Listen Here!

A commodity close to many of our hearts, but how does it end up in our mugs? Where is it grown, how is it processed and who trades it? How do the derivative contracts work and what might the future hold as climate, geopolitics and consumer tastes evolve? 

Discussing these issues with Paul Chapman is Charlie Stephens, President of Amarella Café, an independent speciality coffee trader in the Americas. Still in his twenties, Charlie also shares his story of how he launched his own trading company.

 

Welcome to The HC. Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I’m your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we’re talking coffee. How does it end up at our breakfast table? Who are the market participants? Who are the producers? What are the different grades? How does the futures market operate? And then having a conversation with our guest, which I found quite inspirational about how young traders can see opportunities and still launch new trading companies in the commodities world. Our guest is Charlie Stephens.

1

00:00:45

He’s president of Amarillo Cafe, a specialty green coffee trading company. I’ll leave him to describe the rest of his career. Just a note, we have an upcoming event on September 19th in Houston, an HC Commodity podcast live event this time to discuss US natural gas trading in a global market. We’ve got a great panel lined up. The event is free, but RSVP only spaces are limited, but I’ll include a link in the show notes as well. For those who wish to attend. It should be a great night out panels, followed by cocktails and canopies, and it’s always fun networking. And again, please do leave us a positive review on the platform you are listening on. It really supports the show, allowing us to continue to g get great guests and expand our global reach.

1

00:01:31

And As always, I hope you enjoyed the episode. Charlie, welcome to the show.

2

00:01:36

Yeah, thanks for having me, Paul. Excited to be here.

1

00:01:38

So, we are talking coffee. It’s a commodity that, well, I certainly You know, consume every day, but digging into the, into the market, the market structure, who are the participants and what are the trends that are affecting coffee and coffee trading. But before we sort of dig into that, can you, just at a very basic level, help me understand what is the, the coffee supply chain Where? is it grown? How is it processed, and how does it end up in our mugs?

2

00:02:04

Yeah, certainly. So I, I think it, it’s best to start at the most basic part of what is coffee. This, this actually surprises a lot of people, but coffee is a fruit. It’s actually a droop, which is like a, like a stone fruit. And so it’s related to a plum, a, a peach, a cherry apricot. And the, the thing that we call a coffee bean is actually a coffee seed. It’s actually the seed of the fruit. And I, I don’t know the origins of, of why we started calling it a bean. Maybe it just looks like a bean. But I, I think once people wrap their heads around the fact that it’s a fruit, I think it starts to change your viewpoint on the drink that, that people consume every day.

2

00:02:52

I think an another common question that I get, and, and I’m gonna, I’m gonna give an example. If there’s any plant biologists out there listening to this, they’re, they’re probably gonna roll their eyes, but I think that You know it, it’s important to understand where does the flavor of coffee come from? So generally speaking, rule of thumb is altitude kind of will produce better, better coffee. So the higher the elevation that it’s grown at, the better the quality of the, of the, of the coffee. Again, that’s a loose rule of thumb and kind of the way people think through it is, You know when you do exercise the human body, your bloodstream lacks oxygen, right?

2

00:03:35

And kind of the reaction to that, your muscles will, will produce lactic acid, which is what makes your muscles feel sore. Well, the same thing happens in, in the coffee plant. So when it’s at elevation, the plant is working harder to produce the fruit. It’s respirating. And through that respiration process creates acidic compounds. And those acidic compounds are flavors. So when people go to a, a cafe and the barista says that this coffee tastes like blueberries and apricots You know it’s not some fluffy kind of crazy, crazy talk. It’s, it, it it is actually scientific that there are acidic compounds that mimic that of a blueberry or that of an apricot.

2

00:04:22

So I, I think that that does kind of change people’s mindset a little bit. And I wanted to, to mention that, just to give some, some context around coffee as a You know, something that, that we all drink every day. One other thing that I, I wanna mention on that, that I think is, is, is important is You know the, when you go to a cafe, you, you, you often see different roast levels, right? You see a light, medium, dark roast. There’s sort of a misconception that a dark roasted coffee is a higher quality coffee or it’s stronger or something like that. And that, that really is a, a not necessarily true. A a another kind of loose example would be when you, when you grill a steak, you could take the finest Wagyu beef straight from Japan and you could take You know the cheapest cut of meat off the side of the street and throw it on the grill.

