WEBVTT - Why the Price of Coffee Beans Soared in the Last Year 0:00:10.720 --> 0:00:14.560 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.600 --> 0:00:19.440 I'm Joe Wisn'tal And I'm Tracy Alloway. Tracy, We've talked 0:00:19.480 --> 0:00:24.200 a lot about various stresses and price increases that we've 0:00:24.200 --> 0:00:26.720 seen throughout the economy. But one of the themes I 0:00:26.720 --> 0:00:28.760 guess I would say is and we've we've joked about, 0:00:28.880 --> 0:00:30.639 is we talked about a lot of stuff that's very 0:00:30.720 --> 0:00:33.239 much in the background, things that are sort of like 0:00:33.560 --> 0:00:38.839 disconnected or mediated by several steps from the end consumer. Wait, Joe, 0:00:38.880 --> 0:00:41.479 can you explain that we talk we talked a lot, 0:00:41.560 --> 0:00:44.200 you know, like we recently talked about the increased price 0:00:44.240 --> 0:00:46.840 of palettes, right, and then it's gone up a lot. 0:00:47.040 --> 0:00:51.000 But most people don't experience the increased price of wooded 0:00:51.000 --> 0:00:53.920 palettes or even the increased price of a shipping container 0:00:54.320 --> 0:00:57.240 in their day to day life. Oh, I see, Well, 0:00:57.400 --> 0:01:01.120 I don't know. Um, I guess the gets passed on 0:01:01.360 --> 0:01:05.640 like eventually, right. But yes, you're right, we're not like 0:01:05.720 --> 0:01:09.440 purchasing containers once a month, um in the same way 0:01:09.480 --> 0:01:13.319 that we are purchasing consumer goods and things like food 0:01:13.360 --> 0:01:16.600 and stuff like that. Yeah, exactly right, That's all I mean, 0:01:16.640 --> 0:01:18.720 which is that a lot of these things are things 0:01:18.760 --> 0:01:22.119 you wouldn't necessarily see yourself. Even lumber, which we've talked 0:01:22.160 --> 0:01:25.240 a lot about on the show, you might not necessarily see. 0:01:25.640 --> 0:01:27.800 We've talked a lot about grain, which people see, but 0:01:27.880 --> 0:01:30.640 in many ways that manifest itself in the form of 0:01:30.720 --> 0:01:35.319 higher meat prices or dairy prices for consumers. So a 0:01:35.319 --> 0:01:36.920 lot of these things they seem to be like sort 0:01:36.920 --> 0:01:40.959 of like background factors that eventually feed through. Yeah. But 0:01:41.400 --> 0:01:44.800 on the other hand, since we're basically talking about inflation now, 0:01:44.840 --> 0:01:49.000 there are some price increases out there that are very 0:01:49.080 --> 0:01:54.720 much in front of consumers right now. Um, primarily food, right. 0:01:55.280 --> 0:01:57.480 I did a deep dive into mayonnaise and that was 0:01:57.800 --> 0:02:01.680 like something like eight person And everyone has an opinion 0:02:02.000 --> 0:02:04.840 on food inflation and what's going on, and it really 0:02:04.840 --> 0:02:09.040 seems to um, I guess touch and nerve with people. Yeah, 0:02:09.160 --> 0:02:12.560 food inflation in particular, gasoline probably the other one is 0:02:12.680 --> 0:02:16.280 that people that really touches a nerve, but food for sure. 0:02:16.600 --> 0:02:18.919 And everyone has a theory and everyone's trying to figure 0:02:18.919 --> 0:02:21.800 out is this a macro thing that's something about the 0:02:21.840 --> 0:02:24.680 money supply or fiscal that's pushing the price of everything 0:02:24.720 --> 0:02:27.520 up with food. You also have this other dynamic of 0:02:27.600 --> 0:02:32.480 wet weather and other idiosyncratic factors. Anyway, I'm very excited 0:02:32.520 --> 0:02:35.600 because we're going to be talking about another consumable good 0:02:36.000 --> 0:02:40.200 that is highly emotional for people, that's highly relevant to 0:02:40.240 --> 0:02:43.799 a lot of people, and that is the price of coffee, right, 0:02:43.880 --> 0:02:47.919 so truly something that a lot of people would consume 0:02:48.240 --> 0:02:52.360 on a daily basis. So the price of coffee has 0:02:52.639 --> 0:02:56.800 dramatically surged over the past year or so, and uh, 0:02:56.880 --> 0:02:59.920 I guess the question is how much of that pricingcrea 0:03:00.160 --> 0:03:03.960 