1 00:00:10,720 --> 00:00:14,560 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,600 --> 00:00:19,440 Speaker 1: I'm Joe Wisn'tal And I'm Tracy Alloway. Tracy, We've talked 3 00:00:19,480 --> 00:00:24,200 Speaker 1: a lot about various stresses and price increases that we've 4 00:00:24,200 --> 00:00:26,720 Speaker 1: seen throughout the economy. But one of the themes I 5 00:00:26,720 --> 00:00:28,760 Speaker 1: guess I would say is and we've we've joked about, 6 00:00:28,880 --> 00:00:30,639 Speaker 1: is we talked about a lot of stuff that's very 7 00:00:30,720 --> 00:00:33,239 Speaker 1: much in the background, things that are sort of like 8 00:00:33,560 --> 00:00:38,839 Speaker 1: disconnected or mediated by several steps from the end consumer. Wait, Joe, 9 00:00:38,880 --> 00:00:41,479 Speaker 1: can you explain that we talk we talked a lot, 10 00:00:41,560 --> 00:00:44,200 Speaker 1: you know, like we recently talked about the increased price 11 00:00:44,240 --> 00:00:46,840 Speaker 1: of palettes, right, and then it's gone up a lot. 12 00:00:47,040 --> 00:00:51,000 Speaker 1: But most people don't experience the increased price of wooded 13 00:00:51,000 --> 00:00:53,920 Speaker 1: palettes or even the increased price of a shipping container 14 00:00:54,320 --> 00:00:57,240 Speaker 1: in their day to day life. Oh, I see, Well, 15 00:00:57,400 --> 00:01:01,120 Speaker 1: I don't know. Um, I guess the gets passed on 16 00:01:01,360 --> 00:01:05,640 Speaker 1: like eventually, right. But yes, you're right, we're not like 17 00:01:05,720 --> 00:01:09,440 Speaker 1: purchasing containers once a month, um in the same way 18 00:01:09,480 --> 00:01:13,319 Speaker 1: that we are purchasing consumer goods and things like food 19 00:01:13,360 --> 00:01:16,600 Speaker 1: and stuff like that. Yeah, exactly right, That's all I mean, 20 00:01:16,640 --> 00:01:18,720 Speaker 1: which is that a lot of these things are things 21 00:01:18,760 --> 00:01:22,119 Speaker 1: you wouldn't necessarily see yourself. Even lumber, which we've talked 22 00:01:22,160 --> 00:01:25,240 Speaker 1: a lot about on the show, you might not necessarily see. 23 00:01:25,640 --> 00:01:27,800 Speaker 1: We've talked a lot about grain, which people see, but 24 00:01:27,880 --> 00:01:30,640 Speaker 1: in many ways that manifest itself in the form of 25 00:01:30,720 --> 00:01:35,319 Speaker 1: higher meat prices or dairy prices for consumers. So a 26 00:01:35,319 --> 00:01:36,920 Speaker 1: lot of these things they seem to be like sort 27 00:01:36,920 --> 00:01:40,959 Speaker 1: of like background factors that eventually feed through. Yeah. But 28 00:01:41,400 --> 00:01:44,800 Speaker 1: on the other hand, since we're basically talking about inflation now, 29 00:01:44,840 --> 00:01:49,000 Speaker 1: there are some price increases out there that are very 30 00:01:49,080 --> 00:01:54,720 Speaker 1: much in front of consumers right now. Um, primarily food, right. 31 00:01:55,280 --> 00:01:57,480 Speaker 1: I did a deep dive into mayonnaise and that was 32 00:01:57,800 --> 00:02:01,680 Speaker 1: like something like eight person And everyone has an opinion 33 00:02:02,000 --> 00:02:04,840 Speaker 1: on food inflation and what's going on, and it really 34 00:02:04,840 --> 00:02:09,040 Speaker 1: seems to um, I guess touch and nerve with people. Yeah, 35 00:02:09,160 --> 00:02:12,560 Speaker 1: food inflation in particular, gasoline probably the other one is 36 00:02:12,680 --> 00:02:16,280 Speaker 1: that people that really touches a nerve, but food for sure. 37 00:02:16,600 --> 00:02:18,919 Speaker 1: And everyone has a theory and everyone's trying to figure 38 00:02:18,919 --> 00:02:21,800 Speaker 1: out is this a macro thing that's something about the 39 00:02:21,840 --> 00:02:24,680 Speaker 1: money supply or fiscal that's pushing the price of everything 40 00:02:24,720 --> 00:02:27,520 Speaker 1: up with food. You also have this other dynamic of 41 00:02:27,600 --> 00:02:32,480 Speaker 1: wet weather and other idiosyncratic factors. Anyway, I'm very excited 42 00:02:32,520 --> 00:02:35,600 Speaker 1: because we're going to be talking about another consumable good 43 00:02:36,000 --> 00:02:40,200 Speaker 1: that is highly emotional for people, that's highly relevant to 44 00:02:40,240 --> 00:02:43,799 Speaker 1: a lot of people, and that is the price of coffee, right, 45 00:02:43,880 --> 00:02:47,919 Speaker 1: so truly something that a lot of people would consume 46 00:02:48,240 --> 00:02:52,360 Speaker 1: on a daily basis. So the price of coffee has 47 00:02:52,639 --> 00:02:56,800 Speaker 1: dramatically surged over the past year or so, and uh, 48 00:02:56,880 --> 00:02:59,920 Speaker 1: I guess the question is how much of that pricingcrea 49 00:03:00,160 --> 00:03:03,960 Speaker 1: is actually being passed on to consumers. And here I 50 00:03:04,040 --> 00:03:08,720 Speaker 1: have to confess I really have no familiarity with the 51 00:03:09,160 --> 00:03:12,880 Speaker 1: coffee market at all. So I'm very, very curious to 52 00:03:12,960 --> 00:03:17,920 Speaker 1: learn how purchasing actually works, how hedging works, and how 53 00:03:17,919 --> 00:03:20,240 Speaker 1: the coffee sort of gets from the farmers all the 54 00:03:20,280 --> 00:03:23,520 Speaker 1: way to Starbucks or you know, a can in the 55 00:03:23,520 --> 00:03:27,320 Speaker 1: grocery store. I am very excited about learning all that 56 00:03:27,400 --> 00:03:29,400 Speaker 1: as well. So we have the perfect guest we're going 57 00:03:29,480 --> 00:03:31,960 Speaker 1: to be speaking with, Ryan Delaney. He is the founder 58 00:03:31,960 --> 00:03:36,360 Speaker 1: and chief analyst at Coffee Trading Academy. He has a 59 00:03:36,440 --> 00:03:41,280 Speaker 1: career of coffee trading both the spot physical markets futures 60 00:03:41,280 --> 00:03:44,200 Speaker 1: and so forth. That he trains companies, he gives them 61 00:03:44,200 --> 00:03:47,200 Speaker 1: analysis and research on how the coffee market is doing. 62 00:03:47,360 --> 00:03:50,160 Speaker 1: So we're gonna learn everything about how this commodity market 63 00:03:50,160 --> 00:03:54,000 Speaker 1: works hopefully. Ryan, thank you so much for joining us. Yeah, 64 00:03:54,040 --> 00:03:57,040 Speaker 1: thanks for having me. Why do you actually just give 65 00:03:57,120 --> 00:04:00,880 Speaker 1: us the very brief overview of why are we talking 66 00:04:00,880 --> 00:04:05,120 Speaker 1: to you? What is your expertise in the coffee market? 67 00:04:05,120 --> 00:04:07,600 Speaker 1: How do you know it? That's a good question. I 68 00:04:07,680 --> 00:04:10,640 Speaker 1: got no idea why you guys are talking about. So 69 00:04:10,760 --> 00:04:12,640 Speaker 1: I've been I've been in the coffee industry for about 70 00:04:12,680 --> 00:04:16,000 Speaker 1: a dozen years. Um, but come up, my entire sort 71 00:04:16,000 --> 00:04:20,800 Speaker 1: of commodity experience is in coffee. So I uh to 72 00:04:20,880 --> 00:04:23,839 Speaker 1: give you, you know, the thirty second version of my 73 00:04:23,839 --> 00:04:26,880 Speaker 1: my background here. I started out with one of the 74 00:04:26,960 --> 00:04:32,320 Speaker 1: large multinationals and you know their rotational program um that is, 75 00:04:32,360 --> 00:04:36,760 Speaker 1: one of the top traders of coffee. So I worked 76 00:04:36,839 --> 00:04:40,800 Speaker 1: and lived in origin in India and in Uganda sort 77 00:04:40,800 --> 00:04:44,560 Speaker 1: of buying coffee locally, processing it, uh and then exporting 78 00:04:44,560 --> 00:04:47,479 Speaker 1: it to two consumers. And then I came back to 79 00:04:47,520 --> 00:04:51,080 Speaker 1: the US and traded coffee physical coffee there for a 80 00:04:51,120 --> 00:04:54,599 Speaker 1: little while before I transitioned to our company's hedge fund. 81 00:04:54,680 --> 00:04:57,720 Speaker 1: And you know a lot of these large multinational commodity 82 00:04:57,760 --> 00:05:01,120 Speaker 1: firms have hedge funds to sort of capitalize on their 83 00:05:01,200 --> 00:05:05,400 Speaker 1: their information informational edge, you know. Um, so I was 84 00:05:05,480 --> 00:05:09,279 Speaker 1: the coffee and coco analysts and trader for our hedge fund. 85 00:05:09,800 --> 00:05:11,839 Speaker 1: And uh, you know, one thing you'll hear a lot 86 00:05:11,960 --> 00:05:14,159 Speaker 1: in the coffee industry the more you talk to coffee 87 00:05:14,160 --> 00:05:18,080 Speaker 1: people is how much uh, there's there's coffee guys, there's 88 00:05:18,080 --> 00:05:21,400 Speaker 1: coffee gals. You know, we refer to ourselves as coffee people. 89 00:05:21,480 --> 00:05:25,280 Speaker 1: It's it's very much a tight knit community. So we 90 00:05:25,400 --> 00:05:29,280 Speaker 1: I missed that interaction, you know. So I actually transitioned 91 00:05:29,279 --> 00:05:31,479 Speaker 1: to the cell side from the from the hedge fund 92 00:05:31,560 --> 00:05:34,040 Speaker 1: and and from the prop book I was trading, and 93 00:05:34,080 --> 00:05:37,599 Speaker 1: from there I was that was actually very interesting because 94 00:05:37,720 --> 00:05:41,480 Speaker 1: I was advising clients on managing their price risk, their 95 00:05:41,480 --> 00:05:44,760 Speaker 1: coffee price risk across the supply chain. So that meant 96 00:05:44,760 --> 00:05:50,400 Speaker 1: producers and exporters, trade houses and uh and traders, speculators, 97 00:05:50,440 --> 00:05:53,479 Speaker 1: but also roasters and consumers. So I kind of really 98 00:05:53,760 --> 00:05:58,040 Speaker 1: got a crash course um in in price risk management 99 00:05:58,080 --> 00:06:01,720 Speaker 1: for coffee, and that led me to starting this this 100 00:06:01,800 --> 00:06:06,160 Speaker 1: firm that I work in now where I provide research 101 00:06:06,320 --> 00:06:09,120 Speaker 1: and training to people who have a steak in the 102 00:06:09,160 --> 00:06:12,960 Speaker 1: price and coffee. So, first of all, it's really um 103 00:06:13,000 --> 00:06:16,120 Speaker 1: fascinating to think that a company like Nestley might have 104 00:06:16,360 --> 00:06:20,760 Speaker 1: a a hedge fund nestled inside of it trading coffee futures. 105 00:06:21,000 --> 00:06:22,839 Speaker 1: And I definitely want to ask more about that. But 106 00:06:22,960 --> 00:06:26,480 Speaker 1: before we do, I have a very basic question and 107 00:06:26,520 --> 00:06:28,360 Speaker 1: I was just thinking of it when when I said 108 00:06:28,360 --> 00:06:31,480 Speaker 1: in the intro, you know the price of coffee has surged. 