Quality coffee will be much more expensive in the future, partly due to climate change, according to International Coffee Traders’ Raihaan Esat. Show host Gene Tunny and co-host Tim Hughes are joined by Raihaan in this episode. They delve into the global coffee market, discussing how Raihaan sources coffee beans from various countries and the factors that affect coffee prices. They also explore the impact of climate change on the coffee market. Take advantage of this deep dive into the fascinating world of coffee.
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What’s covered in EP217
- [00:01:51] The impacts of climate change on the coffee market.
- [00:06:52] Sourcing coffee from farms.
- [00:07:31] Commercialized coffee farming.
- [00:12:51] Farming practices and coffee flavor.
- [00:18:34] Cafe Feminino and empowerment.
- [00:19:23] Coffee cooperative communities.
- [00:26:05] Quality differences in coffee sourcing.
- [00:27:58] Specialty coffee.
- [00:31:28] Antioxidants and coffee benefits.
- [00:35:15] Coffee and sustainability.
- [00:42:03] Coffee production and pricing.
- [00:42:23] Coffee supply chain logistics and financing.
- [00:45:21] Shelf life of green coffee.
- [00:47:13] Coffee demand and market trends worldwide.
- [00:49:45] Emerging coffee markets.
- [00:51:33] Climate change and coffee production.
- [00:56:03] The future of coffee.
- [01:00:07] Exploring coffee variations.
Takeaways
- The biggest problem for coffee roasters is controlling costs and accessing good quality green coffee: the right coffee at the right price. [00:05:57]
- Supply and demand determine the price of coffee at the end of the day. [00:36:42]
- High-quality coffee is going to get more expensive as supply is affected by climate change [00:53:26]
- You should spend some time learning how to craft a nice cup of coffee just like you would learn how to make great pasta or a steak or a dessert. [00:58:59]
Links relevant to the conversation
Coffee Commune and International Coffee Traders:
https://www.coffeecommune.com.au/
https://www.coffeecommune.com.au/international-coffee-traders/
Tim’s new coffee brand Lumo Coffee, “Seriously Healthy Organic Coffee”:
Cafe Feminino:
Aquiares estate in Costa Rica:
https://www.instagram.com/aquiarescoffee/?hl=en
Arturo’s Adept Economics website article on coffee:
https://adepteconomics.com.au/coffees-economic-contribution-in-australia/
Transcript: The Future of Coffee: Climate Change & Rising Prices w/ Raihaan Esat, International Coffee Traders – EP217
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a human, Tim Hughes from Adept Economics, to clear up any confusion left behind by an otter in a rush. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Raihaan Esat 0:03
We see countries that never used to produce coffee starting to produce coffee, or traditionally weren’t coffee growing countries, because the climate now is starting to move in a range that is suitable for coffee production. So maybe they were too cold or too high in altitude to be sustainable for coffee production. But as the climate is generally warming up suddenly that, that geography of that area now is suitable for coffee production.
Gene Tunny 0:36
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show.
Hello, and welcome to the show. This episode is all about the coffee market. My occasional co host Tim Hughes and I are joined by coffee guru, Raihaan Esat, from International Coffee Traders which is based at Phillip Di Bella’s Coffee Commune here in Brisbane. Over the last 15 years, Rai has gone from starting as a part-time Barista to winning Australia’s most prestigious coffee industry award. The Hall of Fame Award at this year’s Golden Bean Australasia competition. Stay tuned for a deep dive into the coffee market thanks to Rai. We explore how Rai sources coffee beans from farms in Brazil, Peru, Ethiopia and other countries. And we talk about demand and supply factors that affect coffee prices. Rai gives us some deep insights into the impacts of climate change on the coffee market. He explains why he thinks high quality coffee is going to become much more expensive in the future. Let me know if you have any feedback on this episode. Are there any aspects of the global coffee market you’d like us to explore more deeply in a future episode? Please let me know. My contact details are in the show notes. Righto, I hope you enjoy our conversation with Rai from International Coffee Traders.
Raihaan Esat from International Coffee Traders, welcome to the programme.
Raihaan Esat 2:25
It’s fantastic to be here. I’m really excited.
Gene Tunny 2:28
Excellent Rai, we’ve got Tim as well. Tim, good to be with you again on another Economics Explored podcast episode.
Tim Hughes 2:36
Yeah, always a pleasure, Gene. Good to be here.
Gene Tunny 2:38
Yes. So we’re at the Coffee Commune which is this amazing venue in Brisbane. It’s on Abbotsford Road at Bowen Hills. And actually Rai, would you be able to explain what is the Coffee Commune and you know, what’s your role here, please?
Raihaan Esat 2:54
Sure thing, from a high standpoint, I guess the Coffee Commune is like a village. It’s a village of many businesses all working together collaboratively, to help advance each other to accelerate each other’s potential. The Coffee Commune provides a lot of services around that. But it basically provides just the resources and access that, and educational opportunities that allows these businesses to really thrive. So it’s all based around coffee, coffee production, hospitality, and education.
Gene Tunny 3:26
Gotcha. So when I come in here, I mean, our first introduction to Coffee Commune, well, I was, I gave a talk here last year I think, I was on a panel. And that was in the area, there’s a cafe restaurant or you know, an area where you have functions. And but you’ve also got, you actually do roasting here, don’t you? There’s a roasting part of the operation. You’ve got these big German, are they German machines?
Raihaan Esat 3:47
They’re Italian.
Gene Tunny 3:51
They’re Italian okay. Yeah, for some reason I thought they were German.
Raihaan Esat 3:57
There’s a lot of German bits and pieces in them, but they’re mostly Italian.
Gene Tunny 4:04
Gotcha. And you’ve also got these silos full of raw coffee beans, green coffee beans.
Raihaan Esat 4:09
Yeah, see, it would take me two hours to tell you everything that the Coffee Commune does. But in a nutshell, it’s solving the three biggest problems that are facing people in the coffee industry at the moment. And that’s access to resources, knowledge and education, and standing out from a crowd. So you know, within the scope of that, the Coffee Commune provides services and support to help people accelerate their business. If I can give you a very quick example, if you want to start a coffee brand, you generally need education, support and resources. Instead of buying your own and setting up your own facility to do that. You can come in and use the resources here. It’s like We Work for coffee.
