Hey friends. For the rest of the year, we’re bringing back old episodes of Boss Barista. Part of the reason we’re doing this is because the community of listeners who are part of Boss Barista is so different than it was just a few years ago. But also, many of these episodes carry lessons and ideas that I still carry with me and are worth revisiting. If you haven’t subscribed to the newsletter yet, here’s a handy link to do so:
Today, we’re re-releasing our episode with Rachel Northrop. Rachel is a freelance writer; a PhD student at the University of Miami; the former content manager for Ally Coffee; and the author of the book When Coffee Speaks: Stories from and of Latin American Coffeepeople, which collects interviews with coffee farmers from South and Central America. At the time that she wrote When Coffee Speaks, Rachel was living in New York, and when the farmers she spoke to heard that, they asked her about coffee prices. Coffee is traded on the New York Stock Exchange, and they assumed that she’d be familiar with the system. She wasn’t—but she made it her personal project to learn more.
What she uncovered was dense and rich and informative, so we broke this episode up into two parts, which originally aired in October 2020. Part One is a breakdown of how coffee markets work, and Part Two looks at these markets with a critical eye, asking why this system continues to govern the sale of coffee—and who that hurts and leaves out in the process. Here’s Rachel.
Ashley: So before we get started with this conversation, I think it's going to be important to note that there are going to be a lot of really big ideas about how coffee futures and contracts, and the economic systems around coffee, are going to work. So let's start not in a complicated place. Rachel, I'm going to have you just talk a little bit about when you became interested in coffee.
Rachel: Thanks so much for having me on Boss Barista. For me, being curious about coffee started when I was working as a high school teacher in New York City, and every morning I would get my coffee—a small cup of black coffee for a dollar from one of those street carts on the corner. While I was teaching, I was also blogging a little bit about sustainable food and farmer's markets and some of these locavore restaurants and different eating styles that were coming up in New York about eating food that was grown locally.
And so I started to get curious about, “Huh, I get this coffee every day and I'm seeing coffees that are roasted locally, coming up at farmer's markets and other places.” But I sort of became curious about, “Where does my regular coffee come from? Where does my dollar-street-corner cup of coffee come from?”
So I ended up actually leaving my teaching position and taking about a year [off] in Central and South America, in Costa Rica, Nicaragua, Panama, and Colombia, just trying to figure out a little bit about where coffee comes from and putting that together into a book of interviews that became When Coffee Speaks, is the title of that book.
And then while I was doing that, I also started freelance writing for two coffee publications, Tea & Coffee Trade Journal magazine in 2012, and then Fresh Cup Magazine in 2014. My coffee interest came from just being a very average coffee drinker, but then as soon as I got to Central America (Costa Rica was the first country where I started), I realized there were so many things that entered into coffee production that I really needed to go do my homework about.
There were people talking about hybrid varieties of plants and all these different agronomic systems, and I was like, “Oh, wait a minute. I'm an English teacher and a writer. I don't have my science chops like this.” And then during the process of interviewing people who were on the producing side or working at cooperatives, I would ask them questions and I would always give everyone an opportunity to ask me questions, just as part of the process of getting to know people and building trust and fairness.
When they heard I was from New York, one of the questions that was most commonly asked from Costa Rica through Panama into Colombia was people said, “Oh, you're from New York City. That's where the price of coffee comes from. What do you know about that?” And so they would ask me that and I would be like, “I don't know where the price comes from. That's not the part of New York City I live or work in.”
But that question kept coming up, and especially interesting was that association between New York City as this faraway place and it as the maker of a price. So that was a question that I didn't have an answer for when people were asking it to me, in the field that first year that I was in coffee, but it stuck with me. And as I put When Coffee Speaks together, I tried to explore it a little bit more. And I paid attention to the differences in systems for pricing between the different countries that I was in and tried to ask more questions about it. And then as I continued to do different freelance stories, I kept that question in mind and kept researching that in the background, and trying to piece together how I could answer that question, which turned into, about eight years later, still—
Ashley: I was going to say, we haven't answered that question yet, have we?
Rachel: Right, and I think that's what makes it a great question—but also a difficult one—is that it doesn't have an easy answer.
