Why the Price of Coffee Beans Soared in the Last Year

disconnected or mediated by several steps from the end consumer. Wait, Joe, can you explain that we talk we talked a lot, you know, like we recently talked about the increased price of palettes, right, and then it's gone up a lot. But most people don't experience the increased price of wooded palettes or even the increased price of a shipping container in their day to day life. Oh, I see, Well, I don't know. Um, I guess the gets passed on

like eventually, right. But yes, you're right, we're not like purchasing containers once a month, um in the same way that we are purchasing consumer goods and things like food and stuff like that. Yeah, exactly right, That's all I mean, which is that a lot of these things are things you wouldn't necessarily see yourself. Even lumber, which we've talked a lot about on the show, you might not necessarily see.

We've talked a lot about grain, which people see, but in many ways that manifest itself in the form of higher meat prices or dairy prices for consumers. So a lot of these things they seem to be like sort of like background factors that eventually feed through. Yeah. But on the other hand, since we're basically talking about inflation now, there are some price increases out there that are very much in front of consumers right now. Um, primarily food, right.

I did a deep dive into mayonnaise and that was like something like eight person And everyone has an opinion on food inflation and what's going on, and it really seems to um, I guess touch and nerve with people. Yeah, food inflation in particular, gasoline probably the other one is that people that really touches a nerve, but food for sure.

And everyone has a theory and everyone's trying to figure out is this a macro thing that's something about the money supply or fiscal that's pushing the price of everything up with food. You also have this other dynamic of

wet weather and other idiosyncratic factors. Anyway, I'm very excited because we're going to be talking about another consumable good that is highly emotional for people, that's highly relevant to a lot of people, and that is the price of coffee, right, so truly something that a lot of people would consume on a daily basis. So the price of coffee has dramatically surged over the past year or so, and uh, I guess the question is how much of that pricingcrea

is actually being passed on to consumers. And here I have to confess I really have no familiarity with the coffee market at all. So I'm very, very curious to learn how purchasing actually works, how hedging works, and how the coffee sort of gets from the farmers all the way to Starbucks or you know, a can in the grocery store. I am very excited about learning all that as well. So we have the perfect guest we're going to be speaking with, Ryan Delaney. He is the founder

and chief analyst at Coffee Trading Academy. He has a career of coffee trading both the spot physical markets futures and so forth. That he trains companies, he gives them analysis and research on how the coffee market is doing. So we're gonna learn everything about how this commodity market works hopefully. Ryan, thank you so much for joining us. Yeah, thanks for having me. Why do you actually just give us the very brief overview of why are we talking

to you? What is your expertise in the coffee market? How do you know it? That's a good question. I got no idea why you guys are talking about. So I've been I've been in the coffee industry for about a dozen years. Um, but come up, my entire sort of commodity experience is in coffee. So I uh to give you, you know, the thirty second version of my my background here. I started out with one of the large multinationals and you know their rotational program um that is,

one of the top traders of coffee. So I worked and lived in origin in India and in Uganda sort of buying coffee locally, processing it, uh and then exporting it to two consumers. And then I came back to the US and traded coffee physical coffee there for a little while before I transitioned to our company's hedge fund. And you know a lot of these large multinational commodity firms have hedge funds to sort of capitalize on their

their information informational edge, you know. Um, so I was the coffee and coco analysts and trader for our hedge fund. And uh, you know, one thing you'll hear a lot in the coffee industry the more you talk to coffee people is how much uh, there's there's coffee guys, there's coffee gals. You know, we refer to ourselves as coffee people. It's it's very much a tight knit community. So we

I missed that interaction, you know. So I actually transitioned to the cell side from the from the hedge fund and and from the prop book I was trading, and from there I was that was actually very interesting because I was advising clients on managing their price risk, their coffee price risk across the supply chain. So that meant producers and exporters, trade houses and uh and traders, speculators,

but also roasters and consumers. So I kind of really got a crash course um in in price risk management for coffee, and that led me to starting this this firm that I work in now where I provide research and training to people who have a steak in the price and coffee. So, first of all, it's really um fascinating to think that a company like Nestley might have a a hedge fund nestled inside of it trading coffee futures.