is actually being passed on to consumers. And here I 0:03:04.040 --> 0:03:08.720 have to confess I really have no familiarity with the 0:03:09.160 --> 0:03:12.880 coffee market at all. So I'm very, very curious to 0:03:12.960 --> 0:03:17.920 learn how purchasing actually works, how hedging works, and how 0:03:17.919 --> 0:03:20.240 the coffee sort of gets from the farmers all the 0:03:20.280 --> 0:03:23.520 way to Starbucks or you know, a can in the 0:03:23.520 --> 0:03:27.320 grocery store. I am very excited about learning all that 0:03:27.400 --> 0:03:29.400 as well. So we have the perfect guest we're going 0:03:29.480 --> 0:03:31.960 to be speaking with, Ryan Delaney. He is the founder 0:03:31.960 --> 0:03:36.360 and chief analyst at Coffee Trading Academy. He has a 0:03:36.440 --> 0:03:41.280 career of coffee trading both the spot physical markets futures 0:03:41.280 --> 0:03:44.200 and so forth. That he trains companies, he gives them 0:03:44.200 --> 0:03:47.200 analysis and research on how the coffee market is doing. 0:03:47.360 --> 0:03:50.160 So we're gonna learn everything about how this commodity market 0:03:50.160 --> 0:03:54.000 works hopefully. Ryan, thank you so much for joining us. Yeah, 0:03:54.040 --> 0:03:57.040 thanks for having me. Why do you actually just give 0:03:57.120 --> 0:04:00.880 us the very brief overview of why are we talking 0:04:00.880 --> 0:04:05.120 to you? What is your expertise in the coffee market? 0:04:05.120 --> 0:04:07.600 How do you know it? That's a good question. I 0:04:07.680 --> 0:04:10.640 got no idea why you guys are talking about. So 0:04:10.760 --> 0:04:12.640 I've been I've been in the coffee industry for about 0:04:12.680 --> 0:04:16.000 a dozen years. Um, but come up, my entire sort 0:04:16.000 --> 0:04:20.800 of commodity experience is in coffee. So I uh to 0:04:20.880 --> 0:04:23.839 give you, you know, the thirty second version of my 0:04:23.839 --> 0:04:26.880 my background here. I started out with one of the 0:04:26.960 --> 0:04:32.320 large multinationals and you know their rotational program um that is, 0:04:32.360 --> 0:04:36.760 one of the top traders of coffee. So I worked 0:04:36.839 --> 0:04:40.800 and lived in origin in India and in Uganda sort 0:04:40.800 --> 0:04:44.560 of buying coffee locally, processing it, uh and then exporting 0:04:44.560 --> 0:04:47.479 it to two consumers. And then I came back to 0:04:47.520 --> 0:04:51.080 the US and traded coffee physical coffee there for a 0:04:51.120 --> 0:04:54.599 little while before I transitioned to our company's hedge fund. 0:04:54.680 --> 0:04:57.720 And you know a lot of these large multinational commodity 0:04:57.760 --> 0:05:01.120 firms have hedge funds to sort of capitalize on their 0:05:01.200 --> 0:05:05.400 their information informational edge, you know. Um, so I was 0:05:05.480 --> 0:05:09.279 the coffee and coco analysts and trader for our hedge fund. 0:05:09.800 --> 0:05:11.839 And uh, you know, one thing you'll hear a lot 0:05:11.960 --> 0:05:14.159 in the coffee industry the more you talk to coffee 0:05:14.160 --> 0:05:18.080 people is how much uh, there's there's coffee guys, there's 0:05:18.080 --> 0:05:21.400 coffee gals. You know, we refer to ourselves as coffee people. 0:05:21.480 --> 0:05:25.280 It's it's very much a tight knit community. So we 0:05:25.400 --> 0:05:29.280 I missed that interaction, you know. So I actually transitioned 0:05:29.279 --> 0:05:31.479 to the cell side from the from the hedge fund 0:05:31.560 --> 0:05:34.040 and and from the prop book I was trading, and 0:05:34.080 --> 0:05:37.599 from there I was that was actually very interesting because 0:05:37.720 --> 0:05:41.480 I was advising clients on managing their price risk, their 0:05:41.480 --> 0:05:44.760 coffee price risk across the supply chain. So that meant 0:05:44.760 --> 0:05:50.400 producers and exporters, trade houses and uh and traders, speculators, 0:05:50.440 --> 0:05:53.479 but also roasters and consumers. So I kind of really 0:05:53.760 --> 0:05:58.040 got a crash course um in in price risk management 0:05:58.080 --> 0:06:01.720 for coffee, and that led me to starting this this 0:06:01.800 --> 0:06:06.160 firm that I work in now where I provide research 0:06:06.320 --> 0:06:09.120 and training to people who have a steak in the 0:06:09.160 --> 0:06:12.960 price and coffee. So, first of all, it's really um 0:06:13.000 --> 0:06:16.120 fascinating to think that a company like Nestley might have 0:06:16.360 --> 0:06:20.760 a a hedge fund nestled inside of it trading coffee futures. 