Ashley: So I think that that's actually a good framework to think of this conversation, that question of, “Where does the price of coffee come from?” And by no means are we going to, number one, answer that question, because you've been working on it for eight years. And, two, a lot of the things that you are probably sharing come from your background as a freelance journalist, as a researcher, as someone who doesn't trade coffee, but has studied it for the writing work that you do.
But before we get into that, I'm always really compelled by the little details of people's lives. It's kind of incredible that you had a question and you were like, “I'm going to go find it out. I have this cup of coffee in my hand and I'm going to go find out where this comes from.” Have you always been that kind of question-asker, a person who pursues questions as far as they go?
Rachel: Yeah, I'm sort of curious, but stubbornly so; probably far more than is good for me. That was actually how I learned to speak Spanish, by living in Spain. I was an exchange student for [my] junior year of high school. That was sort of the same thing where I just decided, “Huh, I wonder what it's like.” I grew up in New Hampshire in a small town, in the central mountains of New Hampshire. And so I just was like, “Huh, that seems interesting and different over there. I wonder what it's like.”
And then I just went and found out and then did the same thing with coffee, which actually was part of the reason why I was looking to [explore]. I love New York City and have a deep love, and always will have, for New York, but because I grew up in the mountains outdoors, at some point New York becomes a lot of city very quickly.
So that was why I was interested in getting to know a different part of the world and its mountains and its culture. And then using the Spanish that I learned from living abroad, so a lot of things just came together that ended up being something [that I did]. I had the Spanish from Spain, which is very much not tropical. It has agriculture, but certainly not coffee. And then I had the mountain experience from New Hampshire, and they converged in Central America.
So I was able to do the initial research and then I actually did return to teaching in New York for a few years after that, but continued the coffee freelance writing. It was in 2015 when I also started working for Ally Coffee as the content manager.
Working for an importing company, even though I'm not the one who does any of the coffee buying, that added another perspective in seeing how the supply chain operates, the flow; knowing about the timelines and some of the processes for physically purchasing coffee volumes from around the world.
Again, that was just another piece in getting to hear from different producers in different countries, and all these different pieces over time have contributed to me coming up with different ways to approach an answer to this question about where does this “magic number,” where does this price come from?
Ashley: Cool. So let's dive in and let's try to figure out at least some of the contributing factors to this number. So let's start, I guess, pretty broadly. And again we talked a little bit about this a little bit earlier, and we said this a little bit before we started recording, but a lot of this perspective that you're about to offer comes from your work as a freelance writer, and it's a question that you've been exploring for a long time. So where would we even start with a question like this? Where does the price of coffee come from?
Rachel: Yeah, it was interesting. And the thing that struck me, and why I decided to approach it from that original question that was asked of me, was that there was a very strong association among the producers in Central and South America between New York City and the price of coffee. And that struck me as odd because there are no coffee farms in New York City.
And so I was, I was sort of curious like, “Huh, why? I'm coming to where the coffee is. Why do they think the coffee price comes from where I come from?” And so what we've been alluding to here is the Coffee Futures Market, or what's called the “C market.”
So the Coffee Futures Market originally was traded [at] a physical trading floor in New York City, and now all of that trading happens digitally. It sort of happens everywhere. There are no floor brokers and no more pit trading for coffee at this time. But it was the New York Coffee Exchange that was in New York City, and that was where these futures contracts were traded. From that process a price is derived, and then ultimately that number that comes out of the daily trading in New York City (or currently on online platforms) yields a price that then translates to what producers see when they sell their coffee in Central America.
And so that understanding, that was why they were asking me that—that all producers know that in New York City, a price of coffee is discovered, or the price comes almost magically. And that's what's been interesting, is that's part of the actual truth of this, is that it sort of is magic about how a price is generated by a futures exchange. It's almost as mystical as people think it is. And then it's mythical, but at the same time, it's also very much math and technical.
Ashley: Some of the “mysticalness” that surrounds that is that it seems from—again, this might be me asking you to explain it to me like I'm a five-year-old—but it seems like a lot of these conversations are happening totally independent of where the actual coffee is coming from. So it involves no person who physically has the coffee to be like, “This is the price of the coffee. Here, I am selling it to you.” It's like, “I have this coffee and somewhere way far away, someone is using magical algorithms to figure out how much this thing that I currently have that I'm in charge of is worth.”