2

00:05:18

And, and if you cook both of them, rare You know pink throughout. The bad one is gonna taste bad, and the good one is gonna take, you’re gonna taste the characteristics of that meat, right? And when, when you cook, both of them well done, they’re both gonna taste very similar. They’re gonna taste charred, they’re gonna taste like the grill basically. So coffee’s the same, where dark roast, a lot of times you lose those inherent characteristics of the, of the bean and the lighter roast, you’re going to be able to really taste that, the, those characteristics. And so it’s not necessarily fair to say that a light roast is better or a dark roast is better.

2

00:05:59

It kind of depends on the, on the product that goes, that that goes in, right? Yeah.

1

00:06:03

Although, although You know definitely a rare steak’s better than a well done one, just throw that in. So just, just I mean, that’s fascinating. Right. and we can talk about where it’s grown, but just before we talk about sort of that supply chain, how do you take that fruit and turn it into a roasted coffee bean that we grind, that goes into our You know that creates the coffee drink?

2

00:06:25

Yeah, definitely. And, and I mean that is an entire industry. You know a lot of producing countries, people, that’s something that people study in college and, and it, it is actually quite in depth. So I’ll do my best to, to kind of describe that at a high level. So there’s, there’s essentially three or four layers, depending on how you look at it, of the fruit. So the post harvest processing, we’ve gotta remove those layers while maintaining the integrity of the seed, right? So, and each producing country does it differently there. And, and a lot of that is just tradition that’s, that’s been passed along over time.

2

00:07:10

And so each country kind of has different infrastructure for different processes. Generally speaking, You know, we, we have to remove the, the, the, the fruit, the, the, the meat of the fruit. And that can be done in, in kind of three main ways. One would be the use of water, which we call the wash process. So essentially after harvest the, the, on the farm, they’ll put the, the coffee into a tank and they’ll kind of move the coffee around. They have these kind of rakes and they move the coffee around in the tanks and the water eventually removes that, that mucilage, right?

2

00:07:54

And it’ll go through a series of machines that, that will, that will move that, but the water kind of helps do that. The second method is called the natural method. And essentially the cherry is taken and placed on what we call raised African beds, or it’ll be placed on the ground on like stone patios. And You know the coffee will sit under the sun for a, a few weeks, and essentially the sun will dry the coffee and turn that fruit into something that, that, that resembles a date, like a dried date. And once that’s dried, it becomes very easy to remove that through a machine, right?

2

00:08:36

Because it’s, it’s hard. So you can just kind of crack that off. The natural method usually will produce a sweeter coffee when done correctly, when done poorly, it will be fermenty, it will kind of have some unpleasant flavors. And I’d say the, the third method is used to a much lesser extent, but definitely becoming more popular, is that there are different forms of fermentation. So they will put the coffee into tanks and they will ferment the coffee. Sometimes they’ll add different yeast.

2

00:09:18

They’ll, they’ll introduce different yeast, they’ll introduce different microorganisms. And those microorganisms essentially break down the sugars, and that removes the, the fruit from the seed. Those fermentations You know again, when done well, can create some really wild exotic flavors. And you have coffees that sometimes almost taste more like wine than they taste like coffee. And when done poorly, You know it can be, it, it, it can taste like, well, I’ll be honest, I I’ve tasted coffees done poorly like that and they taste like it’s gross.

2

00:09:59

It’s very gross. And so You know it, it’s up to the producer how they want to do that. But You know, I’d say the washed method is probably the, the, the least risky. You’re, you’re not gonna lose as much product. And, and then down to kind of the fermentation is if you do it well, you’re gonna be able to sell your, your crop for a significant premium. But there’s risk there because you’re introducing external factors. And You know you, you, you might get a heavy discount for your coffee if you do it poorly.

1

00:10:30

And are, who’s doing that part of the processing? Is that typically the farmers themselves or cooperatives or the, the, the, the wholesalers come in and just take the, the, the cherries? Like who’s doing that bit?

2

00:10:44

Yeah, it, it depends on the country. And, and my context in, in the coffee world is, is largely in Latin America. And, and even within Latin America, it’s different in every country. Let’s say in Columbia for example, it’s, it’s gonna be done on the farm. So the farmer is the one controlling that process. In El Salvador, you, it’s a little bit of both kind of a hybrid model. So the farms will do some of it, and the, the, sometimes they’re kind of centralized facilities that that will do it maybe on a, on a more mass scale. So yeah, it, it just depends on the, on where you are.

1

00:11:26

Okay. And then that’s when you end up with this green coffee seed, or now is it called a bean,

2

00:11:31

Correct? Yeah, we can call it a bean just for, since everyone’s used to that.

1

00:11:36

Is coffee transported globally as a green coffee bean or is it processed within destinations? Like how, how does it, how does it end up to be get to roasted?

