Separating Signal From Noise in Forecasting

Black Coffee . This is the Cavoya Coffee Podcasting Network. Coffee people talking to coffee people about coffee and things coffee adjacent. This episode of Coffee Memo with Rob Stephen is brought to you by Cavoya Specialty Coffee, where coffee is always a collaborative voyage. Welcome to Coffee Memo with Rob Steven, a podcast where we talk about coffee industry news and current events. The topic for this episode is the weather. El Nino specifically. What are we expecting and how do we prepare? So Rob, as you know, I was uh born and raised mo or lived most of my life in Southern California. And uh after moving to New England about seven years ago, I've learned to embrace the idea that there's no such thing as bad weather, there's just the wrong gear. Very true. But I am not a coffee tree. If I were a coffee tree, I'd be shaking in my roots any time it was uh too cold or too hot or too much rain or not enough rain or the weather was out of the ordinary in any way or, in the wrong ord er, or the wrong part of the mountain. Like those of us who keep an eye on supply, the weather is always with us. So uh when there's news about weather. Uh it's something we're gonna listen to. Yes. Yeah. And I I think that when we talk about news about the weather, uh that's actually what made me want to talk about this this uh this subject at this time, right? So we're in the sort of uh just had cinquemai the other day. It's it's early May here. And there was an article in the New York Times a couple of days ago that's uh I'll I'll read the first sentence. A climate monster is growing right now in the Pacific Ocean, perhaps the most fearsome El Nino since before scientists even began modeling them. And all we need is that guy who does in a world, you know, to do the movie intro from you know what's happening next, right? So and I have actually received a bunch of calls from uh clients asking you know well my god, what do I do? The sky's falling, that kind of thing. So um I really to wanted sort of put this into context. And I actually in the process of of researching for this, I learned a few things myself. So it's hopefully we we can share those. So weather is one of the most powerful and misunder stood aspects of of the coffee industry. It's like one of the sort of the most strongest forces in coffee because it's completely unchangeable by anybody. It happens to all of us at the same time. And w when coffee people talk about El Nino or La Niña, they're really talking about risk more than they're talking about weather. Right? Because if you think about it, uh if you have a farm in Mexico, you don't hit get hit by the average temperature. What it happens on your farm, it goes into the average temperature. Right? And so and you don't get hit by the average rainfall. You get a certain amount of rainfall, which is part of the average. And and you know averages are made of large numbers and small numbers. And you could get either one. And you could get them on the day that on the time of the harp harvest that you need it and the time that you don't. So um when people talk about global weather, they talk about averages. You know the average temperature went to here or you know um average rainfall went to here and it's like that's uh not what we're talking about. What we're talking about is what's going to happen to the places that grow coffee at the specific times that things need to happen. When you see coffee markets moving as a result of weather stories, there's two kinds. There's the there was a frost in Brazil yesterday, and that's like a real thing that happened. And then you can say, okay, how much coffee did we lose? And then there'ss condition are evolving to create more chaotic weather in the future, which is just uncertainty. Right. No predictions at all. Right. So and usually when weather risk rises it's uncertainty, so uh confidence drops. And when confidence drops, that shows up in pricing. It shows it shows up in spreads and it shows up in structure. And um you can sort of see the early warning signs of it before you actually see it in just outright price. Now right now you don't see that at all. It's the opposite. We have an inverted market. So people are more confident in coffee in the future than they are um in the right now. And that's based in reality. There's not enough coffee right now, but there is by all intents and purposes of everything that we've seen, more coffee coming in the future. We've said that on a number of number of episodes, right? But then you start looking at what could impact that rosy outlook. So we had an episode we talked about fertilizer. Right? That's a a long tail uh thing where if you don't put inputs into a tree at the right time. Um coffee is a is a tree with a long memory. And it doesn't have the ability to catch up. If you don't give it what it needs at the time that it needs it, you can't give it to it later and have that work. Right. And so uh weather is one of those things. It needs rain when it needs rain, it needs to not rain when it needs to not rain, you know, it needs the sh sun needs to shine and dry things when it needs to you know, there's all these things need to happen at the right time. There's no IOUs. There's no IOUs. There's no we'll we'll add more later. Um right. Um and you can't take it away once it's gotten something it doesn't need. So uh when we're talking about weather, we're talking about uncertainty of those things not happening like they're quote supposed to. Right? And so when we talk about something