The Coffee Exporter’s
Guide
THIRD EDITION

USD 70ISBN 978-92-9137-394-9

United Nations Sales No. E.12.III.T.1

EXPORT IMPACT FOR GOOD© International Trade Centre 2011
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The Coffee Exporter's
Guide
THIRD EDITION

Geneva 2011

ii

ABSTRACT FOR TRADE INFORMATION SERVICES
ID=42619

2011

SITC-071
COF

International Trade Centre (ITC)
The Coffee Exporter's Guide. – [3rd ed.]Geneva: ITC, 2011. xvi, 247 p.
Guide providing information on trade practices relating to exporting coffee – presents an overview of the world
coffee trade and markets; deals with international coffee contracts (Europe and United States), logistics, insurance,
dispute resolution, futures markets, risk management and hedging, trade financing, and related management
issues; covers coffee quality with a special emphasis on quality control aspects; outlines new trends in the coffee
trade such as electronic commerce, niche markets, organic certification, fair trade labelling, and other sustainability
schemes; highlights climate change and environmental issues relevant to the coffee industry; includes a list of
frequently asked questions from coffee producers and the respective answers.
Descriptors: Coffee, Trade Practices, Contracts, Organic Products, Certification, Labelling, Climate Change,
Electronic Commerce, Market Surveys, Manuals.

English, French, Spanish (separate editions)
ITC, Palais des Nations, 1211 Geneva 10, Switzerland (www.intracen.org)

The designations employed and the presentation of material in this publication do not imply the expressionof any opinion whatsoever on the part of the International Trade Centre concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

Cover design and illustration: © International Trade Centre, Kristina Golubic© International Trade Centre 2011
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form orby any means, electronic, electrostatic, magnetic tape, mechanical, photocopying or otherwise, without prior permission inwriting from the International Trade Centre.

P246.E/DMD/SC/11-XI

ISBN 978-92-9137-394-9
United Nations Sales No. E.12.III.T.1

iii

FOREWORD
This third edition of The Coffee Exporter’s Guide marks the 20th anniversary of this popular publication. First published as
Coffee - An exporter’s guide in 1992 and subsequently updated in 2002, this practical handbook has become the world’s
most extensive and authoritative publication on the international trade of coffee.
With neutral, hands-on information about the mechanics of trade in green coffee, the guide addresses value chain
stakeholders in both coffee-producing and coffee-importing countries. A detailed overview of the world coffee trade isaccompanied by advice on marketing, contracts, logistics, insurance, arbitration, futures markets, hedging, trade credits,risk management, quality control, e-commerce and more.
This new edition addresses trends which were barely apparent in the coffee industry ten years ago, such as climate change
adaptation and mitigation, as well as the important role of women in the sector. It also features a more detailed comparisonof the leading sustainability schemes – in addition to more established certification schemes for organic production andfair trade.
Over the years, this guide has been used by ITC and many others to train both newcomers and more experienced people
in the coffee industry, who use the information regularly – both in daily routines and for major decisions.
We wish to thank the many industry experts, companies and institutions that have contributed in various ways to the guide.
We are particularly grateful for the support from the International Coffee Organization, which has shared its knowledge forall three editions of the guide, and also has cooperated with ITC in other coffee projects over the years.
It is our hope that this guide, along with its companion website www.thecoffeeguide.org, will continue to serve as an
essential training and knowledge-sharing tool to advance the interests of producers, exporters and those who support
them in coffee-producing countries around the world.