2

00:11:46

Yeah, so once the coffee is, is processed, it will be selected, sorted, sorted by density and by, by screen size. So by, by the size of the, of the bean. And then it’ll be packed and shipped and, and shipping containers globally. So the roaster coffee roaster in destination countries is buying jute bags or, or You know when you think of like a, a coffee bag, right? Like a burlap bag generally around 70 kilos. And that, that is the, the product that they’re buying that they then put in their roaster and they You know sell freshly roasted coffee to their customers,

1

00:12:33

Let’s just stay with the customers and then we’re gonna come back and unpick the sort of the, the trading in the, the intermediation that goes on, on the customer side. So I think the vast majority of coffee is actually still grown in Latin America, right? I mean it actually originally comes from the, the Horn of Africa, but You know now it’s primarily grown in South America. How You know how, what, what sort of scale of market are we talking on the consumer side? How does that split between Arabica and Robusta break down? Can you give us some sense of that? And then we’ll come back to the trading piece.

2

00:13:05

Co coffee’s consumed in, in virtually every country in the world, right? Maybe to a lesser extent in the uk, I don’t know because of the Yeah. The tea market, but no, I’m kidding that the UK has a, has a strong coffee market, but You know the coffee’s consumed globally even in producing countries, right? So typically I’ll, I’ll take Columbia for example. There is a sort of a minimum quality that you have to meet in order to export that coffee. And the government heavily controls that because that it, it’s sort of a marketing thing for them, right? I mean you remember back when they came out with 100% Colombian coffee, the Juan Valdez, right?

2

00:13:49

And that was a, a genius marketing scheme that, that Columbia came up with to promote exports from their country. And it’s worked, right? And, and You know, consumers generally think that Colombian coffee is a higher quality coffee. And I, I don’t necessarily disagree with that, but it’s, it’s not the whole truth, right? It it, there there is a piece of marketing. There is

1

00:14:15

Marketing, yeah.

2

00:14:16

Right? So yeah, so generally speaking, the the, the consumer, the destination countries are getting kind of the, the best quality coffee that’s out there. And then the kind of the lower end coffee will stay in the producing countries. And a lot of times that’s what people consume there locally. Quick story there is, You know, I get it. I have a lot of friends that are like, oh, you, you spend a lot of time in Columbia, I bet you just drink amazing coffee all the time. And, and actually the the, the opposite is true. You know you, you some, some of the coffee consume there is is is not that great because it’s, it’s not the stuff that people are exporting, right?

2

00:14:58

And, and that’s something that’s changing too. And, and we’re starting to see producing countries are starting to consume better quality coffee and you see some local demand and, and things like that. But to, to your question on Arabica versus Robusta. So You know Arabica makes up about 70% of the market. Robusta would be about 30%. And the difference between those two, and I’m not a plant biologist, so apologies to anyone out there that that’s a plant biologist, but Arabica and Rob Robusta are, are related, but they’re different species of plants. So I think it’s the, the distinction is really important because Rob Robusta is a, a very hearty plant.

2

00:15:45

It doesn’t need to be grown at altitude. It yields maybe five, six times more than an Arabica plant. And it’s largely pest resistant, disease resistant, drought resistant. It’s, it’s a very resilient plant. And You know the, the result of that is, it, it, it produces a product that is fairly bitter. It doesn’t taste all that great caffeine content is, is significantly higher. And if you were to drink just a robust a coffee by itself, it probably would, would hurt your stomach. It, it’s so strong. So Robusta globally is, is kind of used more in the, the flavoring markets.

2

00:16:31

So to flavor ice cream for example, or, or, or, or candies, things like that. It is also used You know it’s, it is important to point out at the Italians, use it as a base for their espresso blends, but it’s, it’s not the whole thing, it’s just a, a, a component of the blend. And they, the reason they do that is, is it adds kind of that strength and that bite that they’re looking for. And it also adds what they call crema crema is, is is kind of the, that that beautiful brown foam on top of the espresso shot and the, the Italians are crazy for that.

2

00:17:12

And so You know that that is an, an important distinction.

1

00:17:16

Oh right. So when we’re buying espresso coffee, it’s not just actually how finely grounded is it also probably has a different mixture or or content of, of robusta.

2

00:17:26

Correct. Correct. Absolutely. And, and then You know on the Arabica side, You know the, the Arabica plant is a little bit more delicate. I’d say generally it, it still is a, a resilient plant. But in comparison to the Robusta plant, it is a little bit more delicate. It’s susceptible to, to disease, to pests. It, it needs to be grown at altitude and You know generally it, it, it is a, a good tasting drink. It, it produces sweeter flavors. And it’s largely what you and I consume every day. I I would say that the vast majority of people that drink coffee on a daily basis or drinking Arabica coffee and, and Paul, I I, one kind of further distinction there too is You know in the Arabica market, like I said, represents about 70% of the total coffee produced in the world.