like about you What is El El Niño and La Niña? And it it actually starts with talking about something called Enzo , which is not your cousin from New Jersey. It is E-N-S-O-E-SO. And it is the sort of a re occurring phenomenon, a natural phenomenon that creates El Niño and La Niña. So so Enzo it stands for the El Niño Southern Oscillation, right? And it's a repeating interaction of ocean temperatures and winds that happens in the Pacific. So uh what is sort of quote normal when there isn't an El Niño or a La Niña? Um trade winds, they push warm air uh from the eastern Pacific to the western Pacific. Um I'm sorry, they push warm water uh toward towards the towards Indonesia, right? And then as a result, the cooler water stays near South America. And that's uh normal and that sort of creates traditional normal weather patterns, seasons that we know, and this and you know, rain when it we're expect to have it, and no rain when we don't expect to have it., you know During an L N ino, the winds get weaker and so uh you get more warm water closer to South America and that changes uh when heat is released into the atmosphere and so that changes weather patterns. Yeah. Rain, um, winds, and the in the severity of storms. And so um and that can just because it's happening in that part of the world, it actually can have a global impact all across the world. And then La Niña is the opposite. So you get stronger winds, you get more water west in in the sort of South Pacific region, and then you get cooler water in the eastern Pacific near South America, and that can make things drier. Yeah, colder than so the thing to think about with Enzo is that it's it's a probability shifter. So So if you have a La Niña, you have more probability of a certain kind of weather, and if you have an El Niño, you have more prob probability of a certain kind of weather. It's not a weather forecast. Right. It's a sort of intensifier of a prediction. And when I look at you know something like we're going to have a Monster Real Nino, it's just basically saying the ranges of outcomes are going to be greater. And a range high range of outcomes is also bus volatility. It's risk. Yeah. Right. So when we think about this with with coffee, it's really a matter of when will stress show up in coffee agriculture. And so um you know coffee has some sensitivity to weather and that's when traders tend to look mostly at weather during some pretty narrow windows. It's flowering, it's the fruit setting, it's the cherry development , and it's the harvest. If you got the wrong kind of heat or rain or dryness outside those windows, you can manage it. Uh but during those windows, um you can have real impacts, right? But again, this isn't something that happens uniformly across the whole world at the same time. It happens in you know wherever it happens, may or may not be over areas under carpet cultivation. Okay. Right. So knowing that there is going to be a large El Nino isn't enough to say coffee's in trouble. It's enough to say the range of what might happen with coffee is larger. Trevor Burrus, okay. And so we go from thinking, will there be an El Nino? The answer is yes. I mean, it's it's a scientific fact at this point, to instead, how resilient are the farms and ecosystems and and sort of uh schema of coffee to multiple stresses occurring all at once. Mm-hmm. Right? So if storms, f wildfires, droughts, um fungus, which is a result of too much moisture, you know, these kinds of things. Right? How much can the places that grow coffee take should these things happen? And so let's take Brazil, for example. So in El in an El Nino year, some parts of Brazil will see like a warmer than average conditions. So uh and that's usually paired with uneven rainfall. So like on paper, that's like uh overall rainfall s, which is what you see on a precipitation map, they look acceptable, but they're they're patchy. Yeah, okay. You know, and so if it's like, you know, if the heat spikes during the flowering or the rain arrives late or you know, really heavy when it does arrive, um it can have an impact on how the fruit sets, or it can have an impact on uniformity. And so again, it's not a thing like El Nino is bad for Brazil. It's more of like it could create timing issues with weather that could impact parts of Brazil. Is there any chance that within that range there's sort of a nothing burger where it's almost normal? Aaron Powell Yes. Yeah. So I mean and also it can in certain regions reduce risk. it's not like universally negative for coffee. You can bring drier conditions, which would lower fung fungus. You can have more manageable rainfall, which makes it easier to harvest and doesn't damage coffee as much. You know, in Central America they've had years where uh an El Nino has drastically improved their crop. Right. So it's its location, its intensity, its range, and its timing.. Trevor Burrus Yeah So the we're opening up we're going to have a larger range of possibilities and within that is some good outcomes. Yes. Within that range. Trevor Burrus. And potentially some bad outcomes. So it's really we we're talking about at this point is uh resiliency to weather volatility. Um and whenever the market feels there's not enough resiliency, that's there's an impact in pricing. So um I'll give you uh another example. Colombia had a very strong El Nino in the 1516 crop, 2015-2016. Higher than normal terror temperatures, uh extended dry spells, and it really did hit the coffee growing regions pretty hard. It reduced uh disease. So less less uh fungus, less uh