Patricia Francis
Executive Director
International Trade Centre

v

ACKNOWLEDGEMENTS
Hein Jan van Hilten is the principal author of this guide as well as the previous editions from 1992 and 2002. He has
spent some 50 years in the coffee industry, first as an exporter in East Africa and subsequently as an independent
Coffee Development Consultant in numerous producing countries. Currently he serves on the Executive Board of the 4C
Association, a mainstream sustainability initiative for the coffee industry, and moderates www.thecoffeeguide.org, ITC’s
electronic version of this guide.
The guide was made possible through the valuable contributions of expertise, experience and time by the people,
companies and organizations below, whose assistance is acknowledged with thanks and appreciation.
Paul J. Fisher was also co-author of the 2002 edition of the guide. He has served many years in the coffee trading androasting sectors. In recognition of his contribution to the industry, including his role in development of the widely used
eCOPS™ (Electronic Commodity Operations Processing System), he was elected an Honorary Life Member of the Green
Coffee Association (GCA) in 2011 and remains active in GCA affairs in an advisory capacity.
Michael A. Wheeler served many years as Executive Director of the Specialty Coffee Association of Europe, He contributed
extensively to both this and the 2002 edition of this guide. At the International Coffee Organization he currently serves as
Overseas Representative for the Papua New Guinea Coffee Industry Corporation and has chaired a number of committees
at ICO.
Beatriz M. Wagner is a former Class A member of the Coffee, Sugar and Cocoa Exchange in New York and was acontributor also to the 2002 edition of the guide. Mrs. Wagner continues to lecture and consult on soft commodity trading
issues. She is also co-author of ITC’s guide on cocoa trade.
Gerd Uitbeijerse is a Master Mariner and former Senior Cargo Care Expert with leading shipping lines. He remains actively
involved in cargo care matters through the Global Cargo Consultancy Management enterprise in the Netherlands.
Sunalini Menon is founder and CEO of Coffeelab Pvt. Ltd. in Bangalore, India. She is an internationally recognized coffee
cupper and has contributed extensively to the chapters dealing with coffee quality, especially robusta.
Captain Reinhard Diegner has many years experience in commodity marine insurance, physical risk management andloss assessment, primarily from many years with a leading firm of underwriting agents in Germany.
Michael P. Flynn is a past Chairman of the European Coffee Federation’s Contracts Committee. Currently he acts as anadviser to the Committee and has contributed extensively on issues related to contracts and arbitration.
Joost Pierrot has many years experience in the field of organics and contributed to the guide’s sections on sustainability
issues. He works as an Organic Development Consultant and has contributed to other publications in ITC.
Roel Vaessen is Secretary-General of the European Coffee Federation and serves on many industry bodies. He has
contributed extensively on European Union issues as food safety and cargo security rules.
Morten Scholer, Senior Market Development Adviser in ITC, was responsible for overall management, coordination andstrategic direction of the work in ITC.
ITC also wishes to thank the following industry personalities and organizations who over the years have contributed to thedifferent editions of the Coffee Guide, especially so Abba Bayer who contributed extensively to the 1992 edition and who
today is an Honorary Life Member of the Green Coffee Association in the United States. Special thanks are also due to theInternational Coffee Organization in London for its unstinting assistance with information on coffee statistics and related
matters for all three editions.

vi

Individual contributors
Peter Baker, Romeo S. Barbara, Maurice Blanc, Carlos H.J. Brando, Ivan Carvalho, Renaud Cuchet, Robin Dand, Frans
Douqué, Norbert Douqué, Reinier Douqué, Pablo Dubois, Stephen Dunn, Dick Engelsma, Gerrit van Elst, John Eustace,
Massimiliano (Max) Fabian, Judith Ganes Chase, M.P.H. Gathaara, Bernard Gaud, Gordon S. Gillett, Daniele Giovannucci,
Michael C. Glenister, Gabriel Cadena Gomez, Jeremy Haggar, Jos Harmsen, Hidetaka Hayashi, Clive A. van Hilten, Patrick
F. Installé, Birthe Thode Jacobsen, Phyllis Johnson, Rebecca L. Johnson, Sipke W. de Jong, Alexander Kasterine, Paul
Katzeff, Soren Knudsen, Paula A. Koelemij, Karl Kofler, Surendra Kotecha, David Landais, Ted Lingle, Kerstin Linne, Sandy
McAlpine, Jan Meijer, Kerry Muir, Robert F. Nelson, Henry Ngabirano, Kif Nguyen, Doan Trieu Nhan, Ronald J. Onzima, Luis
Norberto Pascoal, Alain Pittet, R. Price Peterson, Gloria Inés Puerta Quintero, Paul Rice, Mike Ritchie, Elodie Robin, David
Roche, Aimee Russillo, Josefa Sacko, Jasper P. van Schaik, John Schluter, Christian Schøler, Garth Smith, Susie Spindler,
Dominic Stanculescu, Gerrit H.D. van der Stegen, Søren Sylvest, Joachim Taubensee, Panos Varangis, Rinantonio Viani,
Martin Wattam, Joachim R. Wernicke, Birgit Wilhelm, Christian B. Wolthers, Eric C. Wood.
Organizations
The Coffee Quality Institute – United States of America, the Coffee Science Information Centre – United Kingdom, theEuropean Coffee Federation – ECF, the International Women’s Coffee Alliance – IWCA, the National Coffee Associationof USA, Inc., NYSE Euronext Liffe – United Kingdom, the Specialty Coffee Association of America – SCAA, the Specialty
Coffee Association of Europe – SCAE.
Dianna Rienstra copy edited the guide. Publication production and promotion was managed by Natalie Domeisen. Desktop
publishing was done by Isabel Droste in ITC.