109 00:06:32,000 --> 00:06:34,800 Speaker 1: If we say the price of coffee is at a 110 00:06:34,880 --> 00:06:39,240 Speaker 1: ten year high, what are we actually talking about, Like, 111 00:06:39,320 --> 00:06:43,600 Speaker 1: what is the benchmark of being because I know they're 112 00:06:43,640 --> 00:06:47,680 Speaker 1: there are obviously different types, but like, what's the being 113 00:06:47,720 --> 00:06:52,360 Speaker 1: equivalent of the I guess the ten year US treasury? Okay, 114 00:06:52,400 --> 00:06:57,479 Speaker 1: So I love that being equivalent of the question. Yeah, 115 00:06:57,680 --> 00:07:00,320 Speaker 1: if you could put it in financial terms, Uh. Yeah, 116 00:07:00,320 --> 00:07:05,320 Speaker 1: So the coffee futures market, effectually known as the C market, 117 00:07:05,720 --> 00:07:09,240 Speaker 1: is the primary benchmark for the price of coffee. As 118 00:07:09,240 --> 00:07:13,080 Speaker 1: you kind of alluded to, there are two major types 119 00:07:13,120 --> 00:07:15,480 Speaker 1: of coffee. There's Arabica, which is what we trade on 120 00:07:15,520 --> 00:07:18,120 Speaker 1: the C market. Uh, and then there's Robusta, which is 121 00:07:18,120 --> 00:07:23,240 Speaker 1: what is traded on the London market. Now, the Arabic 122 00:07:23,360 --> 00:07:26,040 Speaker 1: market is traded in cents per pound and the Robusta 123 00:07:26,040 --> 00:07:29,040 Speaker 1: market is traded in dollars per metric ton. But the 124 00:07:29,080 --> 00:07:34,640 Speaker 1: Arabic market is the larger, more volatile and more exciting market, 125 00:07:34,720 --> 00:07:36,520 Speaker 1: so that that also attracts a lot more of this 126 00:07:36,840 --> 00:07:40,840 Speaker 1: speculative interest. But those are the two main markets that 127 00:07:40,880 --> 00:07:43,120 Speaker 1: were trading. And of course there's there's you know, a 128 00:07:43,160 --> 00:07:48,120 Speaker 1: spot market. There's a cash market that's incredibly varied because 129 00:07:48,400 --> 00:07:52,040 Speaker 1: coffee has really exploded in the last twenty years into 130 00:07:52,120 --> 00:07:55,600 Speaker 1: this this idea of specialty coffee and fine coffee. So 131 00:07:55,640 --> 00:07:58,760 Speaker 1: there's a whole you know, secondary market out there, much 132 00:07:58,800 --> 00:08:02,120 Speaker 1: like there is for for wine. Right there's probably a 133 00:08:02,160 --> 00:08:05,920 Speaker 1: benchmark price for wine, but there's also a huge variety 134 00:08:06,120 --> 00:08:08,320 Speaker 1: on the you know, on the low and the high end. 135 00:08:08,640 --> 00:08:11,640 Speaker 1: So quickly, quicklyure are these are the futures that are traded. 136 00:08:11,680 --> 00:08:15,640 Speaker 1: Are they cash settled futures or are they physical delivery future? 137 00:08:16,560 --> 00:08:21,320 Speaker 1: They are physical delivery and that is an essential part 138 00:08:21,360 --> 00:08:25,960 Speaker 1: of the you know, keeping these futures honest. So there 139 00:08:26,000 --> 00:08:30,360 Speaker 1: really is a connection you know, between the futures prices 140 00:08:30,440 --> 00:08:33,000 Speaker 1: and the and the physical and and then you know 141 00:08:33,040 --> 00:08:37,920 Speaker 1: that's done through the certified stocks. It's particularly relevant because 142 00:08:38,520 --> 00:08:43,559 Speaker 1: the exchange has set very steep aging penalties and and 143 00:08:43,600 --> 00:08:45,839 Speaker 1: that exists for a very important reason, and that's to 144 00:08:46,000 --> 00:08:49,360 Speaker 1: to facilitate that cash convergence. Right. We don't want the 145 00:08:49,360 --> 00:08:52,719 Speaker 1: certified stocks to just be a sort of a theoretical 146 00:08:52,880 --> 00:08:55,280 Speaker 1: financial asset. At the end of the day, someone needs 147 00:08:55,280 --> 00:08:58,040 Speaker 1: to take that coffee out of the warehouse and drink it, right, 148 00:08:58,160 --> 00:09:02,920 Speaker 1: So they put heavy aging penalties on that to incentivize 149 00:09:03,400 --> 00:09:10,079 Speaker 1: consumers to d stock certified inventory and consuming. So could 150 00:09:10,080 --> 00:09:13,240 Speaker 1: we um dive into that a little bit more, because 151 00:09:13,480 --> 00:09:17,479 Speaker 1: I was reading that people traders are using more futures 152 00:09:17,800 --> 00:09:20,560 Speaker 1: than normal right now because they're worried they might not 153 00:09:20,640 --> 00:09:24,280 Speaker 1: be able to get enough stock piles on the physical 154 00:09:24,720 --> 00:09:27,360 Speaker 1: the spot market, so they're worried there won't be enough 155 00:09:27,400 --> 00:09:31,439 Speaker 1: to actually take delivery of. Can you just explain how 156 00:09:31,480 --> 00:09:34,920 Speaker 1: that process typically works and how much of trading is 157 00:09:35,000 --> 00:09:40,320 Speaker 1: divided between UM spot and futures and sort of forward 158 00:09:40,400 --> 00:09:44,200 Speaker 1: hedging versus buying right now, because I imagine again a 159 00:09:44,240 --> 00:09:48,040 Speaker 1: company like Starbucks or Nestley, which needs huge amounts of 160 00:09:48,040 --> 00:09:52,080 Speaker 1: coffee every year is probably hedging its exposure very far 161 00:09:52,120 --> 00:09:57,200 Speaker 1: in advance. Yeah, So it really depends because there's a 162 00:09:57,600 --> 00:10:01,520 Speaker 1: there is a variety of size in the consuming side 163 00:10:02,000 --> 00:10:05,240 Speaker 1: and on the export side as well. Right, So there 164 00:10:05,320 --> 00:10:08,640 Speaker 1: is a threshold that you need of of production or 165 00:10:08,679 --> 00:10:12,280 Speaker 1: consumption to to make hedging in the futures market relevant 166 00:10:12,280 --> 00:10:17,400 Speaker 1: and useful. So, for for context, a single futures contract 167 00:10:17,400 --> 00:10:21,600 Speaker 1: of Araplica is thirty seven five pounds. So if you're 168 00:10:21,679 --> 00:10:24,880 Speaker 1: just a small mom and pop roaster, you're probably not 169 00:10:24,920 --> 00:10:27,280 Speaker 1: going to be hedging, you know, on the futures market 170 00:10:27,679 --> 00:10:31,320 Speaker 1: in terms of adding coverage. This is, as you kind 171 00:10:31,360 --> 00:10:34,680 Speaker 1: of mentioned, something for the bigger traders or the bigger 172 00:10:34,720 --> 00:10:39,640 Speaker 1: consumers to deal with. They have a a pretty you know, 173 00:10:39,760 --> 00:10:43,320 Speaker 1: clear system. They have a methodology to how they're they're 174 00:10:43,320 --> 00:10:47,160 Speaker 1: acquiring coffee in general, and that is a combination of 175 00:10:47,240 --> 00:10:51,719 Speaker 1: physical contracts and futures contracts. If you're if you're a 176 00:10:51,800 --> 00:10:55,120 Speaker 1: large company like you know, Nestle or Folgers or whoever, 177 00:10:55,240 --> 00:10:58,800 Speaker 1: you you have a network of suppliers um and you 178 00:10:58,840 --> 00:11:01,559 Speaker 1: will put out you know, sort of bounties. You'll say, hey, 179 00:11:01,720 --> 00:11:03,680 Speaker 1: who wants to sell me coffee, give me your best 180 00:11:03,720 --> 00:11:07,560 Speaker 1: bids or offers rather and and they will send out 181 00:11:07,559 --> 00:11:11,120 Speaker 1: proposals to to those big companies. I don't want to 182 00:11:11,120 --> 00:11:14,760 Speaker 1: get too into at the moment UH the nuance of 183 00:11:15,520 --> 00:11:20,479 Speaker 1: differential contracts and and price to be fixed contracts, but essentially, 184 00:11:20,720 --> 00:11:23,120 Speaker 1: if you're a company like Nestlie, you need to there 185 00:11:23,200 --> 00:11:26,120 Speaker 1: is a spread, right, there is a premium or a 186 00:11:26,200 --> 00:11:30,880 Speaker 1: discount to buying specific physical qualities of coffee to the 187 00:11:30,920 --> 00:11:34,200 Speaker 1: futures contract. So there's there's two different kind of risks 188 00:11:34,240 --> 00:11:36,880 Speaker 1: that they need to manage, but there there is also 189 00:11:37,080 --> 00:11:41,240 Speaker 1: a general larger correlation. So if you're a company that 190 00:11:41,280 --> 00:11:45,760 Speaker 1: does size that needs that physical of coffee, you have 191 00:11:45,800 --> 00:11:49,000 Speaker 1: the option of either buying that physical making a physical 192 00:11:49,040 --> 00:11:53,400 Speaker 1: contract with a producer or an exporter to buy that coffee. 193 00:11:53,559 --> 00:11:56,680 Speaker 1: Or if you don't have a good deal there's not 194 00:11:56,720 --> 00:11:59,800 Speaker 1: a good UH offer to you, or or you're not 195 00:12:00,000 --> 00:12:02,760 Speaker 1: sure exactly which qualities you want to buy, you could 196 00:12:02,800 --> 00:12:05,480 Speaker 1: buy futures right, so you could just buy you know, 197 00:12:05,679 --> 00:12:08,760 Speaker 1: as much of the physical that you need in futures 198 00:12:08,800 --> 00:12:12,839 Speaker 1: contracts and hold that as a hedge until you are 199 00:12:13,000 --> 00:12:17,319 Speaker 1: prepared to sell those out and buy your your physicals. 200 00:12:33,160 --> 00:12:37,160 Speaker 1: Just for the sort of my visual understanding of this, 201 00:12:37,640 --> 00:12:41,439 Speaker 1: can you sort of walk through very quickly every player 202 00:12:41,480 --> 00:12:46,000 Speaker 1: that's involved between the grower and you mentioned you worked 203 00:12:46,000 --> 00:12:48,680 Speaker 1: in India and Uganda. And then I drink some coffee, 204 00:12:48,960 --> 00:12:51,080 Speaker 1: Let's say I buy it at a gas gas station, 205 00:12:51,400 --> 00:12:53,440 Speaker 1: or I drink it at the office like sort of 206 00:12:53,440 --> 00:12:56,600 Speaker 1: like office office quality coffee, which is actually very good. 207 00:12:56,600 --> 00:12:58,520 Speaker 1: At Bloomberg by the way, we have really good coffee. 208 00:12:58,800 --> 00:13:01,480 Speaker 1: But anyway, can you just talk like, okay, someone, there's 209 00:13:01,480 --> 00:13:04,600 Speaker 1: a farmer in Uganda, India. Can you just real quickly 210 00:13:04,640 --> 00:13:08,280 Speaker 1: like the whole supply chain from farmer to mouth. Oh, sure, 211 00:13:08,320 --> 00:13:12,599 Speaker 1: I can. The coffee industry is really divided into or 212 00:13:12,679 --> 00:13:14,559 Speaker 1: let me sit put it this way, that the farmers 213 00:13:14,920 --> 00:13:22,040 Speaker 1: are primarily divided into Brazil and everybody else. Historically coffee 214 00:13:22,160 --> 00:13:26,160 Speaker 1: is produced, it's a it's a small holder production. It's 215 00:13:26,160 --> 00:13:30,199 Speaker 1: done on small farms and small estates um and that's 216 00:13:30,400 --> 00:13:36,559 Speaker 1: has geographical underpinnings because coffee is what we call high grown, 217 00:13:36,679 --> 00:13:39,800 Speaker 1: so it's grown in the mountains and it's tropical. So 218 00:13:39,840 --> 00:13:43,680 Speaker 1: it's really only possible to grow coffee in tropical mountains. 