Rachel: Right. It's an interesting angle to approach the question, because from that perspective it does seem very nonsensical, this number is very much divorced from this thing that I've grown on my land over the course of the years and have been cultivating possibly for generations.
Just to back up, what I learned—and this is information that's out there and I encourage everyone to look this up and to research it—so what I’ll explain a little bit about now is just what a futures market is in general, and then I'll tie it back to coffee.
Ashley: Yes, I would love that.
Rachel: Yeah. So I do think language is powerful and that we should try to be as accurate as possible in whatever we're talking about. Even I have been saying so far, “the price of coffee,” but what happens is that the New York C-market price, that is a futures exchange, which means that that is a marketplace where contracts are traded. So that is a separate activity, what happens in New York City, so to speak, but it currently happens on [what is] called the Intercontinental Exchange [ICE], the owner of that marketplace of that exchange.
And again, that is a digital platform and you have to be a licensed broker, and there's a whole process to participate in trading on that exchange. And you can see all of that. And again, I encourage everyone to go to www.theice.com, [the website for] the ICE Intercontinental Exchange. Look up the specifications of that contract.
And just to get a sense of all the different products that are traded with futures, which include other agricultural things, metals, currencies, it starts to get really abstract, but basically what a futures exchange is, is there are contracts that correspond to physical units of coffee. So you can trade those contracts, meaning buy and sell those contracts and never see a green coffee bean in your life. And that is a very common way to participate in a futures exchange.
The futures exchanges in the U.S. go all the way back to the 1800s. The first one was in Chicago—the first one in the U.S.—and actually way back, they go [as far back as] rice exchanges in Japan in the 1600s. These are places where people will come and buy and sell these contracts as a way of anticipating what will or will not happen, or might or might not happen with the actual supply and demand of a product.
So you have a contract, and if you purchase that contract that entitles you to the delivery of the physical goods that matches the specifications on that contract. Vice versa, if you sell that contract, then you must deliver goods that match the specifications on that contract.
Ashley: But can I ask where the contracts come from?
Rachel: That's something that the exchange itself has set up, basically, the terms of the contract. You actually don't physically receive a piece of paper that you can hold. It's your broker who would manage the call, your position, how many contracts you have. And again, there's a whole system, and this is similar to if you know anything about stock trading, in some ways it's similar. But futures contracts have expiration dates. They have certain months of the year when they expire, and certain days. There's a whole trading calendar, again, on the ICE website. I encourage you to go and just take a peek.
But these contracts, if they expire, you either owe the physical good, or you must receive the physical good as specified on that contract. But that’s the last way [it happens]. They call that “the buyer and seller of last resort.” That's fairly uncommon.
What most people will do is that they will either buy back a contract that they've sold or sell a contract that they've bought. They call it “closing a position,” or undoing the position that you took in the market. There's a way to do that as a hedge, meaning as a protection for whatever you're physically buying and selling in real containers of coffee, but you can also buy and sell these contracts purely with the hope that the value of them will change in your favor, which is speculation.
And again, this is something that exists. There are futures contracts for cotton, for soy, for cocoa, for sugar, for corn, wheat, all sorts of stuff. And again, different participants in the futures market have different goals. Some people trade contracts in order to, what they call “lock in,” or protect a price, meaning that you want to use a future contract to know what you will pay for a product in the future.
And we won't get into [that]. Again, I am not a trader. I'm not providing anyone any instructions or advice for how to hedge or how to speculate; none of that. But there's a way—just trust me on it—that you can use the trading of futures contracts to what they call again “protect a price.” Sometimes that's described as a risk management tool.
But then there's other people who buy and sell contracts for speculative purposes, meaning that they hope that the sale of those contracts or the purchase of those contracts will work in their favor, and earn them a profit just on those transactions, [and] for them it doesn't matter whether or not it correlates to a physical unit of coffee.
That's a very, very brief overview of how an exchange operates, and they call that whole process “price discovery,” which, again, that's the part that does feel a little bit mystical in this way, that there are just people, whoever they are—and that's actually something else the exchange guarantees, is anonymity—so that when you buy and sell a contract, you don't know who the other party is.