Gene Tunny 4:50
Yeah, and this is what Tim’s done. I mean, Tim, we can chat about your brand later, but you’ve set up Lumo Coffee using the resources here at the Coffee Commune which is pretty amazing. So we can talk about that.
Tim Hughes 5:00
Uh, yeah, that’s right. I mean without these guys, Lumo Coffee wouldn’t be a thing. So, yeah, I’m uh I guess one of the graduates of this village.
Raihaan Esat 5:12
Tim is one of the startups. Yeah, we have 75 Coffee Roasters all producing coffee here at the Commune. About 20 of them are startups, including Tim as one of them. And within that scope, I have two functions. Mine, first of all, is to import green coffee from farms directly and bring it into Australia and sell to coffee roasters. The second part is to introduce people to the commune, and grow the family.
Gene Tunny 5:38
Gotcha. So is that what you’re the business you’re part of? International Coffee Traders, can you tell us a bit about that please Rai?
Raihaan Esat 5:45
Yeah, so if I go deeper into International Coffee Traders, it’s, it’s a resource and for the for the coffee industry, for the coffee roasters in particular. The biggest problem for coffee roasters is controlling costs, accessing good quality green coffee, the right coffee at the right price. You have to start with a raw product, then roast it and then turn it into coffee drinks. That’s what coffee roasters do. So the raw product is what I specialise in. Sourcing that from farms, overseas countries like Brazil, Colombia, Costa Rica, Ethiopia, all the classic coffee growing regions. I source coffee from there, depending on what my clients want.
Gene Tunny 6:28
Okay, so what does this sourcing look like? Are you hopping on a plane? Or have you got agents over there who help you out? How do you? How do you identify the right farms? Or how does it all work? That’s what’s that’s what’s fascinating me, are there, are the wholesalers? I mean I imagine there are wholesalers like how do you how does it all work? How does it get from the farm to Abbotsford Road in Brisbane, Australia? And, you know, farms in Peru or Brazil or wherever?
Raihaan Esat 6:55
Yeah the coffee world is huge. And it’s so diverse. Country to country is very different. Each country has their own models of how you can buy from them. For example, in Ethiopia, up until very recently, you had to buy from something called the ECX, the Ethiopian Commodities Exchange, you couldn’t actually go to a coffee farmer directly and say, I want to buy your coffee. The coffee farmer had to sell their coffee to the ECX and the ECX then on sells to people like me. That’s Ethiopia is an example. Compare that with Brazil, which is highly commercialised, very, very well established and has huge, huge farms that are the size of small countries sometimes. You, there’s there’s one farm that Phil visited a few years ago, they have an airport landing strip on their farm. They have a dairy on their farm, you know, they’re massive. And you can go directly to the farm and say, Mr. Coffee farmer, I want to buy your coffee, and they will sell it to you directly. And then there’s infinite shades of grey in between. So in terms of contacting traditionally, yes, you had to go over there and visit the farms to make contact. But this is now 2023 borderline 2024. Everyone is on WhatsApp. Everyone’s on email. Everyone’s on Instagram. So it’s easy to connect with a coffee farmer literally on Facebook now and say, Hey, looks like you’re doing interesting stuff, can we, can we connect? Send me some samples? Let’s talk give me a guided tour of your farm on online basically.
Gene Tunny 8:32
Yep and what criteria do you use to choose the suppliers? The farmers?
Raihaan Esat 8:38
Yeah, so I’m really led by my clients. So for example, if a client of mine comes to me and says, I want a coffee with an organic certification, or Rainforest Alliance certification, which protects native rainforest as well, and it must taste sweet, fruity and vibrant. Those are my criteria to then go hunting. Traditionally, the client may have been using Colombian coffee. And roasters tend to play it safe, they tend to like, I was buying Colombian coffee so I was, I want to stick with Colombian coffee. But my job is to kind of challenge that a little bit and go, Hey, there’s also great options in Ecuador, or in Peru or in Guatemala, which may taste very similar for better value or better, better on the seasonal scale of freshness. They might be in season compared to the coffee that you’re using is out of season. So there’s a lot of, it’s a global perspective we have to take to try to find the right coffee at the right price.
Tim Hughes 9:43
Yeah, it’s interesting because with so I remember seeing somewhere that coffee was the second most traded commodity in the world. Is that right?
Raihaan Esat 9:51
Yeah, that gets floated around quite a lot. A lot of people sort of throw that stat out and say I’d say it’s the second most traded commodity in the world after oil. So coffee is traded on an exchange on a commodities exchange. And you can literally buy and sell futures on coffee, if you wanted to, you could jump on one of these trading platforms and buy and sell coffee. The difference between say coffee and foreign currency or any of the other others is that someone actually has to take delivery of coffee. It’s a physical product, it’s an agricultural product. So while it’s traded, there’s a lot of paper being pushed around. And then eventually, that coffee has to land up in someone’s warehouse. But it is very, very, very heavily traded. Especially because it seems sometimes as a bit of a safe haven when currencies are moving around a bit or interest rates are moving around a little bit. You know, how speculators work? Sometimes they’ll move investments from gold to foreign currency, depending on what seems to be the safer option at the time. Coffee is one of them.
Gene Tunny 10:56
Yeah, so you’ll have speculators who they won’t ever actually want to take delivery of the coffee. Right. But they’re jumping into the market to try and pick up some plays.
Raihaan Esat 11:05
Some plays on the movements.
Gene Tunny 11:09
Yeah, yeah, gotcha. And what’s happening? I’m interested in the different countries, are there different flavour profiles for different countries? Or does it depend on the farm I mean I imagine it depends on climatic conditions on the soils, etc.