0:06:21.000 --> 0:06:22.839 And I definitely want to ask more about that. But 0:06:22.960 --> 0:06:26.480 before we do, I have a very basic question and 0:06:26.520 --> 0:06:28.360 I was just thinking of it when when I said 0:06:28.360 --> 0:06:31.480 in the intro, you know the price of coffee has surged. 0:06:32.000 --> 0:06:34.800 If we say the price of coffee is at a 0:06:34.880 --> 0:06:39.240 ten year high, what are we actually talking about, Like, 0:06:39.320 --> 0:06:43.600 what is the benchmark of being because I know they're 0:06:43.640 --> 0:06:47.680 there are obviously different types, but like, what's the being 0:06:47.720 --> 0:06:52.360 equivalent of the I guess the ten year US treasury? Okay, 0:06:52.400 --> 0:06:57.479 So I love that being equivalent of the question. Yeah, 0:06:57.680 --> 0:07:00.320 if you could put it in financial terms, Uh. Yeah, 0:07:00.320 --> 0:07:05.320 So the coffee futures market, effectually known as the C market, 0:07:05.720 --> 0:07:09.240 is the primary benchmark for the price of coffee. As 0:07:09.240 --> 0:07:13.080 you kind of alluded to, there are two major types 0:07:13.120 --> 0:07:15.480 of coffee. There's Arabica, which is what we trade on 0:07:15.520 --> 0:07:18.120 the C market. Uh, and then there's Robusta, which is 0:07:18.120 --> 0:07:23.240 what is traded on the London market. Now, the Arabic 0:07:23.360 --> 0:07:26.040 market is traded in cents per pound and the Robusta 0:07:26.040 --> 0:07:29.040 market is traded in dollars per metric ton. But the 0:07:29.080 --> 0:07:34.640 Arabic market is the larger, more volatile and more exciting market, 0:07:34.720 --> 0:07:36.520 so that that also attracts a lot more of this 0:07:36.840 --> 0:07:40.840 speculative interest. But those are the two main markets that 0:07:40.880 --> 0:07:43.120 were trading. And of course there's there's you know, a 0:07:43.160 --> 0:07:48.120 spot market. There's a cash market that's incredibly varied because 0:07:48.400 --> 0:07:52.040 coffee has really exploded in the last twenty years into 0:07:52.120 --> 0:07:55.600 this this idea of specialty coffee and fine coffee. So 0:07:55.640 --> 0:07:58.760 there's a whole you know, secondary market out there, much 0:07:58.800 --> 0:08:02.120 like there is for for wine. Right there's probably a 0:08:02.160 --> 0:08:05.920 benchmark price for wine, but there's also a huge variety 0:08:06.120 --> 0:08:08.320 on the you know, on the low and the high end. 0:08:08.640 --> 0:08:11.640 So quickly, quicklyure are these are the futures that are traded. 0:08:11.680 --> 0:08:15.640 Are they cash settled futures or are they physical delivery future? 0:08:16.560 --> 0:08:21.320 They are physical delivery and that is an essential part 0:08:21.360 --> 0:08:25.960 of the you know, keeping these futures honest. So there 0:08:26.000 --> 0:08:30.360 really is a connection you know, between the futures prices 0:08:30.440 --> 0:08:33.000 and the and the physical and and then you know 0:08:33.040 --> 0:08:37.920 that's done through the certified stocks. It's particularly relevant because 0:08:38.520 --> 0:08:43.559 the exchange has set very steep aging penalties and and 0:08:43.600 --> 0:08:45.839 that exists for a very important reason, and that's to 0:08:46.000 --> 0:08:49.360 to facilitate that cash convergence. Right. We don't want the 0:08:49.360 --> 0:08:52.719 certified stocks to just be a sort of a theoretical 0:08:52.880 --> 0:08:55.280 financial asset. At the end of the day, someone needs 0:08:55.280 --> 0:08:58.040 to take that coffee out of the warehouse and drink it, right, 0:08:58.160 --> 0:09:02.920 So they put heavy aging penalties on that to incentivize 