And I definitely want to ask more about that. But before we do, I have a very basic question and I was just thinking of it when when I said in the intro, you know the price of coffee has surged. If we say the price of coffee is at a ten year high, what are we actually talking about, Like, what is the benchmark of being because I know they're there are obviously different types, but like, what's the being equivalent of the I guess the ten year US treasury? Okay,

So I love that being equivalent of the question. Yeah, if you could put it in financial terms, Uh. Yeah, So the coffee futures market, effectually known as the C market, is the primary benchmark for the price of coffee. As you kind of alluded to, there are two major types of coffee. There's Arabica, which is what we trade on the C market. Uh, and then there's Robusta, which is what is traded on the London market. Now, the Arabic market is traded in cents per pound and the Robusta

market is traded in dollars per metric ton. But the Arabic market is the larger, more volatile and more exciting market, so that that also attracts a lot more of this speculative interest. But those are the two main markets that were trading. And of course there's there's you know, a spot market. There's a cash market that's incredibly varied because coffee has really exploded in the last twenty years into

this this idea of specialty coffee and fine coffee. So there's a whole you know, secondary market out there, much like there is for for wine. Right there's probably a benchmark price for wine, but there's also a huge variety on the you know, on the low and the high end. So quickly, quicklyure are these are the futures that are traded. Are they cash settled futures or are they physical delivery future? They are physical delivery and that is an essential part

of the you know, keeping these futures honest. So there really is a connection you know, between the futures prices and the and the physical and and then you know that's done through the certified stocks. It's particularly relevant because the exchange has set very steep aging penalties and and that exists for a very important reason, and that's to to facilitate that cash convergence. Right. We don't want the certified stocks to just be a sort of a theoretical

financial asset. At the end of the day, someone needs to take that coffee out of the warehouse and drink it, right, So they put heavy aging penalties on that to incentivize

consumers to d stock certified inventory and consuming. So could we um dive into that a little bit more, because I was reading that people traders are using more futures than normal right now because they're worried they might not be able to get enough stock piles on the physical the spot market, so they're worried there won't be enough

to actually take delivery of. Can you just explain how that process typically works and how much of trading is divided between UM spot and futures and sort of forward hedging versus buying right now, because I imagine again a company like Starbucks or Nestley, which needs huge amounts of coffee every year is probably hedging its exposure very far in advance. Yeah, So it really depends because there's a there is a variety of size in the consuming side

and on the export side as well. Right, So there is a threshold that you need of of production or consumption to to make hedging in the futures market relevant and useful. So, for for context, a single futures contract of Araplica is thirty seven five pounds. So if you're just a small mom and pop roaster, you're probably not going to be hedging, you know, on the futures market in terms of adding coverage. This is, as you kind of mentioned, something for the bigger traders or the bigger

consumers to deal with. They have a a pretty you know, clear system. They have a methodology to how they're they're acquiring coffee in general, and that is a combination of physical contracts and futures contracts. If you're if you're a large company like you know, Nestle or Folgers or whoever, you you have a network of suppliers um and you will put out you know, sort of bounties. You'll say, hey, who wants to sell me coffee, give me your best bids or offers rather and and they will send out

proposals to to those big companies. I don't want to get too into at the moment UH the nuance of differential contracts and and price to be fixed contracts, but essentially, if you're a company like Nestlie, you need to there is a spread, right, there is a premium or a discount to buying specific physical qualities of coffee to the futures contract. So there's there's two different kind of risks that they need to manage, but there there is also

a general larger correlation. So if you're a company that does size that needs that physical of coffee, you have the option of either buying that physical making a physical contract with a producer or an exporter to buy that coffee.

Or if you don't have a good deal there's not a good UH offer to you, or or you're not sure exactly which qualities you want to buy, you could buy futures right, so you could just buy you know, as much of the physical that you need in futures contracts and hold that as a hedge until you are prepared to sell those out and buy your your physicals.

Just for the sort of my visual understanding of this, can you sort of walk through very quickly every player that's involved between the grower and you mentioned you worked in India and Uganda. And then I drink some coffee, Let's say I buy it at a gas gas station, or I drink it at the office like sort of like office office quality coffee, which is actually very good. At Bloomberg by the way, we have really good coffee. But anyway, can you just talk like, okay, someone, there's

a farmer in Uganda, India. Can you just real quickly like the whole supply chain from farmer to mouth. Oh, sure, I can. The coffee industry is really divided into or let me sit put it this way, that the farmers are primarily divided into Brazil and everybody else. Historically coffee is produced, it's a it's a small holder production. It's done on small farms and small estates um and that's has geographical underpinnings because coffee is what we call high grown,

so it's grown in the mountains and it's tropical. So it's really only possible to grow coffee in tropical mountains. And that doesn't facilitate itself well to big, mega farms, and so that that kind of has this sort of small holder farmer implication. The exception to that is Brazil, which has these very large plateaus, so they are able to grow large amounts of coffee and indeed they're the world's largest producer of coffee and mechanize it at the

same time. So they are the exception where they have these, uh, these these large farms and and sort of the mass production of the farming of coffee. So you're gonna have exporters now who are generally multinationals, but there's also local exporters as well, who are positioned in all of these key origins, these key producing origins, and they'll have buying centers uh, spread out throughout the coffee farming regions, and much like you know grain elevators or whatever in the