Raihaan Esat 11:24
So I’m gonna make the wine analogy here, coffee is a bit like wine, where you have these broad characterizations based on country, you know, roughly New Zealand wine tastes a certain way, and French wine tastes a certain way. Similarly, with coffee, there are broad categorizations. But then within each category, within each country, there’s infinite amount of variables and agricultural practices that can then modify the flavour. So a practical example of Brazilian coffee generally, at a commodity level, tastes quite nutty. It’s, it’s mild, it’s mellow. It’s quite nutty. It’s coffee that tastes like coffee. And then you go to Ethiopia and the standard coffee that comes out of Ethiopia generally is quite vibrant, and lively, and sometimes has some fruit notes to it. So those are the broad categorizations. And every country has its own rough, sort of flavour profile. And that is somewhat dependent on the terrain, the variety, the commercial varieties that are grown there, and then the general farming practices. So I think the geography and the farming practices and the genetics are fairly self explanatory. But the farming practices can have such a huge impact on the flavour of the coffee as well. For example, in countries like Rwanda and Burundi, these sort of central African countries, up until very late recently, it was completely illegal to process your coffee using the what’s called a dry process. All the coffee had to be washed. And there’s a lot of stuff online, you can look up if you want to go deeper into that, what washed coffee is and what dry coffee is, but it was mandated by the government, that your coffee if you produced it had to be washed. Whereas you go to a country like Yemen, which is in the middle of the desert, but produces coffee, they have no water, so they cannot do washed coffee, they have to do all of their coffee as dry coffee. And that’s that’s a post harvest practice that has a massive influence on the flavour of the coffee. That’s that comes out at the end.
Gene Tunny 13:44
Gotcha, but one other thing. What’s the difference? There are Arabica beans, and there are Robusta beans. Is that right? There’s a difference?
Raihaan Esat 13:54
Yeah, I guess. They they both taste like coffee to some degree. But they’re like two different species. It’s like comparing an apple and a pear. They are slightly different species. And there’s a number of these sort of genetic families or species that exist within coffee. Arabica is very well known because of the marketing machine always says, drink Arabica. 100% Arabica, it is better than Robusta. Robusta generally is a little bit harsher, a little bit more bitter, has a lot more caffeine in it, and grows at a different altitude. But having said that, I’ve tasted some Arabicas that are so poorly processed, or so poorly created at the farm, I guess, that they taste worse than Robustas so quality of post production at the farm level does have a massive impact on the quality of flavour as well.
Tim Hughes 14:50
Actually on that note, because I know there are three processes in having a great cup of coffee so the farming and the sourcing is one like how that part of the the process is done, and then the roasting is obviously really significant as to how it’s roasted and the temperatures and the time, and then how it’s made at the final stage. So if only one of those three stages isn’t done well, then the whole thing can be, well sort of fall apart a little bit.
Raihaan Esat 15:20
Yeah, it’s like, the best analogy I can make is like, like a professional chef. Sourcing Green Coffee is like sourcing a great steak, or a great piece of ingredients that you’re gonna then transform into a delicious dish. That’s the roasting component of coffee. That’s where the chef takes a really amazing ingredient, turns it into something delicious. And then service at the end in the cafe is like the plating the final touch. They all matter, you can have the best chef make the best dish. If they don’t present it well. It just lacks something. So at any step in the process, whether it’s farming, whether it’s roasting, or whether it’s production in the cafe, it can all fall over and be butchered. So each each step in the chain is equally important. And each one is a craft. It’s a skill. It’s something that adds value to the coffee as it progresses along the chain.
Gene Tunny 16:16
Yeah. You mentioned was it Rainforest Alliance Certification?
Raihaan Esat 16:22
Yeah, so there’s a few different certifications that exist in the coffee industry for different reasons. Some are on sustainability, some are on farming practices, some are ethical standards. Rainforest Alliance, for example, mandates that a coffee farm should allocate a certain proportion of their farm to regenerating rainforest. For example, in Costa Rica, some of the coffee farms, the coffee farm that we deal with is a amazing coffee farm and community called Aquiares Estate. They are a community, people live on the farm, and they dedicate a lot of time to, to looking after the native rainforest. That is part of the ecosystem of their farm. It’s really, really an amazing community and encourage everyone to go and look up Aquiares Estate. They’re on Instagram there, they put up a lot of pictures of what they do. Their coffee is stunning.
Gene Tunny 17:19
I’ll put a link in the show notes here for sure. Yeah, that sounds sounds sounds great. And I know that Tim your coffee is coming from, is your coffee coming from a community of women in Peru somewhere.
Tim Hughes 17:31
The decaf is. So we’ve got the three coffees. Two of them are actually the same bean but a different roast. So that’s, and they all happen to be from Peru so that the caffeinated bean Luma Sol, as we’ve called it, we have a dark roast and a lighter roast. And so that is from a different place to the decaf. So the decaf, the one you’re mentioning, is the Cafe Femenino Decaf. And so I mean, Rai you’ve got more information on that, I know. But basically, it’s a co op of female farmers who, a lot of the profits go back into the community and libraries and schools. And it’s a fascinating, it’s a really, yeah, same Cafe Femenino. If we put it in the show notes, and if people could check it out, because it’s just one of those things, there seems to be in coffee, a lot of intent and purpose to do the right thing. And and Cafe Femenino was a really good example of that. Have you got anything to add to that, Rai?
Raihaan Esat 18:34
Yeah. So this is an example of how some countries have structures in coffee that are not as simple as you might think. It’s not as easy as just going to a farmer and saying, I want to buy your coffee, for example, some of these farms at Cafe Femenino in Peru, they’re very small. They don’t actually have the resources to process their own coffee. So they grow coffee on the land that they have in their backyard, for example, or they may have a couple of acres of land and they’re producing coffee. But what they do is all the women producers in that area, then collect their coffee together and take it to a central processing plant where the fruit is removed from the seed, the coffee gets dried out and it all gets graded, the defects are removed. So they’re working together as a community. And they’re sharing a resource. It’s kind of a bit like the Coffee Commune here in Brisbane, where we have one resource and it’s being shared in the community. That’s how Cafe Femenino are working. And there’s a number of other countries that have similar styles of cooperative coffee production, so to speak, and they put so much back into their own communities from what they make.
Gene Tunny 19:49
Yeah, with the grading. Is there an international standard for grading and who does the grading are there professional graders?
Raihaan Esat 19:57
Yeah, that’s a great question. There, there is an in International Standard, it’s run by an organisation called the Specialty Coffee Association. They used to be an American Association, they’re European they have since merged. And they’ve basically set the global standard that is accepted everywhere. We have a lab here at the Coffee Commune in Brisbane, that is the only lab of its kind in Queensland, there’s a few around the country. But basically, we can look at a sample of green coffee, grade it, and then compare our results with labs all around the world. So hypothetically, if a coffee roaster looks at their green coffee and goes, I’m worried about this, I think it’s got a few defects in it, which you know, I wasn’t expecting, can you grade it for me, they don’t have to send the coffee back to the farm, to get checked, they can just send it to the lab here in Brisbane, we will check it and produce a report, which is, anyone around the world can read it as long as they are running the same the same systems as us which they are generally.
