SIGNED SEALED DELIVERED
A Guide to Green Buying
Part One
by Andi C. Trindle
SIMPLY PUT, GREEN BUYING is the act of securing raw coffee beans
from a producing country, shipper, importer, trader or broker, so that
they can be roasted and distributed in a consuming country. Of course,
nothing in specialty coffee is simple. Many changes in the industry
over recent years, such as roaster-direct sourcing and auction and certification
programs, have altered the green buying process significantly. Nonetheless,
even with a constantly evolving industry, the knowledge required to
understand and successfully manage a green buying program remains largely
the same.
Part One of this series looks at green coffee purchasing at origin
and explains market pricing. Part Two will review green coffee buying
from within consuming countries, while clarifying what a successful green
buyer should know about securing the right coffee at the right time and
at a preferable price.
The Sellers at Origin
Like any type of purchasing, green buying involves a buyer and
seller. But in the coffee industry many different types of people
play these two roles, and most often there is more than one of
each between the original seller (coffee grower) and the final
buyer (coffee roaster).
In all cases, coffee producers/farmers are involved in the original
sale because they provide the product: ripe cherries. Coffee
producers may run large private estates or, on the other end
of the spectrum, they may be farmers who tend to small plots
of land and later pool their harvest with other small holders
who have joined into a cooperative. Beginning coffee’s
journey from farm to cup, producers first sell their crop to
millers, exporters or any number of additional folks in between,
generically labeled “middlemen” or “coyotes.”
The number of middlemen that exist between a producer and an
exporter is determined by the location, education level and economic
situation of producers, which dictate whether they can fully
process their own coffee and whether they have direct access
to buyers. Larger producers or cooperatives may run their own
processing mills, and some may even have an export license, so
they have the ability to manage cherry-to-seed processing from
start to finish and sell green beans directly to importers.
The smallest producers, on the other hand, likely have no capability
to handle processing, so they sell their unprocessed coffee cherries
directly to a mill when possible or, when necessary, to a middleman,
who facilitates the movement of coffee from the farm (or nearby
roadside) to a processing mill. Middlemen offer credit and transportation
in places where often neither is available.
Upon delivery, the mill will generally purchase the cherries
in full. Payment is typically a dollar amount per quintal (100
pounds) of cherry; mills that produce the best quality will purchase
only fully ripe cherries and ideally pay a premium for them.
In some cases, if a coffee lot will remain separate and sell
under the name of a particular farm or mark, partial payment
may be issued at the time of cherry delivery, with full payment
being made after the coffee is sold to a buyer.
Next, the mill processes the coffee by the wet or dry method,
or various semi-washed methods in between. Depending upon the
mill’s size, capabilities and connection to buyers, the
mill may or may not keep the coffee through the dry milling and
export process. If the facility does not have a dry mill, the
coffee may change hands again before reaching an exporter, who
will sell the coffee to the buyer.
 The Buyers at Origin
The green buyer at origin is typically an importer who takes
physical possession of and pays for the coffee while it is still
in the producing country. The importer then has the responsibility
to ship the coffee from the producing country to a consuming
country warehouse or directly to their buyer’s plant. Importers
incur costs over and above the FOB(1) per pound price, including
ocean freight, insurance, interest, duty and all fees until the
coffee arrives at its destination.
The Offer and Contract
Regardless of who is serving as the buyer or seller in a particular
transaction, the final paperwork between the end-point seller
at origin and the consuming-country buyer remain largely the
same.
The buyer and the seller connect (either one contacting the
other first) and the buyer makes an inquiry to the seller communicating
what they need, specifying coffee quality, total quantity, shipment
or delivery timing and, perhaps, a price indication. Alternatively,
the sellers provide regular offers of available coffees.
The seller reviews their availability (either within their
own inventory or by contacting a grower or miller to arrange
a purchase) and uses the information to prepare an offer for
the buyer. A typical offer quote looks something like the sample
on this page; these are the same details that will ultimately
be recorded on a contract if the offer is accepted.
Assuming a buyer accepts a quote,
the buyer and seller sign a contract to finalize the purchase.
(See sample below.)
After both parties sign the contract,
the seller arranges for a pre-shipment sample (PSS) for buyer
approval, assuming a PSS is required for the contract. In some
cases, a sample is available immediately and, in other cases,
it may be weeks or even months before a contracted coffee becomes
available.(2) Whenever the sample is available, the next step
is for the buyer to approve a sample before shipment. Ideally,
this is a straightforward process with a single sample submitted
and approved; however, if a sample does not match the buyer’s
expectations based on the contracted quality, they will reject
the sample and request an alternative lot if the contract is “Replace” and
not No Approval No Sale (NANS). This process continues until
the buyer approves a sample.