2

00:18:23

There’s a sub-sector where, where we operate, and that is the specialty coffee market, which is about 15% of the Arabica market is specialty grade. And specialty grade coffee is the, the distinction there is You know, the, the, the cherries are picked at optimum maturity. So rather than going to the tree and stripping the tree of all the cherries at the same time, You know each cherry is actually picked at the optimal maturity level. So you have to think You know that the labor costs there are significantly higher, but the flavors are, are significantly different.

2

00:19:06

And it, it is a distinct product from kind of a commercial grade. Arabica I mean this is

1

00:19:12

A huge market as well, right? So You know, I think it’s sort of around 28 billion in the US alone. So big market and, and a and a big commodity in that sense. How is I just putting specialty aside ‘cause we can come back to that with Amarillo Cafe, your business, but how is this traded? Who’s trading it? What is You know what’s future supporters there? Can you give us some sense of trading operations in coffee and, and who the major participants are?

2

00:19:41

Yeah, sure. So the, the kind of standard supply chain is, it’s a long one. And so a lot of times, so, so again, my context being Colombian coffee, the average farm size in Columbia is two and a half hectares, right? So pretty small. And I think there’s something like 700,000 coffee producers in, in Columbia. So the aggregation of that product is complicated at best. It it is, it is very tricky. So what you have is you have a lot of cooperatives and you have farmer associations, which are a little different than the cooperative model that essentially aggregate this coffee in, in country, right?

2

00:20:26

And then those cooperatives will typically sell to an exporter. They’ll usually You know mill and process the coffee, then they’ll sell the green coffee to an exporter. A lot of times that exporter will sell to an importer and destination country. And then that importer is selling to a roaster kind of a final, final consumer. Right? And You know, the the interesting thing with coffee is you have a, a huge combination of massive industry and small players that, that have been in the game for a long time, right?

2

00:21:07

So the the scale is, is wild. It really is wild. And, and you have companies like Olam and Louis Dreyfus and Vol Cafe, for example, that are just behemoths in the market all the way down to Amarillo Cafe us, right? Hey, You know we’re, we’re, we’re one of the small guys.

1

00:21:31

What what makes them behemoth though? Are they got storage transportation facilities around the world? You know what, how, how are they and and are they primarily, they’re doing both the exporting and the importing, like You know, not necessarily naming names, but what’s your typical setup for a big trader?

2

00:21:47

A lot of times they have their own mills, their own processing mills in origin countries. A lot of times they have multiple around different regions within those countries. And then if you think about it, they’re sort of aggregating everything up to the destination countries. So when they go to a roaster and let’s just say, let’s just say Starbucks as an example, they’re able to go to Starbucks and say, Hey look, we have, we can offer you a hundred containers a month from Columbia, a hundred containers from Vietnam, a hundred containers from Malaysia, right? And so they have the scale to be able to be kind of a one-stop shop for those, for those big roasters that are You know offering coffees from different different origin countries.

1

00:22:38

So they have essentially a series of sort of originators, You know buyers in country that are going to these farmers or, or the cooperatives. And then obviously they’ve their own processing facilities, I guess quality control. And then yeah, they’ve, they’ve got these, they can be, as you say, that one stop shop You know how many participants are there at kind of that scale. I mean, how concentrated is this sector? And then can you give us some sense of how robust the futures market is? How they use,

2

00:23:04

Yeah, so at the top, it, it’s quite concentrated and just to kind of give an example, You know Nestle or Nest Cafe, which is a part of Nestle. It, it represents about 20 to 25% of the market. And then You know below them is gonna be, there’s a company called JB Holdings, which is 10 to maybe 15% of the market, of the global market. JB it is, is a holding company that has You know Pete’s Coffee, Keurig Caribou Coffee. A lot of the brands that, that we all know You know Coca-Cola owns a, a company which I believe is, is out of the UK Costa Coffee, which You know, I think is around 5% of the market.

2

00:23:51

So You know from the top, it’s, it’s pretty concentrated, but then as you go down the list, it starts to get very, very fragmented, decentralized, I guess. Yeah, yeah. Fragmented.

1

00:24:02

Where does the, so just one final piece of the puzzle, and I, you can tell I’m finding this fascinating. Where do futures sit in this?