Gene Tunny 21:03
And what’s being graded. Is it being graded for bitterness or I mean what’s…?
Raihaan Esat 21:09
Yeah, there are two parts. There’s green grading, and then what we call cupping. So green grading is where you look at the green product that’s arrived. And if you think about it, green coffee is the seed of the coffee fruit. So it’s an it’s not a uniform thing. Every single seed is an individual. And there are many things that can go wrong in the process of producing that coffee. So if you imagine 1000 coffee plants all producing seeds that get harvested, some of those are going to be picked when they’re underripe. Some are going to be overripe. Some are gonna have insect damage on them. When they, after they get hulled and pulped. Some of them will get chipped or broken. Sometimes there’ll be mould that grows on the coffee. Sometimes they will be what we call sours or, and floaters, those are just immature coffees. So the the best quality coffee is what you imagine is the perfect coffee bean. It’s round, it’s shiny, it’s green, it’s got no additional defects to it. It’s got no mould growing on it. It’s not blackened or overripe. It was the fruit picked at its optimum ripeness, and then processed correctly and all the defects removed. Having said that defect-free coffee generally doesn’t exist. Right? There will always be to some degree some defects. So we categorise primary defects and secondary defects. So we couldn’t ask, for example, part of my job, a lot of my clients will say, I want this coffee and I want no primary defects in it. Primary defects are serious defects in the coffee. So for example, in the sample, if you take a sample of the green coffee, which is 350 grammes, and you look through it and you sort through it, you might find one which is completely encased in fungus.
Gene Tunny 23:10
Haha, right? Yeah,
Raihaan Esat 23:12
That would be a primary defect that that now eliminates that coffee as an option for that client. If we find no primary defects, there’s a whole guide book on this that explains every defect in coffee. There’s a number of them. We then look into secondary defects. Yeah, they might be like a little insect that has bored a hole into the coffee. One little hole on that seed might be a partial defect, but it’s not that serious compared to a full mouldy bean.
Tim Hughes 23:45
And what’s the sample size of that Rai?
Raihaan Esat 23:47
350 grammes
Tim Hughes 23:49
350 grams sorry Yeah. Yeah, cool.
Raihaan Esat 23:52
The next step is to do what we call cupping, which is to roast the sample of that coffee and then taste it. So there’s a sensory evaluation that has to happen. And the sensory evaluation is then scored out of 10. Well, sorry, it’s it’s out of 100. The, to qualify as specialty coffee, it has to score 80 or above. So for example, on the score sheet, we’re looking for things like flavour, acidity, balance, aftertaste, body, we’re looking for consistency across multiple cups. The score sheet is quite intimidating when you first look at it. But once you use it a few times, it’s actually quite straightforward.
Gene Tunny 24:36
Yeah. So you’re looking at specialty coffees and you’re often going to what small or medium sized coffee farms is that right? Are there, I’m just wondering like, how is the market segmented because like, what about one of these, you know, what about Nestle? Or, or what’s the big, is it Dutch or the company that owns Moccona? I can never remember, I don’t know how to pronounce their name.
Raihaan Esat 25:03
Douwe Egberts, JDE
Gene Tunny 25:07
JDE, Gotcha. And like they must buy huge quantities of coffee. So they’re massive, do they just have massive coffee farms that are contracted to them to supply, are you dealing with the same ones?
Raihaan Esat 25:18
Pretty much, pretty much so you can buy coffee on forward contracts. For example, JDE might say say, we project that we’re going to need 500 tonnes, 500 containers of coffee, each container being 20 tonnes next year. They can approach their producers and contract that coffee ahead of time and say this is the quality spec we expect. And we’re going to buy 500 containers from you over the next year. Now not every farm can fulfil that. So they may go alright, that farm can fulfill 20 containers, we have to now find other suppliers for the remaining balance of our requirements. So they do what I do, but on a much larger scale.
Gene Tunny 26:03
Gotcha. But with what you do, does that mean you can get, like that they’ll have to go for something more, like are they basically going for something that is more mass market? And maybe they accept more defects than then you would? I mean, are there differences in in the quality of the coffee sourced? The the flavours, that sort of thing? I mean, you’re you’re producing specialty coffees, aren’t you? So you can go really niche? Is that right?
Raihaan Esat 26:30
Well, I’ll, I’ll use Starbucks as a bit of an example for this because this is probably a better a better case study for your question. Starbucks buys very good quality coffee, what tends to happen is sometimes it goes wrong in the roasting or in the extraction phase, where if people tend to go “ah Starbucks is crap”, or they don’t like, they don’t like what they get from there. Starbucks has never promoted that they sell the best coffee in the world, but they’re very good at what they do. And they do buy very good coffee. And it’s all about setting up the requirements for quality before they go to market, just like you would in any procurement business. You set up what you need, what your requirements and projections are, and then you go to market and you try and find it or as close to it as possible.
Gene Tunny 27:19
Gotcha. Would you be buying from similar farms to what Starbucks or JDE would be buying from?
Raihaan Esat 27:28
Yeah. To some degree. So every every farm produces all levels of quality. A farm can produce absolute garbage, middle of the range coffee and super high quality coffee, because it’s an agricultural product, it then gets sorted, right? And so you get these different quality grades coming out of every farm on the planet. So it’s just about setting up the parameters of what you want. So we would buy, we buy everything from commercial grades of coffee, what we call commodity coffee, to specialty coffee, to super fancy boutique coffees, like experimental things, which haven’t hit the market yet. You know, we’re we’re funding where we’ve partnered with a producer in Colombia. And he wants to do some experiments. And we’re helping him set up the lab and the resources that he needs to do interesting fermentations using yeasts and bacterias to produce interesting and crazy flavours in coffee.
Tim Hughes 28:31
That does sound interesting.
Gene Tunny 28:33
And what’s Tim, is Tim, are you a specialty coffee Tim?
Raihaan Esat 28:37
Tim’s a specialty coffee yes.
Gene Tunny 28:39
Right? Tim, you set some parameters for Rai didn’t you, how did that interaction work?
