Grounds for optimism?

I met recently with Nicolas A. Tamari, the CEO of Sucafina. I asked him about the geographical spread of his business.

We are in the top five of global coffee traders. One out of every 20 cups of coffee drunk in the world comes from Sucafina. That is a big number, but we look more at profitability than at volume. We say that ‘volume is vanity, profit is sanity and cash flow is reality’. We look to be profitable, not to fight for market share.

We source about one third of our coffee from Africa, one third from the Americas, and one third from Asia. Historically we were more of a robusta based company, but in the last decade we’re now doing more arabica. The majority of our business is now arabica.

Our strategy in the next five years is to build in Asia in terms of both origination and destination. A couple of months back we acquired a specialty coffee merchant operating in Hong Kong, Australia and New Zealand. It used to be called MTC, which stood for Mountain Top Coffee, but has been rebranded as Sucafina Specialty.

Who owns Sucafina today?

The company today is owned by the family and by the management. We believe that commodity trading companies should be owned by the management. It’s a people business. We are about one thousand employees in total in the company.

We encourage key people to become shareholders. To become a shareholder, you have to have worked for the company for a minimum number of years, to share our values, and to contribute to the bottom line financially.

Why are coffee prices so low and do you see any relief for growers in the near future?

Prices are currently low because the Brazilian Real is low against the US dollar. Brazil is the largest producer and exporter of coffee, and the low Real gives producers there a reasonable return.

As you know in coffee, we have two exchanges: one in New York that trades arabica and one in London that trades robusta. They are two different qualities. To make an analogy, they are like red wine and white wine.

The contract specification for the New York contract is washed arabica. Brazil mainly produces natural Arabica, which means that the vast majority of Brazilian coffee cannot be tendered on the Exchange – even if it still trades on that Exchange.

It’s a little bit like the cotton anomaly of a decade or so ago. You remember how most of the cotton in the world cannot be tendered against the futures market. It has to be US origin.

We have a similar phenomenon in coffee now where most of the physical coffee trades against a market where it cannot be delivered. I believe that this technical situation in itself will lead to a rally in prices.

In addition, even with the Coronavirus I am confident that coffee consumption will keep growing in the decade to come.

So yes, I believe we will soon have a rally, and that the New York market will reflect the fundamental tightness in washed arabica coffee.

If the New York contract is washed arabica while Brazil produces only natural arabica, why doesn’t Brazil just wash the coffee and make it deliverable?

Less than 10 percent of Brazil’s arabica coffee can be washed in Brazil. That 10 percent can be delivered on the exchange. Traditionally – for the last hundred years or so – the Brazilians rarely washed their coffee. The majority do not currently have the infrastructure to wash it, and it would need substantial capex to build it.

Do the futures markets in London and New York work well?

Both are liquid. Both set prices correctly.

But as I mentioned, most of the coffee traded against the New York Exchange is not tenderable. This results in a de-correlation between physical and futures prices in terms of the basis, which we call the ‘differential’.

Historically differentials were not particularly volatile, except for Colombia in 2009 when we had a weather problem. Recently differentials have become more volatile leading to a total de-correlation between physical and futures.

Right now, we’re currently living with a scenario where washed arabica coffee is trading at the massive premium to the underlying futures. There is a shortage of washed arabica coffee, but an excess of natural arabica coffee.

So, what would stop someone taking delivery of New York and getting the washed coffee?

That’s what’s happening as we speak and that’s why I believe the market will rally.

Thank you, Nicolas, for your time and your insights.

© Commodity Conversations ®

This is a short extract of an interview that I plan to publish in full in my new book Merchants and Roasters – Conversations over Coffee – hopefully out at the end of this year.