2

00:24:09

Sure. So, and, and I can speak more to the Arabica futures than the Robusta, but Robusta is traded on the exchange in London, and You know as, as it pertains to Arabica. So that’s traded on the ice in New York. And You know, look, I’ll, I’ll be honest, Paul, and I don’t know if, if you have listeners from the ice, but You know the, the Arabica contract in my personal opinion is, is a little outdated at this point. It’s a difficult contract to, to trade for a couple different reasons. One being that it is a large contract, so it, it represents a, a full container essentially of, of coffee.

2

00:24:56

So there are a lot of people in the, in the, in the market, particularly producers that have no access to hedging because of that, right? And then down to kind of your smaller roasters, they, they You know they’re, they’re not consuming enough coffee at any given time to, to find that contract useful. So that, I think that that presents a, a big challenge. And then the other side of that is, is really just the, the structure of the contract in that it’s a physically delivered contract. There are warehouses globally that are You know ice delivery points and You know, at the end of the day it’s, it’s, it’s subjective whether a coffee is good or not, right?

2

00:25:41

So you have people called Q graders, which are essentially a sommelier of, of coffee and they’re testing these bags as they come in the warehouse and every day ice releases a report on You know how many bags have been submitted to the exchange, how many passed yesterday? And You know the, the pass rates can go from 5% a day to 70% the next day. And, and it, and You know it, it, it’s not clear what drives that. And so a lot of times it’s really hard to get a feel for how tight I is the market actually.

2

00:26:23

Is it because You know a couple of the graders were, were sick that day, or You know what I mean. And so it’s, it, it’s difficult to gauge that supply and demand in, in a physically delivered market like coffee. And so the, the dynamic with the Arabica contract is, is quite difficult. It is a very volatile market, but it, it’s not to say that it’s, it’s not useful, right? So it, it definitely still is useful, but I, I do think that a move to something like a financially settled contract could do the industry a huge service.

1

00:27:04

Yeah. Interesting. Well, I know we do have some ICE listeners, so maybe they’ll reach out, but yeah, again, and it’s another example of where actually having the wrong type of contract or having some complexity to it that doesn’t match the reality on the ground, really can hold a, a You know that that contract back and obviously therefore not accomplish what it does, what it needs to do, which is manage volatility and allow participants to lay off risk if they choose to.

3

00:27:31

The energy and resources sector is experiencing unprecedented change to help companies navigate this world and capture its opportunities. HC Group launched Enco Insights in 2023. Enco has rapidly become the leading global experts network dedicated to energy and resources. Enco Insights leverages HC Group 20 years of connections and dedication to the sector to give clients the expertise they need to take decisions fast. Connect with ECO’S experts for anything from a one hour insights call to a longer term consulting project@encoinsights.com on

1

00:28:17

We are, we’re gonna come on to sort of this specialty market and, and really your story because there’s an analogous story that’s going on in the commodities world to some extent. But just when you look You know, if I think about the thread and theme of this, this podcast, a lot of it is ultimately how everyone’s being affected by the decarbonization, deglobalization digitization and just the rapidity of change that’s going on. What You know, what has been the dynamic in coffee since the, the pandemic as everyone started drinking a little more or You know how, how, how volatile has that space been? And of course, we’re talking biological systems here and we’ve got increased volatility in weather, not just geopolitics.

2

00:28:57

One kind of easy, easy answer there is, is on the consumption side, during, during the pandemic, the consumer began ordering coffee online. That was kind of a, a, a new thing, right? Historically, people have bought coffee when they go to the grocery store weekly or, or biweekly. and we saw a huge shift to people ordering coffee online, You know, and, and they had more time on their hands. So people were buying Chem Xes and, and You know all of their, their little coffee apparatuses in their houses. So they were, they were exploring and, and, and trying new things and, and So, we saw a huge boom in e-commerce on the consumption side of, of coffee.

2

00:29:42

And, and I think that was a, a big kind of tailwind for the specialty coffee space because people started to, like I said, explore and try different, different types of coffee and okay, I want to, last week I tried a coffee from Panama, now I want to try a coffee from Ethiopia. Yeah. So I, I’d say that, that that was one advancement, You know, we, since the pandemic, things have gone back a little bit to kind of the traditional consumption habits. But that being said, You know, I I was on the phone yesterday with a customer that is a You know very much a, a highly specialty roaster and they’re selling in the Walmart now.

2

00:30:22

So you have, you have companies like Walmart that are starting to carry high grade coffees, not just instant coffee. So that’s, that’s one thing that that has, has shifted You know, there have been attempts at rolling out various kind of digitized supply chain solutions there, there’s a company in Europe that, that I, I think has made some headway on it, but it still presents a lot of challenges. And I, and I think you see that across all commodity industries, right? It’s in theory and on paper it’s a great idea, but I think there are a lot of nuances there that it’s really difficult to take your supply chain completely online and, and kind of take out that, that human aspect to it.