Tim Hughes 28:43
Yeah, that was it was funny, actually, because it started when we came over last year when you were on that panel and got introduced to the Coffee Commune and seeing what you guys did here Rai was really interesting. And it was the right time with a lot of the work that I was doing, you know, my background in the health industry and listening to all the research on the health properties of coffee. Because it’s had a chequered past people, you know, that caffeine obviously sometimes isn’t great for everybody and overconsumption, you know, can be a problem. But the health benefits, the antioxidants, the polyphenols, chlorogenic acids, these properties are where the health aspects of coffee often comes in. So it was really interesting, and I had a chat with Rai about it. And I think at that time, no one had actually mentioned..
Raihaan Esat 29:31
Tim’s request was one of the more unusual requests that I’ve ever seen in my life, but er…
Tim Hughes 29:36
Thank you very much.
Raihaan Esat 29:38
Normally people come to me and they go, Oh, look, I want coffee that tastes like this, or I want coffee that tastes like that, or it’s got to be at this price point. Those are 99.9% of the parameters that we work in. And then Tim comes along and he goes I want coffee that’s healthy for you. I went okay, we don’t have a measurement system for that. How do we measure that? He said I have, I’ve got a solution for that, we can do lab testing and figure out what the antioxidant levels are in coffee. And we want to do some testing and find out which one is the healthiest coffee that we can get. So, you know, that started the journey with, with Tim.
Gene Tunny 30:19
Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 30:24
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Gene Tunny 30:53
Now back to the show.
Tim just a question for you. Why do we care about antioxidants?
Tim Hughes 31:03
Good question. I mean, basically, from health terms, antioxidants are what would be the chemicals or properties that combat free radicals in our body. So the oxygenation process in our body where cancers can thrive and the ageing process and all of these things they are basically free radicals running around our our system, antioxidants are known to combat those. So antioxidants in our systems generally work well for us, they slow down the anti ageing process. They’ve been shown, this is where new studies are coming through all the time, they’ve been shown that they can help prevent heart disease. They’ve got, you know, improved cognitive function. There’s so many different areas where they’ve been shown to be beneficial for us. And coffee is a good way of getting those antioxidants into your system. They’re also a good source of fibre, which was a new thing to me, that was a fairly recent thing I heard from, Dr. Tim Spector is somebody who does a lot of work with the microbiome. And he was he was stating that coffee is definitely a health food because he’d had different, a lot of people have changed their minds on coffee. And he’s one person who had changed his mind on coffee. He said, Yeah, it’s definitely a health food. It’s good for the microbiome, you get about three grammes of fibre from a cup. You know, if you have three cups of coffee a day that can supply 25% of your regular daily allowance of fibre, which, you know, for a lot of people, there’s not enough fibre in their diet. So it’s not just the antioxidants, it’s all these other areas.
Raihaan Esat 32:40
Yeah what really stood out to me when we did the testing was what the variability was from one coffee to another. So you know, there’s a lot of good research out there that says coffee has antioxidants, that it has these health benefits for you. But choosing the right coffee can really accelerate that. And you can get very different results, depending on what coffee you choose. And it seemed like just, you know, just off the small sample set of data that we had, that the high grown organic coffees tended to perform better than the lower grown coffees that were not organic. So that was really, really revealing to me, and I found that super interesting.
Tim Hughes 33:22
And it’s that thing of like, you know, you could you could get a coffee with even higher antioxidant levels than than the ones we have, but it has to taste great as well, you know, so these compromises that you do, you can’t do everything, purely for the antioxidants. It’s, it’s a bit of a balance. And I’m really happy with where we got ours to but we’re constantly on the search like we’ve got other beans that we’re checking out from different regions at the moment. So it’ll be an ongoing thing we’ll add either add or or move out coffees as we go along. Because that actually, that leads into something I was, we were going to talk about anyway. So that maybe this is a good time, Rai to talk about the supply and demand for coffee. Because it’s a living growing thing. It must be hard to secure coffee sufficient to demand all the time. So there’s a few prongs to this question. One is, is the overall supply or sorry, the overall demand of coffee, is that growing or is it plateaued? And the supply of coffee, is that because it appears from different, different people that I hear from that it’s getting more challenging to grow the coffee because it’s quite a sensitive plant with the altitude and the conditions and with the changing climate that that can be affecting the future of coffee growth. So with that, have we plateaued with the supply? Are we good with the with the demand, etc?
Raihaan Esat 34:47
Okay, so, short answer good news. We’re not going to run out of coffee.
Tim Hughes 34:51
That’s good news.
Raihaan Esat 34:53
But there’s a couple of key factors and it’s a very big full bodied “but” that I have to put in here. There’s agricultural factors. There’s economic factors. And then there’s demographic factors that are really interplaying in interesting ways right now within the coffee industry globally. So we read, read the global food and beverage report for 2023. And that showed demographics wise, who’s drinking coffee? And where are they drinking coffee? So generally speaking, you’ve got sort of your professionals, slightly older generation tend to be drinking more coffee than the younger generation right now. So across the demographics, you’ve got one population drinking the same or more coffee daily, but you’ve got one generation that’s slightly in decline. So that will transfer later to probably a slightly declining requirement for coffee. But it’s not declining at the same rate as production is at the moment, there is a problem with agriculture. Coffee is not sustainable generally speaking, for a lot of producers, the variability in the markets, the climate change, the difficulties of producing coffee consistently, because it’s an agricultural and seasonal product. The demands of producing coffee to the level that we are demanding it as consumers is so difficult, and it’s actually forcing a lot of producers off their farms, or forcing producers to change to other crops, like avocados, which are more profitable for them. So it’s supply and demand at the end of the day, and we’ve actually seen coffee prices jump very, very drastically in the last 12 to 18 months, coffee prices on green coffee have gone up probably close to double what they were. And you know, how much does it how much have you seen that flow through into the cafes? It has started to happen, you’re starting to see cafes charging a bit more and more for their coffee, because everything has to flow through. So you’ve got economic effects, you’ve got the supply and demand, everything comes down to supply and demand, you have a shortage on supply, demand goes up comparatively to that. And then you’ve got all the demographic interplays that go on with it, we have further problems that are driving the price of coffee up at the moment, things like interest rates, every time our interest rates goes goes up, we have to finance coffee, to get it into the coffee, into the country, right? When you buy huge amounts of coffee it’s all under finance. Interest rates play a big part in what we have to factor into the price then, and you know, a half a percent or a quarter percent interest rate rise is quite significant across 20 tonnes of coffee. So generally, the price of green coffee at the farm level is going up, supply is slightly restricted and so that’s further pushing the price up. And then you have, let me call it political issues, as well that sort of come into play. For example, in Ethiopia, there was a like a civil war last year, what didn’t get a lot of news coverage, but basically, there was a civil war that was affecting transport networks and that made it difficult to get coffee out of Ethiopia. Now Ethiopia is one of the largest producers of coffee in the world. As soon as that becomes difficult to get coffee from one of your biggest producers. It puts a lot of strain on the other producers so anyone with a even a basic economics background can kind of see what’s happening here it’s it’s a difficult place, marketplace to do business that’s constantly evolving.