The exchange acts as [a sort of] clearing house in the middle. And part of the way that works is that way it's like a guarantee, because you're trading through a clearing house, you know that you'll receive—or you know that you'll owe—whatever the amount is. And there's very, very clear procedures for all of this in how these transactions actually take place.
There's something called the Commodity Futures Trading Commission (CFTC) that oversees all of this and regulates it and sort of audits and checks to make sure that everything's happening the way it should—and the exchange itself, like the “house,” doesn't play, so to speak, so that the owners of the marketplace do not buy and sell in the market. They just operate and “oversee the orderly operations of the exchange,” I think is how they phrase it.
At this point it's even more abstract again, because everything happens online and there are no longer floor brokers gathering in the same room together in front of a ticker in New York City. Now all the brokers and traders just work from wherever they are in the world. That's the process of price discovery, is that the price that's generated every day is just the results of every trade that was placed. So the price moves up and down as people buy and sell contracts at either higher or lower prices.
And again, those are futures contracts, so that does not mean that everyone who's buying and selling in the futures market has any intention or any interest in ever buying or selling green coffee. In that sense, the two are totally separate, meaning that you can buy and sell futures contracts and never see a green coffee bean. And in that way they're separate.
But getting back to the question of coffee that people want to know is, “Why is that [the] price that those people are ‘discovering’ somewhere?”
Ashley: Right—how's that related to what actually happens at origin?
Rachel: Right? How does that mean that when I go to the co-op on Wednesday, that that's going to be the number that I'm paid for my coffee, or when I go to the intermediary to deliver my green coffee? And so that's where, again, what I'm about to explain is from just a theoretical overview, the conceptual process of how this works.
One of the things I've certainly learned, too, is that part of the reason it's really hard to talk about this stuff in general terms is because—I would say it's probably safe to say that every single coffee transaction is unique. If you go through the whole chain of how a container of coffee got from origin to a roastery, there's probably something unique about every single one of those transactions, meaning the order in which people confirmed, how much they wanted, how much they wanted to pay for it, what the quality was, which port it’s going to.
All those things, they all have to happen, and they all have to happen more or less in the same order, but it's by no means a scientific process.
Ashley: Why is that? Is that because of different customs and different countries, or you mentioned even just the ports that they can enter? Why is that not uniform?
Rachel: Yeah, that's part of the beauty of the physical trade, and that's what people will recognize in the basket of things that can be called direct trade, is that sometimes a transaction is initiated by a producer offering someone coffees. Sometimes the transaction is initiated by a roaster seeking out coffees. Sometimes it's initiated by a connective business, like an exporter or an importer, either offering coffee or sourcing coffee for someone, or looking to fill their spot position.
So based on all those many ways that a transaction can be generated, everything else happens in slightly different orders, just depending on when those pieces all fall into place. So the way that then translates to these pricing mechanisms is that one benefit of this “mystical”—it’s not mystical, but—one benefit of this price-discovery process is that the number that is generated every day, that everyone sees as the C-market price, that number is one number, and it's visible to everybody.
And this visibility has actually increased with the internet, meaning that maybe at different points in time this number was not visible to certain people in the supply chain. But certainly with the internet and certainly with better connectivity and improved dissemination of information in different ways, this number is not something that the exchange hides. It's not something that they delay. You don't have to pay to see it. It's something that is publicly visible. It's reported by all the different news outlets that report on markets and things. And it's basically public, open, free information, and everyone can see it. And so the benefit of having a single price that's publicly shared is that then you can use that as a benchmark and everyone is seeing the same benchmark.
That's sort of where I think it's interesting, at least for me in this process of trying to understand the futures market—especially at this [time that’s] being called the price crisis, and watching prices fluctuate, knowing that they're below the cost of production for probably the majority, if not the vast majority, of coffee producers in the world—that the C market has gotten a lot of flack for generating a number that doesn't cover the cost of production for people.
But I think one of the things that I've tried to understand through the different years and angles of looking at this is trying to understand what the “tool” itself [a futures market], what that “tool” is designed to do.
And then from there you can sort of look at, “Okay, is the ‘tool’ being used correctly? Is it being used as it was designed? Or is it maybe being misused?” Which then leads to other questions of, “If the tool itself is being used correctly, then maybe there's a flaw in its design, or maybe that tool is not the tool that we need for this job.”
