Episode 59

Time for a Coffee Break?

Articles From: Interactive Brokers
Website: Interactive Brokers

Find out what’s brewing in the coffee futures market with Sean McGovern, vice president of research at McAlinden Research Partners. We cover everything from Brazil’s weather to international trade to the Fed’s monetary policy to China’s Zero-COVID policies and more. We also take a deep dive into consumer spending patterns with IBKR’s human resources director Michael Kerrigan and senior trading education specialist Jeff Praissman. Where are coffee prices headed? What could the commodity say about Starbucks’ and KDP’s upcoming earnings? What’s happened to the quality of diner coffee? And who would switch to a coffee that’s not made from … coffee? All this and more!  

Note: Any performance figures mentioned in this podcast are as of the date of recording (January 26, 2023).

Summary – IBKR Podcasts Ep. 59

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Steven Levine

Hello, and welcome to IBKR Podcasts. I’m Steven Levine, senior market analyst at Interactive Brokers and your host for today’s program. We’ll be speaking with Sean McGovern, vice president of research at McAlinden Research Partners, about the current state of coffee futures – it’s part of our series on agricultural commodities and what you might expect your next breakfast bill could amount to. Speaking of which, we’re joined here by Michael Kerrigan, our human resources director at IBKR. Also, Jeff Praissman, our senior trading education specialist…. And they’re going to talk about some of their experiences on the ground, so to speak, in terms of their spending on coffee.

So, Sean, Michael, Jeff … it’s like a party. Welcome!

Jeff Praissman

Thanks for having me.

Sean McGovern

Great to be here – coffee in hand, actually.

Steven Levine

Me too, actually. Not a good idea for me, but it’s there. Okay, so, today we’re going to talk about coffee. It’s one of the staples in many people’s morning routines. I think Dolly Parton called it a ‘cup of ambition’, didn’t she? …in the title song from the movie 9 to 5. At least in many parts of the U.S., it typically sits alongside other agricultural commodities like sugar, wheat, lean hogs for bacon, frozen concentrated orange juice … to name just a few. And there are some consumer staples [and] consumer discretionary companies like Starbucks or Keurig Doctor Pepper … they’ve got earnings coming up … so, maybe we can get a glimpse into what these firms might serve up.

Great to have all your perspectives here. [We’re] going to get some insights into what coffee futures prices are doing and what they’re pointing to and why, as well as what some of us are paying for coffee at our local retailer, which just might be our own kitchen here at work. 

You all drink coffee. Let’s just talk about your first cup of the day. What’s your brand of choice? Is it big? Is it small? How much do you pay for it? We’ll start with start with Jeff. Jeff….

Jeff Praissman

I usually have actually one cup of coffee a day, usually around 10:30-11:00 [AM]. It kind of varies depending on where I’m at, so if I’m at the office, I’ll prefer Dunkin’ Donuts’ Hazelnut out of the Keurig there. If I’m working from home, I usually pop open a Costco Kirkland Brand Cold Brew Iced coffee. And if it’s during the week, and I’m running errands, I usually grab a Dunkin’ Donuts or a Starbucks iced coffee, while I’m out running errands with the kids. In fact, I actually usually see Mike [Michael Kerrigan] at my local Starbucks. As far as costs, I would say I think they definitely have gone up. The Starbucks and Dunkin’ Donuts, I would say have probably gone up like $0.60 a cup, I would think, from the year before.

Steven Levine

$0.60 a cup, you think it’s gone up? Since last year?

Jeff Praissman

I think so. I usually go with the large or extra-large iced coffee.

Steven Levine

What is it now? Do you mind telling us what you pay for it now?

Jeff Praissman

I’m going to say around $5.

Steven Levine

$5 for a cup of coffee. Wow.

Jeff Praissman

Probably $4.50-$5.

Steven Levine

What’s that brand again?