Gene Tunny 38:54
Yeah I’ve got a couple of follows on from that. Broadly, what is the what range is the coffee price in and so is it is it in tonnes? Is it US dollars per tonne what is it?
Raihaan Esat 39:05
USD per pound. Generally gets quoted in US dollars per pound on the market on the coffee market. It’s called the C market. And right now the level is sitting at if I’m not mistaken at about one $1. $1.70 USD per pound.
Gene Tunny 39:24
Okay and so that obviously means like just thinking about what it costs to buy coffee in the shops after it’s been roasted and, or ground or whatever. There’s obviously a lot of value add from in the roasting and then the distribution and…
Raihaan Esat 39:42
Yeah, so, 1.70 USD per pound is your baseline benchmark for just bog standard commodity grade coffee. Okay, as soon as you go up in quality into specialty, for example, Tim’s coffee wasn’t $1.70 US per pound. It was much more than that. because we added the organic certification, we added the quality of it, it’s at least an 83 point coffee, if I’m not mistaken. So we’ve now got a quality level that we have to compensate for, then when you get to roasting, so that coffee would have cost us quite a bit more, factor in the exchange rate, Australian dollar’s not performing that well against the US dollar at the moment. So as soon as we have to pay in US dollars, the underperformance of our currency means that we have to factor that and our coffee costs a little bit more. Come to roasting, here’s the bit that is quite a tragedy. If I put one kilo of coffee into the roaster, I don’t get one kilo out, you have about 10 to 12% moisture in the green coffee that just evaporates, basically, plus you have a little bit of carbonization, basically, you lose close to 20% of the weight of the coffee, just through the chimney of the coffee roaster. So you’re adding 20% on top of the cost of the coffee just at the roasting stage. Then there’s all the labour, operational costs that go into packing coffee, transporting coffee around the world, out to cafes, and then it has to be made into a drink, and coffee these days, I mean, if you go and just just stand in line at a coffee shop and listen to everyone’s orders, not everyone orders the same thing. I guarantee you seven out of 10 people will have a very different order from each other, one will be on an almond alternative dairy, one will have a syrup in it, one will be double strength, one will have chocolate powder on top. A cup of coffee is now a cocktail made by a bartender effectively. It’s, it’s not a simple product to produce at any stage. It’s crafted by hand and by skilled people all the way through the chain. And so if I can be honest, 5 or $6 for a cup of coffee? It’s too cheap.
Gene Tunny 42:10
Hmm, interesting. I mean, Australian households struggling with interest rates may not agree, but I know, I know where you’re coming from. I’m just, I’m just joking. Yeah, that’s some really good points there Rai, and can you tell us about the the finance, you mentioned you had to borrow money, so you have to settle the contracts in US dollars is that right? Like what’s going on there?
Raihaan Esat 42:35
Usually yes. So practical example, we are now buying coffee for next season, we’re in contact with our producers in Brazil. And we’re going right, we need to, we need probably six to 10 containers next year of coffee. They’ll say right, we can, we can settle six containers at, I’ll put a hypothetical number on it, five US dollars per kilo. Contract gets written as soon as the coffee ships from the port in Brazil, we get a bill to settle the contract. So the contract is in place. But it only gets paid when the coffee gets shipped. Now there’s lots of different Incoterms here and different contracts, setups and scenarios, you could pay at the farm directly when the coffee leaves the farm, you could pay when the coffee reaches, reaches the destination. But we generally work on as soon as the coffee ships, we pay the bill immediately. And that’s in US dollars. Most of the time.
Gene Tunny 43:41
Yeah. And so where’s the where’s that? Where’s Why do you have to borrow the money, I mean, rather than going to the, okay, I’m just trying to think how this works.
Raihaan Esat 43:54
Ok so think about it this way. It’s a cash flow problem, right? For us to produce coffee and supply to cafes. If Tim wants to supply coffee, if he were to buy coffee from the farm, he would have to pay for the coffee before he sold it.
Gene Tunny 44:13
Gotcha. Yeah, that makes sense.
Raihaan Esat 44:15
All right. So the coffee has got to come and land in the warehouse so that it can be roasted so that he can sell it. And then Tim can collect the money from the sale and and then pay back the loan that he took to buy the coffee in the first place.
Gene Tunny 44:30
Yeah, yeah so it’s for your cash flow. So yeah…
Raihaan Esat 44:35
It’s a timing thing. Sometimes we land coffee here, three months in advance of when we need to actually roast it. And that’s because of seasonal variations. If the coffee is ready to harvest now, I might not need it for six months. But I’ve got to buy it now because it’s on the trees. It’s being harvested, it’s an agricultural product. And I think people take that for granted sometimes that coffee has to be grown on a tree, harvested by people and then there’s an interim period where there’s no coffee on the trees.
Gene Tunny 45:08
Yeah. And how long would you typically have the beans, the green beans here in storage or in stock in your inventory?
Raihaan Esat 45:16
Look, green coffee has a shelf life that’s a bit better than roasted coffee, roasted coffee tends to sort of lose its vibrancy and character after about 30 days after roasting, but green coffee, we can we can store it for sort of six to, six to 12 months, as long as the storage conditions are good, not not too much light, not too much heat, not too much humidity. If the storage conditions are good, we can store the coffee up to 12 months, and then it really starts to fade, in flavour, in in character. So it won’t be terrible after 12 months, it just does fade a little bit. So there is a quality drop if we store it for too long. So that’s the balancing act that we have to, we have to navigate trying to get coffee at its optimum, balance the agricultural cycle and the demand cycle from roasters.