219 00:13:44,200 --> 00:13:49,199 Speaker 1: And that doesn't facilitate itself well to big, mega farms, 220 00:13:49,520 --> 00:13:51,360 Speaker 1: and so that that kind of has this sort of 221 00:13:51,360 --> 00:13:55,439 Speaker 1: small holder farmer implication. The exception to that is Brazil, 222 00:13:55,679 --> 00:14:00,280 Speaker 1: which has these very large plateaus, so they are able 223 00:14:00,320 --> 00:14:02,920 Speaker 1: to grow large amounts of coffee and indeed they're the 224 00:14:02,960 --> 00:14:06,880 Speaker 1: world's largest producer of coffee and mechanize it at the 225 00:14:06,920 --> 00:14:10,120 Speaker 1: same time. So they are the exception where they have these, uh, 226 00:14:10,160 --> 00:14:12,600 Speaker 1: these these large farms and and sort of the mass 227 00:14:12,640 --> 00:14:18,920 Speaker 1: production of the farming of coffee. So you're gonna have 228 00:14:19,560 --> 00:14:24,480 Speaker 1: exporters now who are generally multinationals, but there's also local 229 00:14:24,520 --> 00:14:27,880 Speaker 1: exporters as well, who are positioned in all of these 230 00:14:28,360 --> 00:14:31,680 Speaker 1: key origins, these key producing origins, and they'll have buying 231 00:14:31,720 --> 00:14:36,000 Speaker 1: centers uh, spread out throughout the coffee farming regions, and 232 00:14:36,080 --> 00:14:39,680 Speaker 1: much like you know grain elevators or whatever in the 233 00:14:39,800 --> 00:14:43,640 Speaker 1: US and other countries. UH, the farmers will will have 234 00:14:43,720 --> 00:14:47,120 Speaker 1: relationships with those buyers and they'll know the prices and 235 00:14:47,160 --> 00:14:50,880 Speaker 1: they will deliver They will harvest the coffee themselves and 236 00:14:50,920 --> 00:14:56,040 Speaker 1: then they will deliver it to the exporters. The processing 237 00:14:56,360 --> 00:14:59,480 Speaker 1: of coffee is actually kind of nuanced as well, and 238 00:14:59,520 --> 00:15:03,920 Speaker 1: there's two primary ways of processing coffee. So the coffee 239 00:15:03,920 --> 00:15:06,440 Speaker 1: bean itself, like that brown bean that you see in 240 00:15:06,440 --> 00:15:09,720 Speaker 1: in the bag when you buy that bag, that starts 241 00:15:09,760 --> 00:15:12,760 Speaker 1: out as a green bean inside of a ripe cherry, 242 00:15:12,920 --> 00:15:15,960 Speaker 1: right like a red cherry piece of fruit. So the 243 00:15:16,200 --> 00:15:19,040 Speaker 1: two ways of processing that and getting that bean to 244 00:15:19,320 --> 00:15:23,240 Speaker 1: the roaster is either what we call it the natural process, 245 00:15:23,280 --> 00:15:26,400 Speaker 1: which means that the farmer picks those those cherries, they 246 00:15:26,440 --> 00:15:29,360 Speaker 1: spread them out on a patio to dry, and they 247 00:15:29,520 --> 00:15:31,920 Speaker 1: dry over that bean like a like a kind of 248 00:15:31,920 --> 00:15:34,600 Speaker 1: like a raisin, you know, um, like a hard raisin, 249 00:15:34,680 --> 00:15:36,760 Speaker 1: and you can actually pick those up and shake them 250 00:15:36,760 --> 00:15:39,200 Speaker 1: and hear a little rattle inside when they're when they're ready, 251 00:15:39,480 --> 00:15:42,880 Speaker 1: or they have the washed process. And with the wash process, 252 00:15:42,920 --> 00:15:46,400 Speaker 1: you're picking that ripe cherry and you are putting it 253 00:15:46,480 --> 00:15:50,200 Speaker 1: through a wet mill and and that sort of has 254 00:15:50,560 --> 00:15:54,720 Speaker 1: kind of like uh, remember you know the log shoot 255 00:15:54,800 --> 00:15:57,280 Speaker 1: ride in Disney World where you're you know, you're getting 256 00:15:57,320 --> 00:15:59,560 Speaker 1: the log and it goes down to the thing of water. 257 00:15:59,760 --> 00:16:02,480 Speaker 1: It's what I like that. And so you're being goes 258 00:16:02,520 --> 00:16:05,520 Speaker 1: through this this shoot of water and goes through kind 259 00:16:05,520 --> 00:16:08,160 Speaker 1: of like a cheese graater type of device, which pulps 260 00:16:08,200 --> 00:16:11,880 Speaker 1: that cherry off of it and then brings your washed 261 00:16:11,920 --> 00:16:14,760 Speaker 1: green being at the end out the other side. So 262 00:16:14,800 --> 00:16:17,880 Speaker 1: those are your two primary ways of getting that that 263 00:16:17,960 --> 00:16:21,960 Speaker 1: being to the the exporter UH, and the exporter will 264 00:16:21,960 --> 00:16:26,080 Speaker 1: convert either of those methods into a green processed green 265 00:16:26,160 --> 00:16:29,320 Speaker 1: being that they will sell to the consumer. Now, the 266 00:16:29,320 --> 00:16:31,720 Speaker 1: big issue that you guys have probably been talking about 267 00:16:31,720 --> 00:16:34,120 Speaker 1: with with others and um that everyone is talking about 268 00:16:34,120 --> 00:16:37,600 Speaker 1: in general is supply chain issues. Right so right now 269 00:16:37,800 --> 00:16:40,760 Speaker 1: there is a big issue especially in Brazil, but all 270 00:16:40,800 --> 00:16:44,200 Speaker 1: over the world in Asia, Vietnam with getting containers and 271 00:16:44,240 --> 00:16:47,080 Speaker 1: getting ships there to to actually get that coffee to 272 00:16:47,160 --> 00:16:49,360 Speaker 1: the people who need it UM. And this is this 273 00:16:49,400 --> 00:16:52,280 Speaker 1: has been affecting the price and the supply and demand 274 00:16:52,320 --> 00:16:56,720 Speaker 1: issues because now destination markets have had to draw down 275 00:16:56,760 --> 00:17:00,920 Speaker 1: inventories and consume locally coffee that normally would have been 276 00:17:01,040 --> 00:17:04,320 Speaker 1: been imported in. Now, once that gets into the destination 277 00:17:04,359 --> 00:17:07,160 Speaker 1: marketing and that importer has that coffee, they will sell 278 00:17:07,200 --> 00:17:10,439 Speaker 1: it to the roasters UM. And those can be large 279 00:17:10,520 --> 00:17:14,720 Speaker 1: roasters like the various groups that that roast Dunk and 280 00:17:14,760 --> 00:17:18,359 Speaker 1: Donuts coffee, or or or small roasters or mom and 281 00:17:18,400 --> 00:17:22,800 Speaker 1: pop shops and when that roaster gets that those bags 282 00:17:22,840 --> 00:17:25,600 Speaker 1: of green beans, then they will put it in their 283 00:17:25,680 --> 00:17:28,720 Speaker 1: roasting machines and they will come up with with blends 284 00:17:28,760 --> 00:17:31,080 Speaker 1: of coffee and then it's and then it's delivered to 285 00:17:31,119 --> 00:17:34,800 Speaker 1: the to the coffee shops. So maybe this is a 286 00:17:34,880 --> 00:17:39,359 Speaker 1: good place to explain exactly what is driving the price 287 00:17:39,400 --> 00:17:43,080 Speaker 1: of coffee higher. And I know you mentioned supply chain issues, 288 00:17:43,320 --> 00:17:47,120 Speaker 1: but it seems like, well with most things that seem 289 00:17:47,240 --> 00:17:51,280 Speaker 1: to be experiencing a shortage or some degree of scarcity recently, 290 00:17:51,600 --> 00:17:55,439 Speaker 1: it seems like it's a combination of factors. Absolutely, and 291 00:17:55,480 --> 00:17:59,159 Speaker 1: it's really been you know, what do you call it 292 00:17:59,160 --> 00:18:02,920 Speaker 1: a perfect store? You know, a confluence of events here. 293 00:18:03,359 --> 00:18:07,320 Speaker 1: I am a fundamental um trader at heart. That's kind 294 00:18:07,359 --> 00:18:09,840 Speaker 1: of how I was raised. And what I believe drives 295 00:18:10,000 --> 00:18:13,440 Speaker 1: markets in general is supplying de marin and fundamentals. And 296 00:18:13,440 --> 00:18:17,879 Speaker 1: and this has been a fundamental story. So coffee is 297 00:18:17,920 --> 00:18:23,119 Speaker 1: a biannual crop, so it um meaning that the coffee 298 00:18:23,200 --> 00:18:25,359 Speaker 1: is a is a tree crop, unlike row crops, and 299 00:18:25,400 --> 00:18:29,520 Speaker 1: that you're planting with you know, corn or wheat or 300 00:18:29,640 --> 00:18:32,919 Speaker 1: cotton or whatever. So you have a tree that produces 301 00:18:33,000 --> 00:18:35,720 Speaker 1: fruit and and so what happens is the tree usually 302 00:18:35,960 --> 00:18:39,040 Speaker 1: produces a lot of fruit one year and then the 303 00:18:39,119 --> 00:18:41,119 Speaker 1: next year it sort of has to recover and rest, 304 00:18:41,480 --> 00:18:43,560 Speaker 1: and so it will have less fruit the next year. 305 00:18:43,720 --> 00:18:46,479 Speaker 1: And that's sort of the general biannual cycle of coffee. 306 00:18:46,480 --> 00:18:47,879 Speaker 1: So you tend to have an on near and an 307 00:18:47,960 --> 00:18:50,600 Speaker 1: off here. So we had a very big on year 308 00:18:50,800 --> 00:18:55,200 Speaker 1: in Um where there was a surplus and abundance of coffee, 309 00:18:55,880 --> 00:19:00,400 Speaker 1: and then one we were expecting to have an off year, 310 00:19:00,440 --> 00:19:03,680 Speaker 1: and that was normal, but but it actually was exacerbated 311 00:19:03,720 --> 00:19:06,040 Speaker 1: a bit more than that due to droughts in Brazil 312 00:19:06,480 --> 00:19:12,160 Speaker 1: that that affected the coffee crop on sort of two ends. Now, again, 313 00:19:12,520 --> 00:19:16,240 Speaker 1: coffee is a tree crop, so the way that the 314 00:19:16,280 --> 00:19:20,320 Speaker 1: fruit comes onto the tree is in sort of two phases. 315 00:19:21,119 --> 00:19:24,119 Speaker 1: You will have the branch growth the year prior to 316 00:19:24,640 --> 00:19:27,280 Speaker 1: the coffee crop, and so that you will have what 317 00:19:27,320 --> 00:19:30,040 Speaker 1: we call new growth on the end of the branch 318 00:19:30,119 --> 00:19:33,480 Speaker 1: of the coffee tree, and then the following season you 319 00:19:33,520 --> 00:19:37,160 Speaker 1: will get flowering and fruit on that new growth. So 320 00:19:37,320 --> 00:19:41,359 Speaker 1: what we had was we had a drought that stunted 321 00:19:41,560 --> 00:19:45,240 Speaker 1: that new growth and made less room for coffee cherries, 322 00:19:46,280 --> 00:19:49,960 Speaker 1: and then we had also aged route during that blooming 323 00:19:50,040 --> 00:19:52,520 Speaker 1: season during the flowering season where where those would grow 324 00:19:52,560 --> 00:19:55,160 Speaker 1: into new fruits. So that had kind of a double 325 00:19:55,160 --> 00:20:00,360 Speaker 1: whammy on already a down year for for coffee. Now, 326 00:20:00,560 --> 00:20:05,280 Speaker 1: just to make things even more interesting, um, we also 327 00:20:05,359 --> 00:20:08,959 Speaker 1: had the worst frost that we've seen in Brazil um 328 00:20:09,040 --> 00:20:13,520 Speaker 1: in in in twenty five years. And so even though 329 00:20:13,560 --> 00:20:15,879 Speaker 1: we had this bad crop that we were like, okay, 330 00:20:15,880 --> 00:20:18,359 Speaker 1: this is a bad crop. There's a deficit, but you know, 331 00:20:18,480 --> 00:20:20,760 Speaker 1: we had an on year the year prior. That's normal, 332 00:20:20,880 --> 00:20:23,400 Speaker 1: so you know, the market needed to rally, and all 333 00:20:23,480 --> 00:20:26,320 Speaker 1: that was was well and good, but at the same time, 334 00:20:26,400 --> 00:20:31,080 Speaker 1: we had this frost that essentially killed a lot of 335 00:20:31,080 --> 00:20:34,560 Speaker 1: the new growth now on on the tree that we 336 00:20:34,560 --> 00:20:37,760 Speaker 1: were expecting for our next on crop, our next on cycle. 