, at European rates (very low.)
$58 BILLION...in six years. It might not end well. A small hiccup at those numbers can kill you.
Thank you. I wish there is an automated way to get a "TL; DR" version of a page. These bloomberg, wsj, nytimes articles are lengthy with very little useful information.