US and other countries. UH, the farmers will will have relationships with those buyers and they'll know the prices and they will deliver They will harvest the coffee themselves and then they will deliver it to the exporters. The processing of coffee is actually kind of nuanced as well, and there's two primary ways of processing coffee. So the coffee bean itself, like that brown bean that you see in in the bag when you buy that bag, that starts out as a green bean inside of a ripe cherry,

right like a red cherry piece of fruit. So the two ways of processing that and getting that bean to the roaster is either what we call it the natural process, which means that the farmer picks those those cherries, they spread them out on a patio to dry, and they dry over that bean like a like a kind of like a raisin, you know, um, like a hard raisin, and you can actually pick those up and shake them and hear a little rattle inside when they're when they're ready,

or they have the washed process. And with the wash process, you're picking that ripe cherry and you are putting it through a wet mill and and that sort of has kind of like uh, remember you know the log shoot ride in Disney World where you're you know, you're getting the log and it goes down to the thing of water.

It's what I like that. And so you're being goes through this this shoot of water and goes through kind of like a cheese graater type of device, which pulps that cherry off of it and then brings your washed green being at the end out the other side. So those are your two primary ways of getting that that being to the the exporter UH, and the exporter will convert either of those methods into a green processed green

being that they will sell to the consumer. Now, the big issue that you guys have probably been talking about with with others and um that everyone is talking about in general is supply chain issues. Right so right now there is a big issue especially in Brazil, but all over the world in Asia, Vietnam with getting containers and getting ships there to to actually get that coffee to

the people who need it UM. And this is this has been affecting the price and the supply and demand issues because now destination markets have had to draw down inventories and consume locally coffee that normally would have been been imported in. Now, once that gets into the destination marketing and that importer has that coffee, they will sell

it to the roasters UM. And those can be large roasters like the various groups that that roast Dunk and Donuts coffee, or or or small roasters or mom and pop shops and when that roaster gets that those bags of green beans, then they will put it in their roasting machines and they will come up with with blends of coffee and then it's and then it's delivered to the to the coffee shops. So maybe this is a good place to explain exactly what is driving the price

of coffee higher. And I know you mentioned supply chain issues, but it seems like, well with most things that seem to be experiencing a shortage or some degree of scarcity recently, it seems like it's a combination of factors. Absolutely, and it's really been you know, what do you call it a perfect store? You know, a confluence of events here. I am a fundamental um trader at heart. That's kind of how I was raised. And what I believe drives

markets in general is supplying de marin and fundamentals. And and this has been a fundamental story. So coffee is a biannual crop, so it um meaning that the coffee is a is a tree crop, unlike row crops, and that you're planting with you know, corn or wheat or

cotton or whatever. So you have a tree that produces fruit and and so what happens is the tree usually produces a lot of fruit one year and then the next year it sort of has to recover and rest, and so it will have less fruit the next year. And that's sort of the general biannual cycle of coffee. So you tend to have an on near and an

off here. So we had a very big on year in Um where there was a surplus and abundance of coffee, and then one we were expecting to have an off year, and that was normal, but but it actually was exacerbated a bit more than that due to droughts in Brazil that that affected the coffee crop on sort of two ends. Now, again, coffee is a tree crop, so the way that the fruit comes onto the tree is in sort of two phases.

You will have the branch growth the year prior to the coffee crop, and so that you will have what we call new growth on the end of the branch of the coffee tree, and then the following season you will get flowering and fruit on that new growth. So what we had was we had a drought that stunted that new growth and made less room for coffee cherries, and then we had also aged route during that blooming season during the flowering season where where those would grow

into new fruits. So that had kind of a double whammy on already a down year for for coffee. Now, just to make things even more interesting, um, we also had the worst frost that we've seen in Brazil um in in in twenty five years. And so even though we had this bad crop that we were like, okay, this is a bad crop. There's a deficit, but you know,

we had an on year the year prior. That's normal, so you know, the market needed to rally, and all that was was well and good, but at the same time, we had this frost that essentially killed a lot of the new growth now on on the tree that we were expecting for our next on crop, our next on cycle.