337 00:20:38,440 --> 00:20:42,480 Speaker 1: So that turned out to be an absolute disaster. And 338 00:20:42,520 --> 00:20:45,840 Speaker 1: that was just back in July, and so we were 339 00:20:45,880 --> 00:20:50,160 Speaker 1: waiting until the flowering which which starts in um sort 340 00:20:50,160 --> 00:20:55,080 Speaker 1: of October November, and to see how how bad things were. 341 00:20:55,480 --> 00:20:58,320 Speaker 1: And we had a decent flowering, so we thought things 342 00:20:58,359 --> 00:21:02,400 Speaker 1: were gonna be okay, but it turned out that what 343 00:21:02,440 --> 00:21:06,960 Speaker 1: we call the setting what was subpar. So what what 344 00:21:07,040 --> 00:21:10,560 Speaker 1: happens is that the branch grows these flowers, um, and 345 00:21:10,600 --> 00:21:14,200 Speaker 1: then those become pollinated and turned into fruits they set 346 00:21:14,240 --> 00:21:17,879 Speaker 1: into a bean. But uh, we much less of those 347 00:21:18,160 --> 00:21:22,200 Speaker 1: flowers turned into you know, juvenile beans than than expected. 348 00:21:22,560 --> 00:21:25,840 Speaker 1: So now we have a massive deficit in the current 349 00:21:25,920 --> 00:21:28,919 Speaker 1: year that we're already in and the bumper crop that 350 00:21:28,960 --> 00:21:31,679 Speaker 1: we were looking to save this deficit to solve the 351 00:21:31,680 --> 00:21:36,359 Speaker 1: deficit has now been severely compromised by frost. So that's 352 00:21:36,400 --> 00:21:39,800 Speaker 1: the supply and demand issue, but it kind of we 353 00:21:39,880 --> 00:21:42,639 Speaker 1: had other factors as well that went into that. You know, 354 00:21:42,800 --> 00:21:46,000 Speaker 1: we had We've been talking a lot about inflation, right, UM, 355 00:21:46,080 --> 00:21:50,080 Speaker 1: that's been uh, certainly a factor, and we saw that 356 00:21:50,400 --> 00:21:56,840 Speaker 1: coffee largely um rallied into uh dollar weakness, uh you know, 357 00:21:57,160 --> 00:22:00,560 Speaker 1: last the earlier part of this year, UM, along with 358 00:22:00,600 --> 00:22:03,840 Speaker 1: many other commodities, and it's really kind of never looked back. 359 00:22:05,160 --> 00:22:08,520 Speaker 1: You know. The people are always it's like people hear 360 00:22:08,680 --> 00:22:12,919 Speaker 1: these supply side explanations and weather in particular, and I 361 00:22:12,960 --> 00:22:15,159 Speaker 1: feel like it's almost unsatisfied to them. And what you 362 00:22:15,200 --> 00:22:17,360 Speaker 1: said is like totally makes sense, but they're like, yeah, 363 00:22:17,440 --> 00:22:20,840 Speaker 1: but sure, certainly there must be like some big macro story. 364 00:22:20,840 --> 00:22:23,639 Speaker 1: And you mentioned the dollar a little bit. I'm curious 365 00:22:23,640 --> 00:22:26,520 Speaker 1: if there's any sort of demand element, and I'm thinking 366 00:22:26,520 --> 00:22:29,800 Speaker 1: specifically in two ways, Like one is a has there 367 00:22:29,840 --> 00:22:32,720 Speaker 1: been a new change in overall volume demand? But be 368 00:22:33,560 --> 00:22:37,760 Speaker 1: did the shift in particularly the developed world and say, 369 00:22:37,840 --> 00:22:41,120 Speaker 1: you're really all over the world from offices where people 370 00:22:41,119 --> 00:22:44,840 Speaker 1: obviously consume a lot of coffee to uh home to 371 00:22:45,000 --> 00:22:49,239 Speaker 1: working from home? Did that change coffee buying behavior at 372 00:22:49,280 --> 00:22:51,720 Speaker 1: all in terms of what kind of coffee people drink 373 00:22:51,960 --> 00:22:54,560 Speaker 1: and did that have any sort of ripple effects on 374 00:22:54,640 --> 00:22:58,240 Speaker 1: the overall market. Yeah? Absolutely. And you know there's a 375 00:22:58,240 --> 00:23:01,080 Speaker 1: reason that we look at the supply side over the 376 00:23:01,160 --> 00:23:04,199 Speaker 1: demand side, I think, UM, at least in coffee, and 377 00:23:04,240 --> 00:23:07,399 Speaker 1: that's because the supply side is volatile and the demand 378 00:23:07,440 --> 00:23:10,399 Speaker 1: side is relatively static. So I always teach them my 379 00:23:10,520 --> 00:23:14,840 Speaker 1: classes that you know, coffee is has inelastic demand and 380 00:23:14,880 --> 00:23:18,040 Speaker 1: it also has inelastic supply generally UM. And that's why 381 00:23:18,080 --> 00:23:21,439 Speaker 1: it's so it's so volatile because because it's a tree crop, 382 00:23:21,840 --> 00:23:25,520 Speaker 1: you can't just plant more if prices are high. You 383 00:23:25,600 --> 00:23:29,320 Speaker 1: have to plant that profits several years earlier, and so 384 00:23:29,480 --> 00:23:33,000 Speaker 1: this exacerbates moves on either side. So you know, prices 385 00:23:33,040 --> 00:23:35,359 Speaker 1: are high, you plant a bunch of new trees, and 386 00:23:35,400 --> 00:23:38,520 Speaker 1: then three years later you start getting the supply from 387 00:23:38,560 --> 00:23:41,040 Speaker 1: that um that point, so then you can get a 388 00:23:41,080 --> 00:23:44,119 Speaker 1: massive oversupply at that point. But to your to your 389 00:23:44,119 --> 00:23:47,480 Speaker 1: point about demand, to the initial reaction back in in 390 00:23:47,480 --> 00:23:51,600 Speaker 1: in in when COVID first became people first realized that 391 00:23:51,680 --> 00:23:53,280 Speaker 1: COVID was going to be here to stay and it 392 00:23:53,359 --> 00:23:55,600 Speaker 1: was gonna be a problem, was a sell off. The 393 00:23:55,640 --> 00:23:58,920 Speaker 1: initial reaction was, this is going to destroy demand. Now 394 00:23:59,400 --> 00:24:02,120 Speaker 1: that that was true, and and I'll tell you why 395 00:24:02,200 --> 00:24:06,360 Speaker 1: in a second, but but before I do, In general, 396 00:24:06,440 --> 00:24:10,159 Speaker 1: coffee has very inelastic demand. And that's because you if 397 00:24:10,160 --> 00:24:12,880 Speaker 1: you're walking down the street and someone is like, hey, coffee, 398 00:24:13,400 --> 00:24:15,320 Speaker 1: free coffee, you might say, oh, great, I'll take a 399 00:24:15,320 --> 00:24:17,439 Speaker 1: cup of coffee, right uh. And then you walk a 400 00:24:17,440 --> 00:24:20,000 Speaker 1: few more feet and someone says, hey, free coffee, you'd say, no, thanks, 401 00:24:19,960 --> 00:24:22,800 Speaker 1: I already have one. Right. You drink one or two coffee, 402 00:24:22,800 --> 00:24:25,080 Speaker 1: so coffee a day or whatever whatever it is that 403 00:24:25,160 --> 00:24:28,640 Speaker 1: you drink, whether the price is ten dollars or one dollar, right, 404 00:24:28,880 --> 00:24:31,040 Speaker 1: that's just it's very there's there's not a lot of 405 00:24:31,040 --> 00:24:33,439 Speaker 1: substitutions for it. You're not like, oh, should I have 406 00:24:33,480 --> 00:24:35,399 Speaker 1: a coke, or should I have a coffee? You have 407 00:24:35,520 --> 00:24:38,760 Speaker 1: your coffees, you know, set amount of them, no matter what. 408 00:24:39,400 --> 00:24:43,159 Speaker 1: Now where the demand does have some wiggle room and 409 00:24:43,240 --> 00:24:46,200 Speaker 1: some play. One of the major ones is in out 410 00:24:46,200 --> 00:24:51,199 Speaker 1: of home consumption. When Starbucks charges you ten dollars for 411 00:24:51,280 --> 00:24:53,960 Speaker 1: a latte or whatever it is, uh, then you might, 412 00:24:54,080 --> 00:24:56,800 Speaker 1: if if times are toffee, might say I can't afford that, 413 00:24:57,040 --> 00:25:01,760 Speaker 1: I'm just gonna buy the cafe bustello, local bodega and 414 00:25:01,760 --> 00:25:03,800 Speaker 1: and that'll and that's how I'm gonna have my coffee. 415 00:25:04,119 --> 00:25:07,840 Speaker 1: So the overall demands tends not to move that much, um, 416 00:25:07,840 --> 00:25:11,440 Speaker 1: but you might shift where you're buying it. And when 417 00:25:11,440 --> 00:25:15,160 Speaker 1: we had COVID and the lockdowns, that created an intense 418 00:25:15,240 --> 00:25:19,560 Speaker 1: shift from out of home consumption where the business of 419 00:25:19,600 --> 00:25:23,520 Speaker 1: coffee shops was all but destroyed, to grocery store where 420 00:25:23,720 --> 00:25:26,840 Speaker 1: that was suddenly where or or Amazon or whatever you know, 421 00:25:26,920 --> 00:25:30,200 Speaker 1: digital subscriptions, and that was really the model now where 422 00:25:30,200 --> 00:25:34,040 Speaker 1: people had to consume their coffee. But more than that, 423 00:25:34,600 --> 00:25:39,000 Speaker 1: the other sort of hidden demand that was destroyed was 424 00:25:39,480 --> 00:25:44,080 Speaker 1: the sort of social demand for coffee. You mentioned office coffee, right, 425 00:25:44,320 --> 00:25:46,800 Speaker 1: so whereas in normally you would have had to go 426 00:25:46,840 --> 00:25:49,200 Speaker 1: to the office and you make a brew of pot 427 00:25:49,280 --> 00:25:51,359 Speaker 1: of coffee, and then you brew a second pot of 428 00:25:51,359 --> 00:25:52,920 Speaker 1: coffee and if no one drinks that, you dump it 429 00:25:52,960 --> 00:25:55,520 Speaker 1: down the drain, right, Or you go to a wedding 430 00:25:55,960 --> 00:25:58,720 Speaker 1: and they might brew a couple of big vats of 431 00:25:58,800 --> 00:26:01,639 Speaker 1: coffee and then they dumped down the drain. What people 432 00:26:01,680 --> 00:26:04,040 Speaker 1: don't consume. So all of these sort of out of 433 00:26:04,040 --> 00:26:07,960 Speaker 1: home events and or or industry events, right, you know, 434 00:26:08,240 --> 00:26:10,760 Speaker 1: people stopped going to industry events for a while, so 435 00:26:10,840 --> 00:26:14,679 Speaker 1: all of that demand from catering and and from coffee 436 00:26:14,680 --> 00:26:18,960 Speaker 1: shops was was pretty much destroyed. M So what happens 437 00:26:19,119 --> 00:26:23,320 Speaker 1: when coffee prices go a lot higher, like A how 438 00:26:23,359 --> 00:26:27,880 Speaker 1: are the costs actually absorbed or passed on? And then 439 00:26:28,000 --> 00:26:31,480 Speaker 1: be do you see a lot of people maybe switching 440 00:26:31,960 --> 00:26:36,800 Speaker 1: from high quality coffee beans like Arabica to something cheaper 441 00:26:36,880 --> 00:26:40,840 Speaker 1: to try to offset that price increase? Oh yeah, absolutely, 442 00:26:40,920 --> 00:26:44,639 Speaker 1: so you see you definitely see switching. Like I mentioned, 443 00:26:44,760 --> 00:26:48,240 Speaker 1: total demand doesn't tend to change that much, but you 444 00:26:48,280 --> 00:26:54,000 Speaker 1: definitely see switching from different varieties. The COVID really hurt 445 00:26:54,240 --> 00:26:57,280 Speaker 1: the specialty coffee business that has been something that have 446 00:26:57,400 --> 00:27:00,480 Speaker 1: been growing tremendously for the last twenty years, as I mentioned, 447 00:27:00,600 --> 00:27:03,600 Speaker 1: you know, there there was a large group of people 448 00:27:03,640 --> 00:27:07,000 Speaker 1: who enjoyed going to the specialty coffee shops and using 449 00:27:07,040 --> 00:27:10,160 Speaker 1: a chemics or um you know, a special pour over 450 00:27:10,359 --> 00:27:13,879 Speaker 1: type of delivery system and and