• Operational risks


    Different categories of traders have different strengths and weaknesses. Weaknesses can of course be equated with potential risks.




    International multi-country traders or trade houses

    Long-term supply contracts provide buying power and opportunities to add value by offering services.

    Global sourcing means being able to hedge some or much risk in-house while country risk is mitigated.

    Usually strong management, and financial strength/backing

    Global trade requires complex organization.

    Multi-location risk centres.

    Just-in-time commitments may translate into need to carry high stocks.

    Dependency on large roasters.

    Must be 'in the market' at all times.


    Local expertise. Can invest 'upstream' in processing and even production. Can add value by tailoring quality for niche markets.

    Country risk if stability becomes problematic.

    Supply risk if crops are poor or fail.

    Often higher financing costs and competition from international trade houses.

    New exporter faces all these and also lacks track record and client base.


    Local expertise.

    Can add value by adding services and servicing niche markets.

    Specialized products can mean higher margins.

    Can face reducing client base because of concentrations of buying power.

    Services often include holding stocks and providing credit.

    Supply, quality and price risks on specialized products higher.

    There are also the in-house buying or trading companies of the very large roasters and some retail chains (who have coffee roasted for them by third parties), whose strength lies in buying power and strong financial resources that permit them to negotiate favourable terms of trade, either with trade houses or directly with origin. The fact that such in-house buying companies have guaranteed outlets for their purchases obviously appeals to banking system. In partnership with collateral management providers (discussed later in this chapter), this combination of interested bank and strong buyer is therefore able to get closer to origin through all-encompassing credit packages that extend backwards from the roaster-buyer to the exporter and indirectly enable the exporter to purchase the necessary coffee at the farm gate.

    Last but not least, there are speculative operations, technical or paper traders, and investment or commodity funds. The latter in particular have access to huge capital resources. They can therefore invest in top-flight personnel and can afford to buy the best (and certainly the most expensive) analytical services available. But as they have no real trading function, they tend not to have much 'feel' for the physical market. Their risk exposure is therefore substantial.

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