So that turned out to be an absolute disaster. And that was just back in July, and so we were waiting until the flowering which which starts in um sort of October November, and to see how how bad things were. And we had a decent flowering, so we thought things were gonna be okay, but it turned out that what we call the setting what was subpar. So what what happens is that the branch grows these flowers, um, and then those become pollinated and turned into fruits they set

into a bean. But uh, we much less of those flowers turned into you know, juvenile beans than than expected. So now we have a massive deficit in the current year that we're already in and the bumper crop that we were looking to save this deficit to solve the deficit has now been severely compromised by frost. So that's the supply and demand issue, but it kind of we

had other factors as well that went into that. You know, we had We've been talking a lot about inflation, right, UM, that's been uh, certainly a factor, and we saw that coffee largely um rallied into uh dollar weakness, uh you know, last the earlier part of this year, UM, along with many other commodities, and it's really kind of never looked back. You know. The people are always it's like people hear these supply side explanations and weather in particular, and I

feel like it's almost unsatisfied to them. And what you said is like totally makes sense, but they're like, yeah, but sure, certainly there must be like some big macro story. And you mentioned the dollar a little bit. I'm curious if there's any sort of demand element, and I'm thinking specifically in two ways, Like one is a has there

been a new change in overall volume demand? But be did the shift in particularly the developed world and say, you're really all over the world from offices where people obviously consume a lot of coffee to uh home to working from home? Did that change coffee buying behavior at all in terms of what kind of coffee people drink and did that have any sort of ripple effects on

the overall market. Yeah? Absolutely. And you know there's a reason that we look at the supply side over the demand side, I think, UM, at least in coffee, and that's because the supply side is volatile and the demand side is relatively static. So I always teach them my classes that you know, coffee is has inelastic demand and it also has inelastic supply generally UM. And that's why it's so it's so volatile because because it's a tree crop,

you can't just plant more if prices are high. You have to plant that profits several years earlier, and so this exacerbates moves on either side. So you know, prices are high, you plant a bunch of new trees, and then three years later you start getting the supply from that um that point, so then you can get a

massive oversupply at that point. But to your to your point about demand, to the initial reaction back in in in in when COVID first became people first realized that COVID was going to be here to stay and it was gonna be a problem, was a sell off. The initial reaction was, this is going to destroy demand. Now that that was true, and and I'll tell you why in a second, but but before I do, In general,

coffee has very inelastic demand. And that's because you if you're walking down the street and someone is like, hey, coffee, free coffee, you might say, oh, great, I'll take a cup of coffee, right uh. And then you walk a few more feet and someone says, hey, free coffee, you'd say, no, thanks,

I already have one. Right. You drink one or two coffee, so coffee a day or whatever whatever it is that you drink, whether the price is ten dollars or one dollar, right, that's just it's very there's there's not a lot of substitutions for it. You're not like, oh, should I have a coke, or should I have a coffee? You have your coffees, you know, set amount of them, no matter what. Now where the demand does have some wiggle room and some play. One of the major ones is in out

of home consumption. When Starbucks charges you ten dollars for a latte or whatever it is, uh, then you might, if if times are toffee, might say I can't afford that, I'm just gonna buy the cafe bustello, local bodega and and that'll and that's how I'm gonna have my coffee. So the overall demands tends not to move that much, um,

but you might shift where you're buying it. And when we had COVID and the lockdowns, that created an intense shift from out of home consumption where the business of coffee shops was all but destroyed, to grocery store where that was suddenly where or or Amazon or whatever you know, digital subscriptions, and that was really the model now where people had to consume their coffee. But more than that, the other sort of hidden demand that was destroyed was

the sort of social demand for coffee. You mentioned office coffee, right, so whereas in normally you would have had to go to the office and you make a brew of pot of coffee, and then you brew a second pot of coffee and if no one drinks that, you dump it down the drain, right, Or you go to a wedding and they might brew a couple of big vats of coffee and then they dumped down the drain. What people

don't consume. So all of these sort of out of home events and or or industry events, right, you know, people stopped going to industry events for a while, so all of that demand from catering and and from coffee shops was was pretty much destroyed. M So what happens when coffee prices go a lot higher, like A how are the costs actually absorbed or passed on? And then be do you see a lot of people maybe switching from high quality coffee beans like Arabica to something cheaper

to try to offset that price increase? Oh yeah, absolutely, so you see you definitely see switching. Like I mentioned, total demand doesn't tend to change that much, but you

definitely see switching from different varieties. The COVID really hurt the specialty coffee business that has been something that have been growing tremendously for the last twenty years, as I mentioned, you know, there there was a large group of people who enjoyed going to the specialty coffee shops and using a chemics or um you know, a special pour over type of delivery system and and drinking these single origin find coffees. That all kind of went away um and

and a lot of that was lost. But it's more generally if you're talking about large prices increases and and how are you switching, well, you you have the switch in both destination markets and in origin. So in origin, the producing countries tend to drink locally and consume the cheaper qualities of coffee and export the higher qualities that that that are are more valuable. So in Brazil, for example,