drinking these single origin 451 00:27:13,960 --> 00:27:17,600 Speaker 1: find coffees. That all kind of went away um and 452 00:27:17,600 --> 00:27:20,280 Speaker 1: and a lot of that was lost. But it's more 453 00:27:20,359 --> 00:27:24,360 Speaker 1: generally if you're talking about large prices increases and and 454 00:27:24,400 --> 00:27:28,200 Speaker 1: how are you switching, well, you you have the switch 455 00:27:28,400 --> 00:27:32,760 Speaker 1: in both destination markets and in origin. So in origin, 456 00:27:33,359 --> 00:27:37,919 Speaker 1: the producing countries tend to drink locally and consume the 457 00:27:38,040 --> 00:27:43,880 Speaker 1: cheaper qualities of coffee and export the higher qualities that 458 00:27:43,880 --> 00:27:48,560 Speaker 1: that that are are more valuable. So in Brazil, for example, 459 00:27:48,600 --> 00:27:53,080 Speaker 1: they produced both Arabica and Robusta. So with the high 460 00:27:53,200 --> 00:27:57,359 Speaker 1: prices of Arabica, what you'll see is that the local 461 00:27:57,400 --> 00:28:01,160 Speaker 1: consumption will shift towards Robusta UH and they will export 462 00:28:01,240 --> 00:28:05,320 Speaker 1: less Robusta and more more Arabica. So we'll see that 463 00:28:05,320 --> 00:28:09,320 Speaker 1: shift there. But also on the consumption side, there's plenty 464 00:28:09,600 --> 00:28:14,119 Speaker 1: of companies and and businesses that do Arabica UH and 465 00:28:14,320 --> 00:28:17,479 Speaker 1: so they can't really shift that that split, although they 466 00:28:17,480 --> 00:28:20,680 Speaker 1: will shift too cheaper versions of Arabica if they if 467 00:28:20,680 --> 00:28:23,600 Speaker 1: they need to. But but many companies just put out 468 00:28:23,600 --> 00:28:26,000 Speaker 1: like a breakfast blend or you know, they're you know, 469 00:28:26,040 --> 00:28:29,080 Speaker 1: their French roast or whatever, and they don't specify where 470 00:28:29,240 --> 00:28:32,200 Speaker 1: where that coffee is coming from, and so then they're 471 00:28:32,200 --> 00:28:35,640 Speaker 1: really selling more of a flavor profile. And then it's 472 00:28:35,680 --> 00:28:40,920 Speaker 1: just a matter of optimizing cost versus flavor. When when 473 00:28:41,000 --> 00:28:46,520 Speaker 1: when prices are expensive, is it the Arabica robusta spread? Like, 474 00:28:46,680 --> 00:28:50,120 Speaker 1: isn't that a thing you trade? Yeah? For sure, So 475 00:28:50,160 --> 00:28:52,720 Speaker 1: there is the we call it the ARB, even though 476 00:28:52,720 --> 00:28:55,760 Speaker 1: it's not really an arbitrage. There's sort of two different products, 477 00:28:55,880 --> 00:28:58,360 Speaker 1: um but but that's what we we we call the ARB. 478 00:28:58,760 --> 00:29:02,560 Speaker 1: So the ARB tends to be have a nice little 479 00:29:02,680 --> 00:29:05,600 Speaker 1: range when things are calm, you know, maybe something like 480 00:29:06,440 --> 00:29:08,480 Speaker 1: sixty cents or something like that would be the typical 481 00:29:08,560 --> 00:29:14,080 Speaker 1: Arabica arbitrage. But when Arabica goes nuts, that ORB tends 482 00:29:14,080 --> 00:29:16,720 Speaker 1: to just sort of disappear and just become the price 483 00:29:16,760 --> 00:29:21,840 Speaker 1: of arabica because Arabica tends to um outpace robustas so 484 00:29:22,240 --> 00:29:25,760 Speaker 1: steeply that it's it ceases to have that sort of 485 00:29:26,280 --> 00:29:30,800 Speaker 1: range bound nature and just tends to have I don't 486 00:29:30,800 --> 00:29:33,560 Speaker 1: know how into options you are, but uh, it tends 487 00:29:33,560 --> 00:29:37,680 Speaker 1: to have the same delta as Arabica. So is trading coffee. 488 00:29:37,880 --> 00:29:40,840 Speaker 1: Uh you know, given all that volatility that you just 489 00:29:40,920 --> 00:29:44,560 Speaker 1: laid out, and given these different spreads between different types 490 00:29:44,600 --> 00:29:48,600 Speaker 1: of coffee bean, is trading coffee fun and lucrative? Should 491 00:29:48,600 --> 00:29:52,720 Speaker 1: we all be going into the coffee trading business? All 492 00:29:52,760 --> 00:29:55,280 Speaker 1: become coffee people. You might need to take a couple 493 00:29:55,320 --> 00:29:58,800 Speaker 1: of courses first at the coffee Trade ACAP. But no, 494 00:29:59,040 --> 00:30:02,240 Speaker 1: they they it's not true. It's a myth. But they 495 00:30:02,280 --> 00:30:05,160 Speaker 1: say that coffee is the second most traded commodity in 496 00:30:05,200 --> 00:30:08,440 Speaker 1: the world. Um, for exactly that reason. It's because it 497 00:30:08,560 --> 00:30:13,080 Speaker 1: is fun. I love the coffee business. It's very interesting. Um. 498 00:30:13,120 --> 00:30:16,640 Speaker 1: If you travel to do crop tours, you know you're 499 00:30:16,640 --> 00:30:19,640 Speaker 1: going to sort of interesting and exciting places to to 500 00:30:19,720 --> 00:30:25,240 Speaker 1: learn about it. But from a lucrative speculative point of view, 501 00:30:25,600 --> 00:30:29,480 Speaker 1: there is volatility and coffee and volatilities how you make 502 00:30:29,720 --> 00:30:33,480 Speaker 1: or or in many cases lose money. Right. But but 503 00:30:33,560 --> 00:30:36,520 Speaker 1: you need that volatility to be able to trade. So 504 00:30:36,720 --> 00:30:41,640 Speaker 1: the what we call the tourists interesting coffee is is heavy. Uh, 505 00:30:41,640 --> 00:30:43,840 Speaker 1: there's a lot of uh, there's a lot of people 506 00:30:43,880 --> 00:30:47,040 Speaker 1: who are you know, not necessarily coffee people don't necessarily 507 00:30:47,040 --> 00:30:49,680 Speaker 1: have a coffee background, but like to trade coffee. Uh, 508 00:30:49,720 --> 00:30:51,920 Speaker 1: both you know, sort of technical analysts and sort of 509 00:30:52,160 --> 00:30:56,680 Speaker 1: amateur or armchair fundamental traders. Um. And and there's there's 510 00:30:56,680 --> 00:30:58,200 Speaker 1: plenty of good ones too. You know, there's plenty of 511 00:30:58,200 --> 00:31:01,040 Speaker 1: people who are are just sort of part time specs 512 00:31:01,040 --> 00:31:05,040 Speaker 1: who make money and coffee. Interestingly enough, I I only 513 00:31:05,080 --> 00:31:09,200 Speaker 1: got into Twitter for my business, but in the Twitter sphere, 514 00:31:09,320 --> 00:31:13,280 Speaker 1: the financial twitter sphere, there is a lot of heated 515 00:31:13,320 --> 00:31:16,400 Speaker 1: discussion on the coffee market and what's going on there 516 00:31:32,320 --> 00:31:35,240 Speaker 1: something I'm curious about. It's like, okay, we've talked about 517 00:31:35,240 --> 00:31:37,959 Speaker 1: Arabbic on Robusta, but I think there's other types of 518 00:31:38,000 --> 00:31:40,760 Speaker 1: coffee and I'm sort of curious, like you know, more 519 00:31:40,840 --> 00:31:44,960 Speaker 1: specialized beans or like kna. I was in Hawaii and 520 00:31:45,040 --> 00:31:47,440 Speaker 1: I had ConA coffee there, and then I know also 521 00:31:47,560 --> 00:31:50,800 Speaker 1: like fairly traded coffee, which I imagine has something of 522 00:31:50,800 --> 00:31:54,600 Speaker 1: a different market structure. Let's say, like I want to 523 00:31:54,640 --> 00:31:58,520 Speaker 1: sell in volume ConA coffee in New York, can I 524 00:31:58,640 --> 00:32:03,640 Speaker 1: predictably you use the futures markets for say Arabica as 525 00:32:03,680 --> 00:32:06,520 Speaker 1: a hedge as a hedging instrument, even if my end 526 00:32:06,680 --> 00:32:11,080 Speaker 1: need isn't Arabica, Like, they're enough relationship generally between the 527 00:32:11,120 --> 00:32:14,360 Speaker 1: price where these instruments will be of use to me 528 00:32:14,720 --> 00:32:18,120 Speaker 1: regardless of whether I'm actually selling Arabica. Well, that's a 529 00:32:18,120 --> 00:32:22,240 Speaker 1: great question, and um, you know, the unfortunate answer is 530 00:32:22,280 --> 00:32:28,800 Speaker 1: that it depends right. Uh. So of coffee is either 531 00:32:28,840 --> 00:32:34,240 Speaker 1: Arabica or Robusta. There is a tiny proportion of coffee 532 00:32:34,280 --> 00:32:39,920 Speaker 1: that is um some sort of ancillary uh species like Liberica, 533 00:32:40,280 --> 00:32:43,880 Speaker 1: which is sort of a much larger coffee tree. And 534 00:32:43,920 --> 00:32:46,760 Speaker 1: I've only ever seen that once and that was the 535 00:32:46,920 --> 00:32:51,000 Speaker 1: people used to sort of to border uh their plantations. 536 00:32:51,040 --> 00:32:52,920 Speaker 1: So it was just kind of created a sort of 537 00:32:52,920 --> 00:32:56,160 Speaker 1: a tree border around their plantation that also produced a 538 00:32:56,160 --> 00:32:59,160 Speaker 1: little bit of coffee. But they're not efficient, um and 539 00:32:59,360 --> 00:33:02,600 Speaker 1: they don't produce good tasting coffee. So almost all of 540 00:33:02,640 --> 00:33:05,080 Speaker 1: it is Arabica or Robusta. Now where you see the 541 00:33:05,160 --> 00:33:08,520 Speaker 1: specialization is really an origin. So it's really if you're 542 00:33:08,520 --> 00:33:12,880 Speaker 1: talking about ConA coffee, you're talking about Arabica that's produced 543 00:33:13,240 --> 00:33:16,800 Speaker 1: in Kona. Um. It's that's that's that's produced there and 544 00:33:16,840 --> 00:33:19,960 Speaker 1: other people like you might, I personally always buy a 545 00:33:20,080 --> 00:33:23,440 Speaker 1: hundred percent Colombian. That's my personal coffee that I that 546 00:33:23,560 --> 00:33:25,800 Speaker 1: I really like. It doesn't, then you know the secret 547 00:33:25,880 --> 00:33:28,040 Speaker 1: for you. It doesn't have to be expensive Colombian coffee. 548 00:33:28,360 --> 00:33:30,200 Speaker 1: If you can just you just go by the the 549 00:33:30,360 --> 00:33:33,280 Speaker 1: can of a pent Colombian, it's usually gonna be pretty decent. 