Gene Tunny 46:08
Gotcha.
Tim Hughes 46:10
Now, it’s fascinating, I mean, and a good reason as to why I wouldn’t be able to do this on my own. You know, that’s why it’s such a great opportunity for what you guys offer here for, you know, the three stages of the coffee from the sourcing from the farm through ICT, the coffee alliance with the roasting and and then allows someone like me to, you know, benefit from all that experience and all those connections otherwise, yeah, yeah, so it’s from, from my perspective, it’s been great, very educational and very exciting. But yeah, it’s interesting seeing the dynamics behind the bigger operation, you know, and how far ahead you have to plan to get all this in place? I know, we talked about it with, with with my, you know, my business and the considerations that had to be made a long way ahead. And so yeah you have to secure those secure those, those coffee beans. It has all those different people? Yeah.
Gene Tunny 47:13
Yeah, I found it interesting, you were saying, were you suggesting Rai that, I imagine coffee demand, it’s been growing has it, because the world economy is growing, population’s growing. But are you concerned that with these demographic shifts, I mean, I’ve found that extraordinary, but I guess that makes sense because the younger, the Gen Z’s in particular, they’re very health conscious. And maybe they, do they see coffee as not healthy, is that one of the concerns?
Raihaan Esat 47:43
I just think that there’s a lot of, a lot of variety out there now, there’s a lot of choice. Let’s think back to say, you know, late 90s, early 2000s, anyone that wanted to look cool, carried around a cup of coffee with them. But now there’s so many alternatives. There’s bubble tea’s gone crazy. Right? So there’s an alternative for you. Tea shops in general have gone crazy. There’s an alternative for you. There’s so many other options for drink, hot and cold drinks. There’s yoghurt places, there’s milk bars, there’s so much different variety out there now. So I think there’s a lot of competition for choice. And that partially hurting the demand for coffee, even though the demand is still going up. It’s not going up at the same rates that it used to be.
Gene Tunny 48:34
Yeah, I just wonder about some of the some of the bigger markets. I mean, I know in the States, they just all historically they’ve just drunk gallons of coffee and a lot of it in diners or wherever, just constantly pouring the filtered coffee.
Raihaan Esat 48:52
People have changed where they drink their coffee as well. COVID was a big driver of this. When everyone started setting up home offices to work from home. What are the, what’s the first thing that they put in their home office? A coffee machine. Right? You, you could not buy coffee machines from white goods stores for six months, the demand for coffee machines went through the roof. So because everyone changed where they were drinking their coffee. So instead of say buying two or three coffees through the day, one coffee is now at home. And then the other two are out at work or from your local cafe. So the dynamics are changing a lot.
Gene Tunny 49:28
Yeah, gotcha. But I’m just wondering, like, Are you starting, just like with the big markets, so say United States, China? Or is or is China a big market and India? I mean, maybe they’re not maybe it’s Europe, I don’t know what are the big markets for…
Raihaan Esat 49:44
Yeah, China and India, Asia in general is, is an emerging market for coffee. They’re very traditional in, in tea. They’ve had long history of being tea drinking countries, and still are huge tea drinking countries, but what’s driving the growth in Coffee in those countries is this sort of middle, middle professional class, that’s growing like India has a huge middle class growing, that are professional people earning incomes really well. And they’ve got some disposable income. And so there’s time to spend on coffee because it’s the cool thing. Funny enough, though, in India, compared to Australia, Australia, coffee is a very morning thing. After two o’clock, it’s almost impossible to to get a coffee because all the cafes are closed, because no one’s really drinking coffee after two o’clock. In India, everyone goes out for coffee after work. Because they they have their day where after work, everyone goes out. So the coffee drinking culture is more evening time over there. Very, very interesting how the population uses the drink in a different way. For them, it’s more social. Whereas we’ve got a huge takeaway culture.
Gene Tunny 50:59
Yeah, yeah, we do. I just realised that Arturo wrote a note on coffee and the market worldwide for my website for our website earlier this year. So I’ll put a link in the show notes. I think he might, we might have summarised the, where the demands coming from. But yeah, I found that fascinating that because of these demographic changes maybe here the growth will be moderated, or it won’t be as strong as it has been in the past. Or it could even mean demand could decline. Is that what you’re concerned about?
Raihaan Esat 51:33
I’m more concerned about climate change, and the effects that it has on coffee production, because the demands for high quality coffee are so high right now, everyone wants the best of the best, or the best they can get for a given price. So the demand for high quality coffee is very high. But climate change is making it very difficult to produce coffee at a high level. For example, seasons are starting to change slightly. And there’s I’ll use a case study in Colombia, the farmer that we’re dealing with, never used to have a problem with what they call Broca. It’s the, it’s a beetle that bores holes into the coffee bean and basically eats it from the inside out. They are getting worse and worse and worse every year. And those beetles are actually very temperature sensitive. So they don’t like cold climates. As the temperature generally is increasing on average, these beetles are moving higher and higher up the mountain into the coffee plantations and destroying more and more crops. So to produce high quality coffee is becoming more difficult as a result of climate change. Weather patterns are changing as well. We’ve got rains happening when they shouldn’t be happening, triggering inconsistent flowerings in the coffee plants. And generally, it’s forcing producers to move higher up the mountain so to speak, right? The higher up the mountain you go, the colder it gets, the better it is for coffee, up to a certain level. But when you go up the mountain, there’s less mountain, there’s less land to produce coffee on. So I think there are some interesting pressures, especially on the climate change and geological side that are affecting coffee quite strongly. So finding high quality coffee is going to get more expensive, basically.
Gene Tunny 53:30
Yeah I understand climate change. What do you mean by geological?
Raihaan Esat 53:33
So we see countries that never used to produce coffee starting to produce coffee, or traditionally weren’t coffee growing countries, because the climate now is starting to move in a range that is suitable for coffee production. So maybe they were too cold or too high in altitude to be sustainable for coffee production. But as the climate’s generally warming up, suddenly that that geography of that area now is suitable for coffee production.
Gene Tunny 54:01
Which countries are those?