2

00:31:13

But that, that definitely is something that, that people are, are trying to move towards. You know, a big one that I would say that that’s, that’s going on as we speak is the EUDR. And I’m not sure if you have spoken much about this or, or know much about it, but it’s the European Union regulation of deforestation.

1

00:31:35

Mm, no. So yeah, please expound.

2

00:31:37

Yeah. And it, this is quite controversial, so You know, to, to put it simply, basically the, the eu, I think it was 2022, came out and said by 2025, you will not be able to import products that have not been traced to a certified farm or, or a farm would have to be certified to say that it has not contributed to deforestation. So, and they, they listed several commodities. So coffee is one of ‘em. I know cattle is one of ‘em. Palm oil lumber, I think there’s a couple others.

2

00:32:20

But this has presented a huge challenge and actually we’re coming up on, on the deadline for it. So December 1st, I believe is, is the first deadline for any companies that have over 750 employees have to fall in line with this regulation. And You know you. I I think no one is in disagreement of the intention here, right? Like we, we all wanna prevent deforestation. I I don’t know a single person that is, that, that is for deforestation, but I think the challenge is, is really on the ground. And when you think about these origin countries, particularly You know Latin America and, and You know I’d say Africa as well.

2

00:33:09

It’s, it’s really hard to, to get the producers to, to kind of fall in line with regulations like this. It’s intense and it’s, it’s really difficult. And You know, like I said earlier, you have 700 something, like 700,000 coffee producers in, in Columbia. And I’m not sure if you’ve ever been to Columbia, but You know the, the remote parts of Columbia are very, very remote and difficult to navigate. Yeah. So to go and find every two and a half eight hectare farm in Columbia just seems like a really tall order. And You know further to that, a lot of these areas fall into conflict zones where not only is it difficult to find those farms, but it’s dangerous.

2

00:33:54

Right? And, and You know, even outside of Latin America, you think of You know the Congo is a, is a coffee producer and some of these places where it, it’s, it’s really hard to send a European You know regulator to go certify a farm and, and say that, Hey, this farm has not contributed to deforestation. And so You know, again, i I think it’s, it’s, it’s a well-intentioned piece of regulation, but it almost feels like it hasn’t been well thought through on, on the implementation side. And I know that the industry is, is pushing back on the deadline.

2

00:34:36

Several of the, the large coffee companies have come out and, and petitioned for the EU to delay this, this deadline to give them time to figure out what in the world they’re gonna do and how they’re gonna do this. Because really the regulation doesn’t give a whole lot of guidance as to how we’re gonna regulate this. It just say, it’s basically just saying you can’t import product unless it’s been certified. And so it’s creating a lot of problems in the space for sure. A lot of challenges You know us as an American company, we are not necessarily directly subject to it, but I know that a lot of the producers that we buy from are, and there’s a lot of confusion, a a lot of confusion.

2

00:35:22

And so this is gonna be interesting to see how it plays out. and we, we’ve even seen it in the futures market really transform things. And, and You know, I I read on Twitter, so I don’t know how accurate this is, but You know a couple months ago someone wrote that in the ice certified warehouses, only 4% of the certified stocks on the ice in Hamburg were compliant to this regulation.

1

00:35:52

What does this mean, I mean, does this mean that sort of Jan first is sort of like a coffee apocalypse happens in Europe? Like You know I mean, it sounds like You know time’s running, the clock’s ticking on that. And as you say, it’s, there’s a lot of complexity and you could just have a shut down coffee market. I mean that, that would really upset the well the Europeans

2

00:36:13

Yeah. I mean, I I think that that’s sort of the fear in the industry right now. And You know, I certainly don’t wanna come out here and be, be an alarmist and, and cause the the people to, to to, to freak out about where they’re gonna get their coffee. I think it’s gonna sort itself out. But I, I do think that if you’re in the trade right now, this is a, a very, it, it it’s, it’s very worrying You know. And and I think a lot of the, the traders are, are concerned on how in the world they’re gonna navigate this.

1

00:36:47

Yeah. And presumably You know stockpiling right now. Right. And that goes for our You know for your own kitchen cabinets as well. Well, well, we’ll we’ll track that one and perhaps we can get you to comment when we get closer. Okay. So the final part to discuss right, is Amada Cafe, which is your specialty coffee trading business. And kind of, I guess what I’m kind of most fascinated about this in some ways is that it we’ve had 15 years of concentration, well plus in, in all the commodity markets. And that’s a function of increased cost of financing, increased barriers to entry with regards to regulation, et cetera, et cetera. And, and the assets required to get any kind of edge.

