by Joe Marrocco, Café Imports
Navigating a Volatile Market
When buying green coffee, the supply chain can seem to be more of a labyrinth than a pathway. Navigating the ever-volatile market in order to find coffees that meet both your quality standards and budgetary needs, while also maintaining a green inventory or supply over the long haul, can seem more like the job of a sorcerer than a sourcer. I am asked about the market on a daily basis, typically many times a day. For some, the market is a subject that evokes intrigue, and can even pique a latent gambling curiosity. For others, it is a subject that carries with it fear, confusion, and in the worst cases, regret. As I reread what I have just written, I realize that so much of the time, market positions are managed through an emotional haze.
The commodities market is actually kind of a beautiful thing. If you don’t believe me, read the article written by Ric Rhinehart in 2014 Issue No. 1 of The Chronicle. Ric says this of the original concept of the market: “Put simply, sellers can be guaranteed a selling price for future crops, and buyers can be guaranteed a known cost for future deliveries. This allows both ends of the supply chain to manage their risk and to focus on their core business.”
This doesn’t mean that the market is the perfect system, or that we shouldn’t be working toward something better. But today’s green-coffee-buying reality includes the C market. Not only should you acknowledge this fact, but your company should also understand it and use it as a tool.
Managing Risks in Green Coffee Buying
The sound of the phrase “managing risk” evokes all of the emotions discussed above. However, this does not have to be the case. To manage risk, one must understand the risks they are facing, and understand the tools that they have to work with.
Understanding Risks in Green Coffee Buying
One major risk facing a green coffee buyer is how “far out” should their position be. Should they be “long” or “short”? There are a number of different areas where these concepts can be applied: the product, the market, or contracts. Here are some examples:
Long in product: A coffee is getting old and worn, staff members working with it are bored and no longer passionate, and both the bad coffee and bad vibes are being passed on to your guests.
Long in the market: Contracts are fixed with six months’ worth of coffee in a 220 market. After two months, you see that the market has dropped to 180 and trending lower. Now you have coffee that appears to be much more expensive than it should be.
Short in product: There is a particular level of quality or characteristic of coffee needed that is in short supply or is about to run out. There will be a gap in time until more is available that the current stock will not span.
Short in contracts: Contracts have been locked in x number of bags against a market that was low, but the market is trending high and the amount of bags booked will only carry to an even higher market, when more contracts will be written.
Understanding the Tools
Perfectly mitigating these risks is impossible, but it is critical for the viability of a company to be intentional in working toward doing so. Here are some recommendations:
Have a plan. Have a plan in place for how the company will act at different stages which the market may reach. Look at the history of the market, both short- and long-term. If the market is imagined in “peaks” and “valleys,” then the average market level, over the entire existence of the market, is “sea level.” The tops of the peaks stand as mountains above that sea level, the highest close in the past 15 years being $2.9935 per pound. The valleys are deep trenches, which all roasters swim hard to reach, and which have not dropped below $1.00 a pound since 2005. If the average market your company has fixed coffee to during its lifetime is the market’s sea level (or C Level?…never mind) then you are market neutral, which is a win. Think in the long term. Think of the market throughout the lifespan of your company. Make decisions that reflect this idea. When the market is below that average, you may want to be long. The lower that level gets, the longer you may want to be. Nevertheless, know that this level may be preparing you for booking later into a market that may be higher than you would like. By booking long in a low market, you have mitigated the risk of high-market loss. After all, we should not be surprised by the market: It will always rise and fall, and rise and fall again. You can deflect the market’s volatility by planning how you will react to different scenarios. If you are going to blame luck for a market decision your company makes, you want to ensure that you are only blaming good luck. Bad luck should be calculated and planned for.
Form a team. This should actually be number one, but the plan underscores the need for a team. One rogue buyer who is managing this part of your business will rise or fall with these decisions. Usually, the manager over this piece of the business is an owner. Owners carry an even deeper level of emotion into this process of decision-making. That is not to say that they are not the right ones for the job, but that having a team can support the owner, dilute some of the emotional strain, and back up decisions that are logical and wholesome for the long-term goals of the company. When responsibility belongs solely to an individual who is not the owner, that person can quickly become the company hero or villain. If the company plan is to execute the scapegoat for a poor market decision, the company will only be in the business of executions, and will eventually be staring in a mirror anyway. Sitting down as a group and building support behind decisions adds cohesion and mitigates emotional upheaval in the company. Owning loss and gain as a group also injects oversight, continuity of company strategy during employee turnover, and accountability. This gives your company a chance to reflect before carrying out any hasty executions. Even better, rather than executing employees, you now have a team executing plans, together. The team can rest easy once the plan is being carried out, and that can allow the owners to rest easy as well. If the company is long on a contract, all is well; it was in the plan, the group decided as a team it was going to work out, and now the team will build the forward-moving plan accordingly.