0:09:03.400 --> 0:09:10.079 consumers to d stock certified inventory and consuming. So could 0:09:10.080 --> 0:09:13.240 we um dive into that a little bit more, because 0:09:13.480 --> 0:09:17.479 I was reading that people traders are using more futures 0:09:17.800 --> 0:09:20.560 than normal right now because they're worried they might not 0:09:20.640 --> 0:09:24.280 be able to get enough stock piles on the physical 0:09:24.720 --> 0:09:27.360 the spot market, so they're worried there won't be enough 0:09:27.400 --> 0:09:31.439 to actually take delivery of. Can you just explain how 0:09:31.480 --> 0:09:34.920 that process typically works and how much of trading is 0:09:35.000 --> 0:09:40.320 divided between UM spot and futures and sort of forward 0:09:40.400 --> 0:09:44.200 hedging versus buying right now, because I imagine again a 0:09:44.240 --> 0:09:48.040 company like Starbucks or Nestley, which needs huge amounts of 0:09:48.040 --> 0:09:52.080 coffee every year is probably hedging its exposure very far 0:09:52.120 --> 0:09:57.200 in advance. Yeah, So it really depends because there's a 0:09:57.600 --> 0:10:01.520 there is a variety of size in the consuming side 0:10:02.000 --> 0:10:05.240 and on the export side as well. Right, So there 0:10:05.320 --> 0:10:08.640 is a threshold that you need of of production or 0:10:08.679 --> 0:10:12.280 consumption to to make hedging in the futures market relevant 0:10:12.280 --> 0:10:17.400 and useful. So, for for context, a single futures contract 0:10:17.400 --> 0:10:21.600 of Araplica is thirty seven five pounds. So if you're 0:10:21.679 --> 0:10:24.880 just a small mom and pop roaster, you're probably not 0:10:24.920 --> 0:10:27.280 going to be hedging, you know, on the futures market 0:10:27.679 --> 0:10:31.320 in terms of adding coverage. This is, as you kind 0:10:31.360 --> 0:10:34.680 of mentioned, something for the bigger traders or the bigger 0:10:34.720 --> 0:10:39.640 consumers to deal with. They have a a pretty you know, 0:10:39.760 --> 0:10:43.320 clear system. They have a methodology to how they're they're 0:10:43.320 --> 0:10:47.160 acquiring coffee in general, and that is a combination of 0:10:47.240 --> 0:10:51.719 physical contracts and futures contracts. If you're if you're a 0:10:51.800 --> 0:10:55.120 large company like you know, Nestle or Folgers or whoever, 0:10:55.240 --> 0:10:58.800 you you have a network of suppliers um and you 0:10:58.840 --> 0:11:01.559 will put out you know, sort of bounties. You'll say, hey, 0:11:01.720 --> 0:11:03.680 who wants to sell me coffee, give me your best 0:11:03.720 --> 0:11:07.560 bids or offers rather and and they will send out 0:11:07.559 --> 0:11:11.120 proposals to to those big companies. I don't want to 0:11:11.120 --> 0:11:14.760 get too into at the moment UH the nuance of 0:11:15.520 --> 0:11:20.479 differential contracts and and price to be fixed contracts, but essentially, 0:11:20.720 --> 0:11:23.120 if you're a company like Nestlie, you need to there 0:11:23.200 --> 0:11:26.120 is a spread, right, there is a premium or a 0:11:26.200 --> 0:11:30.880 discount to buying specific physical qualities of coffee to the 0:11:30.920 --> 0:11:34.200 futures contract. So there's there's two different kind of risks 0:11:34.240 --> 0:11:36.880 that they need to manage, but there there is also 0:11:37.080 --> 0:11:41.240 a general larger correlation. So if you're a company that 0:11:41.280 --> 0:11:45.760 does size that needs that physical of coffee, you have 0:11:45.800 --> 0:11:49.000 the option of either buying that physical making a physical 0:11:49.040 --> 0:11:53.400 contract with a producer or an exporter to buy that coffee. 0:11:53.559 --> 0:11:56.680 Or if you don't have a good deal there's not 0:11:56.720 --> 0:11:59.800 a good UH offer to you, or or you're not 0:12:00.000 --> 0:12:02.760 sure exactly which qualities you want to buy, you could 0:12:02.800 --> 0:12:05.480 buy futures right, so you could just buy you know, 0:12:05.679 --> 0:12:08.760 as much of the physical that you need in futures 0:12:08.800 --> 0:12:12.839 contracts and hold that as a hedge until you are 0:12:13.000 --> 0:12:17.319 prepared to sell those out and buy your your physicals. 