A Brief Overview of the Language and Processes of Buying Green Coffee
This week, along with our sister company Casa Brasil, we will finalize selections for our first shipment of Brazilian coffees for the 2018–2019 harvest. As roasters, we obviously want to get our hands on the best coffees we can find, but it is equally important that the coffees we select arrive quickly and are accurately represented throughout the supply chain. Coffee is an agricultural product that begins to degrade the moment that is it harvested, so the sooner we can get it roasted and brewed, the better. Coffee that is contracted at origin will go through multiple processes and can change hands several times. We sample our selections at various steps along the chain to ensure that quality is maintained throughout and that the coffee we select at origin is the same coffee that arrives in our Austin warehouse. The following is a brief guide to some of the purchasing, sampling, and shipping terms critical for navigating the world of green coffee buying.
Contracts: Futures, Forward, and Spot
Coffee is the second most traded commodity in the world behind crude oil, and thus there are many approaches to the way it is bought, sold, and traded. Future contracts (or “futures”) are legal obligations to purchase a standardized amount of a product at a fixed price on a predetermined date. In coffee, futures are typically sold by the container (37,500 lbs), and delivery months are March, May, July, September, and December. These contracts are bought, sold, and traded on the New York Stock Exchange and their movement along with supply and quality projections play a big role in determining the “C-market” value of coffee at any given time. Futures traders, even if they will never see an actual coffee delivery, have great impact on the value of coffee and nearly every contract written in the industry, large or small, is calculated based on coffee’s C-market value.
Forward contracting is a broad term that encompasses the way many roasters purchase green coffee. Like futures, forward contracts require a set price to be paid on a predetermined delivery date, but unlike futures, these contracts are not traded on an open exchange and are usually between an actual buyer and seller, not just speculators who will never touch the product. While forward contract pricing is often based on futures, it does not have to be. In Brazil, for example, we attempt to operate outside of the C-market. Under this very simple model, we request a certain quantity and a quality threshold and agree to a fixed rate in advance, assuming our requests are met. This way the producers know what we expect from them, and they know what they can expect from us in return. This greatly reduces unexpected risk on both sides from volatile market swings and allows producers to invest in quality improvements without the fear of financial losses due to factors out of their control.
The most simple contract and perhaps the most common among small roasters is a spot contract. “Spot” refers to the purchase of a product for immediate payment and delivery. Coffees purchased spot are typically available in the seller’s warehouse and are ready for immediate release to the buyer. While these transactions are fast and easy, relying on spot coffee is risky as there is no guarantee that a roaster will be able to fulfill all of their needs this way. The most sought after coffees are typically forward contracted, and thus much of the coffee arriving from any given origin is already spoken for. For roasters looking to maintain consistent flavor profiles and quality year-over-year, forward contracting is strongly recommended.
Samples: Type, Offer, PSS, Arrival
Throughout the buying process we receive samples of green coffee at various stages. Each green sample that arrives in our Austin warehouse is visually inspected for defects and then roasted for cupping. During the cupping process we assign each sample a sensory score determined by evaluating attributes like aroma, flavor, aftertaste, and acidity. In addition to determining overall quality, samples are evaluated for a host of other purposes. The following are a few of the most common sample types:
A type sample is representative of the quality and/or flavor profile that a seller can provide. These are often used to establish new relationships and to introduce a potential buyer to an unfamiliar product line. Contracts can be established using type samples, but they are typically followed by offer samples once the parties narrow down profile and quality needs.
An offer sample is representative of an actual lot of coffee that is available for purchase. The coffee could be at origin, in transit, or ready for immediate spot purchase. Once a buyer approves an offer sample, further terms are then set for additional expectations and sample approvals.
A pre-shipment sample (PSS) is a sample sent for approval just before a contracted lot of coffee is shipped from origin. The PSS should be an accurate representation of the entire lot as it will arrive. Many contracts are subject to PSS approval and can be rejected if the buyer is unhappy with their evaluation.
The final sample we will receive before our coffee is delivered to Austin is an arrival sample. This sample represents the lot that has arrived in the U.S. and is ready or being prepared for release to us. We prefer our coffee to be shipped to Houston, but sometimes logistics require it to go through busier ports like Oakland or Newark. Regardless of where the coffee lands, a lot can go wrong on its journey. Storage or weather conditions can affect the coffee, bags can break, spill, or even be lost. An arrival sample is used to ensure that the approved PSS is the same coffee that has arrived in the U.S. Some contracts are subject to arrival sample approval and if rejected can result in no sale or an obligation for the seller to replace the rejected coffee with an approved lot.
Shipping Terms: FOB, FOT, FAS, and EXW
Another important element to consider when contracting and shipping coffee internationally is liability. Who pays for what and who is responsible if something goes wrong? The following terms are used to establish when the coffee will change hands—more specifically, when the cost of logistics and risk are passed from the seller to the buyer.
The most common form of International shipping is called FOB, or Free on Board. Under this model, the seller relinquishes all risk and expense to the buyer once the freight is loaded onto the ship. In simple terms, once the coffee is on the boat, the seller’s obligation is complete. The buyer will handle import and additional warehousing and delivery costs as well as assume all risk if the freight is lost or damaged in transit. Similar freight models include FOT (Free on Truck) if the freight is being shipped by ground transportation, and FAS (Free Alongside Ship) where the seller delivers the freight to the port but the buyer is responsible for loading fees and risk.
Another common contract type is “EXW, Ex Works, or Ex Warehouse.” This one is simple. The seller fulfills their obligations when the goods are available for pick-up at their premises. This could be at warehouse at origin where the buyer would be responsible for pick-up, loading, export/import, etc. but more commonly it means the coffee has already been imported and is ready to be released to the buyer. Spot contracts, for example, are usually EXW.
International trade and shipping are clearly complicated, but understanding some basic terms and, more importantly, building relationships throughout the chain can be the difference between a smooth transaction and a logistical nightmare.