550 00:33:33,640 --> 00:33:39,800 Speaker 1: So most Arabica coffees have a good correlation with the 551 00:33:39,840 --> 00:33:44,080 Speaker 1: futures market. Now each will have a differential based on 552 00:33:45,040 --> 00:33:49,320 Speaker 1: how in demand really that origin is versus the the 553 00:33:49,360 --> 00:33:52,640 Speaker 1: overall the overall market. So because the futures market is 554 00:33:52,680 --> 00:33:55,640 Speaker 1: really made up of a basket of what we call 555 00:33:55,720 --> 00:33:58,880 Speaker 1: milds um so that those would be washed coffees. So 556 00:33:59,200 --> 00:34:01,080 Speaker 1: the futures are good that we look at. It's sort 557 00:34:01,080 --> 00:34:04,960 Speaker 1: of like an average of Arabica's right, of a certain 558 00:34:04,960 --> 00:34:09,200 Speaker 1: group of Arabicas. If you look at Colombians, they tend 559 00:34:09,280 --> 00:34:12,000 Speaker 1: to be say, you know, ten or twenty cents more 560 00:34:12,360 --> 00:34:14,440 Speaker 1: than that right now, they're more like fifty five or 561 00:34:14,440 --> 00:34:17,719 Speaker 1: sixty cents more just because of supplying demand issues. If 562 00:34:17,719 --> 00:34:21,160 Speaker 1: you look at something like ConA coffee, you have almost 563 00:34:21,320 --> 00:34:25,440 Speaker 1: zero correlation with UM with the futures market, because that 564 00:34:25,600 --> 00:34:28,600 Speaker 1: is such a tiny area of production and such a 565 00:34:28,680 --> 00:34:31,839 Speaker 1: highly sought after coffee that it's always gonna be like 566 00:34:32,239 --> 00:34:34,520 Speaker 1: four or five dollars per pound. I'm just making that 567 00:34:34,600 --> 00:34:38,040 Speaker 1: number up, But so even if the futures market is 568 00:34:38,160 --> 00:34:41,560 Speaker 1: rallying heavily, that that price tends to be sticky. Same 569 00:34:42,160 --> 00:34:45,760 Speaker 1: with Kenyan coffee. Kenyan coffees are often like a hundred 570 00:34:45,840 --> 00:34:50,360 Speaker 1: cents more than than the futures market. So for those 571 00:34:50,360 --> 00:34:55,120 Speaker 1: sort of very outlier specialty coffees, you're probably not it's 572 00:34:55,120 --> 00:34:57,799 Speaker 1: probably not gonna make a lot of sense to to 573 00:34:57,920 --> 00:35:00,879 Speaker 1: use the futures market to hedge it. But for the 574 00:35:00,920 --> 00:35:07,200 Speaker 1: bulk of coffees first say, the UM, it definitely would 575 00:35:07,239 --> 00:35:11,040 Speaker 1: make sense. Can we go back to something you said 576 00:35:11,120 --> 00:35:15,880 Speaker 1: in the very beginning about large multinationals having hedge funds 577 00:35:16,040 --> 00:35:20,719 Speaker 1: UM that profit off of the information flow, and it 578 00:35:20,800 --> 00:35:24,320 Speaker 1: kind of reminded me of UM. I guess Goldman Sachs 579 00:35:24,600 --> 00:35:28,760 Speaker 1: pre um vocal rule sort of pre financial crisis, where 580 00:35:29,280 --> 00:35:33,360 Speaker 1: it could have a very lucrative internal trading DUSK that 581 00:35:33,480 --> 00:35:36,319 Speaker 1: traded for its own account and it used it's sort 582 00:35:36,320 --> 00:35:40,600 Speaker 1: of position in the market looking at the flow going 583 00:35:40,640 --> 00:35:44,520 Speaker 1: through it to help it make trading decisions. Is that 584 00:35:44,960 --> 00:35:48,080 Speaker 1: sort of what's going on here with coffee? I would 585 00:35:48,320 --> 00:35:53,360 Speaker 1: in differentiate first of all, between say a consuming company 586 00:35:53,480 --> 00:35:57,880 Speaker 1: and a trading company. Okay, this is somewhat of an 587 00:35:57,960 --> 00:36:03,080 Speaker 1: arbitrary distinction, because no matter who's trading coffee, you're and 588 00:36:03,080 --> 00:36:06,359 Speaker 1: this is something I was taught from day one as 589 00:36:06,400 --> 00:36:10,080 Speaker 1: a trader, is you're always speculating. Right. If you don't buy, 590 00:36:10,320 --> 00:36:13,600 Speaker 1: you're speculating that that's you know, a good decision. If 591 00:36:13,680 --> 00:36:16,440 Speaker 1: you if you're buying now, then you're you're essentially bullish. 592 00:36:16,480 --> 00:36:19,560 Speaker 1: If you're if you're selling more than then you're buying, 593 00:36:19,600 --> 00:36:22,399 Speaker 1: then you're barish. Right, So, no matter who you are 594 00:36:22,440 --> 00:36:25,960 Speaker 1: in the supply chain, you're always speculating somehow in your 595 00:36:26,000 --> 00:36:30,120 Speaker 1: interaction with the futures market. So if you are an exporter, 596 00:36:30,360 --> 00:36:34,400 Speaker 1: for example, exporters will trade sort of a prop book. 597 00:36:35,200 --> 00:36:38,400 Speaker 1: Usually they you know, different companies have different rules on 598 00:36:38,640 --> 00:36:41,960 Speaker 1: internal lafer for managing their price risk. But you know, 599 00:36:42,040 --> 00:36:46,200 Speaker 1: let's say you're just a normal local exporter. You buy 600 00:36:46,320 --> 00:36:50,080 Speaker 1: coffee locally and then you sell it for export. So 601 00:36:50,680 --> 00:36:53,800 Speaker 1: what they would normally do if they're a differential trader 602 00:36:54,000 --> 00:36:57,359 Speaker 1: is they would buy coffee locally and local currency from 603 00:36:57,520 --> 00:37:00,920 Speaker 1: the farmers and the producers, and then they would immediately 604 00:37:00,920 --> 00:37:04,560 Speaker 1: sell futures against that in the futures market, and that 605 00:37:04,600 --> 00:37:08,399 Speaker 1: would create a differential position. So they would have, say 606 00:37:08,440 --> 00:37:12,320 Speaker 1: that the current futures prices two dollars and they're buying 607 00:37:12,840 --> 00:37:17,960 Speaker 1: coffee at two thirty UH cents per pound, So they 608 00:37:17,960 --> 00:37:22,040 Speaker 1: buy coffee locally at two per pound, they sell a 609 00:37:22,080 --> 00:37:25,080 Speaker 1: future against it at two dollars per pound, so they 610 00:37:25,080 --> 00:37:28,200 Speaker 1: would have they would be buying coffee for thirty cents 611 00:37:28,239 --> 00:37:31,880 Speaker 1: over and they have locked in that differential right. Then 612 00:37:31,920 --> 00:37:36,319 Speaker 1: when they export that coffee, they sell it to another company, 613 00:37:36,360 --> 00:37:39,879 Speaker 1: and maybe that company buys it for thirty two cents 614 00:37:39,920 --> 00:37:42,279 Speaker 1: over the market, right, and then they would lift their 615 00:37:42,280 --> 00:37:46,600 Speaker 1: heads and sell that coffee to that company. Now, if 616 00:37:46,640 --> 00:37:51,839 Speaker 1: that exporter is smart and they know that prices are 617 00:37:51,880 --> 00:37:54,480 Speaker 1: going to rally, they know that, Let's say you're a 618 00:37:54,480 --> 00:37:58,080 Speaker 1: Brazilian exporter and you know you need to buy coffee 619 00:37:58,520 --> 00:38:02,120 Speaker 1: uh for your you know, for your business, and you 620 00:38:02,160 --> 00:38:04,040 Speaker 1: know that the crop is gonna be small this year 621 00:38:04,040 --> 00:38:06,960 Speaker 1: and the market is gonna go nuts, then maybe you 622 00:38:07,000 --> 00:38:11,040 Speaker 1: would buy futures ahead of time so that when you're 623 00:38:11,040 --> 00:38:14,480 Speaker 1: ready to buy physical, you can sell out those futures 624 00:38:14,520 --> 00:38:17,800 Speaker 1: and and make make some profit. Or maybe you wouldn't 625 00:38:17,800 --> 00:38:20,320 Speaker 1: hedge it right away. Maybe you would buy that physical 626 00:38:20,840 --> 00:38:24,439 Speaker 1: from the farmers, and then rather than just immediately turning 627 00:38:24,480 --> 00:38:26,880 Speaker 1: around and selling futures against it to lock in your hedge, 628 00:38:27,040 --> 00:38:28,719 Speaker 1: you might wait for it to rally another five or 629 00:38:28,719 --> 00:38:31,640 Speaker 1: ten cents and then lock in your hedge. Right. So, 630 00:38:31,640 --> 00:38:34,520 Speaker 1: so that's how they're going to be sort of speculating 631 00:38:34,560 --> 00:38:36,880 Speaker 1: in that in that market, and the consumers are going 632 00:38:36,920 --> 00:38:38,600 Speaker 1: to do the same thing on their side, sort of 633 00:38:38,640 --> 00:38:42,360 Speaker 1: the opposite. They'll be buying or selling futures or options 634 00:38:42,760 --> 00:38:46,840 Speaker 1: to protect their books and protect their hedges in different ways. 635 00:38:46,840 --> 00:38:51,319 Speaker 1: But the trade themselves sometimes have a hedge fund that's 636 00:38:51,320 --> 00:38:54,279 Speaker 1: either or a prop test that's either part of the 637 00:38:54,320 --> 00:38:57,680 Speaker 1: company itself or sort of shares a parent company and 638 00:38:57,760 --> 00:39:00,640 Speaker 1: share information, but have sort of Chinese walls and operations, 639 00:39:01,239 --> 00:39:04,919 Speaker 1: and so they are straight up you know, I don't 640 00:39:04,920 --> 00:39:08,440 Speaker 1: want to say gambling, but you know, speculating without a 641 00:39:08,440 --> 00:39:12,560 Speaker 1: physical position in those um in those markets. That honestly 642 00:39:12,600 --> 00:39:14,520 Speaker 1: makes a lot of sense, and I think is good 643 00:39:14,560 --> 00:39:19,040 Speaker 1: for the market because they have insights into what the 644 00:39:19,040 --> 00:39:21,400 Speaker 1: supply and demand is going to be, and so it 645 00:39:21,520 --> 00:39:24,200 Speaker 1: is better for the market if we know there's going 646 00:39:24,239 --> 00:39:27,200 Speaker 1: to be a shortage for the market to start rallying 647 00:39:27,280 --> 00:39:31,200 Speaker 1: now and repricing to what the proper price of coffee 648 00:39:31,200 --> 00:39:34,200 Speaker 1: should be, to the levels that are going to incentivize production. 649 00:39:34,480 --> 00:39:37,120 Speaker 1: You want that to happen as soon as possible. And 650 00:39:37,120 --> 00:39:39,279 Speaker 1: and the opposite is true on the other side, right 651 00:39:39,280 --> 00:39:42,399 Speaker 1: when when coffee is vastly oversupplied, you need to push 652 00:39:42,440 --> 00:39:45,920 Speaker 1: the prices down to a point that's going to disincentivize production. 653 00:39:46,920 --> 00:39:49,399 Speaker 1: You know, we talked about, okay, the price of these 654 00:39:49,400 --> 00:39:53,879 Speaker 1: commodity coffee futures roughly having doubled in the last year, 655 00:39:54,480 --> 00:39:57,600 Speaker 1: how volatile is the end price of saying, you know, 656 00:39:57,680 --> 00:40:00,400 Speaker 1: like I would say I buy coffee at Starbucks. Actually 657 00:40:00,400 --> 00:40:02,680 Speaker 1: I typically buy a coffee at Dunkin Donuts when I 658 00:40:02,719 --> 00:40:05,440 Speaker 1: buy a couple out there, Like how much is the 659 00:40:05,480 --> 00:40:09,000 Speaker 1: bean in that price versus you know, all the other 660 00:40:09,040 --> 00:40:11,400 Speaker 1: things like the labor of staff at dunkin Donuts and 661 00:40:11,440 --> 00:40:13,759 Speaker 1: so forth. It's a great question, and it's always a 662 00:40:13,800 --> 00:40:18,319 Speaker 1: little bit controversial because coffee is the one of the 663 00:40:18,360 --> 00:40:22,799 Speaker 1: most socially conscious commodities out there. Um, I think just 664 00:40:22,840 --> 00:40:26,800 Speaker 1: by nature of the consumer. I mean, historically they say 665 00:40:26,840 --> 00:40:29,440 Speaker 1: that coffee house has created the enlightenment. Back in the 666 00:40:29,480 --> 00:40:32,360 Speaker 1: seventeenth century, before that, everyone went to the pub. Once 667 00:40:32,520 --> 00:40:35,200 Speaker 1: people started making coffee houses, they were sober enough to 668 00:40:35,520 --> 00:40:38,000 Speaker 1: actually sit up and talk and think with each other. 