Coffee Trading / Physical Trading Q&A
Hey Everyone,
Some of you may have seen some of my older posts (roughly 2015 onward) about physical coffee trading and the coffee trading space in general. I am a partner at a major firm, running the trading operation, and have a young family, so I really haven't been super engaged on checking WSO but I still receive dozens of messages a year about physical trading, coffee trading, comp, trade concepts, and just commodities in general. Many people have suggested that I start an AMA thread so here we are!
Salaries have exploded in the field, and as guy in my late 30s i'm still considered "young," with roughly 70% of traders being 55 or older the industry is changing fast.
From a trade setup the carry market has been a total disaster, which has lead to a field day for the more conservative back to back style traders whose strategy I explained in the past. The cash and carry traditional speculative model lead to spectacular losses in a heavily inverted market with interest rates in the 10% range, leading to many large multinationals taking a bath for years now. We've seen the rise of new players, interesting new models, and a bifurcation between houses with explosive growth and profits, and old giants getting crushed and scrambling to change.
All in all I truly believe it's the most interesting field in finance. Coffee is our #1 beverage in America and truly ubiquitous. It's more consumes than bottled water (in America), yet has more complexity and specs / regionality than wine. What does that give a savy innovative trader? The best arbitrage opportunities in physical commodities, massive scale + unlimited quality and price arbitrage = a happy trader...IF you know what you're doing on coffee quality.
There's excitement and interesting segments of the business everywhere.If you are a technical paper trader well we have two super active and volatile futures contracts to work with. Quality arb player? Well each lot (and big houses sells thousands and thousands of these) is cupped and graded per spec like a wine or cigar rating and then commoditized and sold as another spec to a buyer. Logistics your thing? Well we move 7-10k containers a year at my one office and find ways to squeeze efficiencies out of line rates, trucks, warehouses etc. Want travel? How does Costa Rica, Colombia, Brazil x 3-4 times a year sound? Want adventure? Imagine making a $5 mill bet on a shipment of Honduras SHG and having to fly down and trek into a mountain village and find the exporter coyote who has run away with your contract and refusing to ship? You a sales guy and like to wine and dine and get that expense account going? Well we have 3,000+ customers across the world and some guys just focus on being a "good time" sales person.
Are you a hipster coffee snob with artistic aspirations? Well not sure why you're reading WSO but there's a massive specialty trading industry designed just for you, where you can spend 10 weeks discussing how each bean was picked by virgins in the moonlight and how your Tanzanian Peaberry AB exploded with ripe stone fruit on the cupping table, while you drive home in your Plaid Tesla because you're making 50+ cent profit per lb off their buys. Like technology and engineering, well there's a whole field of tech savvy roasters, roaster equipment, and AI driven cupping programs that the trade is heavily investing in. Care about sustainability and helping farmers? Well coffee directly employees over 10 million people in the poorest countries in the world, and arguably started the sustainability movement with Fair Trade coffee and RFA coffee. The sustainability field is brimming with young ethical people trying to make a change, and also a lot of sharks exploiting free margin, how you sleep at night wether like a baby or restless on a bed of money is up to you. You want to get your Gordon Gecko on? You can wheel and deal and "fill or kill" as much as you want as physical trading is done person to person direct just like the 80s. Want to work with and grow new companies, imagine finding starbucks in 1985 and getting in early and buying shares / getting ipo granted to you, it happens often in the field. Like research and science? Well we have papers and meteorological studies galore. Crypto guy, imagine the implications of blockchain across a field of 25+ producing countries where transparency and order flow is highly valued and even legally required (it's all paper now.)
You want prestige to impress your significant other? How about walking into any Starbucks and seeing the coffee you found, convinced them to buy, blended and wrote the story about, written on the little chalkboard and for sale across 20,000 locations? Or hearing the "best part of waking up is folgers in your cup" and knowing 25% of that red can is yours and paying the mortgage. Or that trendy new place that opened up down the street with the pretentious coffee dbag charging $20 for a latte, well they are serving your coffee and you killed them on price and get the last laugh. Just don't tell someone you're trying to pickup at a bar or on tinder you're a coffee trader, because they'll say "ah so you're a barista?"
The best part of all this, is that we are a super close brotherhood of traders and while we compete nonstop and ruthlessly we all take care of each other too.
So if you want to learn more about this awesome industry please let me know. The answer may come back in minutes, days, weeks, or months but I will get to it I promise!
Also drink more coffee people!
- Coffee Trader
1. Which firms are in your view ideal for juniors? NKG, Volcafe, ECOM or Sucafina? I found junior roles to be rare but are there companies one should avoid b/c they are dead-ends? I currently look for a “Coffee TDP”.
2. I presume much of the job is learning by doing but what are top skills that help differentiating yourself/land a job? Languages?
Sent out a few apps but this industry is even for commodities standards quite opaque and nearly impossible to break into.
1.) - The traditional coffee only merchants are the best ones to break into and those are the original big 3, Neumann Rothfos, Volcafe, Ecom. In reality Rothfos v Volcafe was the equivalent of Goldman vs JPM for many years. With that said there are many other large multis like Dreyfus, Olam, etc and some new up and comers like Sucafina who has made a ton of noise trying to be the biggest. Any one is good to break into, but you have to eat a lot of crap in the beginning and learn the ropes. Moving to origin is the best bet to being a senior level hire quickly. Going to run a mill or exporter in PNG is a tough assignment but ingratiates you quickly and you learn fast. You can backdoor at a small local specialty house and then move up too.