they produced both Arabica and Robusta. So with the high prices of Arabica, what you'll see is that the local consumption will shift towards Robusta UH and they will export less Robusta and more more Arabica. So we'll see that shift there. But also on the consumption side, there's plenty of companies and and businesses that do Arabica UH and so they can't really shift that that split, although they will shift too cheaper versions of Arabica if they if

they need to. But but many companies just put out like a breakfast blend or you know, they're you know, their French roast or whatever, and they don't specify where where that coffee is coming from, and so then they're really selling more of a flavor profile. And then it's just a matter of optimizing cost versus flavor. When when when prices are expensive, is it the Arabica robusta spread? Like, isn't that a thing you trade? Yeah? For sure, So there is the we call it the ARB, even though

it's not really an arbitrage. There's sort of two different products, um but but that's what we we we call the ARB. So the ARB tends to be have a nice little range when things are calm, you know, maybe something like sixty cents or something like that would be the typical

Arabica arbitrage. But when Arabica goes nuts, that ORB tends to just sort of disappear and just become the price of arabica because Arabica tends to um outpace robustas so steeply that it's it ceases to have that sort of range bound nature and just tends to have I don't know how into options you are, but uh, it tends to have the same delta as Arabica. So is trading coffee. Uh you know, given all that volatility that you just laid out, and given these different spreads between different types

of coffee bean, is trading coffee fun and lucrative? Should we all be going into the coffee trading business? All become coffee people. You might need to take a couple of courses first at the coffee Trade ACAP. But no, they they it's not true. It's a myth. But they say that coffee is the second most traded commodity in the world. Um, for exactly that reason. It's because it

is fun. I love the coffee business. It's very interesting. Um. If you travel to do crop tours, you know you're going to sort of interesting and exciting places to to learn about it. But from a lucrative speculative point of view, there is volatility and coffee and volatilities how you make or or in many cases lose money. Right. But but you need that volatility to be able to trade. So

the what we call the tourists interesting coffee is is heavy. Uh, there's a lot of uh, there's a lot of people who are you know, not necessarily coffee people don't necessarily have a coffee background, but like to trade coffee. Uh, both you know, sort of technical analysts and sort of amateur or armchair fundamental traders. Um. And and there's there's plenty of good ones too. You know, there's plenty of people who are are just sort of part time specs

who make money and coffee. Interestingly enough, I I only got into Twitter for my business, but in the Twitter sphere, the financial twitter sphere, there is a lot of heated discussion on the coffee market and what's going on there something I'm curious about. It's like, okay, we've talked about Arabbic on Robusta, but I think there's other types of coffee and I'm sort of curious, like you know, more

specialized beans or like kna. I was in Hawaii and I had ConA coffee there, and then I know also like fairly traded coffee, which I imagine has something of a different market structure. Let's say, like I want to sell in volume ConA coffee in New York, can I predictably you use the futures markets for say Arabica as a hedge as a hedging instrument, even if my end need isn't Arabica, Like, they're enough relationship generally between the price where these instruments will be of use to me

regardless of whether I'm actually selling Arabica. Well, that's a great question, and um, you know, the unfortunate answer is that it depends right. Uh. So of coffee is either Arabica or Robusta. There is a tiny proportion of coffee that is um some sort of ancillary uh species like Liberica, which is sort of a much larger coffee tree. And I've only ever seen that once and that was the people used to sort of to border uh their plantations.

So it was just kind of created a sort of a tree border around their plantation that also produced a little bit of coffee. But they're not efficient, um and they don't produce good tasting coffee. So almost all of it is Arabica or Robusta. Now where you see the specialization is really an origin. So it's really if you're talking about ConA coffee, you're talking about Arabica that's produced

in Kona. Um. It's that's that's that's produced there and other people like you might, I personally always buy a hundred percent Colombian. That's my personal coffee that I that I really like. It doesn't, then you know the secret for you. It doesn't have to be expensive Colombian coffee. If you can just you just go by the the can of a pent Colombian, it's usually gonna be pretty decent. So most Arabica coffees have a good correlation with the

futures market. Now each will have a differential based on how in demand really that origin is versus the the overall the overall market. So because the futures market is really made up of a basket of what we call milds um so that those would be washed coffees. So the futures are good that we look at. It's sort of like an average of Arabica's right, of a certain

group of Arabicas. If you look at Colombians, they tend to be say, you know, ten or twenty cents more than that right now, they're more like fifty five or sixty cents more just because of supplying demand issues. If you look at something like ConA coffee, you have almost zero correlation with UM with the futures market, because that is such a tiny area of production and such a highly sought after coffee that it's always gonna be like

