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Perspectives: Unpacking the global coffee market with DRWakefield
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HSBC’s Global Head of Trade Solutions, Vivek Ramachandran, sits down with DRWakefield's Managing Director Terry Sparling to unpack what’s reshaping the global coffee market right now. From tariffs and trade disruption to price volatility and supply chain pressure, they explore what it means for businesses on the ground - and how HSBC can help clients stay resilient and keep trade moving through uncertainty.
Watch or listen to find out more.
Disclaimer: Views of external guest speakers do not represent those of HSBC.
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Transcript
Introduction to Global Insights
00:00:00
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:12
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto to today's show.
HSBC and DR Wakefield Collaboration
00:00:22
Speaker
HSBC is the world's trade bank and the world of trade has never undergone as much change as we've seen in the last 12 months. I'm delighted to be joined by Terry from DR Wakefield, a client at the bank for many, many years and a critical part of the coffee value chain.
00:00:37
Speaker
Today Terry is going to tell us a little bit about how supply chain dynamics, sustainability and tariffs are reshaping the industry and what it means for DR Wakefield.
Impact of Tariffs on Coffee Trade
00:00:49
Speaker
really what happened when the tariffs came in, particularly because they're differential depending on the origin, is um the trade flows started changing. So Brazilian coffee, which was hit with a 50% tariff, predominantly went to America, ah but it was unaffordable to send Brazilian coffee in the volumes they were sending it, so they found markets elsewhere. So the difference between coffees priced from different origins changed.
00:01:15
Speaker
So that systemically affected our business.
Factors Behind Coffee Price Volatility
00:01:17
Speaker
The last 12 months have been particularly troubling because unique to coffee at the moment, we've had incredible price volatility. To distill why that's happened is quite complex and subject to debate. But the main driving factors are the tariffs, but also um the amount of stock available in country here in Europe or in America. was at all-time lows and that panicked the market.
00:01:41
Speaker
At the same time, for the last five years, the supply of coffee has been diminishing with respect to the growth in consumption. It's a perfect soup for the investors to come in. What starts as a fundamental phenomenon, such as low stocks, suddenly becomes very interesting to people who want to ah invest in coffee via the financial markets, via our future markets. um and they really drove the price up significantly.
Risk Management in Coffee Market
00:02:06
Speaker
Now, the impact of that on like DR Wakefield is that we have to hedge our exposures and to do this we take out a financial instrument called a future. That future is a regulated market and it needs to have cash positions put on to support your positions. So if I bought and the market goes down, my position's worth less than the market says it is, I have to supply money to the market.
Understanding Coffee Value Chain
00:02:32
Speaker
How does the coffee market work? What's the value chain all the way from farm to cup? It's a lot more complex than you think when you drink a cup of coffee. So it starts at the origin, where farmers choose which variety of coffee they want to grow.
00:02:45
Speaker
And that variety of coffee can be due to the yield they get, the taste of it and the value of it. But it could also be around climate resistance, drought resistance. It could be around insect resistance or disease resistance. There's no automation in that process? There is automation in some parts, but in the sector we deal with, which is specialty coffee, the higher end coffee, it's mainly manually picked, harvested. It then goes to processing facility in country to take the seed or the bean out of the cherry. and there are many, many different processes that work to extract the bean from the actual cherry.
00:03:24
Speaker
Finally, it's dried, sent ah in its green, hard, inert form to the destination markets, and then traders or merchants like ourselves will sell it to roasters who will sell it onto the coffee shops or to the home where it's consumed. All along that value chain, The decisions made, what variety, when you pick it, how you process it in in at origin, how you roast it, how you drink it in your house or in the coffee in in the in the high street.
00:03:49
Speaker
The interest of that, every single decision has an impact on the flavour of the coffee that you're going to finally consume. And so coffee really I don't see as a true commodity um in that it isn't a homogenous product. It's very, very diversified.
Sustainability in Coffee Production
00:04:08
Speaker
a little bit about sustainability and what that means. get Obviously it's so physical to the industry you're in and it shapes everything that you do. Absolutely and and I'm proud to say DR Wakefield has been a very early adopter of of these of sustainability and certification. So we've had we were one the first to adopt fair trade in the country and we were the very first of any product to drop to adopt Rainforest Alliance as a certification process in in the UK. And is the consumer demanding it? Definitely. there There is a sector of the coffee drinking market who really care about how their coffee is made, dare I say, as much as how good the coffee tastes. And that's important to us as well because our mantra in DR Wakefield is do the right thing.
00:04:53
Speaker
So fair trade fits with doing the right thing. It it pays a fair price to the farmers for for a fair product. Organic is is fair to the planet and fair to the local economy. And Rainforest Alliance is fair to people who are growing coffee in in in high altitude areas and rainforests.
Supply Chain and Relationship Management
00:05:12
Speaker
Transparency visibilities are you typically one of the largest challenges that corporates have in ensuring sustainability.