CONTENTS

vii

FOREWORD .................................................................... iii

FACTORS INFLUENCING DEMAND ........................... 28

ACKNOWLEDGEMENTS ................................................ v

LIFESTYLE, DIET AND COMPETING DRINKS ........... 28

NOTE .............................................................................. xvi

CHAPTER 1

1

WORLD COFFEE TRADE – AN OVERVIEW ...2
THE IMPORTANCE OF COFFEE IN WORLD TRADE .. 2
SUPPLY, PRODUCTION, STOCKS AND DOMESTICCONSUMPTION .............................................................. 2
Definitions related to supply ..................................... 2
Readiness for export ................................................. 3
Coffee producing countries by ICO quality
group ........................................................................... 3
Geographical distribution......................................... 4
Conversions to green bean equivalent ................... 4
Grading and classification ....................................... 5
Domestic consumption .............................................. 6
Exports ......................................................................... 7
Stocks in producing countries ................................. 7
DEMAND, CONSUMPTION AND INVENTORIES ........ 8

ADDING VALUE – AN OVERVIEW................................ 29
Soluble coffee ........................................................... 29
Soluble coffee – Outlook ......................................... 30
Soluble coffee – Manufacturing methods............. 30
Decaffeinated coffee ............................................... 31
The decaffeination process .................................... 32
Roasted coffee .......................................................... 32
Ready-to-drink and extracts or concentrates ...... 33
TRADE PRICES, INVESTMENT COSTS
AND TARIFFS ................................................................. 33
Imports and prices of roasted and soluble
coffee ......................................................................... 33
Tariffs and taxes ....................................................... 34
Classification of coffee products tradedinternationally ........................................................... 34
Tariffs imposed on coffee and coffee products.... 34
PROMOTING COFFEE CONSUMPTION ................... 35

CHAPTER 3

37

Consumption trends .................................................. 8
Stocks or inventories in importing countries .......... 9

NICHE MARKETS, ENVIRONMENTAND SOCIAL ASPECTS ..............................38

PRICES ............................................................................ 10

THE SPECIALTY MARKET............................................. 38

THE INTERNATIONAL COFFEE ORGANIZATION .... 10

The meaning of specialty ........................................ 38
Niche markets – Definition ...................................... 39
Quality segmentation of coffees ............................ 39
Exclusive marketing arrangements....................... 39
The scope for specialty coffee ............................... 40
The difference between mainstream
and specialty roasters ............................................. 42

Identification of exports ........................................... 10
Main elements of the International Coffee
Agreement 2007 ....................................................... 11

CHAPTER 2

15

THE MARKETS FOR COFFEE .....................16

ORGANIC COFFEE ....................................................... 43

THE STRUCTURE OF THE COFFEE TRADE .............. 16

What are organic products?................................... 43
Why buy or grow organic coffee? ......................... 44
Processing and marketing organic coffee– The audit trail......................................................... 44
Organic certification and import ........................... 45
World market for organic coffee ............................ 46
Organic coffee and small producers .................... 47
Certification costs and viability .............................. 47

STRUCTURE OF THE RETAIL MARKET ...................... 17
DEMAND ......................................................................... 18
Roast and ground coffee ........................................ 19
Instant or soluble coffee .......................................... 19
Decaffeinated coffee ............................................... 20
DEMAND BY GEOGRAPHICAL AREA ........................ 20
North America .......................................................... 20
Europe ....................................................................... 21
Asia and Australasia ............................................... 24
Other importing countries....................................... 25
Producing countries ................................................. 27