And so looking at some of those questions, you can be critical of this tool and its role in the coffee trade, or the futures market’s role in the cocoa trade or in cotton and corn and soy and all sorts of other things. But it's also interesting to look at [how] it works, and to question if maybe there's also elements of this tool that are successful and that are positive.
And I do think one of those things is the fact that when you get one number that is visible to everybody, then everyone can use that as a benchmark, and there's not a question of, “Oh, you just made up this number because it serves you.” So even though it's this sort of nameless, faceless “price discovery” process, because it's nameless and faceless almost makes it fair in one sense, meaning that it's discovered by everyone's collective activity together.
And because it's the result of the market rather than the result of some individual naming a number, then everyone can use it for what they call “fix contracts,” or to “finalize contracts.” And there's a couple different ways, again, where that might be useful to you because you're also hedging, so that if you have a price where you fix a contract for physical coffee, you might use that same price when you're doing your hedging activity also.
But there's a huge qualification to that, which is how do you then say something is fair if you know it's not performing this other very important function of compensating people? I think one of the things to keep in mind, and what I've noticed about the stated goals of a futures exchange—which are to provide price discovery and to offer opportunities for hedging and price risk management, and then to be a buyer and seller of last resort—but those are all goals that are designed to facilitate the trade of products.
Unfortunately, in that design, there's not any stated goal that says, “We will make sure this number is either fair to the people who are producing the raw material or, on the flip side, that it's fair to the consumer and that we won't let it get above a certain point because then no one can afford something.”
So that's where there's other mechanisms, either for international agreements or regulations from different bodies, whether it's exporting countries, importing countries, there's sort of a bunch of other things that have come into play at different points in history. You can look at something like oil, which is also a commodity, but has the OPEC—essentially a cartel—to inform its prices in ways that coffee doesn't.
So you have a features exchange, which one of its benefits is that it generates something that everybody can see at the same time to collectively use as their benchmark, but then one of its huge drawbacks is: What if that number is very un-useful to you?
And so I think that's part of the reason why we've seen in the coffee industry a whole bunch of different ways to buy and sell coffee that don't rely on the price “discovered” by the C-market. And so I think that's something else important to note, is that price again exists, but there's no obligation to make that the price that you pay.
Ashley: Right, and we talked about that a little bit before with direct trade or even just some sort of interaction between producers and roasters—roasters can pay whatever they want or importers can pay whatever they want. Just because the C-market is a certain price doesn't mean that they're obligated to pay that price. I think I'm going to try to summarize what you just said. I think I'm going to try it. I'm gonna see what happens, just to make sure that I understand it.
So it seems like, number one, it's important to look at what the point of a futures exchange is. And I might ask some more clarifying questions on this, but it seems like the point of a futures exchange or a futures market is to make sure that there's at least any sort of benchmark that there is at least some benchmark to talk about the price of coffee, as opposed to, there is no benchmark, so you could pay a hundred dollars or you can pay 2 cents. It at least somewhat limits the range that we're talking about.
And two, that you have some frame of reference so that it doesn't change. I mean, obviously the price of coffee changes day to day, but I'm imagining two people and it's like, “You're going to get 50 cents for this per pound and you're going to get $4 per pound.” It's like, “Wait, what? Why is this different?” Does that somewhat make sense?
Rachel: Yeah, yes, all of that is in there. And I think one point to make to explain why a futures market exists … again, I'm very slow to form opinions, so I have no opinions on what the right tool is or what the best tool is. I think that's why it's so important to look case by case. If you're buying a hundred containers of coffee every month, maybe you do something different than if you buy one container of coffee a year.
I think the same way that we say in specialty coffee, “There's a home for every coffee, and a coffee for every home,” that's the same with all these different tools too. I think you can look at what the best use is for each tool and what the best tool is for each situation and go from there.
This is just one in our basket of tools, but part of the reason that futures exchanges evolved was to limit the ability of one or a few people to manipulate the physical supply of something and therefore manipulate its price to falsify a supply and demand by stockpiling something and then releasing it.
If you can imagine back in the [early and mid 1800s], coffee's still what they call “break bulk,” [being transported] in the bellies of the ships. Today, there's still limited ports in the world and limited warehouses compared to the number of roasteries or farms. So if you own several of those in a region of the world, you could theoretically stockpile the coffee to make it very scarce and drive up the price. And then you'd be the first one to flood the market, get the high price. And then all of a sudden the price drops and anybody else who's trying to sell coffee has that low price.
