The structure of the coffee trade in North America, most of
Western Europe and Japan is very similar. Coffee is generally purchased from
the exporting countries by international trade houses, dealers and traders. The
very largest roasters in Europe also maintain their own in-house buying
companies, which deal directly with origin. In the main, however, roasters tend
to buy their coffee from international trade houses or from specialized import
agents who represent specific exporters in producing countries. The
international trade plays a vital role in the worldwide marketing and
distribution of coffee. Coffee is generally sold FOB (free on board) but many
roasters, especially in the United States, prefer to buy on an ex-dock basis,
and small roasters often prefer to buy in small lots on a delivered in store or
ex-store basis. This allows plenty of scope for the various middlemen involved
in the trade to operate and perform useful functions, although the increasing
concentration at the roasting end of the industry has led to a substantial
reduction in their number.
Essentially the coffee trade assists the flow of coffee from the exporting
country to the roaster. Traders and dealers take responsibility for discharging
the coffee from the incoming vessel and make all the necessary arrangements to
have the coffee delivered to the roaster. Using the futures markets either for
hedging or as a price guide, traders offer and provide roasters spreads of
physical coffee for shipment 1 month to 18 months in the future. Many of these
sales, especially for later shipment positions, are short sales: the seller
will source the required green coffee at a later date.
Such positions are more often than not sold at a premium or a discount (the
differential) against the price of the appropriate delivery month on the London
or New York futures markets (selling price to be fixed – PTBF - see sections
08.00 and 09.00 on futures markets and trading). This gives the roaster the
right to fix the price for each individual shipping position at their option,
usually up to the first delivery day of the relevant month. Some roasters might
want a separate contract for each position, while others might have a single
contract for six positions, for example July through December. Obviously
selling so far ahead carries considerable risk. In some cases the coffee may
not even have been harvested yet. To reduce their exposure, traders therefore
sometimes offer such forward positions as deliveries of a basket of acceptable
coffees rather than committing to a single growth. This is becoming less common
today than it was in the past but it remains a significant feature of the trade
in many parts of the world. Typical examples of such baskets are given
below.
-
Guatemala prime washed, and/or El Salvador central standard, and/or Costa
Rica hard bean, versus the appropriate delivery months of the New York Futures
market.
-
Uganda standard grade, and/or Côte d’Ivoire grade 2, and/or Indian robusta
AB/PB/EPB grades, versus the appropriate delivery months of the London Futures
market.
These baskets represent coffees that are acceptable for the same purpose in
many blends of roasted coffee; traders can fulfil their delivery obligations by
providing one of the specified growths. Any shipment would however still be
subject to the roaster’s final approval of the quality.
Not all coffee is always immediately sold to a roaster. Before arrival an
individual parcel of coffee may be traded several times before it is eventually
sold to a roaster. This trading in physical coffee should not be confused with
trading coffee contracts on the futures exchanges and terminal markets. Given
the variability of supply, the coffee market is inherently unstable and is
characterized by wide fluctuations in price. The futures market therefore plays
an important role in the coffee trade, as it does with other commodities, by
acting as the institution that transfers the risk of price movements to
speculators and helps to establish price levels. These markets do not handle
significant quantities of physical coffee, although dealers do occasionally
deliver coffee or take delivery of coffee in respect of contracts that have not
been closed out. Participants in the industry use the futures markets primarily
for hedging.
The structure of the trade in other importing countries is broadly similar
although naturally there are variations. In some countries, such as the Nordic
countries, there are no main traders or importers as such but rather just
roasters and brokers/agents. In others, such as in Eastern Europe, importers
either import directly or increasingly via the international trade houses based
in the main coffee centres of Hamburg, Antwerp, Le Havre and Trieste.