669 00:40:38,440 --> 00:40:40,960 Speaker 1: So that tradition has carried on to today where if 670 00:40:40,960 --> 00:40:45,040 Speaker 1: you have coffee houses that the consumer of coffee tends 671 00:40:45,080 --> 00:40:48,439 Speaker 1: to be sort of conscientious and they tend to care 672 00:40:48,800 --> 00:40:52,440 Speaker 1: about whether the beans come from. That's not true, you know, entirely, 673 00:40:52,480 --> 00:40:54,480 Speaker 1: it's not true across the boards. Some people, you know, 674 00:40:54,560 --> 00:40:55,960 Speaker 1: just wake up and they want a cup of coffee, 675 00:40:56,000 --> 00:41:00,720 Speaker 1: and that's fine. But that sort of culture has spilled 676 00:41:00,760 --> 00:41:07,200 Speaker 1: over into the demand side. You mentioned fair trade coffee before. That's, um, 677 00:41:07,239 --> 00:41:10,840 Speaker 1: something that basically came out of this coffee culture and 678 00:41:10,880 --> 00:41:14,120 Speaker 1: this desire to ensure that there's sort of equitable treatment 679 00:41:14,840 --> 00:41:18,359 Speaker 1: of farmers and everything. Because of that demand for it, 680 00:41:18,640 --> 00:41:20,400 Speaker 1: that is that is spilled into the trade, and so 681 00:41:20,440 --> 00:41:24,960 Speaker 1: the trade has to facilitate sustainable practices. Something that was 682 00:41:25,080 --> 00:41:29,440 Speaker 1: pioneered in the coffee industry is what we call certified 683 00:41:29,480 --> 00:41:32,719 Speaker 1: coffee um, which is where you have fair trade or 684 00:41:33,080 --> 00:41:37,200 Speaker 1: Rainforest Alliance or boots or whatever, that where they have 685 00:41:37,280 --> 00:41:40,040 Speaker 1: to actually certify that these certain practices are being met, 686 00:41:40,160 --> 00:41:41,920 Speaker 1: you know, in order to to sell your coffee in 687 00:41:41,920 --> 00:41:44,799 Speaker 1: that way. So to answer your question, So that's why 688 00:41:44,840 --> 00:41:47,279 Speaker 1: it's a little bit controversial because when we look at 689 00:41:47,280 --> 00:41:49,080 Speaker 1: the price of coffee versus what you have in a 690 00:41:49,080 --> 00:41:52,120 Speaker 1: coffee shop, and I just saw an infographic about this 691 00:41:52,160 --> 00:41:54,560 Speaker 1: the other day that was put out by the Financial Times, 692 00:41:54,880 --> 00:41:59,600 Speaker 1: then the it's it's pretty depressing because you say, for 693 00:41:59,680 --> 00:42:03,799 Speaker 1: a cup of coffee that costs say, uh, five dollars, 694 00:42:04,520 --> 00:42:07,960 Speaker 1: maybe about twenty cents of that is going to the grower. 695 00:42:08,680 --> 00:42:12,759 Speaker 1: I don't think that that's necessarily inappropriate because a lot 696 00:42:12,800 --> 00:42:16,280 Speaker 1: of the costs are are heavier on the shop side. 697 00:42:16,560 --> 00:42:19,880 Speaker 1: For example, if you offer free milk with your coffee, 698 00:42:20,160 --> 00:42:23,279 Speaker 1: that often has almost the same price as a commodity 699 00:42:23,440 --> 00:42:26,720 Speaker 1: to coffee. So so that's that's gonna be one portion 700 00:42:27,320 --> 00:42:31,440 Speaker 1: of your costs. The rent for your coffee shop is 701 00:42:31,480 --> 00:42:35,040 Speaker 1: going to be something like nine times your cost to 702 00:42:35,160 --> 00:42:38,160 Speaker 1: buy the coffee beans. If you have staff, that's gonna 703 00:42:38,200 --> 00:42:40,920 Speaker 1: be something like six times the cost of your of 704 00:42:40,960 --> 00:42:44,040 Speaker 1: your coffee beans. Right, then you have taxes, right, that's 705 00:42:44,080 --> 00:42:46,719 Speaker 1: that's that's four times the cost of those coffee beans. 706 00:42:46,760 --> 00:42:49,160 Speaker 1: So you have all of these different costs that that 707 00:42:49,719 --> 00:42:53,280 Speaker 1: really are built into the price of that cup of coffee, 708 00:42:53,400 --> 00:42:56,840 Speaker 1: which feels unfair, you know in a lot of ways 709 00:42:56,920 --> 00:42:58,800 Speaker 1: to that to that grower. And you know, there's a 710 00:42:58,840 --> 00:43:01,840 Speaker 1: lot of people who have dedicated their lives to ensuring 711 00:43:02,280 --> 00:43:05,520 Speaker 1: that the the grower gets more of that. And uh, 712 00:43:05,640 --> 00:43:07,640 Speaker 1: you know, I think that's a very that's a very 713 00:43:07,640 --> 00:43:11,600 Speaker 1: popular industry in the coffee world is facilitating that. But 714 00:43:11,680 --> 00:43:15,520 Speaker 1: I think what really sort of irks people about it 715 00:43:15,600 --> 00:43:18,200 Speaker 1: is that it feels like a cup of coffee is 716 00:43:18,280 --> 00:43:22,680 Speaker 1: almost like a direct commodity. Right. It feels like, oh, 717 00:43:22,800 --> 00:43:26,320 Speaker 1: you know, if you buy uh an orange in the store, 718 00:43:26,680 --> 00:43:29,080 Speaker 1: like most of the price for that orange should go 719 00:43:29,160 --> 00:43:31,600 Speaker 1: to the grower of the orange. Right, the same thing 720 00:43:31,600 --> 00:43:33,160 Speaker 1: if you buy a cup of coffee, you feel like 721 00:43:33,200 --> 00:43:36,600 Speaker 1: it's it's coffee. Shouldn't you know, require anything but money 722 00:43:36,600 --> 00:43:39,240 Speaker 1: to the grower, But it really requires a whole lot 723 00:43:39,760 --> 00:43:43,480 Speaker 1: of capital aside from that that initial being that a 724 00:43:43,480 --> 00:43:46,200 Speaker 1: being is part of it, but you have to on 725 00:43:46,280 --> 00:43:48,600 Speaker 1: top of you know, once that being just gets sent 726 00:43:48,640 --> 00:43:51,719 Speaker 1: to the exporter. Then you have a huge capital equipment 727 00:43:51,760 --> 00:43:54,319 Speaker 1: costs to process it. Right, all of that those wet 728 00:43:54,360 --> 00:43:56,960 Speaker 1: mills and dry mills we mentioned those are those are 729 00:43:57,080 --> 00:44:02,200 Speaker 1: big intensive machinery. Then you have to process and transport it. Right. 730 00:44:02,320 --> 00:44:04,920 Speaker 1: The we've all seen the prices if you look at 731 00:44:04,920 --> 00:44:07,240 Speaker 1: the Baltic Dry Index or something, you've seen the prices 732 00:44:07,239 --> 00:44:10,080 Speaker 1: of shipping. How much of that goes into it Once 733 00:44:10,120 --> 00:44:14,400 Speaker 1: it comes to the destination market. The roaster has a 734 00:44:14,480 --> 00:44:18,760 Speaker 1: huge amounts of costs, energy costs and UH and capital 735 00:44:18,800 --> 00:44:22,279 Speaker 1: equipment costs to turn that green bean into a brown bean. 736 00:44:22,840 --> 00:44:25,200 Speaker 1: And then once it gets to the shop, right, that 737 00:44:25,320 --> 00:44:27,360 Speaker 1: shop owner has to pay their staff, they have to 738 00:44:27,360 --> 00:44:30,440 Speaker 1: pay health insurance, UH, they have to pay taxes. So 739 00:44:30,560 --> 00:44:34,640 Speaker 1: there is really a whole unseen sort of supply chain 740 00:44:34,680 --> 00:44:38,320 Speaker 1: of costs that go into that. Yeah, it sounds a 741 00:44:38,400 --> 00:44:41,480 Speaker 1: bit like oil, right where there's a huge outlay for 742 00:44:41,640 --> 00:44:45,319 Speaker 1: capital and exploration UM. And then of course you have 743 00:44:45,440 --> 00:44:49,120 Speaker 1: the refining process and all of that actually goes into 744 00:44:49,160 --> 00:44:52,759 Speaker 1: the cost of the end product. Ryan, I want to 745 00:44:52,800 --> 00:44:57,000 Speaker 1: ask you the obvious question here, which is how long 746 00:44:57,280 --> 00:45:01,719 Speaker 1: would we expect these high price is to persist, and 747 00:45:01,840 --> 00:45:05,640 Speaker 1: I asked, because lots of people seem to be suggesting 748 00:45:05,680 --> 00:45:08,040 Speaker 1: that this is going to be a longer term issue. 749 00:45:08,680 --> 00:45:11,560 Speaker 1: But we're actually recording this episode on the day that 750 00:45:11,640 --> 00:45:16,120 Speaker 1: the US Department of Agriculture just released its latest coffee report, 751 00:45:16,200 --> 00:45:19,879 Speaker 1: which is a thing that I didn't know existed. And um, 752 00:45:19,920 --> 00:45:24,600 Speaker 1: the Department just increased its estimate for world coffee output. 753 00:45:24,719 --> 00:45:28,960 Speaker 1: So coffee prices are falling, at least for today. So 754 00:45:29,000 --> 00:45:31,160 Speaker 1: I guess the question is is this a turning point 755 00:45:31,320 --> 00:45:33,839 Speaker 1: or would you expect price pressures to be with us 756 00:45:33,880 --> 00:45:38,799 Speaker 1: for some time? So I would I'm a fundamentalist, And 757 00:45:38,960 --> 00:45:42,160 Speaker 1: the reason that coffee prices are high, I believe or 758 00:45:42,280 --> 00:45:45,440 Speaker 1: because of supply and demand issues, and we are in 759 00:45:45,480 --> 00:45:49,359 Speaker 1: the midst of those supply and demand issues now. Historically, 760 00:45:49,920 --> 00:45:52,719 Speaker 1: if you look at the price of coffee on a 761 00:45:52,960 --> 00:45:55,640 Speaker 1: fifty year charge or hunter deer charge or something, you'll 762 00:45:55,680 --> 00:45:58,160 Speaker 1: see that it looks almost like an e k G. Right, 763 00:45:58,280 --> 00:46:00,400 Speaker 1: you know, like that machine that goes deep in the hospital. 764 00:46:01,000 --> 00:46:03,200 Speaker 1: You have these spikes, then it comes down and rest 765 00:46:03,239 --> 00:46:04,560 Speaker 1: for a minute. And then they had a spike and 766 00:46:04,600 --> 00:46:06,520 Speaker 1: it comes down and rest for a minute, and it 767 00:46:06,560 --> 00:46:09,280 Speaker 1: tends to do that between one dollar and three dollars, 768 00:46:09,360 --> 00:46:13,279 Speaker 1: so to fifty is as my boss or twenty five 769 00:46:13,400 --> 00:46:15,800 Speaker 1: as my my old boss used to say, the hedge fund, 770 00:46:16,320 --> 00:46:19,200 Speaker 1: it's kind of half pregnant. Um, it's not really. It 771 00:46:19,239 --> 00:46:23,200 Speaker 1: hasn't really hit that full three dollar. This is a 772 00:46:23,239 --> 00:46:27,600 Speaker 1: major problem mark that we typically expect from coffee. Now. 773 00:46:27,680 --> 00:46:29,120 Speaker 1: I don't know if it's going to actually go there 774 00:46:29,239 --> 00:46:32,280 Speaker 1: or not. Maybe we've maybe we've solved the supply issues already, 775 00:46:32,440 --> 00:46:35,359 Speaker 1: but it doesn't seem like that. It seems more like 776 00:46:36,000 --> 00:46:38,120 Speaker 1: and in the U. S d. A UH is great 777 00:46:38,160 --> 00:46:41,239 Speaker 1: for things like corn and wheat and especially those US 778 00:46:41,280 --> 00:46:45,360 Speaker 1: centric markets. It's not the people in the coffee world 779 00:46:45,440 --> 00:46:48,239 Speaker 1: don't pay a ton of attention to it. Um, it's not. 780 00:46:48,360 --> 00:46:52,719 Speaker 1: It's not necessarily market moving. But if you look to 781 00:46:52,760 --> 00:46:55,200 Speaker 1: the people in the know right now, it's all about 782 00:46:55,320 --> 00:47:00,120 Speaker 1: revising down Brazil estimates um for this coming crop. And 783 00:47:00,160 --> 00:47:02,760 Speaker 1: that's really what it's all about. We're in the deficit 784 00:47:02,840 --> 00:47:05,719 Speaker 1: market right now, that's for sure. Now the question is 785 00:47:06,360 --> 00:47:09,600 Speaker 1: will twenty two be balanced a little bit of a 786 00:47:09,640 --> 00:47:12,680 Speaker 1: surplus or a deficit, And