broca, like a lot of the things that are sort of plague coffee production, but it made uh very difficult flowering consistency because there wasn't enough water available. And so you had this really like patchy output of you know some areas okay and some areas, you know, just didn't get enough development on the trees. Depending on where you were, and you know that Colombia is a place with a lot of microclimates. You were like, wow, it's best year ever. Another year's like, why does God hate me? Right? And that's why I think these Enzo and El Nino discussions , we have to be very regional specific. You know, when I when I look at what we try and do here with with Coffee Memo, it's like let's put it in perspective and figure out how you can make a plan. So what we're talking about here is something that is i is not determinant and it's not even specific. It's just an increase in risk or a potential increase in benefit. But what it what we're talking about here is amplitude, like how much wider the ranges have just become. So we'll see that in pricing, and we'll see that in specific outputs of specific countries after it happens. So it's not even it's not even cont ent to Trevor Burrus Yeah. Let's say it hits a certain country that you've got a lot of eggs in that basket. Being prepared to pivot. Okay. Or let's say that it does actually create some widespread impacts, being prepared to uh see that coming in price, whether it's market pricing or differential pricing. You know, if one country has a problem, it will create scarcity in that country. And if you need that country, those diffs are going to become uncompetitive. And you might just have to say, well, if it happens in Brazil and I need Brazil, maybe the diffs will go up. I mean all of this is purely speculative. You don't no one really knows what to do . But we're trying to take all the different variables and factors that go into coffee supply and pricing and break them down. Weather is a huge one. Yeah. It's a really big one. And it's it's one of those things that's that's almost totally misunderstood because weather is what happens to you where you are. I would say a couple of things. I would say it's important to separate signal from noise on this one, you know, if you're one of those clients that called me and asked me about El Nino and I told you not to worry about it, what I meant was that there's nothing to worry about yet. What we know is only that the ranges of possible weather outcomes will be higher than normal. Aaron Powell That r that range of possibilities. Interesting, one of the things I learned from reading all this was that when you have uh a system like this, you would expect to have an impact on climate politics. People would react, say, oh, we have to take this seriously. One of the uh sort of overall average impacts of the United States when there's a big El Nino is better weather. Right? So it kind of creates a sense of complacency where we are. And so we could see record temperat ures. We could see average temperatures. But the record temperatures could be record because, again, of that much wider range of outcomes than is is normal. And because this the intensity of this is bigger than anything they've measured before. They there's a reasonable expectation that you'll see bigger ranges in weather and rainfall and storms and things like that. Aaron Ross Powell But we have a buff a buffer coming in Brazil, right? Aaron Ross Powell Just got to get it out of the gr out of the ground before uh Trevor Burrus, Jr.: Yeah, exactly. I like me a good clickbait headline just like anybody else. But if if our goal here is to separate signal from noise and and process instead of panic, then you know that's the kind of stuff we have to talk about. If you're one of those people that really likes to get into this, as the season develops, look at regional data and not global data. And I mean regional , regional, like not, you know, Brazil as as a microcosm of Latin America, you know, or South America, I mean, but like what part of Brazil? And what part of that part? You know, that kind of thing. It's also about persistence. One weather event does not a bad crop make unless it's a frost. But you if you're continually having no rains, or you're continually having too much rain, or you're continually having high temperatures or low temperatures, then you're going to have effects. When we look at the impact on your purchasing decisions, it it's the same advice at the end of the day when we break it down as as always, which is have a plan and the ability to pivot. Could something bad happen to A or a series of orig ins because of El Nino? Yes. Will it happen? Nobody knows. Right. So keep an eye on things. Be ready , don't be swayed by singular headlines, uh, and stay dry out there. Thanks, Mike. Thanks, Rob You've been listening to Coffee Memo with Rob Stevens, part of the Cavoya Coffee Podcasting Network, where the executive producer is me, Mike Ferguson. Our theme music is Jealous Dogs by the Pret enders. Hm Jealous Dogs That might be a good band name. Nah. If you've enjoyed this or any show on the Kavoya Coffee Podcasting Network, please do all the things like sub,scribe , review, don't keep us a secret, and take our listener survey at the link in the show notes. Finally remember two things you can email me with thoughts, ideas, kind words, and limericks at Mike.ferguson at cavoya .com. And Black Coffee is performed by the one the only Ella Fitzgerald. This has been a CCPN production. If my grandmother had wheels, she would have been a bike.