0:12:33.160 --> 0:12:37.160 Just for the sort of my visual understanding of this, 0:12:37.640 --> 0:12:41.439 can you sort of walk through very quickly every player 0:12:41.480 --> 0:12:46.000 that's involved between the grower and you mentioned you worked 0:12:46.000 --> 0:12:48.680 in India and Uganda. And then I drink some coffee, 0:12:48.960 --> 0:12:51.080 Let's say I buy it at a gas gas station, 0:12:51.400 --> 0:12:53.440 or I drink it at the office like sort of 0:12:53.440 --> 0:12:56.600 like office office quality coffee, which is actually very good. 0:12:56.600 --> 0:12:58.520 At Bloomberg by the way, we have really good coffee. 0:12:58.800 --> 0:13:01.480 But anyway, can you just talk like, okay, someone, there's 0:13:01.480 --> 0:13:04.600 a farmer in Uganda, India. Can you just real quickly 0:13:04.640 --> 0:13:08.280 like the whole supply chain from farmer to mouth. Oh, sure, 0:13:08.320 --> 0:13:12.599 I can. The coffee industry is really divided into or 0:13:12.679 --> 0:13:14.559 let me sit put it this way, that the farmers 0:13:14.920 --> 0:13:22.040 are primarily divided into Brazil and everybody else. Historically coffee 0:13:22.160 --> 0:13:26.160 is produced, it's a it's a small holder production. It's 0:13:26.160 --> 0:13:30.199 done on small farms and small estates um and that's 0:13:30.400 --> 0:13:36.559 has geographical underpinnings because coffee is what we call high grown, 0:13:36.679 --> 0:13:39.800 so it's grown in the mountains and it's tropical. So 0:13:39.840 --> 0:13:43.680 it's really only possible to grow coffee in tropical mountains. 0:13:44.200 --> 0:13:49.199 And that doesn't facilitate itself well to big, mega farms, 0:13:49.520 --> 0:13:51.360 and so that that kind of has this sort of 0:13:51.360 --> 0:13:55.439 small holder farmer implication. The exception to that is Brazil, 0:13:55.679 --> 0:14:00.280 which has these very large plateaus, so they are able 0:14:00.320 --> 0:14:02.920 to grow large amounts of coffee and indeed they're the 0:14:02.960 --> 0:14:06.880 world's largest producer of coffee and mechanize it at the 0:14:06.920 --> 0:14:10.120 same time. So they are the exception where they have these, uh, 0:14:10.160 --> 0:14:12.600 these these large farms and and sort of the mass 0:14:12.640 --> 0:14:18.920 production of the farming of coffee. So you're gonna have 0:14:19.560 --> 0:14:24.480 exporters now who are generally multinationals, but there's also local 0:14:24.520 --> 0:14:27.880 exporters as well, who are positioned in all of these 0:14:28.360 --> 0:14:31.680 key origins, these key producing origins, and they'll have buying 0:14:31.720 --> 0:14:36.000 centers uh, spread out throughout the coffee farming regions, and 0:14:36.080 --> 0:14:39.680 much like you know grain elevators or whatever in the 0:14:39.800 --> 0:14:43.640 US and other countries. UH, the farmers will will have 0:14:43.720 --> 0:14:47.120 relationships with those buyers and they'll know the prices and 0:14:47.160 --> 0:14:50.880 they will deliver They will harvest the coffee themselves and 0:14:50.920 --> 0:14:56.040 then they will deliver it to the exporters. The processing 0:14:56.360 --> 0:14:59.480 of coffee is actually kind of nuanced as well, and 0:14:59.520 --> 0:15:03.920 there's two primary ways of processing coffee. So the coffee 0:15:03.920 --> 0:15:06.440 bean itself, like that brown bean that you see in 0:15:06.440 --> 0:15:09.720 in the bag when you buy that bag, that starts 0:15:09.760 --> 0:15:12.760 out as a green bean inside of a ripe cherry, 0:15:12.920 --> 0:15:15.960 right like a red cherry piece of fruit. So the 0:15:16.200 --> 0:15:19.040 two ways of processing that and getting that bean to 0:15:19.320 --> 0:15:23.240 the roaster is either what we call it the natural process, 0:15:23.280 --> 0:15:26.400 which means that the farmer picks those those cherries, they 0:15:26.440 --> 0:15:29.360 spread them out on a patio to dry, and they 0:15:29.520 --> 0:15:31.920 dry over that bean like a like a kind of 0:15:31.920 --> 