MAPPING TECHNOLOGY IN COFFEEMARKETING: GPS AND GIS ....................................... 49
Using GPS and GIS – The principle ...................... 49
Mapping technology in coffee marketing............. 49
Future uses of GPS and GIS – The way forward ... 50

viii

TRADEMARKING AND GEOGRAPHICALINDICATIONS IN COFFEE ............................................ 51
Trademarks and logos ............................................ 51
Trademarks versus geographical indications ..... 51
SUSTAINABILITY AND SOCIAL ISSUES IN THE
COFFEE INDUSTRY ...................................................... 52

Letters of credit ......................................................... 70
Destinations, shipment and shipping advice ....... 70
Delayed shipments .................................................. 71
The bill of lading ....................................................... 71
Title to and endorsement of a bill of lading .......... 71
Dispatching bills of lading ...................................... 72
Certificates ................................................................ 72
Missing and incorrect documents ......................... 73

Sustainability, certification, verification,
corporate guidelines ............................................... 53
Integrated farming systems .................................... 54
The European Retail Protocol for Good
Agricultural Practice ................................................ 54
Codes of conduct ..................................................... 54

STANDARD FORMS OF CONTRACT ......................... 73

THE MAIN SUSTAINABILITY SCHEMES IN
THE COFFEE SECTOR ................................................. 54

ECF AND GCA CONTRACTS ...................................... 75

Overriding principle ................................................ 73
European Coffee Federation contracts ................. 73
Green Coffee Association contracts ..................... 74

Fairtrade Label Organization ................................. 54
UTZ CERTIFIED ........................................................ 56
Rainforest Alliance .................................................. 57
The 4C Association – Mainstreaming
sustainability in coffee ............................................. 58
Other sustainability labels ...................................... 59

UCP 600 IN SALES CONTRACTS................................ 80

CERTIFICATION AND VERIFICATION ........................ 59

INCOTERMS® ...........................................................81

SUSTAINABILITY AND GENDER ................................. 61
Women’s employment and ownershipin the coffee sector................................................... 61
Women’s associations in the coffee sector........... 61

CHAPTER 4

63

Irrevocable and confirmed credits ........................ 80
Non-documentary requirements............................ 81
Time allowed to banks to examine
the documents .......................................................... 81
Force majeure .......................................................... 81
Two distinct classes of rules ................................... 82
Terminal handling charges..................................... 82
Rules for domestic and international trade .......... 82

CHAPTER 5

83

LOGISTICS AND INSURANCE ...................84

CONTRACTS ................................................64

BASIC SHIPPING TERMS ............................................. 84

INTRODUCTION TO CONTRACTS ............................. 64

Shipping services .................................................... 84
Shipping hubs .......................................................... 84
Ocean freight and surcharges ............................... 85
Terminal handling charges .................................... 86
Bills of lading and waybills .................................... 86
Different types of bills of lading .............................. 86
Sea way bills ............................................................. 87
Contract of carriage: FOB, FCA and CIF/CFR ..... 87
Carrier’s liability – Burden of proof ....................... 88
Carrier’s obligations – Three conventions ........... 88
Transshipment issues .............................................. 89
Small lot logistics ..................................................... 90
Options for small lots ............................................... 90

When things go wrong ............................................ 64
Mitigation of loss ...................................................... 64
Variations to standard forms of contract .............. 64
COMMERCIAL OR ‘FRONT OFFICE’ ASPECTS ....... 65
Specifying ‘quality’: On description ...................... 65
Specifying ‘quality’: On sample basis .................. 65
The shipping period................................................. 66
Delivery commitment ............................................... 66
Ocean freight............................................................ 67
Weights ...................................................................... 67
Payment: conditions ................................................. 67
Alternative payment methods ................................ 68
Payment: credit policy ............................................. 68
Scope and validity of an offer................................. 69
Using intermediaries – Who is who ....................... 69
DOCUMENTATION OR ‘BACK OFFICE’ ASPECTS .... 70
Introduction to documentation ............................... 70

