Yunnan Coffee: escaping from Wall Street

Yunnan coffee has stumbled.

This is a big somersault with a loss of at least 800 million yuan. In February 2014, international coffee prices recorded their biggest monthly increase in 20 years, while Yunka production fell by 40%. In late March, when the purchase price was good, there was even an awkward situation of "having nothing to sell" in Yunnan.

The industry really feels that it has learned a lesson. Unlike in the past when suffering from the risks of the industry, Yunnan coffee is now treated in a more practical way-some long-established strategies are being put into practice. However, these strategies will still face long-term challenges from the outside-such as natural weather, or Wall Street.

Yunnan Coffee and Wall Street "Yangmou"

In China, it seems that no kind of farmers feel the pulse of the world economy as closely as Yunnan Ka Nong. As a result, they have to take more complex risks than other categories of farmers.

Xie Zhenglin, a farmer in Pu'er, thinks highly of his coffee planting career. He called it "very low-level" for those who "deliberately" turned the brand logo in the fence of the coffee shop. The reason given by the 23-year-old farmer is that the raw material of the cup of coffee may have come from his own tree; the other is that he will use his mobile phone to follow the trading information of New York futures every day, and "they will only take pictures and post Weibo."

Of course, not all Yunnan farmers view the way young people in the city drink coffee like Xie Zhenglin. But one thing is certain: Canon does pay attention to the NYSE, even Xie Zhenglin's parents. Even they are equally sensitive about international trade and financial information such as the exchange rate of the renminbi and the withdrawal of the third round of quantitative easing in the US.

This is because the price of the coffee they grow is directly affected by the futures price of coffee in New York.

Usually, the daily trading price of coffee futures in New York is about 10%, which is the purchase price of the Yunnan market that day, and this 10% is the theoretical cost of transporting coffee from Yunnan to New York. The New York Stock Exchange is the most important coffee exchange in the Western Hemisphere, and its trading price is the benchmark price for coffee transactions around the world. In other words, the global price of coffee is largely determined by the futures exchange on Wall Street.

From beginning to end, any change in the exchange rate, Fed policy, and so on, will quickly affect the farmers in copycat villages in Yunnan and the returns they get from working in the mountains. In some coffee-growing areas where mobile phone signals have just been covered, learning to watch the changes in Arabic numerals on the New York Stock Exchange and figuring out the conversion from US dollar pounds to RMB kilograms is an important skill that farmers need to master after buying a mobile phone. In the depths of the mountains where coffee has been grown for a long time, such as Pu'er, Dehong and Baoshan, farmers in Chengxiang and Lianzhai often talk about "financial problems" that are not often heard on the streets of Kunming, the provincial capital, even when they encounter each other in oxcarts or tractors.

In China, it seems that no kind of farmers feel the pulse of the world economy as closely as Yunnan Ka Nong. Because of this, they have to bear more complex risks than other types of farmers.

The Xie Zhenglin family has suffered a lot of losses this year, reducing its production by about 30% compared with last year. One reason is that the price of coffee futures on Wall Street has been hovering low since 2012, which caused the coffee purchase price to be lower than the cost price for some time last year, so the Xie family gave up picking. "it's a pity that if I knew the price would rise so well in February, I would have been patient to pick it."

According to the scholars who studied the global coffee market in the past few decades, the relationship between coffee futures price and supply is closer, and there are cycles and rules to follow.

The study points out that with the decline in futures prices, farmers' enthusiasm for growing coffee has greatly decreased. As a result, some farmers have stopped fertilizing and pruning coffee trees and may even cut down coffee trees (Pu'er has happened before), reducing coffee supply in the future and driving prices up sharply. See futures prices rise, profitable, more farmers will join the ranks of coffee growers, or expand cultivation. When supply exceeds demand, prices will fall again.

As a crop, the factors that affect coffee supply include not only subjective reasons such as planting and picking willingness of farmers, but also natural weather.

This is one of the reasons why Yunka's production has been reduced this year. Yunka suffered from drought and cold damage last year, according to the Yunnan Coffee Association. According to the association's earlier estimates, Yunka's production this year was supposed to be about 100000 tons, but by the end of the coffee harvest in late March, the total production was less than 60, 000 tons, a reduction of 40 per cent. The sudden drop in temperature in Yunnan last winter and spring made many coffee fruits blacken or die.

The weather will affect the global coffee supply, affect the price of coffee futures on Wall Street, and eventually spread to the picking strategy of Yunnan farmers. Yunnan farmers have no choice but to accept such a cycle.

The Butterfly effect of Rain in Brazil

The ultimate dream of Yunnan coffee is to become the blue mountain coffee of Jamaica, which can be highly sought after with very little output. But the reality is that nearly 75% of Yunnan coffee in 2013 earned "foreign exchange" from the export of raw beans. This means that Yunka has lost the high value-added profit opportunities in the industrial chain.