Or the same thing could happen with weather events. You could have these frosts or other extreme weather events come through that all of a sudden eliminate supply and have these very brusque changes, either literal or manipulative ones in physical stocks, which would then create these shocks in the price of something based on how much everyone's willing to pay for it and what it's worth on the street, if you will.
So part of what a futures exchange hoped to do was provide some stability, meaning, “Okay, we don't know what the price is going to be three months from now, but if you trade this contract at a certain price, you can effectively guarantee yourself this price trading this contract now, and then paying whatever the price is. Once it actually comes time that you are ready to buy and sell this physical coffee, and then if you net the two of them, it will even out to the price you want.”
So that's sort of the concept of the hedging function. But it gives people a tool. And again, because everyone can see the same price at the same time, it gives everyone theoretically the same ability to hedge. And I do think one of the things that I've noticed is that hedging and using the price protection tools or risk management tools available from the futures market is a lot more common in the middle and downstream parts of the chain—meaning connected businesses and roasters—and a lot of that has to do with things like financing.
Just the dollar amount that it costs to buy and sell these contracts, each contract corresponds to a container of coffee, so they're very expensive. And there's also options against these contracts, which gets into a whole other level of derivative products.
Ashley: Oh gosh. I was just about to go backwards a little bit and ask you about the idea of hedging. Cause you've mentioned it a couple of times, but I'm not 100% sure I understand it. So can you go backwards and explain a little bit what hedging means?
Rachel: Yes, so again, this is just a very theoretical overview. This is not what I do in my day, so what I'm presenting is sort of a conceptual way to understand the tool versus any tips on how to use it. But what hedging allows you to do is essentially set the price that you'll pay for something or that you'll sell something at in the future. And the way that happens is through trading futures, contracts that correspond to your physical coffee contracts.
Basically they're a way to make sure that the coffee C-market doesn't move wildly outside of your favor. Because imagine that you agreed to a contract at a certain price and then six months from now, when you want to deliver that coffee to whoever you sold it to, the market had dropped and somebody says, “I don't want to get it from you. I'm going to go get it where it's cheaper.”
Basically, hedging allows you to have these contracts for physical coffee, where people are more likely to honor the price of those physical contracts if they also have a corresponding position in the futures market, that when they net the two of them, when they balance out the two of them, gives them a price that's favorable to them.
So again, it's sort of tricky to explain without actually getting into numbers and seeing it [in action], which I don't quite want to go down that path, but basically it's a way of protecting yourself from the price either moving way up or way down. Because again, you probably know how much coffee you need as a roaster a couple of months before you need it. Or the same thing as a producer, you know, as you're harvesting the coffee, you know about how much you have to sell.
And in that meantime, you don't want either the price to bottom out on you if you're trying to sell something and you don't want it to skyrocket if you're trying to buy something. So you can effectively lock in the price of the moment by buying or selling your contract at that price, and then you do have to either buy or sell that contract back to close out your futures market position.
And then at the same time you're buying and selling the physical coffee, and the sum of those two transactions or the difference in those two transactions, the transaction that happens entirely in the futures market and then the transaction that happens entirely with the physical coffee. But those two, when you take the difference between them will equal out to a price that you can calculate in advance essentially.
So it's basically not just to protect against these huge movements going in the opposite direction, but by using different hedging tools, it also just gives you the ability to forecast and sort of know, more or less, what you're going to pay for coffee over a period of time versus just waiting to see what the market does or whether it goes up and down. And without worrying about someone defaulting on physical contracts that you have with them. So does that help?
Ashley: That did help a lot. And I think we emailed about this a little bit and mentioned it kind of casually. I had a feeling that this episode might need to be broken up into two parts because we've barely scratched the surface of the outline we made. So with that in mind I want to ask you one final question before we transition into the next part of this.
But something that I find really interesting throughout all this talk about the C-market as a tool and the way of thinking about this as a tool for a very specific purpose is the marketing and language around the C-market price versus direct trade, or some sort of other relationship-based coffee price system. Because I think for so long as I know, as an educator in the past, I've been taught that we are meant to promote this idea that we pay more than the C-market price.
