• QA 177
    Is selling shipment coffee basis 'quality and count final on departure' possible?
    We read that the Cocoa Marketing Company (CMC) in Ghana only sells cocoa on the basis of 'Quality final on departure'. Buyers may inspect the goods before shipment but no arrival claims will be accepted. Is this not something the coffee industry could introduce as well?
    Asked by:
    Direct communication - Peru

    In theory anything is possible. But, in practice, everything that increases or complicates the buyer's risk, or adds costs, reduces from the available price - FOB or otherwise *.

    We are aware of the sales condition 'Quality and Bean Count Final on Departure'. We also know that the quality of Ghanaian cocoa is controlled by the Ghana Cocoa Marketing Board and has a good reputation in the cocoa industry. However, it is not for us to comment on this particular issue, other than to say that the cocoa industry operates quite differently from coffee.

    Nevertheless, we can speculate on some of the consequences that might follow the imposition of similar conditions by individual coffee producers or coffee producing countries…

    The facts **

    • Quality on arrival is not necessarily the same as on departure: goods are subject to many influences including heat and cold, condensation, delays etc, particularly on long voyages that include transhipment(s). Departure quality certificates or inspection certificates do not change this.
    • Coffee roasters only accept green coffee after establishing the arrival quality, no matter who provided what quality certificate. Rejected parcels have to be substituted, often immediately. Therefore, most roasters rather buy from intermediaries (trade houses and importers) who can deal with such eventualities.
    • In the United States all imports must pass quality inspection by the FDA: the US Food and Drug Administration, a Federal Government Agency. All US buyers therefore purchase basis 'No Pass - No Sale'. This places the rejection risk firmly with the supplier. In the European Union food security legislation is increasingly stringent, particularly as regards mould infestations that may also lead to rejection. In Japan shipments that contain traces of prohibited pesticides, or exceed permitted residual limits, are routinely rejected. ***
    • The higher the perceived risk, or the more complicated the conditions of trade from a particular origin, the greater the intermediary's required price margin will have to be. Ultimately the producer pays for this as all other intermediaries in the value chain pass on the reduced FOB value.
    • Unnecessarily complicated conditions of trade or higher risks increase costs but are not always shown as individual items - they become 'invisible' but do not disappear…

    Our comments

    • The free market system does not co-habit well with arbitrarily imposed conditions of trade. Hence only very strong suppliers, whose output may be essential to the market, might be able to impose the kind of conditions your question refers to. But even then, legislation in some consuming countries may prohibit importers from accepting them, like in the US where Federal Law governs such issues. After all, importation is not a right but a privilege that is also subject to certain limitations… Small producing countries, or individual producers/exporters, will find it even more difficult to impose such unilateral conditions. Unless of course they would be willing to accept sizeable price reductions and forego selling direct to certain markets.
    • Yet, producers have long argued that the prevailing conditions of trade mitigate against them in that, in the end, they are held responsible for almost everything that happens until the goods reach the final buyer. And this in spite of the fact that they lose control over the goods once they leave. This is complicated by the nature of the European Coffee Contract which prices coffee on FOB terms but for practically all other purposes is a C&F contract. Many attempts have been made to find solutions to these issues but to date this has proved impossible.
    • The problem with pre-shipment inspections is that whereas such services are available, the agencies do not accept responsibility for subsequent events that may affect quality or quantity. Shipping companies on the other hand routinely reject all claims unless it is clearly proven that the loss or damage was due to an external event that occurred whilst the goods were under their control. Usually, it is extremely difficult to provide such proof, for example in the case of condensation damage.
    • Good pre-shipment inspection services are expensive, not least because of the high insurance cover the agencies must carry. Indirectly this cost will also be borne by the shipper. And then there is the fact that also not every intermediary will be prepared to buy on this basis…

    To summarise…

    We would suggest that unilaterally imposing conditions like 'quality and count final on departure' is very likely to have a double impact. Less buying competition or restricted marketing opportunities, resulting in lower prices.  And rising costs that reduce producer returns still further.

    *   FOB = Free on Board; FCA = Free Carrier; CIF = Cost, Insurance and Freight; C&F/CAF = Cost and Freight.
    ** Contracts and contract conditions (including quality and weights) are discussed in great detail in Chapter 4 of the Guide. Quality Control issues, relevant to this subject, are discussed in Chapter 12.
    *** In Japan rejected shipments must either be returned to the exporter concerned, or re-exported elsewhere. Q&A 002 in the Q&A Archive deals with FDA rejection rules in the US. For more on European Union rejection rules see topic 12.08.01 of the Guide.

    Posted 04 February 2008

    Related chapter(s):
    Related Q & A:
    Q&A 002, 058, 061, 097, 143, 145, 164