SHIPPING IN CONTAINERS......................................... 91
Bagged coffee in containers: Riskof condensation ........................................................ 91
Bagged coffee in containers: Stuffing
and shipping ............................................................. 95
Bulk coffee in containers: Several advantages ... 96

ix

Bulk containers: Lining and filling ......................... 96
Fixing the liner .......................................................... 96
CONTAINERS AT THE RECEIVING END .................... 97
Inland container stations ........................................ 97
Discharge .................................................................. 97
Quality and sampling .............................................. 98
Weights and supervision ......................................... 98Container weights at shipment .............................. 98
Outlook ...................................................................... 99
Cost and convenience ............................................. 99
Container security at customs................................ 99
Receiving containers – United States ................... 99
Receiving containers – European Union ............ 100
Container seals ...................................................... 101
Container tracking and smart containers .......... 101
INSURANCE ................................................................. 102
Utmost good faith ................................................... 102
The risk trail to FOB ............................................... 102
The risk trail to FOB: Farm gate to processing .. 102
The risk trail to FOB: Warehousing
and processing....................................................... 103
The risk trail to FOB: Transport to port ................ 103
Delivery to FOB: FCL (or CY) terms ..................... 104
Delivery to FOB: FCL (or CY) terms in bulk ........ 104
Delivery to FOB: LCL (or CFS) .............................. 104
Termination of risk.................................................. 105
Standard forms of contract .................................. 105
INSURANCE: THE COVER ......................................... 105
Insuring risk ............................................................ 105
Types of cover ......................................................... 106
Claims from receivers at destination .................. 107
WAR RISK INSURANCE IN SHIPPING ...................... 107

PAPERLESS TRADE ..................................................... 112
Taking the paper out of the coffee trade:
An example ............................................................. 112
Bird’s eye view ........................................................ 113
The electronic environment .................................. 113
From B2B-exchange to e-marketplaces.............. 114
Centrally available data versus straight
through processing ................................................ 114
Legal framework required .................................... 114
Contract and title registry ..................................... 114
Compliance, verification and settlement ............ 115
Secure transfer of data and documents ............. 115
SPECIFIC ASPECTS .................................................... 115
Security, common ground and dispute
resolution................................................................. 115
Guaranteed originals and no mistakes .............. 116
What are the benefits of e-commerce? ............... 116
Electronic trade execution in practice ................ 116
End result and outlook for ‘paperless trade’ ...... 117
TECHNICAL QUESTIONS .......................................... 118
Who could use an electronic system?................. 118
Standards ............................................................... 118
Access ..................................................................... 118

CHAPTER 7

119

ARBITRATION .............................................120
THE PRINCIPLE OF ARBITRATION ........................... 120
Arbitration centres ................................................. 120
Types of dispute and claims ................................. 120
Common errors ...................................................... 121
Appointing arbitrators ........................................... 121
Awards..................................................................... 121
Failure to comply with an award.......................... 121
Variations to standards contracts ........................ 122
ARBITRATION IN THE UNITED KINGDOM .............. 122

CHAPTER 6

109

E-COMMERCE AND SUPPLY CHAIN
MANAGEMENT...........................................110
E-COMMERCE AND COFFEE .................................... 110
Efficient commerce – The ICE eCOPS system ... 111
Efficient commerce – Supply chain security andefficiency ................................................................. 112
INTERNET AUCTIONS ................................................ 112

The British Coffee Association ............................. 122
The arbitral proceedings ...................................... 122
Time limits for introducing arbitration claims .... 123
Clarity is essential .................................................. 123
Standard timetable for first-tier proceedings .... 123
Provision of samples .............................................. 123
Awards made by a tribunal .................................. 123
Commencing appeal proceedings ..................... 123
Standard timetable for appeal proceedings ..... 124
Provision of samples .............................................. 124
Awards of interest .................................................. 124
Costs of the arbitration .......................................... 124

x

ARBITRATION IN GERMANY ..................................... 124
The Deutscher Kaffeeverband e.V. ...................... 124
Technical arbitration by the DKV ......................... 124
Quality arbitration in Hamburg ............................ 125
ARBITRATION IN FRANCE ......................................... 126
The Chambre arbitrale des cafés et poivres
du Havre .................................................................. 126
Documents to be submitted and time limits ....... 126
Arbitration panels .................................................. 126
ARBITRATION IN THE UNITED STATES ................... 127
The Green Coffee Association ............................. 127
Quality arbitrations ................................................ 127
Gross negligence and fraud ................................ 128
Technical arbitrations ............................................ 128
Practical considerations ....................................... 129
Costs and fees ........................................................ 130

