Coffee Memo | Rob Talks Coffee Market and Supply Structure Ep. 2

Episode Summary
In this episode of Coffee Memo, Rob Stephen provides an in-depth coffee market analysis, examining the latest coffee market trends influenced by recent weather events in Brazil. He discusses the intricate supply and demand dynamics that are shaping the coffee industry and the potential shifts in global trade due to new tariffs and regulations. Rob highlights the necessity of strategic planning and thorough coffee market research to navigate these uncertainties effectively.

Episode Notes

• The coffee market analysis indicates a highly unpredictable environment that necessitates ongoing scenario planning.
• Recent cold weather in Brazil had a negligible effect on overall coffee crop size.
• Despite fluctuations, coffee demand remains robust, reflecting key coffee market trends.
• Understanding supply and demand dynamics is essential for accurate coffee price forecasting.
• New tariffs and regulations are significantly altering global coffee trade patterns.
• The EUDR poses challenges for coffee imports from Africa to Europe.
• China's increased authorization of Brazilian exporters may lead to significant shifts in trade flows.
• Roasters are encountering sourcing challenges amidst these evolving market conditions.
• A comprehensive understanding of the global coffee supply chain is critical for coffee businesses.
• Strategic planning is crucial for successfully navigating coffee market uncertainties.

MIKE FERGUSON: Welcome to Coffee Memo, a podcast where we talk about coffee industry news and current affairs. This is episode two and Covoya’s Managing Director, Rob Stephen is back in the studio to share his thoughts on where the coffee market stands right now. From the weather in Brazil to regulations in Europe and potential structural changes in the global flow of coffee.

So, Rob, today we're going to talk about things you see happening in the coffee market. But before we get started, I want to make sure you've taken off your Covoya-hat and your ofi-hat and you're wearing only your Rob-hat right now, because as I'll remind our listeners, today, and any day we turn on the microphones here in the studio atop the Tilden Thurber Building, we are offering our personal thoughts and opinions.

ROB STEPHEN:  Yes, I have the hat I usually wear, which is the Boston Red Sox hat.

MIKE:  Okay, so with that in mind, Rob, with your 36 years in the coffee industry, what do you see happening in the marketplace right now?

ROB:  Yeah, well, I'll pile on top of your caveats up there, which is to say, my overall market advice for anybody is that nobody knows where the market's going. Right? And so, anyone who tells you that they know where it's going either has an agenda or is confused about how the market works. So, any comments I'm going to give on the market are going to be more observational and then strategic. In terms of, I think anyone who is exposed to the market has to constantly be running a series of “what-if” scenarios.

And so, whether you're a roaster and you're trying to cover price or you're a producer and you're trying to get the best price for your coffee, or you're in the middle, like us, and you're trying to stay square… There's always a strategy to be done. If the market's going up, there's a strategy to be done.

If the market's going down and there are times of not a lot of volatility, like say, the first ten years that I traded. And then there's the extreme volatility that we've found ourselves in for the last say, 18 months to two years. And so last week was another period of volatility, this time upward. And a lot of people come to me with the question of “why?” And I think that I'd like to use this sort of segment as a way to provide context more than to provide prognostication.

So, I think in this last week, there was definitely a bunch of different things. And I realized that as I look at, you know, my daily sort of inbox of news and information, and I parse it in my head. And so I'm going to try and sort of do that verbally.

MIKE: Okay, great.

ROB: Yeah. And I think that, you know, so the first thing that jumps out at everybody is frost.

There was a scare or there was a low temperature weather event in Brazil. And any time there is news of it might be cold in Brazil in August. There's always a reaction in the market. And there was a cold weather event in Brazil. I think that any sort of sober reading of the results of that were that there was some damage, but very little, not enough to make any significant impact in crop size or future outlook. So, I think it's sort of I won't say non-event, but a very, very de minimis kind of event.

MIKE: And you're saying that's the consensus?

ROB: That's the consensus. Yeah. And so, I mean, I'm sure it's, it was devastating for any particular farm that was impacted. But in terms of the overall Brazil crop, not so much.

MIKE: And when we see outliers at either end, they usually have an agenda.