According to statistics, at present, the output of Yunka accounts for only 1% of the world's output, such a weak status is not enough to make Wall Street interested in the weather of Yunka. The sharp rise in international coffee prices this year is due to an "accident" in coffee countries such as Brazil. International coffee prices rose the most in a single month in 20 years in February, related to the drought facing the coffee kingdom since November, while in late March, a Brazilian weather forecast said rain would come. at the same time, global coffee prices have fallen.

Hu Lu, deputy secretary general of the Yunnan Coffee Industry Association, plans to go to Brazil in mid-April, where he is eager to learn about coffee production there in order to do further research on the possible risks of Yunnan coffee.

Hu Lu also has an identity-the person in charge of Kunming Shanze Culture Communication Co., Ltd. The company provides corporate brand and strategic planning services for China's two largest coffee companies, Yunnan Lincang Lingfeng Coffee Group (Lingfeng Coffee) and Yunnan Hougu Coffee Co., Ltd. (Hougu Coffee).

Getting the "real" information about rainfall in coffee producing areas in Brazil is one of the important purposes of Hulu's visit.

"the purpose of the field trip is to have a more realistic understanding of the actual situation." Hu Lu believes that the correlation between weather information and coffee prices should be evaluated on the spot. One of his concerns is that the weather information itself has been hyped by international coffee speculators, which will be an uncontrollable risk for Yunnan coffee.

The "stumble" this year has clearly made the cloud coffee industry more alert to the risks from Wall Street, at least at a time when Yunnan Coffee is trying to grow big.

Yunnan accounts for 99% of China's coffee production. Now, from Pu'er and Baoshan to Dehong, Lincang and Honghe, the planting area of this kind of cash crop has grown from more than 300,000 mu six years ago to more than 1.4 million mu at present, and will reach 2.5 million mu in 2020. People who are bullish on the development of the industry have even claimed that the future of this international product will replace tobacco, which is increasingly unpopular in the world, and become the "pillar" of Yunnan.

Yunnan is also full of confidence in the quality of its coffee, at least as confirmed by the actions of international giants. Nestl é has been buying Yunnan coffee for many years. It is understood that by 2015, Nestl é plans to buy 15000 tons of coffee beans. Not only Nestle, Starbucks, Maxwell and other international brands are also opening up their appetites step by step in Yunnan. According to the current situation, their purchases have accounted for 30% of Yunnan's coffee production.

The ultimate dream of Yunnan coffee is to become the blue mountain coffee of Jamaica, which can be highly sought after with very little output. But the reality is that nearly 75% of Yunnan coffee in 2013 earned "foreign exchange" from the export of raw beans. This means that Yunka has lost the high value-added profit opportunities in the industrial chain. What is even more distressing for the industry is that these foreign exchange-earning coffees may eventually be blended with the names of South America and Africa, while the Yunka brand will disappear.

Therefore, around Yunka, how to build multiple anti-risk "shields" not only determines the future of the industry, but also closely related to the interests of countless farmers and enterprises.

Is the leading enterprise the "patron saint" of Kanong?

Protecting the interests of growers has gradually become the mainstream consciousness, which is also an important reason why Yunnan is more and more inclined to develop the "company + base + cooperative" model. But the question is, if the risks that farmers cannot bear are concentrated and transferred to enterprises, will the risks disappear or stack into a large "package"?

It is generally believed that the coffee supply chain is a chain composed of coffee growers, buyers, traders, roasters and retailers. In these links, every kilogram of coffee goes one step further, and its value increases by one point.

According to the study, if a kilogram of coffee in Yunnan sells for 19.5 yuan, it retails at 120 yuan per kilogram when it is ground to the United States. These 1kg coffee beans can be milled to produce about 172cups of coffee. Calculated at the lowest price of 16 yuan per cup, the terminal retail segment can sell for 2752 yuan. In this step-by-step value-added process, Yunnan farmers contribute only a little more than 10%, and coffee retail accounts for more than 90% of the value created for it.

More importantly, even if the purchase price of Yunnan coffee is lower than the planting cost, there is little chance that the giants will raise the purchase price of coffee beans. In contrast, in recent years, finished coffee giants have raised the retail prices of some products on the grounds that "pricing takes into account many factors, not just the price of coffee beans."

Usually, it takes four to five years for a coffee tree to sow, plant, and grow into a tree, and it will probably seed in the third year. Because the weather factor is an unavoidable risk in coffee cultivation, when farmers invest in coffee cultivation, the first thing they have to face is the risk of production reduction caused by weather effects, as well as the time risk of investment in three or four years.

After the coffee is seeded, the harvest season is from October to April of the following year, and farmers need to pay a lot of work during this period of nearly half a year. A coffee tree can produce 3-5 kilograms of coffee fruit every year, and its economic life is only about 30 years.

In other words, farmers enjoy the lowest reward in the industrial chain, but bear the highest intensity of payment, while facing the longest and uncontrollable time and weather risks. Even if these risks are overcome, Canon may still be "fooled" by Wall Street speculators.