four or five dollars per pound. I'm just making that number up, But so even if the futures market is rallying heavily, that that price tends to be sticky. Same with Kenyan coffee. Kenyan coffees are often like a hundred cents more than than the futures market. So for those sort of very outlier specialty coffees, you're probably not it's probably not gonna make a lot of sense to to use the futures market to hedge it. But for the bulk of coffees first say, the UM, it definitely would

make sense. Can we go back to something you said in the very beginning about large multinationals having hedge funds UM that profit off of the information flow, and it kind of reminded me of UM. I guess Goldman Sachs pre um vocal rule sort of pre financial crisis, where it could have a very lucrative internal trading DUSK that traded for its own account and it used it's sort of position in the market looking at the flow going through it to help it make trading decisions. Is that

sort of what's going on here with coffee? I would in differentiate first of all, between say a consuming company and a trading company. Okay, this is somewhat of an arbitrary distinction, because no matter who's trading coffee, you're and this is something I was taught from day one as a trader, is you're always speculating. Right. If you don't buy, you're speculating that that's you know, a good decision. If you if you're buying now, then you're you're essentially bullish.

If you're if you're selling more than then you're buying, then you're barish. Right, So, no matter who you are in the supply chain, you're always speculating somehow in your interaction with the futures market. So if you are an exporter, for example, exporters will trade sort of a prop book. Usually they you know, different companies have different rules on internal lafer for managing their price risk. But you know, let's say you're just a normal local exporter. You buy

coffee locally and then you sell it for export. So what they would normally do if they're a differential trader is they would buy coffee locally and local currency from the farmers and the producers, and then they would immediately sell futures against that in the futures market, and that

would create a differential position. So they would have, say that the current futures prices two dollars and they're buying coffee at two thirty UH cents per pound, So they buy coffee locally at two per pound, they sell a future against it at two dollars per pound, so they would have they would be buying coffee for thirty cents

over and they have locked in that differential right. Then when they export that coffee, they sell it to another company, and maybe that company buys it for thirty two cents over the market, right, and then they would lift their

heads and sell that coffee to that company. Now, if that exporter is smart and they know that prices are going to rally, they know that, Let's say you're a Brazilian exporter and you know you need to buy coffee uh for your you know, for your business, and you know that the crop is gonna be small this year and the market is gonna go nuts, then maybe you would buy futures ahead of time so that when you're ready to buy physical, you can sell out those futures

and and make make some profit. Or maybe you wouldn't hedge it right away. Maybe you would buy that physical from the farmers, and then rather than just immediately turning around and selling futures against it to lock in your hedge, you might wait for it to rally another five or ten cents and then lock in your hedge. Right. So, so that's how they're going to be sort of speculating in that in that market, and the consumers are going to do the same thing on their side, sort of

the opposite. They'll be buying or selling futures or options to protect their books and protect their hedges in different ways. But the trade themselves sometimes have a hedge fund that's either or a prop test that's either part of the company itself or sort of shares a parent company and share information, but have sort of Chinese walls and operations, and so they are straight up you know, I don't want to say gambling, but you know, speculating without a

physical position in those um in those markets. That honestly makes a lot of sense, and I think is good for the market because they have insights into what the supply and demand is going to be, and so it is better for the market if we know there's going to be a shortage for the market to start rallying now and repricing to what the proper price of coffee should be, to the levels that are going to incentivize production.

You want that to happen as soon as possible. And and the opposite is true on the other side, right when when coffee is vastly oversupplied, you need to push the prices down to a point that's going to disincentivize production. You know, we talked about, okay, the price of these commodity coffee futures roughly having doubled in the last year, how volatile is the end price of saying, you know,

like I would say I buy coffee at Starbucks. Actually I typically buy a coffee at Dunkin Donuts when I buy a couple out there, Like how much is the bean in that price versus you know, all the other things like the labor of staff at dunkin Donuts and so forth. It's a great question, and it's always a little bit controversial because coffee is the one of the most socially conscious commodities out there. Um, I think just by nature of the consumer. I mean, historically they say

that coffee house has created the enlightenment. Back in the seventeenth century, before that, everyone went to the pub. Once people started making coffee houses, they were sober enough to actually sit up and talk and think with each other. So that tradition has carried on to today where if you have coffee houses that the consumer of coffee tends to be sort of conscientious and they tend to care about whether the beans come from. That's not true, you know, entirely,