ROB: Yeah. It's also, you know, news right. And people want their news to be read. So, a picture of a farm damaged by frost will get a lot of clicks.

But you know, to put it in context, we're not looking at sort of, any, significant reduction in the Brazil output over the coming year. And so, but while that happens, the market will go up. But I think that if you dig deeper into what's going on with the market, there's always a sort of, a thing to remember, which is that when the right coffees in the wrong place or you don't have the right coffee in the right place, it tends to have an upward pressure on the market. And so whenever the market's going up and it's not related to some other fundamental, you always want to look at why. Right. And so, there's a couple of things…

So, if you look at the certified stocks, they are slowly drawing down and they're drawing down very, very slowly. So, it's not like they're disappearing. But what's more important is that they're not going up. So, coffee is not being stored for future use. Coffee's being used as it's becoming available or it's being drawn down as quickly as it's going into the stocks.

MIKE: Right.

ROB: And so that tells you that there is still demand for coffee, right? The origins have been selling hand to mouth. Right. And so, as roasters need to cover, and roasters need to buy, and they need to get futures coverage. There's not enough people on the other side willing to sell. This is something you can get from a report that comes out every week called the Commitment of Traders Report. I think it actually comes out every two weeks, but it is, and it's very hard to read, but it basically tells you how many buyers and sellers there are out there that have registered an interest. And it tells you whether they work in the trade or they're speculative in nature. Right. So, like an index fund could be a speculator. It's not someone sitting at a computer trying to do day trading all the time. Right. So, and so I think that you've got that going on. We're also entering the roll period, which is when contracts will flip from September 25 to December 25 terminal.

And that always creates a lot of volatility. It always creates a lot of volatility. It doesn't always have to go up, but it's one of the two possibilities that it could go. And so it seems to be what's happening this time.

MIKE: It's not going to go sideways.

ROB:  It's not going to go… usually it doesn't go sideways at the roll.

And then you have to look at the origin side of things. Roasters, I mean sellers were happy in a $3 market. They were happy to be there and provide liquidity for people who wanted to buy at $2.80. Not as much. Right? And so, when you have people who need to buy and not enough people willing to sell in any circumstance, price goes up. The next question is: what would it take to make the market go down? More people who are willing to sell. Right. We have to wait and see. So, I don't know if there's anything that is potentially disrupting the global trade of coffee. Oh, wait. Everything.

So, tariffs, the EUDR and all sorts of other things that are in the, you know, which is sort of breaking into the next thing I want to talk about... But I think that when you're looking at why is the market doing what it's doing, you have to look at all the factors that are causing uncertainty and coffee not to flow in the way that it wants to flow, right?

I would say that looking at your news and looking at your sources of information, make sure you have multiple sources and that you are asking the second and third question, right? So yes, there was cold weather in Brazil. The reason for the market going up is significantly more than that. And I'm sure I'm only scratching the surface. There's a lot of other things that I, for sure, don't know about.

MIKE:  But you said something in there that I think is a small bright spot or at least a reason to, to hope is that demand is strong.

ROB:  Yeah. So far. Right. And so, it's supply and demand. And I think we always in our industry take demand as a given. Right. You know, demand will continue to increase is almost like a truism in coffee. You know more people will need coffee next year than they did this year. And if you go to any trade show or you spend any time in the thought circles, you'll find plenty of people who will tell you that's not necessarily going to be the case. Coffee's competing with energy drinks and other sort of, you know, nutraceuticals and all sorts of things for share of stomach.

MIKE: And if we set it for dollars for a year, then we'll see.

ROB: Yeah, right. I mean, coffee's notoriously, notorious for its elasticity. Right. But it still needs to have people who want to consume it, more supply than demand, the price will go down. In a place where there's less supply and more demand, the price will go up. The coffee's been at a deficit for years, but I think that most people who study this would say that we're heading into at least parity by next year. So, I have a strong eye on demand as a result of that.

