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  • Structure of the coffee trade - some examples

     
     

    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.
     

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