Having a team to make decisions on green purchasing also knits your brand to your quality program. Although the team deciding on what to purchase may have different players than the team that is deciding how to purchase, both need to have open and honest communication with each other; the Green Team, if you will, dealing with coffee and cash.
Don’t regret. Regret will pull down the team, the plan, and the business. Regret takes an emotional situation and elevates the level of emotions to logic-threatening heights. In other words, regret can lead to more poor decisions. Instead of regretting a decision or action, make a new plan and strengthen your team. Look at the loss as money toward education instead of a pure loss.
Smaller companies are particularly prone to this mistake. Many times there is regret due to the feeling that they are trapped outside of the market, lacking the buying power to take advantage of times when the market goes low. If you are in a smaller company, but not yet managing a market position, don’t sweat it. Even if you are buying spot coffees only, you would be market neutral over the course of your company’s life. Since you are buying coffee in every market level, your purchases are a weighted average of the amount of coffee purchased against the market levels at which they were purchased, or at least very close in proximity to that. Remember, market neutrality is a win! No regrets!
Price appropriately. No matter what the market is doing, if your prices are not set appropriately, you will not be able to move forward. If your prices are too low, you won’t be able to keep the lights on. If your prices are too high, you will be turning market share over to your competitors by alienating your customers. If your cost of goods increases, but does not affect your guests’ cost of goods, your budget and plan should be reflective of this loss. You can only tighten the belt so much. I have witnessed companies that wait to pull the trigger on a price increase, and then have to increase by a large margin that is no longer palatable to their guests. These companies lose big. Your margins should include space for market risk. All costs should be accounted for, planned for, and calculated. All pricing to customers, both wholesale and retail, should function out of the matrix of costs to run the business plus what is needed for liquidity, savings (unforeseen costs), and profit.
Remember the chain. Working for an importer, I get a bird’s eye view of both the roasters’ world and the producers’ world. When the market is high, my customers are up in arms and angry, yet our producer partners are excited and full of hope. When the market is low, roasters rejoice and producers are now filled with anxiety and disillusionment. We have to keep in mind the effect one side of the chain has on the other. When the market is going lower, that affects someone for the good and someone else for the bad. At the end of the day, a farmer has to put bread on the table, and so does a roaster. Just as a roaster will raise prices in a higher market, so too will a producer. The farmer does this in the form of additions to the cost of the differential (diff) that their coffee can now earn. When the market goes low, quality coffees typically see increased differentials. So, when booking coffee, holding off to pull the trigger on a contract until the market bottoms out may not be the best financial strategy, since the diff may now be higher in that really low market. Plus, that diff is not very likely to decrease once the market begins to again trend upward. Thinking of the market in a more holistic way can help your approach to booking a specific coffee, but thinking about it in these terms may also dissuade you from looking to find the best deal. After all, if a farmer has no income, you have no coffee. There needs to be balance in place in order for the supply chain to continue to function. Seeking out the best deals can undercut the producer of your product financially, while ultimately undercutting your customer in quality. This is not to say coffees bought in a low market are low quality. Rather, it is to say that celebrating a low market is celebrating a situation that is damaging to the suppliers of that product, and thus your future ability to buy that coffee due to either higher diffs, lower quality, or both. If something affects part of the chain, it will affect you too. A healthy supply chain will support your company’s health.
Dedication to focused contemplation, deeper knowledge, and a community set on reaching the aligned goals of an organization that has a clearly defined long-term vision will clear a path through the twists and turns of the market and supply chain. Holding fast to set principles that steer a trajectory toward constant improvement will slowly change urgent decisions, which happen in tumultuous moments of need, into an unfolding plan, with all of the important decisions clearly and strategically mapped out in advance. Add a touch of luck, some delicious coffee, and the support of a collaborative industry, and the future is bright indeed.
Father, husband, home cook, fisherman, roaster, barista, green coffee salesman, hunter, teacher, musician, student, and all around busy guy, Joe Marrocco has a life that is full of people, places, and fun. Joe enjoys to serve, share, and create. Joe’s coffee career has included roasting for Kaldi’s Coffee Roasting Company in St. Louis, MO, selling green coffee for Café Imports, serving as a Chapter Representative for the Barista Guild of America, competing and judging barista competitions including a regional win, and lots of educational opportunities. Joe is excited and honored by the opportunity to serve on the RGEC. He hopes to bring a passion for service, and a deeper connection to the barista community.