That brings me to the point that I really wanted to talk about today. I think I talked a little longer about the market than I wanted to, but I would say that what has got me interested, sort of staring at the ceiling at night, is thinking about the quiet reordering of the global coffee trade that's about to happen, right? And I think people see it, but I'm not sure that we're talking about it enough. So, in a normal world, coffee from the Southern Hemisphere of the Americas, Brazil, Colombia, Central America, etc. flows mostly north to the US. It doesn't mean that none of it goes to Europe or Asia or anything like that, but the majority of it goes north. And then the same thing happens in Africa to Europe. Most of the coffees that flow into Europe are African in origin. And then the Asian coffees flow into Asia. And then there's always some cross-trade between the three to the other three.

But, you have the three main consuming markets and the three main producing regions. And those tend to be mostly north-south trades. And so, what's happening right now, we have a 50% Brazil tariff on the table, as we talked about last time. That's going to significantly depress imports of Brazil coffee into the US. As a matter of fact, I read a news article this morning. I read two. One was that most of the exporters are now reporting that US roasters are asking to defer shipments from Brazil. And the second one was that the Brazilian government is about to sign, I think, today, an aid package for exporters to allow them to finance the delay in shipments. So, that tells me that plus Brazil looking for alternative markets just in general as a political matter means that we're looking at a time where they're going to start looking to send their coffee east and west instead of north. That will have a knock-on effect on the US roasting market, which relies heavily on Brazil as a, both a quality and a price component.

It'll make Central America the next cheapest closest thing. And the big guys in the commercial space will hoover those up. Right. And then, if we cross the pond we have EUDR about to hit at the end of the year. Still, always a chance that will get postponed or canceled again.

MIKE: Okay. Just EUDR is?

ROB:  EUDR is the European Union Deforestation Regulation. Okay, put me on the spot there. I almost forgot it for a second. I've been saying it so long, I forgot what it means. And so that is a series of laws that are going to require coffee to have, geographic data and all sorts of background traceability that certifies basically that it's not coming from a place that has been deforested. And it's going to be very onerous on a lot of the African countries that have traditionally supplied Europe with coffee because they don't have the infrastructure to comply. And so, it will be difficult for the African countries to supply Europe with their coffee. We don't have EUDR in the United States. And so, I would expect to see more of those coffees flowing across the ocean to the US.

MIKE: Okay.

ROB: And so you have the you know, basically if you take the map you're drawing an X on it, right? You got coffee going from Brazil to Europe. That's one of one part of the X. And then you've got coffee going from Africa to the United States, that's the other part of the X.

The other interesting piece of news I read was that China just authorized something like 138 Brazilian exporters all at once. Right. As you know, people authorized to trade into China, which is a massive number, right? I mean, 138 exporters in Brazil is I mean, there's over 1,000 exporters in Brazil. But I mean, that's enough to really bring in a lot of coffee, and that's on top of one of the Chinese coffee firms negotiating a big, just general deal with Brazil two years ago for a big supply contract. And so, you've suddenly got this potential for huge trade flows being disrupted and moving in vastly opposite directions.

MIKE: There's no corresponding X on the Pacific Ocean like the one you just painted on the Atlantic Ocean.

ROB:  Right. Right. And so, you know, China is a huge variable. Then we have ocean logistics for all this coffee. Those voyages take longer. They're more expensive. They're more likely to be disrupted. And what happens when coffee is in the wrong place? Price goes up, right?

MIKE: Market doesn't like that.

ROB: Market doesn't like that. And so, you know we are in a place where there's a vast amount of uncertainty. And as I counseled last episode that we had, I think that having options across the various origins that are available is going to become more and more important. And I like to sort of preface that with, I hope I'm wrong about all of this. I hope that this podcast doesn't stand up for I hope, I hope this information is outdated next week. Nothin would make me happier than to go back to the way things used to be. But, you know, I really think that counseling people to be prepared for the options is the best thing that we can do right now.

MIKE: Yeah. So, these are your, this is sort of your list of things to pay attention to. Yeah. And to be thinking about and planning for in case…

ROB: Yeah, I'm a big scenario planner. Yeah. I mean I think it's been part of our success here is just thinking about what might happen and not necessarily worrying about it, but prioritizing the possibility of things happening and then having an answer for it.. That's the sort of sober way to run a business. And I think that we, with the information that we have at this moment, there's a higher-than-normal probability that we're all going to have to get to learn Asian coffees and African coffees at a higher level of clarity than we've had before.