Raihaan Esat 54:05
So you’ve got countries like Nepal starting to produce some coffee. Some areas in Argentina are producing coffee as well. Cameroon. Those are probably the best examples. Ecuador’s producing a lot of coffee now as well.
Gene Tunny 54:23
Gotcha. Right.
Tim Hughes 54:25
That’s interesting.
Gene Tunny 54:27
Yeah. real example of climate change. Yeah, yeah extraordinary.
Tim Hughes 54:31
Yeah, no, it’s that thing because I knew that those established countries were, yeah, having that problem of basically having a smaller, viable area to grow coffee, but um, yeah, it’s interesting, to, I hadn’t actually thought about it, but it’s clear that obviously those are the places that weren’t suitable and now becoming possible.
Raihaan Esat 54:50
Yeah, yeah, look, another example is leaf, leaf rust. It’s a disease that affects the coffee leaves and it turns them from green into this rusty colour. And that also is seriously moving through coffee farms at a rate of knots and just literally destroying coffee plantations. So, you know, a lot of work is going by an organisation called World Coffee Research. We’re a supporter of them. And we actually sell little coffee trees that the Coffee Commune and all the proceeds go to World Coffee Research to find genetic varieties that are resistant to coffee leaf rust, for example.
Gene Tunny 55:28
Yeah, good one. That’s great. Tim, what have we missed? Is there anything else we want to cover with Rai?
Tim Hughes 55:36
No we’ve largely covered it. I mean, it’s so interesting. And I know that we could talk for a lot longer because it is it’s fascinating. Like, I’ve been immersed in this and been lucky to share a lot of time with Rai and use his expertise and ask him 100 questions. So this is a continuation of me asking in a broader sense, I guess, and learning more about the coffee industry as a whole. No, it’s been really good. I guess, what does the future of coffee look like would be the final point, I guess,
Raihaan Esat 56:03
The future of coffee? Let me get my crystal ball. Where did I pack it, I must have left it in my other in my other bag. Hard to say at the moment, I think the coffee is at a bit of a point now where it can go one of two ways. Either, it’s going to get super expensive, because of all the pressures mounting up and and the result of that is we’re going to have to change the way that we drink coffee, which is only about probably 5, 10 years down the track from now. But if coffee gets to the point where it gets super expensive, let’s call it $10 a cup. I, we you’re going to be faced with the choice. Where are you going to drink your coffee? And what do you expect in terms of value for your cup of coffee? If you’re going to spend $10 on something, it had be, better be a damn good cup of coffee, and there needs to be a level of service that goes with it. I’ll use the burger analogy. I can go and get a $2 burger from a chain store. Or I can go to a fancy restaurant and pay $25 for a burger, right? Different level of experience that I received for my $25 compared to my $2, I think the same thing is going to happen with coffee, we’re going to see this widening spectrum of pricing, you’re going to still have the cheap coffees, and you’re going to have the more gourmet coffees, and there’s going to be a different level of experience that goes with them, the cafes, the organisations that nailed down that model correctly, will do well. And the ones that can’t keep up with it are unfortunately not going to do so well.
Tim Hughes 57:43
That that’s actually really interesting. And just going briefly back to the point that you were saying about in COVID, all those coffee machines going out of stock, you know, as so many things did, of course, but I guess that’s one of the areas with with rising coffee prices. That third part, that last part of the stage of producing a great coffee, if it’s come from a great farm and grown well, if it’s been roasted well, that last part, which ultimately if you do coffee, you know have coffee at home, you have that responsibility yourself and there’s a massive growth opportunity for education as to how people can do that. Because it’s not easy making a great cup of coffee consistently. Like I’ve had some training. And it’s still hard, you know, to do something absolutely bang on each time as you do when you make a coffee. And I’m so impressed with the little designs you put in there as well, you know, just to top it off with but it really is an art form. But that’s I guess when it can become more affordable for a lot of people is if they have the capability to make good coffee at home. And it can be done reasonably inexpensively. But then it allows people yeah to, to save some money.
Raihaan Esat 58:56
Everyone should have a good cup of coffee at home, definitely you should spend some time learning how to craft a nice cup of coffee, just the way that you would spend time learning how to make great pasta or a steak or a dessert. It’s, it’s part of a, it’s a ritualistic part of the process. It’s something that will enrich your life and gives you a lot of appreciation for what goes on in cafes as well. Because effectively when you go to a cafe, you’re paying someone to take your order to, you know, make and craft the coffee for you. Whereas you could do it yourself. So that’s probably where there’s there is a lot of scope for people to start exploring.
Gene Tunny 59:38
I’ve got to ask you about that Rai in terms of you know, everyone can have a great cup of coffee. One of my favourite YouTube channels is the Whisky Tribal, or Whisky Vault I think they’re these guys in Austin, Texas, and they’re huge into their whisky. And they say the best whisky, because there are a lot of debates about whisky and whether you have single malt etc. The best whisky is the whisky you like to drink the way you like to drink it. Is that the same with coffee?
Raihaan Esat 1:00:07
Very much so. And I think there’s a lot of room for exploration. Everyone is, generally speaking, how many times do you walk into a cafe and order the same thing, every single time. The coffee menu is generally quite large, there’s a lot of variation in drinks. So firstly, I’d encourage exploration, you know, explore the coffee menu and try different drinks, and then find the one that really does suit you. But the one that you like, might not be the same one every time. I drink a different coffee almost every day. Sometimes it’ll be espresso, sometimes it will be filtered coffee, sometimes it will be a milky coffee, depending on how I’m feeling on the day. And I’m sure the same thing goes for the whisky drinkers or for wine drinkers, if you just drank the same, the same beer every single day or the same wine every single day. Like, don’t you want to try something different? But some, but I understand some part of that is ritual as well. I want to, need to have some stability in my life. And coffee needs to be the stable thing in my morning. So I understand both sides of the equation, but I encourage explore exploration.
Gene Tunny 1:01:15
Absolutely and given your own Economics Explored, and we’re all very much for exploration. I think that’s a good point to end on.
Raihaan Esat 1:01:23
That was fun. Thank you guys.
Gene Tunny 1:01:24
Very good.
Tim Hughes 1:01:25
That was great. Thank you.
Gene Tunny 1:01:26
Thanks Tim, thanks Rai, I really enjoyed it.
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.