00:05:19
Speaker
You actually know but every ah stage of the value chain all the way through the pharma? i I think we've got a very good appreciation of it. Some coffee ah companies are involved in up-country buying. We buy at the port. However, we buy from farmers and cooperatives and we visit those farmers and cooperatives and we know them very, very well. One of the strengths of DR Wakefield, particularly during the volatile times we're having recently, is that we have so many suppliers that we've worked for many, many decades since we started. And we have many customers as well who've worked with for a very long time. So we have quite a strong supply chain in terms in terms of risk and in terms of managing shocks shocks to the system.
Strategic Financial Management in Commodity Trading
00:06:04
Speaker
And what's your planning hawa horizon Terry? So when you look forward, how far ahead are you planning? Most traders plan a little bit further than their nose. So as an old trader, that's where I tend to plan. But I'm also an accountant, so I've got a dual personality. So I've just finished the five year strategic plan ah for the group. One of the things I did when I first joined. Really we need a mixture of very very short term planning because of the daily market markets of our futures position and the impact that has on cash ah but also strange things like vessels getting stuck in the Suez Canal or in the you know so other ah other news items. How does your plan accommodate big shocks?
00:06:42
Speaker
How do you accommodate that? How do you pivot? What do you change? In trading cash is king. In fact I would argue many businesses including banking cash is king. And so our biggest thing is our sensitivity analysis reply to our our cash positions. What happens if these five vessels are late? What happens if these five suppliers don't take their product and pay us on time? What happens if we can't get our coffee from origin to destination, but we've got hedges outstanding?
00:07:07
Speaker
What's the impact on on that on our business? We also look at where we buy our coffee from and the multiplicity of places we can place it.
Commodity Trading Strategies for Financial Managers
00:07:16
Speaker
It's so fascinating listening to you because a lot of the themes you've talked about are not unique to your industry. So today working capital and cash management and cash conservation has become important for every company.
00:07:28
Speaker
Transparency into your supply chain and making sure you're hedging against shocks has become really important. So a lot of the discipline that commodity traders have had is now becoming standard for financial managers and treasury. Maybe the reason why we spend so much time looking at our cash flow and and these incredibly complex sensitivity analysis we run is because we we don't have that predictability. I'm always surprised when I talk to the bank about a new facility and they say, what's your turnover going to be?
00:07:57
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I don't know is the answer. What we do know is what our gross profit margin is going to be but that doesn't help us when it comes to financing the purchase or the sales that we we enter into in our in our
Risk Management Approaches at DR Wakefield
00:08:07
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business. It's very difficult. Dealing with unpredictability is almost the norm today.
00:08:11
Speaker
It means you have to be careful which opportunities you follow. And I think it's really useful to have that conservative view because um there are shocks outside of your control which can drastically affect your your company very, very quickly. The don't know what i don't know is really, really important in commodity trading. And you have to have that in your head every time you're looking at any plan, whether it's one day, one week, one month or five years. And do you have in your head kind of almost rules of thumb as to what percentage of capital you
00:08:42
Speaker
put to use for different purposes and how much is bet on the future? Absolutely. Again, I spent a very small period of time in investment bank trading and I know they control their capital with great care. I'm sure you you you know more than that than I do. um And so I've adopted that principle here as well. I've turned around and said we don't really want to have 2 or 5 or 8% of our capital at risk at any point in time. I've also gone further and said I don't want so much of that um i don't want so much of that capital deployed on risk strategies that are more than a certain period forward.
00:09:12
Speaker
Because again, the longer time forward, the more chance there is of a shock coming in and disrupting that. um And I've also said I don't want concentration risk. One of the greatest things I saw when I came to DOE from a finance perspective was that no one customer was more than 2% of our revenue.
00:09:27
Speaker
And that's by design? I'm not sure if it is, but I want to keep it that way.
Future Challenges in Coffee Industry
00:09:36
Speaker
And so finally, looking out for the next couple of years, what do you see in the future for the coffee industry and for Wakefield? Well, it's got ah it's got ah a bit of a cloud over it, i'm afraid, the the future because there is this imbalance between demand and supply um and that will eventually trickle through to higher prices and it may trickle through to demand destruction or or substitution in some some cases. um We're slightly immune from that because ah we concentrate on the higher end specialty coffees and they tend to be less price tend to be more price elastic, should I say, than than commercial coffees. um I think the big challenge for us is keeping up with the trend. Coffee is consumed in in urban areas largely. It's consumed by a very from many, many younger people. And their tastes are quite fickle and they're changing constantly. And so we're going to we've got to keep up with those. So we have to continue investing in our social media presence, continue investing in our engagement with our customers and in conferences to understand where these flows and where these um where the where the future consumption of coffee is going to sit.
00:10:47
Speaker
And we have to try it all the time Marry that with the fact that there is reducing availability of land to grow coffee on due to changes in climate. It has to go higher and higher and higher up ah a mountain to grow. And unfortunately, the mountain finishes at some point, so you can't go any higher.
00:11:02
Speaker
Terry, thank you so much. It's been incredibly illuminating to learn about the industry. Thank you for the relationship and thank you for sharing so openly. Thank you for inviting me. Thank you for joining us at HSBC Global Viewpoint.
00:11:13
Speaker
We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.