Next, the exporter prepares the coffee for shipment. At this
point, the coffee is most likely still in parchment and will
need to go through hulling and grading before it is ready for
movement to the port of departure. Simultaneously, the buyer
books space on a vessel and sends shipping instructions to the
seller.
The coffee ships. After arrival at the receiving country’s
pier, the coffee is then transported by land to the ultimate
destination, which is typically the importer’s warehouse,
although sometimes it will go directly to a roaster buyer’s
plant. Customs and other inspections may slow the process, but
generally a coffee reaches its ultimate destination within five
to seven days from arrival at the port.
Upon arrival at the plant or warehouse,
the coffee is sampled again and, provided there are no major
problems or discrepancies between the approved PSS and the arrival
sample(3), the business between this particular buyer and seller
is complete.
Pricing: Differential and Outright
Understanding the green coffee pricing process requires a familiarity
with a number of factors, including world economic markets,
currencies, the oil market and, more recently, hedge funds.
Pricing is complicated enough that it easily requires its own
explanatory book. Nonetheless, here’s a simple pricing
primer, covering the basic terminology needed to navigate a
contract.
Differential Pricing
Green coffee is initially priced by the seller (usually the
exporter) at origin and sold in full container loads, for the
most part. This price is frequently a differential price(4) based
on the New York “C” Market for arabica and London
LIFFE Market for robusta.
For example, a producing country
seller may offer a Guatemala Huehuetenango at +40 May09 NYC.
This means the buyer will pay 40 cents per pound above the New
York “C” Market
price for May on the day the contract is price-fixed.(5) The
producer or importer—whomever is designated to select the
fix (indicated by the terms buyers call or sellers call)—then
scrupulously follows the coffee market and, at any time prior
to the first notice day for May-designated contracts, fixes the
contract. When a fix is called in (which occurs only when the
market is open and trading), the final contract price is confirmed
by adding the differential to the market price. If the Guatemala
contract is fixed by the seller when the market is at $1.2880,
for example, then the final contract price becomes $1.69 per
pound.
Logically, in a sellers-call contract, the producer-side seller
waits for the coffee market to reach what they hope is the highest
level before they call in the fix, so that they are receiving
the highest possible ultimate price on their contract. On the
other side, the buyer waits for the coffee market to reach what
they hope is the lowest level before they fix. Traditionally,
origin contracts are sellers call and domestic contracts are
buyers call. Exporters wait to price-fix (buy the market) at
a high level, and roasters seek to price-fix (sell the market)
at the lowest levels. These transactions are not related and
can take place at any time between contract creation and first
notice day, or date or transfer of ownership of the coffee, whichever
comes first.
This scenario of trying to predict the market to maximize final
price on the sell side and minimize final price on the buy side
is an educated guessing game at best. As we all have learned
recently, the market is not always predictable. And, even more
frustrating, this process does not guarantee adequate coverage
of the cost of production or coffee quality. Coffee is initially
sold at a differential that is intended to support everyone’s
costs, plus a reasonable profit attached to service and quality
provided. But depending on changes in the unpredictable coffee
market, a producer using this method may not even cover production
costs. Green coffee buyers and sellers can really only make the
best decision possible using all of the available information
and learn from successes and mistakes.
Outright Pricing
When coffee is sold at a flat price, like $1.85 per pound, it
is called outright pricing. Unlike differential pricing, outright
pricing allows for predictability of final sell and purchase
pricing at the time of the sale. The clear advantage here is
that origin-side sellers can be certain they are covering costs
and, ideally, earning a suitable profit; buyers also have certainty
of their cost of goods, so they can ensure profitability when
selling to the final buyer—whether it is an importer selling
to a roaster, or a roaster selling to their customer.
So far in this series, we’ve covered how coffee begins
its journey from the farm at origin and who plays a part in transporting
the coffee from place to place. And we’ve discussed offers,
contracts and green pricing. Look for Part Two of this series—which
will explore how green buying works from the perspective of those
in consuming countries, and explain the best times to buy—in
the September/October 2009 issue of Roast.
ANDI C. TRINDLE is a green coffee trader with Atlantic Specialty Coffee,
Inc. in California, where she also runs the quality control lab. She has
been working in specialty coffee since 1989. Andi currently co-chairs the
cupping subcommittee of the SCAA Training Committee. She can be reached
at ATrindle@ecomtrading.com.
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