0:15:34.600 like a raisin, you know, um, like a hard raisin, 0:15:34.680 --> 0:15:36.760 and you can actually pick those up and shake them 0:15:36.760 --> 0:15:39.200 and hear a little rattle inside when they're when they're ready, 0:15:39.480 --> 0:15:42.880 or they have the washed process. And with the wash process, 0:15:42.920 --> 0:15:46.400 you're picking that ripe cherry and you are putting it 0:15:46.480 --> 0:15:50.200 through a wet mill and and that sort of has 0:15:50.560 --> 0:15:54.720 kind of like uh, remember you know the log shoot 0:15:54.800 --> 0:15:57.280 ride in Disney World where you're you know, you're getting 0:15:57.320 --> 0:15:59.560 the log and it goes down to the thing of water. 0:15:59.760 --> 0:16:02.480 It's what I like that. And so you're being goes 0:16:02.520 --> 0:16:05.520 through this this shoot of water and goes through kind 0:16:05.520 --> 0:16:08.160 of like a cheese graater type of device, which pulps 0:16:08.200 --> 0:16:11.880 that cherry off of it and then brings your washed 0:16:11.920 --> 0:16:14.760 green being at the end out the other side. So 0:16:14.800 --> 0:16:17.880 those are your two primary ways of getting that that 0:16:17.960 --> 0:16:21.960 being to the the exporter UH, and the exporter will 0:16:21.960 --> 0:16:26.080 convert either of those methods into a green processed green 0:16:26.160 --> 0:16:29.320 being that they will sell to the consumer. Now, the 0:16:29.320 --> 0:16:31.720 big issue that you guys have probably been talking about 0:16:31.720 --> 0:16:34.120 with with others and um that everyone is talking about 0:16:34.120 --> 0:16:37.600 in general is supply chain issues. Right so right now 0:16:37.800 --> 0:16:40.760 there is a big issue especially in Brazil, but all 0:16:40.800 --> 0:16:44.200 over the world in Asia, Vietnam with getting containers and 0:16:44.240 --> 0:16:47.080 getting ships there to to actually get that coffee to 0:16:47.160 --> 0:16:49.360 the people who need it UM. And this is this 0:16:49.400 --> 0:16:52.280 has been affecting the price and the supply and demand 0:16:52.320 --> 0:16:56.720 issues because now destination markets have had to draw down 0:16:56.760 --> 0:17:00.920 inventories and consume locally coffee that normally would have been 0:17:01.040 --> 0:17:04.320 been imported in. Now, once that gets into the destination 0:17:04.359 --> 0:17:07.160 marketing and that importer has that coffee, they will sell 0:17:07.200 --> 0:17:10.439 it to the roasters UM. And those can be large 0:17:10.520 --> 0:17:14.720 roasters like the various groups that that roast Dunk and 0:17:14.760 --> 0:17:18.359 Donuts coffee, or or or small roasters or mom and 0:17:18.400 --> 0:17:22.800 pop shops and when that roaster gets that those bags 0:17:22.840 --> 0:17:25.600 of green beans, then they will put it in their 0:17:25.680 --> 0:17:28.720 roasting machines and they will come up with with blends 0:17:28.760 --> 0:17:31.080 of coffee and then it's and then it's delivered to 0:17:31.119 --> 0:17:34.800 the to the coffee shops. So maybe this is a 0:17:34.880 --> 0:17:39.359 good place to explain exactly what is driving the price 0:17:39.400 --> 0:17:43.080 of coffee higher. And I know you mentioned supply chain issues, 0:17:43.320 --> 0:17:47.120 but it seems like, well with most things that seem 0:17:47.240 --> 0:17:51.280 to be experiencing a shortage or some degree of scarcity recently, 0:17:51.600 --> 0:17:55.439 it seems like it's a combination of factors. Absolutely, and 0:17:55.480 --> 0:17:59.159 it's really been you know, what do you call it 0:17:59.160 --> 0:18:02.920 a perfect store? You know, a confluence of events here. 0:18:03.359 --> 0:18:07.320 I am a fundamental um trader at heart. That's kind 0:18:07.359 --> 0:18:09.840 of how I was raised. And what I believe drives 0:18:10.000 --> 0:18:13.440 markets in general is supplying de marin and fundamentals. And 0:18:13.440 --> 0:18:17.879 and this has been a fundamental story. So coffee is 0:18:17.920 --> 0:18:23.119 a biannual crop, so it um meaning that the coffee 0:18:23.200 --> 0:18:25.359 is a is a tree crop, unlike row crops, and 0:18:25.400 --> 0:18:29.520 that you're planting with you know, corn or wheat or 0:18:29.640 --> 0:18:32.919 cotton or whatever. So you have a tree that produces 0:18:33.000 --> 0:18:35.720 fruit and and so what happens is the tree usually 0:18:35.960 --> 0:18:39.040 produces a lot of fruit one year and then the 0:18:39.119 --> 0:18:41.119 next year it sort of has to recover and rest, 0:18:41.480 --> 0:18:43.560 and so it will have less fruit the next year. 0:18:43.720 --> 0:18:46.479 And that's sort of the general biannual cycle of coffee. 