Jeff Praissman

Either Dunkin’ Donuts or Starbucks. The Kirkland’s probably about $1.60 a can, and I actually discovered it during the pandemic when I was working from home. And it’s pretty good, and it’s a pretty good deal.

Steven Levine

Alright, we’ll go to you, Michael. Michael, what’s your brand of choice? First couple of the day. Big? Small? How much do you pay?

Michael Kerrigan

Coffee has become a staple of my diet, especially in the morning. I’m an avid coffee drinker. I probably switched over from tea when I moved from Ireland to come over here. So, I’ve kind of progressed in my coffee taste, but I do drink plenty of coffee. I probably have close to two to three…four cups a day, depending on the day. I typically go for a medium and not a large or small. So, through a loop there. Brands of choice … I’m not picky. I tend to lean toward more of the dark roast, so any kind of brand of the dark roast. Although at home my staples are Peet’s and Eight O’Clock … are usually my brands … and I kind of avoid the Keurig when I’m at home, although I use it here in the office. And actually Starbucks’ version is what I use in the office. If you want to jump in the costwise, I think that’s probably why I drink more coffee at home. It became a very expensive habit for my family, because they all drink some version of Starbucks coffee – whether it’s those crazy little drinks that include some caffeine, or whether it includes a coffee. Mine is not as expensive as Jeff’s here. Mine was typically around $3, because I just get a plain coffee and just a little milk, but my wife drinks one of those long-named coffee drinks from Starbucks that I can’t repeat, so it takes literally 12 different directions to make. And I’ve seen that go up almost probably close to $1.50, which would typically for a venti, she would probably pay close to $5 probably last year, but I think the last time I went, I think it was pretty close to like $6.75. The same drink.

Steven Levine

$6.75. Wow. I know Starbucks, I think, mentioned in their earnings at some point last year or late last year, I think maybe around November, that they were raising prices by about 6%. I believe it was something like that.

Sean, [do] you want to share your habits with coffee and what you drink, what your brand of choice is, say for the morning?

Sean McGovern

I jump around a little bit. Sometimes I’m in the mood for a drip coffee, but sometimes I’m a little bit more higher-end in my choices, and I like a good Nespresso. I’ve been doing that for a couple of years. I got one of those sort of Nespresso coffee makers as a gift a couple of years ago, and I’ll tell you it’s good. It’s good, and it’s a bit addictive. So, the prices have really gone up. I mean, I think a sleeve of— They have like these aluminum pods, and I think the aluminum might actually be what’s driving up the price so much. They’re recyclable. Definitely gone up at least $10 to $20 for a sleeve. So, really significant price increases there, but I keep paying it, so….

Steven Levine

It is addictive. I mean, it sounds like prices are going up all ‘round. It’s interesting for me. I mean, I read somewhere that a good Mediterranean diet, which I decided to look into … and there was some site [where] somebody had said that within the Mediterranean diet, all you should really drink is coffee or water. And, so, that’s all I’ve been following. For the past almost year, it’s all I’ve been drinking is coffee and water, and I guess coffee is a good deal water already. So, I can tell you I wake up at about 4:30 in the morning, every morning. I drink instant. That’s probably not such a connoisseur’s coffee of choice, but it is instant. It’s called Jacobs. It’s German, I think. I get it at my local organic market. It’s a 7-ounce bottle [that] costs me about $11.00, which I suppose makes about twenty 15-ounce cups of coffee or something like that. It translates to about $1.36 a cup. I did the math on this. And it’s not bad, right? $1.36 a cup in the morning. I don’t know. I mean, this is what I’d like to find out. I’d like to find out if what we’re paying for coffee is reasonable, and Sean, I’m looking to you for these insights. So, I guess the first thing is, is it reasonable? Do you think that any of us should be spending what we’re spending on coffee? And the second thing is, where are futures headed?