1

00:37:29

But there is sort of this You know, there seems to be popping up one or two smaller companies, entrepreneur led who are leaning into more specialty or secondary commodities. You know ground nuts and cashew You know where you don’t have such transparency that’s more fragmented market. You don’t have efficient futures and derivatives capabilities in those. And You know, it sort of seems to me like You know. Well I’d love to kind of just get, get a few minutes on your story ‘cause I think it’s kind of fascinating and and inspirational to younger traders out there who are sort of thinking, well how can I set up my own You know Mark Rich or whatever it might be.

2

00:38:07

Yeah, no, absolutely. So I, I definitely have had an interesting, interesting path into the, into the world of Coffee You know. So I’ll, I’ll start back real quick. ‘cause I, I think that I, it’s sort of several kind of parallel stories running together, but I went to to Texas Tech in here in, in west Texas and studied agricultural finance. And I will admit I was not the best student in the world. And You know the, the only thing in in college that really caught my, caught my attention was intro to futures and options and just captured me.

2

00:38:48

I was obsessed. The, the, the second that I, I stepped foot in that classroom and You know, I like to say it kind of changed my life and I I loved it every second of it. And You know, my senior year of college, I, I was fortunate enough to, to study abroad in, in Brazil and that was my first time to, to ever go to Latin America and it just was eye-opening. I think if anyone’s ever been to Brazil or if you get the opportunity yeah, we,

1

00:39:14

We have an office there, so I love

2

00:39:16

It. Yeah, I mean their, their scale of, of agriculture is, is amazing and it, it is incredibly impressive. And so it just opened my eyes to what is out there, right? And so You know, fast forward, I, I got a job with Vallon, I was a, a grain trader for them and then moved over to the oil and gas side for a company. At the time it was Mark, Mark West Energy, which is now Marathon Petroleum’s Natural Gas liquids division. and we were, we were selling tankers of propane butane and, and we were actually the first ones, or we were a part of kind of the initial push to ship ethane from the, the northeast of the US to Northeast Europe to Iios.

2

00:40:05

And that was a really exciting project that, that I got to work on and really great experience. But the, the thing that that I got there was that it, it opened my eyes to the international markets and how everything is interconnected and You know, I I just continued down this path of this interconnectivity of commodity markets and, and it ties directly to You know our, our daily consumption habits. Right? And that’s something that just fascinated me and, and I, I couldn’t ever stop thinking about it really. And so after that I, I worked for a small startup in, in Denver, Colorado, where, where we made small little over the counter exchanges for kind of niche commodities and again, kind of continued my, my exploration of different markets globally and, and also got a, a pretty good understanding of, of You know how commodity markets You know the futures markets and the derivative markets actually function, which was, which was pretty intriguing You know through all that, I I I wanted to do something, I wanted to take my experience and, and do something positive with it.

2

00:41:17

You know one of the things that I, that I saw in Latin America particularly was this growing wealth gap, right? And, and so I wanted to to, I always kind of thought like, I would love to have the opportunity to do something in my, in the space and use my experience to, to do some good in the world, right? And you, you mentioned Mark Rich You know and I, I read facetiously, but yeah, yeah, right. I read, was it King Kings of Oil back when I was in college? And, and, and, and I don’t want this to sound sound bad, but You know in a certain way, it really inspired me. You know there, there were sort of amazing things that he did and, and then also some, some other other things as well.

2

00:42:03

So I, I wanna say I, I really admire his, his You know ability to go just kind of make things happen, right? And so I I kind of that, that inspired me. And, and anyways, long story short, I I was learning Spanish and that, that gave me the opportunity to go down to Columbia for the company I was working for at the time and kind of explore a project. And I ended up on a coffee farm. And when I was on this farm, the owner gave me a cup of coffee as his customary there and, and I was enjoying it and we were talking about things and I was like, man, this coffee is really good. And I joke now ‘cause I, I say it’s like, I don’t know if it was like a eating a Snickers bar on a ski lift type type thing where it’s like the best Snickers bar you’ve ever had in your life, You know.

2

00:42:49

And just the, the, the context with which I was, I was enjoying that cup probably had had something to do with it. But I started asking questions about this coffee and she started to explain to me, well, You know, I don’t know how to get it to market. I, the market kind of intimidates me. I don’t know who to sell it to. So I just barter with my neighbors. She just, she just traded it with her neighbors for their You know their crops, fruits and vegetables. And I was You know, it was one of those moments where in my head I’m kind of like, is this the opportunity I’ve been looking for? And it, it was a, it was a door that opened and I kind of in an instant, I said, well, what if I bought all your coffee from you?