0:18:46.480 --> 0:18:47.879 So you tend to have an on near and an 0:18:47.960 --> 0:18:50.600 off here. So we had a very big on year 0:18:50.800 --> 0:18:55.200 in Um where there was a surplus and abundance of coffee, 0:18:55.880 --> 0:19:00.400 and then one we were expecting to have an off year, 0:19:00.440 --> 0:19:03.680 and that was normal, but but it actually was exacerbated 0:19:03.720 --> 0:19:06.040 a bit more than that due to droughts in Brazil 0:19:06.480 --> 0:19:12.160 that that affected the coffee crop on sort of two ends. Now, again, 0:19:12.520 --> 0:19:16.240 coffee is a tree crop, so the way that the 0:19:16.280 --> 0:19:20.320 fruit comes onto the tree is in sort of two phases. 0:19:21.119 --> 0:19:24.119 You will have the branch growth the year prior to 0:19:24.640 --> 0:19:27.280 the coffee crop, and so that you will have what 0:19:27.320 --> 0:19:30.040 we call new growth on the end of the branch 0:19:30.119 --> 0:19:33.480 of the coffee tree, and then the following season you 0:19:33.520 --> 0:19:37.160 will get flowering and fruit on that new growth. So 0:19:37.320 --> 0:19:41.359 what we had was we had a drought that stunted 0:19:41.560 --> 0:19:45.240 that new growth and made less room for coffee cherries, 0:19:46.280 --> 0:19:49.960 and then we had also aged route during that blooming 0:19:50.040 --> 0:19:52.520 season during the flowering season where where those would grow 0:19:52.560 --> 0:19:55.160 into new fruits. So that had kind of a double 0:19:55.160 --> 0:20:00.360 whammy on already a down year for for coffee. Now, 0:20:00.560 --> 0:20:05.280 just to make things even more interesting, um, we also 0:20:05.359 --> 0:20:08.959 had the worst frost that we've seen in Brazil um 0:20:09.040 --> 0:20:13.520 in in in twenty five years. And so even though 0:20:13.560 --> 0:20:15.879 we had this bad crop that we were like, okay, 0:20:15.880 --> 0:20:18.359 this is a bad crop. There's a deficit, but you know, 0:20:18.480 --> 0:20:20.760 we had an on year the year prior. That's normal, 0:20:20.880 --> 0:20:23.400 so you know, the market needed to rally, and all 0:20:23.480 --> 0:20:26.320 that was was well and good, but at the same time, 0:20:26.400 --> 0:20:31.080 we had this frost that essentially killed a lot of 0:20:31.080 --> 0:20:34.560 the new growth now on on the tree that we 0:20:34.560 --> 0:20:37.760 were expecting for our next on crop, our next on cycle. 0:20:38.440 --> 0:20:42.480 So that turned out to be an absolute disaster. And 0:20:42.520 --> 0:20:45.840 that was just back in July, and so we were 0:20:45.880 --> 0:20:50.160 waiting until the flowering which which starts in um sort 0:20:50.160 --> 0:20:55.080 of October November, and to see how how bad things were. 0:20:55.480 --> 0:20:58.320 And we had a decent flowering, so we thought things 0:20:58.359 --> 0:21:02.400 were gonna be okay, but it turned out that what 0:21:02.440 --> 0:21:06.960 we call the setting what was subpar. So what what 0:21:07.040 --> 0:21:10.560 happens is that the branch grows these flowers, um, and 0:21:10.600 --> 0:21:14.200 then those become pollinated and turned into fruits they set 0:21:14.240 --> 0:21:17.879 into a bean. But uh, we much less of those 0:21:18.160 --> 0:21:22.200 flowers turned into you know, juvenile beans than than expected. 