there are some people saying 787 00:47:12,719 --> 00:47:15,680 Speaker 1: that it's going to be a massive deficit. They're kind 788 00:47:15,680 --> 00:47:19,319 Speaker 1: of outliers. I think the consensus is more for a 789 00:47:19,400 --> 00:47:23,239 Speaker 1: modest deficit and moderate deficit, which is no small thing 790 00:47:23,400 --> 00:47:25,560 Speaker 1: on the back of a big deficit, right, especially when 791 00:47:25,600 --> 00:47:29,719 Speaker 1: you were expecting a surplus after that, So that tightness 792 00:47:30,000 --> 00:47:34,239 Speaker 1: should in theory continue uh into the next deficit year. 793 00:47:35,040 --> 00:47:39,839 Speaker 1: But the real estimates so we're right now, we're in 794 00:47:39,920 --> 00:47:44,360 Speaker 1: the cycle of Brazil where the flowering has happened, the 795 00:47:44,400 --> 00:47:47,320 Speaker 1: setting has happened, but the beans are really too small 796 00:47:47,400 --> 00:47:51,040 Speaker 1: to really be able to get an accurate account engage 797 00:47:51,120 --> 00:47:52,880 Speaker 1: yet of what that crop is going to be. But 798 00:47:52,960 --> 00:47:55,120 Speaker 1: in January we should be able to get a more 799 00:47:55,160 --> 00:47:58,120 Speaker 1: accurate count, will start to see the real estimates coming 800 00:47:58,120 --> 00:48:00,600 Speaker 1: out as to what that crop will be, and that's 801 00:48:00,680 --> 00:48:05,279 Speaker 1: largely going to determine the direction the price of coffee. Ryan, 802 00:48:05,320 --> 00:48:07,279 Speaker 1: thank you so much for coming on odd Lots. I 803 00:48:07,360 --> 00:48:10,520 Speaker 1: just learned a ton about coffee and really appreciate you 804 00:48:10,600 --> 00:48:14,040 Speaker 1: joining my pleasure. Yeah, thanks for having me, Thanks so much. 805 00:48:14,040 --> 00:48:29,520 Speaker 1: Frying that was great, Thank you so much. Frying crazy. 806 00:48:29,800 --> 00:48:32,560 Speaker 1: You know, I know people get frustrated a little bit 807 00:48:33,000 --> 00:48:36,600 Speaker 1: about all these sort of like weather and idio sittingcratic 808 00:48:36,680 --> 00:48:39,520 Speaker 1: explanations because they think like, oh, surely must be all 809 00:48:39,560 --> 00:48:42,719 Speaker 1: about the FED or inflation or something like that. But 810 00:48:42,760 --> 00:48:45,680 Speaker 1: it really does feel like coffee, especially as he described 811 00:48:45,719 --> 00:48:48,160 Speaker 1: at the beginning, like, yeah, it's really about like a 812 00:48:48,200 --> 00:48:49,960 Speaker 1: bunch of weird weather stuff and a lot of it, 813 00:48:50,000 --> 00:48:53,359 Speaker 1: particularly in Brazil. Yeah, I mean, it does seem like 814 00:48:53,520 --> 00:48:58,600 Speaker 1: we've had these events where a confluence of different factors 815 00:48:58,680 --> 00:49:02,360 Speaker 1: come together to create this, Ryan said, the perfect storm 816 00:49:02,440 --> 00:49:05,040 Speaker 1: for a lot of commodity prices recently. But I guess, 817 00:49:05,040 --> 00:49:08,120 Speaker 1: on the other hand, you might expect that to happen 818 00:49:08,400 --> 00:49:11,239 Speaker 1: given that we've just had a global pandemic which has 819 00:49:11,320 --> 00:49:14,680 Speaker 1: really up ended the way we do things normally. Right, 820 00:49:14,760 --> 00:49:18,680 Speaker 1: a pandemic isn't technically a storm. But if you you know, 821 00:49:18,680 --> 00:49:21,000 Speaker 1: if you don't have to um, you don't have to 822 00:49:21,040 --> 00:49:24,919 Speaker 1: extend that metaphor or that analogy like too widely to say, 823 00:49:24,960 --> 00:49:27,560 Speaker 1: like how we could use the term perfect storm and 824 00:49:27,600 --> 00:49:30,520 Speaker 1: have it encompashed that and of course is Ryan pointed out, 825 00:49:30,680 --> 00:49:35,040 Speaker 1: you know, there's energy prices go into coffee. He mentioned 826 00:49:35,080 --> 00:49:38,200 Speaker 1: the Baltic Dry Index and shipping, so all of these 827 00:49:38,239 --> 00:49:42,759 Speaker 1: things getting jostled or whacked at once. Uh yeah, Like 828 00:49:42,840 --> 00:49:46,000 Speaker 1: of course, like it's going to happen even in coffee 829 00:49:46,360 --> 00:49:48,839 Speaker 1: at the you know, in the middle or you know, 830 00:49:49,000 --> 00:49:54,560 Speaker 1: the later stages hopefully of a pandemic whack inflation strikes again. Actually, 831 00:49:54,719 --> 00:49:58,880 Speaker 1: there's one thing I'm bummed I didn't ask Ryan this, 832 00:49:58,960 --> 00:50:02,720 Speaker 1: but I wanted to ask how much of the buying 833 00:50:02,840 --> 00:50:05,360 Speaker 1: that we've seen over the past year that's helping to 834 00:50:05,400 --> 00:50:08,760 Speaker 1: push up prices, how much of that is people buying 835 00:50:08,920 --> 00:50:12,200 Speaker 1: in order to pad their inventories, um, just in case 836 00:50:12,360 --> 00:50:15,960 Speaker 1: they can't get they can't get coffee beans in the future. 837 00:50:16,040 --> 00:50:18,120 Speaker 1: Because again, this is an issue that we see in 838 00:50:18,239 --> 00:50:23,640 Speaker 1: lots of different commodities, this bullwhip effect where businesses people 839 00:50:23,680 --> 00:50:28,760 Speaker 1: find it difficult to balance their ordering with actual demand, 840 00:50:28,920 --> 00:50:31,799 Speaker 1: and so you get these big swings in inventory and 841 00:50:31,840 --> 00:50:33,839 Speaker 1: then a big swing in the price as well. So 842 00:50:34,120 --> 00:50:36,480 Speaker 1: I'm curious whether or not that's coming into play, But 843 00:50:37,520 --> 00:50:39,719 Speaker 1: I guess I'll have two d m Ryan on on 844 00:50:39,800 --> 00:50:42,239 Speaker 1: coffee Twitter. Yeah we can, uh, we can write a 845 00:50:42,640 --> 00:50:45,080 Speaker 1: follow up a blog post on that for the blog. 846 00:50:45,120 --> 00:50:46,879 Speaker 1: But yeah, I mean, you know, as you pointed out, 847 00:50:46,920 --> 00:50:51,400 Speaker 1: like everyone in the industry more or less, is some 848 00:50:51,560 --> 00:50:54,440 Speaker 1: reason to have a prop book on the side, or 849 00:50:54,480 --> 00:50:56,719 Speaker 1: as you put it like everyone is also kind of 850 00:50:56,760 --> 00:51:00,000 Speaker 1: speculating as well, and so if there are these concerns. 851 00:51:00,120 --> 00:51:03,000 Speaker 1: I thought that was really interesting about actually the lack 852 00:51:03,080 --> 00:51:08,360 Speaker 1: of sensitivity on the supply side for tree grown crops 853 00:51:08,760 --> 00:51:11,000 Speaker 1: versus other kinds of crops. So obviously, you know, we 854 00:51:11,120 --> 00:51:13,080 Speaker 1: talked about you know, you can talk about like corn 855 00:51:13,520 --> 00:51:15,360 Speaker 1: and rice and soy, and if it looks like the 856 00:51:15,360 --> 00:51:17,719 Speaker 1: price is surging, then a farmer could say, Oh, I'm 857 00:51:17,719 --> 00:51:21,640 Speaker 1: just gonna like reallocate more of my uh my acreage 858 00:51:21,719 --> 00:51:23,759 Speaker 1: next year to soy or corn or whatever it is. 859 00:51:24,440 --> 00:51:26,719 Speaker 1: That's a really interesting distinction that I had never thought 860 00:51:26,719 --> 00:51:30,480 Speaker 1: about that that's inherently impossible with a tree grown crop 861 00:51:30,760 --> 00:51:32,759 Speaker 1: that's going to have a minimum like say like two 862 00:51:32,880 --> 00:51:36,759 Speaker 1: or three year cycle before that tree bears fruit. And 863 00:51:36,840 --> 00:51:38,680 Speaker 1: we kind of interesting, like I hadn't thought about that 864 00:51:38,680 --> 00:51:40,839 Speaker 1: at all, But you know, like watching the next two years, 865 00:51:40,880 --> 00:51:43,239 Speaker 1: and now I'm gonna like, oh, do about the sort 866 00:51:43,239 --> 00:51:47,720 Speaker 1: of like the supply sensitivity two crops or to any 867 00:51:47,800 --> 00:51:51,839 Speaker 1: commodity in which there is that longer, longer lead time 868 00:51:51,880 --> 00:51:56,239 Speaker 1: on the supplies. Definitely, Joe, what's the what's the best 869 00:51:56,280 --> 00:52:01,360 Speaker 1: coffee that you've ever had? Oh? Good, question. I just 870 00:52:01,520 --> 00:52:03,800 Speaker 1: probably just like at a seven eleven or a dunkin 871 00:52:03,840 --> 00:52:07,400 Speaker 1: Donut somewhere and a styrofoam cup like to me, you know, 872 00:52:07,440 --> 00:52:10,920 Speaker 1: like on the on a road trip, big a big cup, 873 00:52:11,480 --> 00:52:14,000 Speaker 1: like a really big cup of coffee, sort of just 874 00:52:14,040 --> 00:52:16,880 Speaker 1: like hitch the spot. What about you? What you probably have? 875 00:52:17,160 --> 00:52:20,600 Speaker 1: Knowing you, you you probably have like some very specific being. 876 00:52:21,840 --> 00:52:24,319 Speaker 1: I'm not seek out when you're in some soon. No, 877 00:52:24,480 --> 00:52:28,920 Speaker 1: I'm not like I'm not a coffee snob. I like 878 00:52:29,120 --> 00:52:33,000 Speaker 1: plain black coffee as well, but I would say probably 879 00:52:33,080 --> 00:52:36,640 Speaker 1: the best coffee I've ever had was um in Vietnam. 880 00:52:36,760 --> 00:52:40,359 Speaker 1: I had one of those egg cream coffees that has 881 00:52:40,440 --> 00:52:44,360 Speaker 1: like egg mixed into it. That was so good. You 882 00:52:44,360 --> 00:52:47,200 Speaker 1: are a chocolate snob though, right, No, not really. I 883 00:52:47,640 --> 00:52:52,400 Speaker 1: am equal opportunity chocolate consumer. I like all the chocolate, 884 00:52:52,520 --> 00:52:55,400 Speaker 1: like from from her, She's all the way up to 885 00:52:55,560 --> 00:53:00,160 Speaker 1: the very fancy stuff. All right. Well, anyway, plenty more 886 00:53:00,160 --> 00:53:02,319 Speaker 1: to talk about. We'll have Ryan back on next year, 887 00:53:02,680 --> 00:53:05,800 Speaker 1: or to talk about what happens if the if supply 888 00:53:05,840 --> 00:53:09,600 Speaker 1: and demand normalized, and we'll be watching those January January 889 00:53:09,640 --> 00:53:13,640 Speaker 1: being reports from Brazil. Yeah, alright, shall we leave it 890 00:53:13,680 --> 00:53:16,279 Speaker 1: there let's leave it there, all right. This has been 891 00:53:16,320 --> 00:53:19,960 Speaker 1: another episode of the Ad Thoughts Podcast. I'm Tracy Alloway. 892 00:53:20,040 --> 00:53:23,239 Speaker 1: You can follow me on Twitter at Tracy Alloway and 893 00:53:23,280 --> 00:53:25,440 Speaker 1: I'm Joe Why Isn't All. You can follow me on 894 00:53:25,480 --> 00:53:29,040 Speaker 1: Twitter at the Stalwart. Follow our guests on Twitter Ryan Delaney, 895 00:53:29,160 --> 00:53:34,120 Speaker 1: He's at Coffee Ninja Ryan. Follow our producer Laura Carlson, 896 00:53:34,280 --> 00:53:37,880 Speaker 1: She's at Laura M. Carlson. Followed the Bloomberg head of podcast, 897 00:53:37,920 --> 00:53:41,600 Speaker 1: Francisca Levi at Francisca Today. And check out all of 898 00:53:41,600 --> 00:53:45,560 Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks 899 00:53:45,600 --> 00:54:02,520 Speaker 1: for listening to