Because of this, protecting the interests of growers has gradually become the mainstream consciousness. Everyone realized that "if you don't do this, you won't have to play." This is also an important reason why Yunnan is more and more inclined to develop the "company + base + cooperative" model.

Leading enterprises leading cooperative organizations are considered to be an important way to realize agricultural industrialization, which will be conducive to the comprehensive marketization of agricultural production and circulation, not only from more modern technological traction to ensure quality and strengthen brands, but also to decompose the risks of the spot market for farmers and reduce their worries. At present, Lingfeng Coffee is being carried out in this way in Lincang. In terms of organization and management, the government that supports this approach even promotes the organic combination of grass-roots party committees and cooperatives.

In the view of researchers in the field of risk management, this model actually integrates the weak land and labor resources, and transfers the price risk faced by its production to the leading enterprises through organizational contracts. But the question is, if the risks that farmers cannot bear are concentrated and transferred to enterprises, will the risks disappear or stack into a large "package"? If the risk is greater, can the enterprise bear it?

Kunming: the coffee capital of Asia?

Yunnan authorities have long hoped to set up a coffee futures exchange in Kunming, which is expected to take shape around 2015. If it comes true, Kunming will become the third largest coffee futures trading center in the world besides New York in the United States and Hamburg in Germany.

In fact, the well-funded coffee companies have transferred the price risk of ordinary growers, but this risk itself will remain within the industry, which is absolutely unbearable for any coffee company. This is an important motivation for the Yunka industry to set up a coffee futures exchange. In the words of Xiong Xiangjin, president of Yunnan Coffee Industry Association and chairman of Hougu Coffee, it is "ultimately through financial means to resist all kinds of risks."

Futures, in popular terms, are goods delivered on a specified future date. This is a financial instrument that is thought to separate risks and transfer them to opportunists. According to Wang Yunfei, an expert in futures practice, if there is a futures market, "enterprises can put the contracts signed with cooperatives in the futures market for hedging, and this process is actually transferring the price risk to the futures market."

It is understood that the relevant departments of Yunnan Province have earlier hoped to set up a coffee futures exchange in Kunming, which is expected to take shape around 2015. If it comes true, Kunming will become the third largest coffee futures trading center in the world besides New York in the United States and Hamburg in Germany.

The Yunka industry has a big abacus for this. Li Gongqin, secretary-general of the Yunnan Coffee Industry Association, previously pointed out that after the establishment of the futures exchange, Kunming "can concentrate coffee from all Southeast Asian countries, and then the total amount of coffee will reach 2 million tons, accounting for about 25% of the world's total." At present, the China-ASEAN Coffee Industry Cooperation Committee has conducted exchanges with ASEAN countries, and ASEAN countries have also agreed to join. After the establishment of futures electronic trading platform, there will be futures and spot trading platform, which will reduce procurement costs and warehousing costs for foreign procurement. At that time, the price of coffee beans in Yunnan can be self-controlled, so it is no longer subject to the US futures market.

Yunnan has moved on to the work of this futures exchange, but by setting up a spot trading center first. It is understood that if all goes well, the spot trading center will be completed in June this year, with auctions, warehousing (supervised by third parties and banks), storage centers and sub-centers in a number of major coffee producing areas. At that time, it will be an important trading place for various coffee organizations, enterprises and factories. "this spot platform will accumulate a lot of experience for future futures trading." Xiong Xiangjin said.

However, some analysts are skeptical about the efficiency of the futures market, as the central government is still cleaning up various trading venues, and a staff member of the Yunnan Securities Regulatory Bureau, who spoke on condition of anonymity, also confirmed that the work is still under way. On the other hand, the enthusiasts believe that at present, Yunnan can make full use of the policy of building a pilot area for comprehensive financial reform along the border that was launched in November last year.

Hu Lu thinks so, although he also admits that the road is by no means plain sailing. The former media man, who resigned from the Writers' Association six years ago and devoted himself enthusiastically to Yunnan Coffee, firmly believes that the spring of Yunka is about to begin, and he even puts forward the concept of turning Kunming into the "coffee capital of Asia".

In Hu Lu's view, Yunnan coffee, which accounts for 99% of the country's output, can itself represent China, and because of its geographical and economic advantages, it can become the center of the coffee industry in South and Southeast Asia. China itself is a trillion-yuan coffee consumption market. According to an industry analysis report, China's coffee consumption market is growing at an annual rate of about 15%, while the international market is growing at only 2% a year. In Hulu's office on Huancheng West Road, he specially hung a not-so-pocket map of China.

Any change in the exchange rate, Fed policy, and so on, will quickly affect the farmers in shanzhai in Yunnan and how much they get in return for working in the mountains.

In some coffee-growing areas where mobile phone signals have just been covered, learning to watch the changes in Arabic numerals on the New York Stock Exchange and figuring out the conversion from US dollar pounds to RMB kilograms is an important skill that farmers need to master after buying a mobile phone.