0:21:22.560 --> 0:21:25.840 So now we have a massive deficit in the current 0:21:25.920 --> 0:21:28.919 year that we're already in and the bumper crop that 0:21:28.960 --> 0:21:31.679 we were looking to save this deficit to solve the 0:21:31.680 --> 0:21:36.359 deficit has now been severely compromised by frost. So that's 0:21:36.400 --> 0:21:39.800 the supply and demand issue, but it kind of we 0:21:39.880 --> 0:21:42.639 had other factors as well that went into that. You know, 0:21:42.800 --> 0:21:46.000 we had We've been talking a lot about inflation, right, UM, 0:21:46.080 --> 0:21:50.080 that's been uh, certainly a factor, and we saw that 0:21:50.400 --> 0:21:56.840 coffee largely um rallied into uh dollar weakness, uh you know, 0:21:57.160 --> 0:22:00.560 last the earlier part of this year, UM, along with 0:22:00.600 --> 0:22:03.840 many other commodities, and it's really kind of never looked back. 0:22:05.160 --> 0:22:08.520 You know. The people are always it's like people hear 0:22:08.680 --> 0:22:12.919 these supply side explanations and weather in particular, and I 0:22:12.960 --> 0:22:15.159 feel like it's almost unsatisfied to them. And what you 0:22:15.200 --> 0:22:17.360 said is like totally makes sense, but they're like, yeah, 0:22:17.440 --> 0:22:20.840 but sure, certainly there must be like some big macro story. 0:22:20.840 --> 0:22:23.639 And you mentioned the dollar a little bit. I'm curious 0:22:23.640 --> 0:22:26.520 if there's any sort of demand element, and I'm thinking 0:22:26.520 --> 0:22:29.800 specifically in two ways, Like one is a has there 0:22:29.840 --> 0:22:32.720 been a new change in overall volume demand? But be 0:22:33.560 --> 0:22:37.760 did the shift in particularly the developed world and say, 0:22:37.840 --> 0:22:41.120 you're really all over the world from offices where people 0:22:41.119 --> 0:22:44.840 obviously consume a lot of coffee to uh home to 0:22:45.000 --> 0:22:49.239 working from home? Did that change coffee buying behavior at 0:22:49.280 --> 0:22:51.720 all in terms of what kind of coffee people drink 0:22:51.960 --> 0:22:54.560 and did that have any sort of ripple effects on 0:22:54.640 --> 0:22:58.240 the overall market. Yeah? Absolutely. And you know there's a 0:22:58.240 --> 0:23:01.080 reason that we look at the supply side over the 0:23:01.160 --> 0:23:04.199 demand side, I think, UM, at least in coffee, and 0:23:04.240 --> 0:23:07.399 that's because the supply side is volatile and the demand 0:23:07.440 --> 0:23:10.399 side is relatively static. So I always teach them my 0:23:10.520 --> 0:23:14.840 classes that you know, coffee is has inelastic demand and 0:23:14.880 --> 0:23:18.040 it also has inelastic supply generally UM. And that's why 0:23:18.080 --> 0:23:21.439 it's so it's so volatile because because it's a tree crop, 0:23:21.840 --> 0:23:25.520 you can't just plant more if prices are high. You 0:23:25.600 --> 0:23:29.320 have to plant that profits several years earlier, and so 0:23:29.480 --> 0:23:33.000 this exacerbates moves on either side. So you know, prices 0:23:33.040 --> 0:23:35.359 are high, you plant a bunch of new trees, and 0:23:35.400 --> 0:23:38.520 then three years later you start getting the supply from 0:23:38.560 --> 0:23:41.040 that um that point, so then you can get a 0:23:41.080 --> 0:23:44.119 massive oversupply at that point. But to your to your 0:23:44.119 --> 0:23:47.480 point about demand, to the initial reaction back in in 0:23:47.480 --> 0:23:51.600 in in when COVID first became people first realized that 0:23:51.680 --> 0:23:53.280 COVID was going to be here to stay and it 0:23:53.359 --> 0:23:55.600 was gonna be a problem, was a sell off. The 0:23:55.640 --> 0:23:58.920 initial reaction was, this is going to destroy demand. Now 0:23:59.400 --> 0:24:02.120 that that was true, and and I'll tell you why 0:24:02.200 --> 0:24:06.360 in a second, but but before I do, In general, 0:24:06.440 --> 0:24:10.159 coffee has very inelastic demand. And that's because you if 0:24:10.160 --> 0:24:12.880 you're walking down the street and someone is like, hey, coffee, 0:24:13.400 --> 0:24:15.320 free coffee, you might say, oh, great, I'll take a 0:24:15.320 --> 0:24:17.439 cup of coffee, right uh. And then you walk a 0:24:17.440 --> 0:24:20.000 few more feet and someone says, hey, free coffee, you'd say, no, thanks, 0:24:19.960 --> 0:24:22.800