The Perks of Splurging

Sean McGovern

I’m actually really glad you asked this question, because I think the most cliché advice I’ve heard about saving money is: ‘If you want to save money, stop buying the fancy latte, stop buying the Starbucks, Dunkin’, whichever of those.’

Steven Levine

You hear that, Michael? Jeff?

Sean McGovern

You want to build savings – some people really pretend that that’s going to be a huge game changer, and to some extent you will save more money. It’s true, right? But to me, there’s a bit of behavioral economics at play there. Coffee is obviously an important part of our day. We get something out of it. If we didn’t, it wouldn’t be one of the most widely-traded commodities. We wouldn’t be talking about it. But every person is different. They have varied preferences, and I think there’s something to be said for spending a little extra on things that boost someone’s happiness and really their productivity. For some people, all the coffee out there, whether you get it at the coffee shop … make it at home … you’re going to get an identical reaction. That’s some people, but other people … maybe guys like Jeff, right … a higher-end brand … maybe the retail experience. Something like that can actually be encouraging, motivating, part of an effective routine. It’s actually making someone more productive and driving their performance at work. Before COVID, we actually had free coffee in our office, and sometimes I’d I drink that, but I would still go across the street to the Starbucks as an excuse for some fresh air to see other people. Most importantly, I have a strong preference for iced coffee, which just is not the same out of the fridge. I don’t know why nobody can seem to get that right, but that’s just a perfect example of why coffee is more than some kind of ‘thing’ we just shut our eyes, and then kick back. I’m not saying it’s sustainable for everyone to go out and spend like crazy on coffee or stopping by the Starbucks twice a day or something like that. But within reason, I do believe some people … a cup of their preferred coffee can play a role in increasing their productivity, maybe even if they’re more productive, their income – enough to compensate for that marginal cost you might incur from spending a little extra. If you just think about it in dollar terms, the difference between spending something like $3 a day on coffee or $1, as a hypothetical, it’s going to end up something like $700-$750 a year, and that’s nice to have $700 more in your pocket, right? That’s something you could invest. But at the same time, is it going to change your quality of life? Probably not. But coffee is one of those things that isn’t purely utilitarian, and like I said, we get something out of it, and that ‘something’ can oftentimes be enough to cover your coffee habit whatever the price actually is. It just … it comes down to your tastes, which items you consume … that really make a difference in your day-to-day life.

What’s Brewing in the Coffee Futures Market?

Steven Levine

I don’t think my breakfast would be complete without a cup of coffee. It just seems to be a matter of complete habit now. It’s amazing. But what about coffee futures? If we look at coffee futures, I saw that they were fairly astronomical last year, maybe around the third-quarter, there were highly elevated prices. They’ve come down quite a bit. I think sometime in January … like January 11th or something like that … they’d hit a low of about $1.43 or something. $1.44. This is according to our IBKR Trader Workstation. They’re still about that level now. They’re about, I don’t know, $1.52, $1.53. We’re in late January. So, how do you account for these moves? Is it weather in those producing, exporting countries? What can you break down for us?

Sean McGovern

Sure. Well, just looking at the price pattern, like you said, throughout a good portion of last year all the way up into the second-quarter or so, we were watching the agricultural commodities very closely, focusing [a] good amount of our research on those futures. Along with wheat and corn, coffee is one of the big winners in that sector, and as you said, coffee had really been in a two-year long bull run before the wheels started coming off back in the fall. And if you go back to August of 2020, coffee futures were trading around $1.15, $1.20 per pound or so. By August last year, you were seeing those futures double that – shooting up north to $2.40. But from then on, 2022 ended up being kind of a brutal year for coffee and most other crop futures as well in fact. Part of that widespread drawdown was perceived weakness on the demand-side by traders, which played a large role in commodity pricing across the board … whether it was crops or copper … anything like that.

Commodities stock chart

Monetary policy has been a major factor there with the interest rates in the U.S. and just about everywhere else rising quickly, ratcheting up concerns around economic growth. And we’ve also seen trade flows beginning to slow down, and that’s a really significant factor when you’re talking about a widely exported commodity like coffee. It had begun ticking up a bit into the new year once it became clear that major central banks like the Fed were getting ready to pull back on the size and frequency of these ongoing rate hikes, but that rally was derailed by some of the bullish supply-side factors we’re seeing at this point. And coffee is back toward those multi year lows around $1.55 or so.

And yes, weather, like you said, is a huge factor in that coffee prices are heavily dependent on what’s happening in several key regions. Central and South America are the most important of those because you have Brazil, Colombia, Honduras, Costa Rica … all these huge arabica-producing powerhouses … and those are just some examples.

Steven Levine

You mentioned slowing trade flows. Is that mostly a consequence of the strengthening dollar, or is that a culmination of all sorts of catalysts involved in trade like … still … maybe some kind of COVID-zero type policy consequence from China? I don’t know if that has to do anything with coffee though, or? I’m not sure.

The Beans from Brazil

Sean McGovern

It absolutely does. It absolutely does. So, the dollar has actually been weakening into this year. I think it peaked … if you look at the DXY [U.S. Dollar Currency Index] … somewhere around $1.12, $1.14 … somewhere in there … last year. But coming into this year, we’re looking at it around $1.02 as of yesterday [January 19, 2023], I believe. So, we’re actually seeing a weakening dollar, and what you would think [is] that trade flows might speed up, because foreign countries would be getting more goods from the United States for more bang for their buck against dollar-denominated goods. But it’s just not enough. Aggregate demand appears to be falling. We saw both … in the U.S., alone, we saw exports and imports fall in the most recent data we have … I think it’s through November… and coffee is going to be hugely dependent on that. And it’s all reflective of demand, and it’s really been the demand-side.

But I do want to highlight some of the supply-side factors that are playing a role, like you said, weather’s a big deal … coffee has to grow in really delicate conditions, particularly in Brazil – that’s where most of the arabica comes from. By far, Brazil is one of the leading producers of arabica beans, and that’s kind of the higher-end bean. It’s a very fragrant, sweet kind of vibe, and most importantly for this conversation, they’re also the global benchmark for coffee futures on the Intercontinental Exchange. That’s the bean we’re usually referring to when we talk about coffee futures contracts. As I said, we look at Brazil to get a real kind of broad sense of what’s happening in coffee markets, and they’ve had some strong rains lately that leads to very high levels of soil moisture in Brazil’s coffee growing regions. So, not only does that lead to good harvest, but also larger beans, and the larger the beans are, the fewer it takes to fill a bag, and that’s how they measure the yield – in bags. So, that’s going to kind of inflate the yield a little bit, if the beans are larger in size.

Brazil’s harvest typically follows a two-year cycle: one strong year and then a weaker year. This is typically supposed to be the weaker year if you follow that traditional cycle, but we’re actually looking at a larger annual harvest this year than last, because last year’s was so far below average. And it’s not to say that this year is so abnormally strong. It’s going to be a larger harvest, but it’s not some supernaturally large…. It’s just that last year was pretty small, but that still does suggest probably more suppressed pricing is ahead unless we do see macro conditions improve and demand is resurgent.

China’s Coffee Shops

You mentioned China. China is a huge consumer of coffee, and they are opening back up. One thing interesting about China, specifically, is that their coffee culture is very much based around the coffee shop. Now, they do drink it at home, I’m sure, but going out to the coffee shop and kind of having that experience at the Starbucks … whatever chains they have out there … that’s the big thing for them, and that will probably … when you have zero-COVID, you can’t go to the coffee shop. So, I do think that will play a role in what we see with coffee going forward.

An Outlook on Robusta-Based Brands

And the one last thing I’ll highlight, too, is … along with the arabica bean, there’s also the robusta bean. That’s seen as a lower-quality bean. It is kind of a little bit more rugged kind of flavor. It actually has a higher caffeine concentration. You get these mostly grown in Africa and Asia. It’s funny that arabica is actually from Ethiopia. That’s where it’s natively from, but that’s more known as a robusta-producing country. I think it’s about 50-50 there. But you get these robusta beans, and they are more protective against bad weather and other external conditions. Those we’re actually seeing a down year for, it looks like. I think in Indonesia, they’re going to have a 10-year low in the harvest for the robusta beans. Uganda [is] seeing some problems, too, and that could create some price … some cost pressure on the lower-end brands you see at the supermarket, not the sort of luxury brands that are using pure arabica, but a lot of the kind of maybe store brands and things like that. They’re going to feel the problems we’re seeing with robusta beans.

Steven Levine

Is that like the ‘Maxwell Houses’ of the world or the Chock Full o’Nuts, or something like?

Sean McGovern

Could be. Exactly. Right.

Steven Levine

Interesting. You mentioned Starbucks, and I think that this is really interesting. We’ve also been talking a bit about the Keurig pods, and so I think that that’s also very [interesting]. Both these companies have earnings coming up, at least from the date of this recording [January 20, 2023]. And so, what do you think they’re going to tell us? I know that Keurig Doctor Pepper had spoken a lot about inflationary prices when it came to coffee and their pretty recent past earnings … with Starbucks’ presence in China as well, and some … I’m sure …. dependency on revenues there. Are we bound to see any kind of changes or difference? Maybe input costs have changed for them with lower prices of coffee in terms of the commodity and keeping maybe consumer prices high? I don’t know if they’ve retracted them. I think they’ve raised them pretty recently.

Bottomless Coffee Consumption?

Sean McGovern

Yes, definitely raising…. Right off the bat, we can expect that falling commodity prices for coffee will ease some of the cost pressure that roasters and coffee shops were probably feeling last summer. That could suggest better margins on the products, but really near-term shifts in coffee prices are not always going to tell us a whole lot about what we should expect for earnings at these companies. Some of them actually secure lots of their supply well in advance of spot buying. I mean, Starbucks buys 12 to 18 months out from when they actually Intend to sell the coffee. I believe they keep a pretty big stockpile of stuff that they’re buying way out there along the curve as opposed to relying on spot-buying or something like that. So, it’s the commodity price of coffee is definitely a significant cost component … no doubt about it. But there’s really a lot more that goes into your bag of coffee at the store or your cup at the barista counter. You’ve got transportation costs, packaging … so many moving parts. Most investors [are] simply not going to be able to account for all those things. Understanding what’s happening on the demand-side, it might be more helpful … in kind of thinking about earnings from these guys, we know prices are rising in general, that’s certain, but we need to figure out how elastic is consumer demand in relation to these price increases. That is, how much does consumption of a product change in reaction to adjustment in price? Well, what the data we’ve seen thus far from previous earnings calls for different companies is that demand at coffee shops like Starbucks have remained relatively inelastic, with comparable sales pretty robust. It’s important to note that we’ve seen that into the most recently reported quarter. That doesn’t necessarily mean that will hold in the quarter coming up here, but consumption of coffee is remaining pretty steady from what we can tell, and that’s not surprising. As we’re all saying we consume it every single day, and I guess it can’t be such a surprise we’re all sitting here talking about our coffee loyalties. And yeah, we’re going to buy coffee.

Habits and Habitats

Steven Levine

It’s true, and I think a big part of this also is consumer behavior. I know that Keurig Dr. Pepper will talk about, say, the ‘at home’ versus ‘at office’ type of consumption – and we’ve had lockdowns. We were at home for a considerable amount of time, and we do now have new policies now out here at IBKR. We’re working three days a week in the office. And, so, the question that I’ve got really is: Has coffee consumption behavior changed?  We’ve got a litmus test we can ask people here. Michael, has your coffee consumption changed? Are you at home? Are you at work? Or…?

Michael Kerrigan

I don’t think my consumption level has changed.

Steven Levine

Since, say, the lockdowns, for example.

Michael Kerrigan

I probably drink the same amount of coffee, I think, and I haven’t changed my purchasing. I think the interesting thing that I have noticed for coffee change over the past year from the pandemic is I am an absolute lover of diner coffee, right….

Steven Levine

I am, too, that’s great.

Michael Kerrigan

It always tasted very good to me, but I’ve noticed over the past several months or past year of post-pandemic … is that it’s become very watery and changed … that I don’t know if diners…. They’re obviously getting the squeeze for coffee, because obviously a lot of consumers go into the diners to get coffee and stuff like that, that that coffee quality has gone down dramatically, like it’s very watered down. But mine, myself … I think the fact that I am coming back in the office and pre-pandemic, the cost wise hasn’t really affected me. I drink the same amount, and now I use the company to supplement the coffee habits by taking their free coffee. So, from my perspective, I haven’t really changed, but I have noticed quality in some areas has gone down, and it could be cost. It could be anything. But something I used to like and go off, and now I’ve kind of stopped going to diners to get coffee.

Steven Levine

That’s really unfortunate. I really like diner coffee as well, but they’re kind of skimping on how much they’re using? That’s interesting. What about you, Jeff? Are you drinking more coffee at home or? At work?

Jeff Praissman

I would say absolutely my habits have changed. I mean, the pandemic is the entire reason I discovered that Costco cold brew coffee. It’s fairly decent tasting, and the convenience of having it in my fridge versus having to drive somewhere if I’m not already out of my house kind of makes it my ‘go to’ when I’m working from home. So, I’m not drinking more. I’m just drinking different. Plus, I think that may be 20 bucks for a 12-pack. So, paying $1.70 per serving beats going to either Starbucks or Dunkin’. With that being said though, Sean made a great point about the behavioral aspect of going to a barista or going to Starbucks or Dunkin’, there is that little bit of luxury there. I’m not going to go out and buy a Ferrari, but I can go to Starbucks and spend $5 on iced coffee and just really enjoy it.

Steven Levine

It’s the same [for me]. I mean, obviously, I think that there’s a lot less Keurig being consumed, for example, with all the pods that we have at work if we’re working from home. So, a lot of that gets unused, I suppose, and so … I don’t know … the surplus of it. I don’t know, Sean. Do you think it’s going to be a big factor in, say, these companies’ earnings that patterns of coffee consumption have or have not changed?

Sean McGovern

Not. I don’t expect that, really. I think we’ll continue to see in stores like Starbucks … I think people are still going. I think people actually want to go there more if we have people working remote all the time, it gets lonely. They want to have an experience. They want to go out and see people. And I know that’s how I felt. I know that is still something … it’s working remotely, which many people are…. There’s kind of … that’s your incentive to get out, right?

Grounds for Inflation?

Steven Levine

Yes, you can’t do that virtually. It’s a whole other game, isn’t it, to have that kind of break from work when you’re working from home. But … you know, I always drink too much, so I know that I need to cut down, because I think I drink way too much coffee. I can say that if I spent what I spend today, and I put that aside, say, and I just drank the coffee at work, all that money from the bottle of instant … all the coffees from my local bakery when I go out … I would save all that, right. And my local bakery, it’s like $1.75 for a cup of coffee, and last year it was $1.50, so really … I think we talked about Inflation … in part … but what about, say, producer prices? Consumer prices? According to, say, the Bureau of Labor Statistics? I mean, are we seeing any of that really come down? I know coffee was a huge concern at one point last year. Is it going to remain so? Are we in a certain lull, or do you think that it’s projected perhaps to scale back up again? Is there any way of knowing?

Sean McGovern

Yes, actually. And no, we have not seen the producer prices for coffee come down whatsoever. They’re actually close to the highs. Going to consumer prices first, coffee at home was rising more quickly than retail locations like quick service shops. NPD has a data they put out on this, and the cost of brewing your own coffee at home was rising around 20% year-over-year in 2022 versus about 7% or 8% for a coffee at a quick service station. So, either way, pretty fast. But coffee at home was really where you saw the most inflation on the consumer side. As far as producer prices go, the BLS does have a series that covers coffee and tea manufacturing in the PPI – Producer Price Index. So, producer prices for roasted coffee were also rising at a rate north of 20%, and that looks like they pass those on to consumers almost completely, right?

Steven Levine

Probably this diner that Michael’s going to….

Sean McGovern

Maybe, right? Right? It breaks my heart, by the way, to hear about diners doing that, ‘cause I also love diner coffee.

Steven Levine

I know.

Sean McGovern

And so, we’re seeing 20% increases in the coffee at home all throughout the fourth quarter. That was the quickest pace in about a decade. I was actually just at the grocery store yesterday, and I made a mental note about the prices I was seeing – sort of regular-sized bag, I guess 12 ounces – or so you think it’s 12 ounces, I’ll get to that. But anyway, it’s going anywhere from $4.99-$8.99 for the store brand or some of the familiar names: Folgers, Dunkin’, all those guys. If you really break that down and assume you’re getting 15 cups of coffee out of that bag, you’re looking at anywhere from 30 to 60 cents a cup. Still a pretty good deal even with inflation. When inflation is 20% on something that’s 30 cents a cup, you might find it a little bit hard to notice, because it’s so relatively cheap, [but] that does add up, right? But what I really noticed was the shrinkflation going on with some of these brands – I’m not going to say any names.

Steven Levine

No, no, I think that’s pretty pervasive, actually. But yes, I understand.

Sean McGovern

But there were definitely a few 11-ouncers mixed in there. They look like the 12-ounce bag. They might be the 12-ounce bag, but the net weight’s only 11. There was even a 10.3-ouncer in there, but you know, selling at the same—

Steven Levine

How much does the air weigh, right?

Sean McGovern

Right? Right? …selling at the same price point of the bags that were 12 ounces, and it was still in that section with them. It didn’t have its own little thing to the side or anything. So, price inflation is definitely there. Sometimes a little hard to spot though, which really is good news for coffee drinkers, right?

Steven Levine

Yes, I mean, I guess unless you’re going to that diner.

Sean McGovern

Yes, I guess so.

Coffee stocks chart

The Un-Coffee

Steven Levine

That’s the unfortunate part of this whole thing.

Okay, so, I’m going to switch tack here altogether, because I think that we’re all very much now informed. Thank you so much to everybody here. We’re not done quite just yet, because there’s an innovation it seems seeping into the world. I think it has a lot to do with ESG [environmental, social, and governance-related concerns] and sustainability, and this is all about sustainable coffee.

There is now such a thing as a company that is producing coffee without any coffee beans at all. And I think that this is interesting. I thought I’d bring it up. It’s called Minus Coffee. I found a company called Minus Coffee that’s doing this, and so I’m going to quote this from this article from Food Institute. It was in January 10th of this year … and it says that coffee beans ‘represent a crop that is the sixth most pollutive agricultural process concentrated in regions around the equator’. So, reason for doing this? Producing coffee with coffee beans is just too pollutive. The article is citing Food Business News for this. And instead, Minus Coffee ‘roasts upcycled roots, seeds and legumes, which are then brewed in a fermentation batch with caffeine’, and the article tells us this information comes from Maricel Saenz. Don’t know if I pronounce the name correctly, but [the] CEO of Minus Coffee’s parent company Compound Foods. And these are comments made to Food Business News. With this kind of process going on, and attention on ESG and sustainability, is this concerning at all to the coffee industry? Does it disrupt anything? Does it affect prices? Would anybody switch to this? I don’t know if I would switch to this, but I’d like to hear your insights, Sean, into whether this is a disruptor or not.

Sean McGovern

There’s been a whole bunch of these coffee substitutes that have been coming around. The first thing I noticed was the mushroom coffee. I think that that’s still out there.

Steven Levine

Mushroom coffee?

Sean McGovern

I think that was marginally successful. I think some people are doing that and then they started throwing nootropics, which was like vitamins and things that was supposed to make your brain work better. Haven’t tried it, skeptical, but Minus [Coffee] is really interesting. I was looking into it, and the fermentation blend is supposed to have chicory, root beans, and some dried fruit, and that’s interesting since chicory was a really popular coffee substitute in the Eastern Bloc countries in Eastern Europe during the ‘70s and ‘80s, when coffee was subject to rationing, and they actually called it ‘Inka’, which is kind of a play on ‘Sanka’ in the U.S. – and maybe not a great endorsement, but definitely It’s not really new. It’s not the first time we’ve seen this kind of drink. And is it a threat to the industry? Yes and no. I’d say ‘no’, because coffee is simply so entrenched in our lives that it’s hard to imagine it being uprooted. And maybe that’s short-sighted, but even if it ever was, I feel like the major coffee producers would do something similar to what the fossil fuel industry is doing to combat the rise of renewables and the way that threatens their business model. Well, they’re buying the competition. If Exxon and Shell … guys like that … can leverage their assets and massive economies of scale to build out big solar power networks, I could see Starbucks or Keurig Dr. Pepper or some of these names we talked about … launching their own iterations of these fermentation batches – getting a good foothold in that market.

Steven Levine

That’s a very, very interesting point. So, the more that these kinds of innovations spring up, the more M&A opportunity there is out there for diversifying their product lines.

Sean McGovern

Exactly.

Steven Levine

That’s really, really interesting. This is great. Would anybody switch to it?

Michael Kerrigan

No.

Sean McGovern

If you’re paying.

Jeff Praissman

No, I wouldn’t switch either.

Steven Levine

You wouldn’t switch either?

Jeff Praissman

No.

Steven Levine

You haven’t tried it yet. I think you have to try it first, right?

Michael Kerrigan

I guess to me it’s like the Beyond Meat type thing. Coffee is ingrained in me. I don’t necessarily want to change it. I’m sure it probably tastes good, but it’s not something I would drink every day – a few cups a day.

Steven Levine

Fair enough. I think I would wait until somebody else had it before I tried it. I think in some cases it’s a very good idea to have food tasters in the world – for the crickets and the coffeeless coffee. Okay, so, I think that this is terrific. I think we’ve got amazing insights into coffee futures – what we might expect from Starbucks … from KDP … coming up. And what we as consumers are more informed about – our coffee purchases, and where our prices come from. So, thank you so much Sean, Jeff, Michael. Thank you all so much for being here … for taking the time. I hope we do this again.

Sean McGovern

Fantastic. It was a pleasure

Steven Levine

For our listeners out there, you can read more commentary and market analysis at IBKR Traders’ Insight. You can keep abreast about topics we’ve discussed here today, as well as a wide range of other news critical to your investment decisions. McAlinden Research [Partners] has a host of articles on several themes – from central banks and gold buying to issues involving cybersecurity. And for a full list of financial educational offerings, visit the IBKR Campus at ibkr.com, where as always, all of our educational material is provided to the public at no cost.

And until next time, I’m Steven Levine with Interactive Brokers.

Learn More

United States Department of Agriculture – World Agricultural Supply and Demand Estimates (Jan 2023)

United States Department of Agriculture – Coffee: World Markets and Trade (Dec 2022)

Coffee Price Forecast 2023: Global Coffee Production Forecast To Increase By 7.8 Million Bags

International Coffee Organization – Historical Data on the Global Coffee Trade

International Coffee Organization – Monthly Coffee Market Report

National Coffee Association – The Economic Impact of the Coffee Industry

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