We pay more than what is on the futures exchange because it's like a dollar per [any given commodity]. And I think it's interesting to almost completely untether that from what essentially we tell ourselves we do in the specialty market which is, “Oh, we pay more,” but these two things are obviously relational because it's coffee. But at the same time, and you mentioned this earlier, the C-market doesn't have to necessitate anything about what we actually pay for coffee.
So with that in mind I was wondering, does that ever bother you? Do you ever notice that same sort of rhetoric?
Rachel: I think that's part of why I wanted to accept your invitation, to talk here on Boss Barista, was just to help clarify, because I think, again, this is very abstract. I describe it as thinking that algebra makes sense. You know? It checks out. Logically algebra is sound, but algebra is not common sense. That logic wouldn't check out if someone didn't sit you down and force you to solve for X a hundred times until you got it.
And so thinking about all this stuff like hedging and futures is kind of the same. Logically it checks out. It does make sense. It does all work when you calculate it. It's been around for 100-150 or so years—I think it was 1882 or something [when] the coffee exchange opened.
So clearly there's a logic to it that works for some people and among them some exporters and some large producer groups, but it's not common sense. And so I think that's where it's tricky, is that if you're a producer or if you're a roaster, or if you're just someone at the grocery store, these things don't make sense unless you've sat down and tried to piece the algebra of them together.
I think that's where it just gets tricky, because while some of the statements people might make about paying more for coffee than what's on the C-market might be true, I do think that sometimes they're not necessarily the most relevant attribute to highlight about the process of making that coffee. And I think sometimes it can create a little bit of noise where maybe there doesn't need to be noise.
Because, again, everyone decides at their own business, and at their own individual level, how they come about agreements and how they want to honor them. Hedging is a tool that makes it easy to honor your agreements, because you know that you sort of have insurance against [them], that there won't be some price movement that somehow makes that contract that you want to honor because you're friends with somebody—if that becomes a financially dangerous decision, then what do you do?
That's part of where, again, one tool is that [hedging] lets you see into the future or trade into the future on a futures exchange. To avoid having to ask those questions of, “Oh, we have this contract at a certain amount, but now the market is doing something totally different. Do we honor this contract that we made or do we go with either someone who's going to pay more because the market's more, or do we go with buying something cheaper because it's now available cheaper?”
But again, depending on how you run your business, just whether the size of it, the type of coffee, all those different questions, the relationship you have with the people you're sourcing from, you can draft physical contracts at literally any price you want, and you can honor them no matter what that market is doing.
But again, I think it's kind of hard to explain how—not revolutionary, but how wild that might seem to just say, “We honored our fixed price contract that was for a very high number, even though we could buy coffee very cheaply over here.” That's sort of a harder one-liner to pitch, I guess.
Sometimes I'm also curious about how much those claims resonate with consumers or resonate with people who drink coffee. I think that's another piece of this, is that not only is the aspect of futures market and price discovery not necessarily common knowledge to every single person who works in the coffee industry, it's not necessarily common knowledge to every single person who's buying coffee. So that's where I always want to make sure in the writing and everything I do, I always want to make sure that I know what I'm talking about before I talk about it.
And so that's something I think is tricky with price because again, it's something everybody interacts with every day at their companies. You know how much you have to go through the process of either buying coffee or pricing your retail bags or something, and your consumers see the price of coffee at the grocery store. They see the price of a latte at a certain cafe.
So it's something we all interact with daily, so it feels very familiar on a lot of levels, but again, there's all of these processes in the middle that come from these fairly sophisticated and very abstract—but also very logical—tools like futures trading.
And that also informs everything, you know, the cost of other normal household goods that include basic grains or even there's contracts for live hogs, there's contracts for metals, there's contracts for orange juice concentrate. I mean, this has a lot to do with how the grocery trade evolves and everything too. So yeah, it’s a little bit tricky to single coffee out in that way when it's found with all these other systems.
Ashley: I have a lot more questions to ask you, which will come up in the second half of this interview.
Part Two of this episode is available now.
Thanks for listening, please share with your friends, and leave a comment. This two-part episode is the last of our December Rewind series. See you in 2022!
December Rewind: Rachel Northrop Breaks Down the C-Market (Part One)