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  • QA 169
    Question:
    Do electronic market places for green coffee exist? If so, which are they?
    Background:
    Where can we find the kind of electronic market place for green coffee that you mentioned in Chapter Six of the Coffee Guide?
    Asked by:
    Importer - Morocco
    Answer:

    Coffee Futures are traded electronically on both LIFFE and ICE but no electronic market places for the physical trade in green coffee have emerged as yet. A number of serious attempts have been made but failed to attract the required interest and we are not aware of any electronic market place actively trading green coffee (as opposed to coffee futures) today. Apart the fact that the international coffee trade remains very fragmented with numerous actors, we can think of two major reasons for this. *

    First, because coffee is not homogeneous end-users need to know what quality they may be purchasing. The reason futures markets work is that they trade a fully standardised product: anyone wishing to deliver (tender) coffee to a futures market first has to have that coffee stored, graded and certified. This ensures that anyone taking delivery from a futures market knows in advance what kind of coffee can be expected. Of course most operators on the futures markets never tender or receive physical coffee, but the basis to do so is there which makes trading possible…

    Coffee quality varies enormously and development of internationally accepted green coffee standards that roasters could trust enough to receive coffee 'unseen' has to date proved impossible. Roasters do need advance samples of the physical coffee they receive and they do need to be able to reject substandard deliveries. But at the same time they also need to safeguard their supply line. This is why direct dealings with trade houses and exporters remain the preferred option. There are mainstream roasters who use electronic documentation throughout but unless and until a number of them give solid backing to the idea of an open electronic marketplace for green coffee, there is little chance of one emerging any time soon.

    In fact it is questionable whether the mainstream coffee industry (85/90% of all coffee roasted) presently has any interest in advancing beyond the electronic trading and execution of futures and options. This enables the industry to purchase physical green coffee at a differential to the futures markets. Final prices are then established using electronically traded futures. Put differently, today's futures markets all operate electronically and are used as a tool for the pricing of most physical or green coffee, leaving only the sourcing and implementation of the actual purchases to be carried out through direct contacts. **

    This is not the same as an 'electronic market place for green coffee' but it would appear this is all the market requires at this stage.  This is why otherwise great ideas as Intercommercial Markets for example, now Eximware -   www.eximware.com , and InterContinental Exchange's eCOPS system - www.theice.com have failed to advance into green coffee trading. Futures markets operate combined electronic trading and documentation systems quite successfully but, this is a very different environment from the trade in physical, in green coffee . ***

    Many specialty coffee sellers would like to see an electronic market place **** where green coffee can be offered and bought at prices that are not based on the futures markets but on actual quality. But this ideal always comes up against the fact that no serious importer or roaster will purchase specialty coffee unseen, i.e. without being able to assess the quality and know the supplier before committing to a purchase.

    Second, one of the original expectations behind electronic documentation was also that such systems could eventually link all or at least most actors along the entire coffee chain. Like the Bolero system (www.bolero.net) for example. And that the logical outcome of such a process would, over time, facilitate the emergence of electronic market places where buyers and sellers of green coffee would meet.

    However, electronic documentation   has developed into something quite different from the original vision. In today's coffee trade most such systems with automatic database updates generate internal documents only and then email or send confirmations to third parties. These third party documents must then be entered manually into the database of the party receiving them.
     
    The problem for fully automated documentation systems is twofold in that few in the coffee trade are (yet?) willing to pay a third party for document generation and, individual companies want to maintain their own database. Documents that update a communal database might save duplicating data entry but in the coffee trade the communal database concept is still perceived as less than secure. Many large coffee companies today employ electronic databases and documentation systems but these are used internally. And, as far as we know, they are seldom linked to other parties in the coffee trade and certainly play no role when it comes to trading green coffee. This then relegates the concept of electronic market places for green coffee still further into the future…

    * LIFFE: London International Financial Futures and Options Exchange - www.liffe.com
        ICE - InterContinental Exchange New York - www.theice.com

    ** See topic 08.01.03 and section 09.02 for more on futures and differentials. See topic 03.01.10 on the difference between mainstream and specialty roasters.

    *** For more on this see Chapter 6 eCommerce; see topic 05.01.04 for information on shipping portals and electronic documentation related to shipping; see Chapter 8 for more on Futures Markets and the use of electronic trading there.

    ****  Electronic market platforms, in our view, allow buyers and sellers of a particular product to make contact and exchange information, after which some might proceed to initiate actual transactions directly, i.e. not via the platform. See for example www.leatherline.org, also operated by the International Trade Centre - ITC. Electronic market places on the other hand would allow them to also enter into and execute legally binding transactions, requiring much more complex and  demanding systems.

    Posted 02 November 2007

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