it's not true across the boards. Some people, you know, just wake up and they want a cup of coffee, and that's fine. But that sort of culture has spilled over into the demand side. You mentioned fair trade coffee before. That's, um, something that basically came out of this coffee culture and this desire to ensure that there's sort of equitable treatment of farmers and everything. Because of that demand for it, that is that is spilled into the trade, and so

the trade has to facilitate sustainable practices. Something that was pioneered in the coffee industry is what we call certified coffee um, which is where you have fair trade or Rainforest Alliance or boots or whatever, that where they have to actually certify that these certain practices are being met, you know, in order to to sell your coffee in

that way. So to answer your question, So that's why it's a little bit controversial because when we look at the price of coffee versus what you have in a coffee shop, and I just saw an infographic about this the other day that was put out by the Financial Times, then the it's it's pretty depressing because you say, for a cup of coffee that costs say, uh, five dollars, maybe about twenty cents of that is going to the grower.

I don't think that that's necessarily inappropriate because a lot of the costs are are heavier on the shop side. For example, if you offer free milk with your coffee, that often has almost the same price as a commodity to coffee. So so that's that's gonna be one portion of your costs. The rent for your coffee shop is going to be something like nine times your cost to buy the coffee beans. If you have staff, that's gonna be something like six times the cost of your of

your coffee beans. Right, then you have taxes, right, that's that's that's four times the cost of those coffee beans. So you have all of these different costs that that really are built into the price of that cup of coffee, which feels unfair, you know in a lot of ways to that to that grower. And you know, there's a lot of people who have dedicated their lives to ensuring that the the grower gets more of that. And uh, you know, I think that's a very that's a very

popular industry in the coffee world is facilitating that. But I think what really sort of irks people about it is that it feels like a cup of coffee is almost like a direct commodity. Right. It feels like, oh, you know, if you buy uh an orange in the store, like most of the price for that orange should go to the grower of the orange. Right, the same thing if you buy a cup of coffee, you feel like

it's it's coffee. Shouldn't you know, require anything but money to the grower, But it really requires a whole lot of capital aside from that that initial being that a being is part of it, but you have to on top of you know, once that being just gets sent to the exporter. Then you have a huge capital equipment costs to process it. Right, all of that those wet mills and dry mills we mentioned those are those are big intensive machinery. Then you have to process and transport it. Right.

The we've all seen the prices if you look at the Baltic Dry Index or something, you've seen the prices of shipping. How much of that goes into it Once it comes to the destination market. The roaster has a huge amounts of costs, energy costs and UH and capital equipment costs to turn that green bean into a brown bean. And then once it gets to the shop, right, that shop owner has to pay their staff, they have to

pay health insurance, UH, they have to pay taxes. So there is really a whole unseen sort of supply chain of costs that go into that. Yeah, it sounds a bit like oil, right where there's a huge outlay for capital and exploration UM. And then of course you have the refining process and all of that actually goes into

the cost of the end product. Ryan, I want to ask you the obvious question here, which is how long would we expect these high price is to persist, and I asked, because lots of people seem to be suggesting that this is going to be a longer term issue. But we're actually recording this episode on the day that the US Department of Agriculture just released its latest coffee report,

which is a thing that I didn't know existed. And um, the Department just increased its estimate for world coffee output. So coffee prices are falling, at least for today. So I guess the question is is this a turning point or would you expect price pressures to be with us for some time? So I would I'm a fundamentalist, And the reason that coffee prices are high, I believe or because of supply and demand issues, and we are in

the midst of those supply and demand issues now. Historically, if you look at the price of coffee on a fifty year charge or hunter deer charge or something, you'll see that it looks almost like an e k G. Right, you know, like that machine that goes deep in the hospital. You have these spikes, then it comes down and rest

for a minute. And then they had a spike and it comes down and rest for a minute, and it tends to do that between one dollar and three dollars, so to fifty is as my boss or twenty five as my my old boss used to say, the hedge fund, it's kind of half pregnant. Um, it's not really. It hasn't really hit that full three dollar. This is a major problem mark that we typically expect from coffee. Now. I don't know if it's going to actually go there

or not. Maybe we've maybe we've solved the supply issues already, but it doesn't seem like that. It seems more like and in the U. S d. A UH is great for things like corn and wheat and especially those US centric markets. It's not the people in the coffee world don't pay a ton of attention to it. Um, it's not. It's not necessarily market moving. But if you look to the people in the know right now, it's all about revising down Brazil estimates um for this coming crop. And

that's really what it's all about. We're in the deficit market right now, that's for sure. Now the question is will twenty two be balanced a little bit of a surplus or a deficit, And there are some people saying that it's going to be a massive deficit. They're kind

of outliers. I think the consensus is more for a modest deficit and moderate deficit, which is no small thing on the back of a big deficit, right, especially when you were expecting a surplus after that, So that tightness should in theory continue uh into the next deficit year. But the real estimates so we're right now, we're in the cycle of Brazil where the flowering has happened, the setting has happened, but the beans are really too small to really be able to get an accurate account engage

yet of what that crop is going to be. But in January we should be able to get a more accurate count, will start to see the real estimates coming out as to what that crop will be, and that's largely going to determine the direction the price of coffee. Ryan, thank you so much for coming on odd Lots. I just learned a ton about coffee and really appreciate you joining my pleasure. Yeah, thanks for having me, Thanks so much. Frying that was great, Thank you so much. Frying crazy.