2

00:43:33

And I exported it in the back of my head thinking like, well, what am I gonna do with this You know? So I came home and, and told my wife what I had done while I was in Columbia. I had, I had kind of accidentally started a, a coffee company and You know, luckily she was, she was supportive of it. And You know after that we, I we had to figure out how to export the coffee. I went to, I knocked on all of the, the big traders doors, right? And I explained what I wanted to do and I, I really wanted to learn the process and understand where do, where do all the pennies go, right? Like what is the, the You know all of the aspects that go into a landed cost of coffee.

2

00:44:15

I wanted to understand that. And of course none of them would, would help me out with that, right? And, and I knew that, but, but I figured it was worth a shot. And I found a, a small company called Ammar Cafe in, in Columbia. It was a brother and sister Juan Carlos and Maria Angelica. And they ran kind of export services for, for people like myself. And I told ‘em what I wanted to do and they said great. and we started working on it and it took several months and, but we got it done and we, we exported the coffee successfully and brought it to the us. It was not a full container.

2

00:44:56

I, I’ll, I’ll say that. I, I’m glad it was not, because it took quite a while for me to figure out once, once the coffee was in the US it took me quite a while to, to figure out what to do with it and how to move it. But through that process, I learned every step of, of the way, right? I learned every little nuance of the business, good, bad and ugly. And You know we worked really well as a team. And so I, I flew back down to Bogota and, and we went and got lunch one day. And You know, I basically said, what, what do y’all want for your business? What’s y’all’s dream? And they told me that one day they’d, they’d like to have a their own mill. And I said, well, me too.

2

00:45:37

What if we, what if I go raise some capital and, and we join our companies and let’s build a mill? And that’s what we did. So, we, we did kind of a, a, a merger, if you will, two very small companies. And I raised a little bit of money around that. and we, we built our mill, we, we placed our mill in Medellin, Columbia, partly due to just location. It’s, it’s centrally located between the Pacific and the Caribbean. So we can export out of both coasts. Access to labor is, is great and Medellin and it also happens to be a really, really fun town. So we settled, we settled on Medellin and built our mill and You know our, our our mill is very small in comparison to the Giants, right?

2

00:46:27

We are capable of doing about two containers a month. And You know that’s, that’s big enough in the specialty space to, to be a significant player. But You know, we, we, it’s hard for us to compete on a commercial scale in, in the commodity coffee market with the guys like Olam and stuff like that. So, we, we found our niche kind of in that specialty coffee space and particularly providing services that traders typically provide to these roasters. and we, we found a gap there because the, the specialty coffee space is generally driven by what we call the cupping table. So You know people were going and, and buying based on the flavor notes that they found, but there were no sort of risk management help.

2

00:47:16

There was no help with the logistics, no help with understanding what’s going on in the coffee market and how can we protect ourselves if prices were to go through the roof or if there’s extreme volatility. So I kind of took that trading background and applied it to this niche specialty market and yeah. And, and so we’re, we’re we’re finding some success there.

1

00:47:42

Fantastic. I just think it’s You know, it’s, it’s inspirational as well, right there, there are those commodities out there where you can get on a plane, find a, find a local producer and start building something right. That, that adds value and You know both to shareholders, but also to employees and, and hopefully the world as well. So I think it’s You know, it’s just great to sort of see that and You know, I think it’s a bit of an inspirational story. Well, we’ll, we’ll, we’ll put links to Amarillo Cafe in the show notes so people know where to find you. We’ll be watching the, the coffee apocalypse story closely and You know. It’s been fascinating and interesting, so thanks so much for coming on.

2

00:48:19

Yeah, thanks for having me. This is great. And, and Paul, I wanna say I I, I love the podcast. I’ve been listening to it for a while and, and a, a lot of the people that you have on are, are amazing. I’m, I’m sitting here on my desk looking at a stack of Jonathan Kingsman books and and he’s someone that I certainly look up to and, and, and so it’s, it’s, it’s an honor to

1

00:48:41

Be Well, I I expect you’re gonna get a call to be in his next book. So he loves these kind of stories, but yeah. Awesome. Well, Charlie, I look forward well, let’s have you on again in a couple years and see where you’re at.

2

00:48:50

Great. Thanks a lot. Paul

1

00:48:53

Thank you for listening to find out more about HC Group, our global offices and our expertise in search within the commodities sector. Please Visit, www HC Group global.