2.) Language is meaningless now, everyone speaks English everywhere. Your ability to sell is the paramount skill, second is your cupping and quality arb ability, third is innovation. The ability to read and make decisions as a technical paper trader is important too but moving beans is the name of the game to max out your salary.
3.) It's absurdly opaque, you're usually born into it.. as I was
how much of a presence do the large ag players have in Coffee? I heard Cargill pulled out of sugar a few years back; is any relevance there in relation to coffee that might make it a hard market to enter for established players?
The big houses don't touch physical trading direct as it's just too esoteric and opaque, you need to really focus on it and have years of experience. With that said they heavily provide services to physical traders including myself in the form of physical repo, trading strategies, capital markets, IB clearance and facilitation of hedging, swaps, and consulting. Cargill is heavily involved here but they sold their assets trading business to I believe Volcafe and Ecom many years ago (could be wrong there.)
Goldman was heavily into physical coffee when they bought J Aron in the 80s. J Aron dominated physical trading and all of the senior managers in the 90s - 2000s ran Goldman. They got out of physical coffee and just focused on gold as it's just too old school and slow moving for a big IB, however they still heavily finance many players
Appreciate the detailed write-up, great first impression, lots of Q&A people just say "alright I'm so and so, ask away." Answered 70% of my questions, and already like you haha.
Just wondering, as an English-only American who did not take Spanish/French classes in high school or college, would I be pigeonholed and/or my career development capped?
CoffeeTrader can answer much better than me, but from those I've talked to in the industry, generally yes as it would be hard to find an edge without learning any language of the origin.
Though, again defer to OP as he's already in the space.
At one time it was critical, and it's always a benefit but on the import side it's not important. Everyone speaks fluent English. If you're on the export side or mill side you need to learn the language of the country. Remember there's just as much if not more money on the milling / export / pre finance side and 200,000 farmers in Colombia aren't working with you if you don't speak Spanish
I’d imagine that only English is fine if you’re a paper trader, but what about for those travel and “adventure”roles?
Can you talk to us more about those interesting models popping up?
I spent a couple of years out of university at a prop shop, and one of the products I traded was coffee. Ended up going the macro HF route as an analyst where I'm making some good money, but my fund isn't great and have been bogged down by admin work with less time for real work.
Been trying to see if I can pivot to physical coffee, if even possible.
Any scope for careers in coffee in london?
So coffee consumption there is now higher than tea so it's growing, but still low.
I do have some friends on the private label side but that would be more roasting and buying.
London however does have the robusta liffe exchange and heavy on the futures side. There's some specialty houses too. Switzerland is the epicenter of European trading if you want to stay close to home would check them out.
send me a message with your resume I'll see if I can help you out
I texted you
Will add that there are recent EU sustainability laws that will affect coffee market (EU deforestation regulation). Traders delivering physical have to prove there is no trace to deforested land. So will be interesting to see what happens in ldn market
Got into drinking coffee black earlier this year. Amazing how nuanced the flavor can be when you’re not throwing cream and sugar into it. I argue a high quality cup of black coffee tastes better than anything you can make with additional add-ins, but I’ve found it extremely difficult to find a good black coffee. Most places are mediocre at best with a higher likelihood of getting bitter garbage than a decent cup.
How does an experienced professional break into commodities trading (in this case, coffee)?
I have close ties to some countries with major coffee production and have a decent amount of capital. Is it crazy to think I could start a coffee monopoly? Sure it already exists but can’t hurt to look into it.
I’m mid-20’s and have been thinking about what I want to do with my life. Great job right now but don’t know how long I can sit at a desk and move numbers around. Have thought about MBA - do people move to trading after business school?
I’ve gone down the commodities rabbit hole a few time and always come out more confused than when I went in. Extremely interesting but not even sure where to start in terms of pivoting to that career
Do you think coffee or just commodity trading requires quant/math skills? And does it always take almost 10 years to become a real trader? Much appreciated!
Some of the biggest and best traders I know never advanced beyond high school algebra. You need to be smart and know how to deal. You need to talk to buyers who are normally regular people at roasters and not overwhelm them.
if you want to be a paper trader and build a sorts based algo it helps.
That sounds good but physical trader need to bear a long term of lower comps than IBD/S&T. And that really bothers me. Do you think there are any better pathway? Or maybe I should try paper trading?
I recently starting trading coffee right after graduation, based in Toronto.
1. I have verified sellers but I have not sure how to find buyers. It seems like specialty houses won't buy enough for a container load.
2. It would be great if I could dm you and ask questions on the side, or if you/anyone would be willing to mentor me as I start my firm. My partners have closed deals in other commodities, I focus on coffee.
3. Also how much of an opportunity is there in Canada to start a coffee trading house?
1.) Very easy to buy coffee, tough to sell it! You have to bring in mixed containers of many micro lots and sell to many specialty roasters to make money in specialty. The name of the game is marketing and selling it fast enough before your carry costs catch up to you. The norm is 75% of the container sells at high levels, then you take a bath on the 25%. It's speculative and risky. You would need to finance it with a bigger trade house which will take a massive chunk and still be leave you with risk, yet they handle all the backend and import. Your best bet is to get a customer to commit to a forward contract say 50 bags a month x 6 months and then buy a 320 bag contract. You do it off pss samples and type samples.
2.) Canada is a large market it's very important to my business, but the specialty market is well covered already.
It's virtually impossible to break into coffee trading as a new company with zero connections. Other commodities have little bearing, it's again a business with heavy flow and at the same time very esoteric. As common as water, as complex as wine. Sugar is sugar, metal is metal, coffee is 9 million different specs and categories.
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