You know, I know people get frustrated a little bit about all these sort of like weather and idio sittingcratic explanations because they think like, oh, surely must be all about the FED or inflation or something like that. But it really does feel like coffee, especially as he described at the beginning, like, yeah, it's really about like a bunch of weird weather stuff and a lot of it,

particularly in Brazil. Yeah, I mean, it does seem like we've had these events where a confluence of different factors come together to create this, Ryan said, the perfect storm for a lot of commodity prices recently. But I guess, on the other hand, you might expect that to happen given that we've just had a global pandemic which has really up ended the way we do things normally. Right,

a pandemic isn't technically a storm. But if you you know, if you don't have to um, you don't have to extend that metaphor or that analogy like too widely to say, like how we could use the term perfect storm and have it encompashed that and of course is Ryan pointed out, you know, there's energy prices go into coffee. He mentioned the Baltic Dry Index and shipping, so all of these

things getting jostled or whacked at once. Uh yeah, Like of course, like it's going to happen even in coffee at the you know, in the middle or you know,

the later stages hopefully of a pandemic whack inflation strikes again. Actually, there's one thing I'm bummed I didn't ask Ryan this, but I wanted to ask how much of the buying that we've seen over the past year that's helping to push up prices, how much of that is people buying in order to pad their inventories, um, just in case they can't get they can't get coffee beans in the future.

Because again, this is an issue that we see in lots of different commodities, this bullwhip effect where businesses people find it difficult to balance their ordering with actual demand, and so you get these big swings in inventory and then a big swing in the price as well. So I'm curious whether or not that's coming into play, But I guess I'll have two d m Ryan on on coffee Twitter. Yeah we can, uh, we can write a follow up a blog post on that for the blog.

But yeah, I mean, you know, as you pointed out, like everyone in the industry more or less, is some reason to have a prop book on the side, or as you put it like everyone is also kind of speculating as well, and so if there are these concerns. I thought that was really interesting about actually the lack of sensitivity on the supply side for tree grown crops

versus other kinds of crops. So obviously, you know, we talked about you know, you can talk about like corn and rice and soy, and if it looks like the price is surging, then a farmer could say, Oh, I'm just gonna like reallocate more of my uh my acreage next year to soy or corn or whatever it is. That's a really interesting distinction that I had never thought about that that's inherently impossible with a tree grown crop that's going to have a minimum like say like two

or three year cycle before that tree bears fruit. And we kind of interesting, like I hadn't thought about that at all, But you know, like watching the next two years, and now I'm gonna like, oh, do about the sort of like the supply sensitivity two crops or to any commodity in which there is that longer, longer lead time on the supplies. Definitely, Joe, what's the what's the best

coffee that you've ever had? Oh? Good, question. I just probably just like at a seven eleven or a dunkin Donut somewhere and a styrofoam cup like to me, you know, like on the on a road trip, big a big cup, like a really big cup of coffee, sort of just like hitch the spot. What about you? What you probably have? Knowing you, you you probably have like some very specific being. I'm not seek out when you're in some soon. No,

I'm not like I'm not a coffee snob. I like plain black coffee as well, but I would say probably the best coffee I've ever had was um in Vietnam. I had one of those egg cream coffees that has like egg mixed into it. That was so good. You are a chocolate snob though, right, No, not really. I am equal opportunity chocolate consumer. I like all the chocolate, like from from her, She's all the way up to the very fancy stuff. All right. Well, anyway, plenty more

to talk about. We'll have Ryan back on next year, or to talk about what happens if the if supply and demand normalized, and we'll be watching those January January being reports from Brazil. Yeah, alright, shall we leave it there let's leave it there, all right. This has been another episode of the Ad Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't All. You can follow me on

Twitter at the Stalwart. Follow our guests on Twitter Ryan Delaney, He's at Coffee Ninja Ryan. Follow our producer Laura Carlson, She's at Laura M. Carlson. Followed the Bloomberg head of podcast, Francisca Levi at Francisca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening to