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You'll find all the links and details in the show notes. Welcome to the Daily Coffee Pro by Mapper Forward Friends, on your host Lee Safar, and this is episode three of a five-part series with everybody's favorite Carly Ghana from the Carly trading. We are talking about what's happening with commodities in 2026, and in this episode, we are asking the question, is there a path for the sea market to be a functioning tool that helps farmers receive a fair price that's above the cost of production? And this question came from a question that we talked about earlier.
I'm sure that Sean Warner from the Honduran Coffee Alliance had submitted in our Patreon community, and there's another question that came from Felipe Croce in that community as well. And I want to read it out, Carly, maybe we can start the conversation here. And Felipe says, we've seen the futures market has been incredibly relevant in the past few years in coffee, lately so much so that most big players buy strictly futures, and he's talking about the big corporates there. Many people believe, including myself, that we are headed to a global oversupply over the next five years.
In the scenario of the global oversupply for many years, what happens to the futures market? Does it end backwardation? Also, does it become relevant as there is so much spot coffee? What are your thoughts on that?
Because this leans into Sean Warner's idea of like, listen, couldn't the sea market be used to make sure that there's a benchmark? Because if Brazil has an oversupply, everybody, like Brazil sneezes, the rest of the coffee industry gets a cold. So what do you think about what Felipe said there? So a couple of things, as I mentioned earlier, like we can put a floor on pricing on our own without, you know, without someone else having to do with my buying puts, and points don't have to be that expensive if they're annoying, but they're doable.
But I'd also point out, I think, because I've thought about this couple of times during this conversation, there's kind of an assumption that the bigger houses are smarter and always on the right side of things, you know, like the big companies are buying futures and they're just, you know, making out like bandits. And I will say, that's not necessarily true. I've seen in many cases, you know, nobody has crucible. No one can see the future, even the smartest guy in the room screws up sometimes.
And sometimes businesses, even big ones, are in positions where they're under duress and they feel pressure and they react to something and make a very expensive mistake. And an example would be when Coco was, I think it was around 9,000, 11,000 or so, just a handful of months ago, a lot of the big candy makers like Hershey, this was reported by Bloomberg, locked into forward contracts, because their fear was, we're nine or 10,000, whatever the price was today, but what if we're, what if we go to 20,000? What if we're, you know what I mean? So they were just as panicked as everybody else is the little guy, they made a really bad decision because they locked in those forward contracts for a couple of years, I believe.
Yeah. And trust me, when I say when there's volatility like this, nobody's winning. I know it's hard to, that's good to know. Yeah, just to everyone else is having fun and you're just miserable.
It's actually the opposite. Literally everybody's losing when it's like that, because it's triggers, emotions, it triggers all kinds of pressure, like financially, emotionally, and people make bad decisions. And especially when we're coming off five or six years of just total chaos between COVID and Terra, so this and that. So don't be so hard on yourself.
If you get caught on the wrong side of something, it happens to the smartest and the biggest of us. From there, help us understand what backwardization is. Okay. So backwardation is like a market that's a normal commodity market, the front month.
So like, let's say, the May crop nature is trading at a lower price than July or September or December. So in a normal market, the back month's trade at a higher prices. In an abnormal market, the front month May would trade at a higher price than the back month. So the back month's are trading at lower prices.
That's backwardation. And I would say, usually you see backwardation, like if there's some sort of temporary supply shock, we're seeing that in oil right now. Oil in the front month's are trading 90 to 100. If you look at the back months, they're 70 to 80.
So I would expect, well, let me answer the original question first. I do think that in my opinion, if you're a, particularly if you're a roaster, the sea market or the futures market is more relevant when coffee's at $1 or $1.50 than it is with coffees at $3 or $4. And what I mean by that is it's not getting all the attention and everybody's complacent. So they're just ignoring it because everything's going just fine with their their coffee buying.
But that's when you really should be paying attention to it and hedging. The problem with the commodity markets is nobody wants to hedge when it's when nothing's going on. Everybody wants to hedge after it. It's too late.
It's ever too late, but it's a lot harder to hedge if you're a buyer with coffees at $3 or $4 that it is with coffees at $1. So I would say I do expect coffee to trade down towards the $2 area by next year. Maybe we even have a one in front of the price. But I would say it would make it more relevant to participants because that's where you really should focus on hedging your price risk.
And it doesn't have to be real complicated or expensive. Like I said, if you're a producer, you can buy puts. If you're a roaster, you can buy calls or more because everybody knows coffee goes up really quickly and all it wants when it does go up. But it's still doable and there's ways to get around it.
You can do call spreads where you buy a call, sell a call above so that you're cutting your your costs a little bit. But there are ways to hedge even if it's in a small way, it's better than other. So for people who don't have access to the same market because they don't they can't afford to participate in it. And I just wanted to reiterate the kind of logic for people who missed it with regards to your explanation to backwardation.
So and to make sure that I understand it correctly, when we look at buying into the future, we expect that if the further and further we're buying into the future, the cheaper the price is going to get because we're buying further and we're giving that promise further and further in normal circumstances. And if we're buying more immediately, it's going to be more expensive because we need it sooner on a very basic level, correct? Actually, so in a normal market, it's the opposite of that. So normally the commodity is cheaper today than it would be if you're taking delivery of it in two months or three months.
And most of that is because of the cost of storage or insurance or whatever it is, the carry costs. So in a normal market, it's actually cheap today, more expensive in the future. In a backwardation market, it's expensive today, cheaper in the future. So it's okay.
It's confusing. I don't know. Backwardation, who came up with that word? It makes no sense.
Like who even thought that in like a normal market is Contingo who thought of that, it makes no sense. Right. So Contingo is the opposite of backwardation. Yeah.
Right. So right now, we are in a market that has backwardation and that is abnormal. All is not the norm. Is that correct?
The accreditation is the exception of the rule. Yes. Right. How long have we been in backwardation?
So we're in backwardation, and wait, let's be 100% honest. I haven't looked at a coffee. Coffee structure. I've just looked at the problem.
At least two years. It's at least two years in backwardation still. Yeah. Absolutely.
I've been just so focused on front months, I haven't really else too far out on the curve. It's a call of ease that it's been in backwardation. And I think that that's why Felipe is asking the question. Okay.
So usually, like when a market's in backwardation, it's usually like when a whole market's working itself out. Now, it's actually really crazy. So if you open a commodity book that was printed or written 20 years ago, they're going to tell you the exact opposite. Usually, if a market's in backwardation, they say that's bullish.
But in the last five, 10 years, it's actually been a bearish phenomenon. So as long as the market's in backwardation, backwardation, we probably should continue lower. Cruell was in backwardation since 2022. And now it's even more so.
So I, yes, I'll have to look at the coffee. Okay. Should I look at that before I get on? No problem.
It's we're trying to understand how these things fit into the real coffee world. And we're all very confused by it, because these things govern our farmers' lives. And this comes to Sean Warner's question of like, how do we is there a path that the C market can be more forgiving in volatility for by having like a floor price? Because there are people who cannot get access to these things because they can't afford to get access to them.
And so, sure, I mean, and a lot of roasters wouldn't be able to afford $1,000 to spend on hedging for against their coffee. So is there a path that in any way the coffee industry would be able to have this thing that exists that is the bane of our existence that rules everything that happens in coffee, but we don't have any control over it. And fundamentals don't seem to, the weather has more of a role in the same market than the fundamentals do. Yeah, I think I'm a believer that in the long run, the fundamentals come into play in the short run.
It can be the Wild West, but I do think fundamentals ultimately go because even in the C market, people that are buying or selling those futures eventually are taking delivery. And so it has to all kind of match up to make sense. The math has to math. But I mean, capitalism isn't perfect, but I think it's the best system we have.
I think I've said this on this podcast before. Like if you look at commodities that don't have futures markets that are just kind of the Wild West, they get even crazier than coffee or cocoa do. So I know it's hard to believe that that's true, but it is true. The liquidity does actually tame prices a little bit.
I don't think we would ever get to a place where we could set a floor or set a ceiling because, like I said earlier, you have to have like two people have to be willing to transact to the certain price. And if you set a floor, you're either you're forcing buyers to pay a price that it might not be worth it to them. And they would just walk away and then we would end up with a whole bunch of coffee, no buyers. So it's, I think it's a nice concept, but I think in practice, it probably would never work.
Like, for example, we'd go back to crude oil. In 2020, we not only do we go below zero, we've been like $40 below zero because there is a point where, you know, what a producer thinks is a fair price may not be what the buyer thinks is a fair price in that situation. In 2020, the fair price was actually a buyer needs to give me money to take my product. So I just don't think there is such a thing as is realistic price floors or ceilings.
But again, you know, maybe this is probably not that easy to do, but maybe there's some way like if, I know with Ford and soybean farmers, they have co-ops where they can actually pull money to hedge. So if the contract size is too big in the sea market, maybe there is some way to open joint accounts or corporate accounts in which farmers pull their money and buy a put. So maybe that would be a possibility. Probably a lot of legwork in it, but might be worth it in the long run.
Is that something that you guys would be with? At the Cali? Yeah, we do stuff like that for sure. I mean, it does take some paperwork.
So they'd have to incorporate like an LLC, which it's not as easy as just filling out a little couple of pieces of paper, but it's doable. We do it all the time. If people, I mean, language barrier becomes a thing, right? So do you guys have ways to be able to get around that?
Can you use translators and stuff to do that? So the nice thing about technology is Google Translate. So we do communicate with people all over the world that it's mostly just copy, paste their email into Google Translate. They do the same to us and we communicate just fine.
Perfect. Perfect. So I have a very basic question that I don't think I've ever asked you before, but it's got me thinking it again now that we're having this conversation about fairness. Who does the coffee futures market serve?
So I don't think there are income out of these. It's never fair. There's no such thing as fair, and I wish that was not the case, but it's just the truth. And I think the futures markets do serve a purpose to reduce volatility.
It doesn't feel like that when we're caught up, especially in the last couple of years. We're caught up with this type of market movement, but I do think it does serve a purpose. Not everybody uses the markets to hedge, but at least they're there for some players and those players that are able to hedge are not adding to the panic price discovery. So I do think that it serves society as a whole by taming prices a little bit.
I know there are people who are already the exact opposite, especially since I just went through a whole segment telling you how the gold market went off the rails because the speculators and those things do happen, but I also think in the long run, they work themselves out. Speculators mostly lose money. So if people get gung-ho and start trading in a market and causing volatility, they're going to eventually lose money and just move to the sidelines and go on with their day. It's unfortunate that they did that, but in the end, it's always temporary.
The house always wins. The house always wins. That is absolutely right. Thank you for saying that.
Actually, if you really want to know the truth, the winners are the exchanges. They are in the business of encouraging volume, and that's why the ETFs exist. And that's why everybody tries to cancel me when I talk about it, because the ETFs are bringing so much business to the exchanges they just look turn blind eye, but they are interfering with our markets, and it's not right, but too many people are making money off of it to say anything. And they make money off phase, don't they?
They do her trade. It's like a transaction fee. And if I understand it correctly, not a lot of people are actually taking delivery off-coffee from buying futures contracts. The vast majority of people, a lot of people kind of infer that that's a negative because nobody's taking delivery, but even like, for example, we have a lot of farm hunters and they're bonafide hunters.
They actually have corn in the bin or cattle in the field, and they really are hedging, but they still don't take delivery because taking delivery is kind of inconvenient. There's only a couple of delivery spots in the country. So it's kind of disingenuous to say that nobody's taking delivery, and so that means there are no true commodity participants in the market, but it's not quite like that. But I will say most of the volume is speculation, but even the hedgers don't really take delivery that often.
But that brings me back to something I was asking in the first episode. Is the market correct? In the long run, the market is correct. In the short run, it doesn't have to be.
And this has always been true. The problem is there's a difference between overshooting reality a little bit, or overshooting reality for several months and 30, 40%. So to me, I think there's something broken here. We need to take a better look at how these markets are being priced.
But in the end, it all has to work out. So in the end, for every buyer, there's a seller, and there's a winner and a loser, and all the math has to work out. And I think it doesn't end. So this is where our industry gets very confused because we keep getting told by people that markets always work themselves out, and markets always write in the long term.
But the long term for coffee prices, coffee at around it all was 20, historically averaged. That's not correct. So from the perspective of, is the market correct? It's not correct, if you look at real life.
But I almost feel like coffee futures shouldn't be called coffee futures because they're so disconnected from reality. Well, if you one way to disconnect from the coffee futures market is to offer a superior product, something that's not standardized. So what's going on in the C market is totally standardized coffee. It's the the base of the trade.
Yeah, correct, correct. So like I work with a lot of farmers and ranchers that they do use the CB cattle to hedge their prices. But ultimately, they're actually growing a premium product. They're not going through the normal cycles.
They're selling direct to consumers. So I mean, that's really the only way to get around it, truthfully. But I always go back to the market will only bear what a buyer is willing to pay. Now I take my coffee very seriously, but in many parts of the world, coffee is a luxury, not a necessity.
So it, you know, we, if we can produce coffee, our cost of productions two or three dollars, but someone's only willing to pay a dollar 20, then that's the right price. The right price is what someone will pay in my opinion. Okay, that's going to be very interesting as we go into the next conversation, which is where we're going to explore what the predictions are for the rest of 2026. And that is absolutely going to be very interesting.
So join us for the fourth episode of the series guys. Peace off and pay not bad. I have an amazing rest of your day. If you enjoyed this episode, consider supporting my beforeward our guests and advertisers on social media.
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