CHAPTER 8

131

FUTURES MARKETS ..................................132
ABOUT FUTURES MARKETS ..................................... 132
Internet access ....................................................... 132
The function of futures markets............................ 132
The two markets – cash and futures ................... 133
Price risk and differential ...................................... 133
Liquidity and turnover............................................ 133
Volatility ................................................................... 135
Leverage.................................................................. 135
ORGANIZATION OF A FUTURES MARKET ............. 135
Clearing house ....................................................... 135
Trading of futures ................................................... 135
Financial security and clearing houses .............. 135
THE PRINCIPAL FUTURES MARKETSFOR COFFEE................................................................ 136
THE NEW YORK ARABICA CONTRACT ................... 136
Trading hours, quotations, price fluctuation
limits ......................................................................... 136
Deliveries, delivery months, tenderable
growths and differentials ...................................... 136
Certification of deliveries ...................................... 137
Integrating futures and cash markets:the eCOPS system ................................................. 137
Supervision by CFTC............................................. 138
Commitment of traders report ............................. 138

Tenderable growths, packing, differentials
and certification ..................................................... 139
Supervision by LCH ............................................... 139
Outlook for an electronic exchange .................... 140
BOLSA DE MERCADORIAS & FUTUROS– BRAZIL ....................................................................... 140
Separate contracts for spot and futures ............. 140
Options .................................................................... 140
Clearing services, turnover and liquidity ............ 140
Turnover – futures and options ............................. 141
SINGAPORE EXCHANGE LTD – THE SGX
ROBUSTA COFFEE CONTRACT ............................... 141
VIET NAM – TWO EXCHANGES FOR ROBUSTA .... 141
THE MECHANICS OF TRADING IN FUTURES ........ 141
Floor procedure...................................................... 142
Delivery .................................................................... 142
Offsetting transactions .......................................... 142
Futures prices ......................................................... 142
Types of orders ....................................................... 143

CHAPTER 9145

HEDGING AND OTHER OPERATIONS ....146
HEDGING – THE CONTEXT ....................................... 146
Principle, risks, protection .................................... 146
Risks ......................................................................... 146
Types of price risk .................................................. 146
The selling hedge................................................... 147
The buying hedge .................................................. 147
The buying hedge – An example ......................... 148
TRADING AT PRICE TO BE FIXED............................. 149
The principle of trading PTBF ............................... 149
Fixing PTBF contracts ............................................ 150
Using PTBF – An example ..................................... 150
Why sell PTBF ......................................................... 150
Sellers need discipline! ......................................... 151
Margins ................................................................... 151
OPTIONS ...................................................................... 152
Put and call options ............................................... 152
Pricing options ........................................................ 152
Intrinsic value – An example ................................ 152
Buying put options – An example ........................ 153

THE LONDON ROBUSTA CONTRACT ..................... 138

HEDGING ..................................................................... 153

Electronic trading at LIFFE ................................... 138
Robusta contract features at LIFFE ..................... 139

Hedging – The advantages .................................. 153
Swap agreements.................................................. 154

xi

HOW TRADE HOUSES USE FUTURES .................... 154
Arbitrage ................................................................. 154
Arbitrage – An example ........................................ 155
Trader speculation ................................................. 155

Availability and cost of credit ............................... 174
Monitoring ............................................................... 174
RISK MANAGEMENT AND CREDIT .......................... 174

Differences between hedging and speculation .. 155
Types of speculators .............................................. 156
Speculative strategies ........................................... 157
Straddling – An example ...................................... 158

Risk management as a credit component ......... 174
Availability of credit is not static ........................... 175
Risk remains risk .................................................... 175
Warehouse receipts as collateral ........................ 176
Warehouse receipts – Summary ofpre-conditions......................................................... 176

TECHNICAL ANALYSIS OF FUTURES MARKETS... 158

TRADE CREDITS IN PRODUCING COUNTRIES ..... 176

Open interest .......................................................... 159
Volume of operations ............................................. 159
Relationship between open interest, volume
and price ................................................................. 159
Charting .................................................................. 160

Trade credit terminology and definitions ............ 176
Types of coffee trade finance ............................... 177

COMMODITY SPECULATION ................................... 155

CHAPTER 10163

RISK AND THE RELATION TO TRADE
CREDIT ........................................................164

TRADE CREDIT AND ASSOCIATED RISKS ............. 177
Physical risk ............................................................ 177
Price risk or market risk ........................................ 178
Differential risk or basis risk ................................. 178
Currency risk .......................................................... 178
Performance risk .................................................... 178
Common errors and misconceptions.................. 179

TYPES OF RISK ............................................................ 164

LETTERS OF CREDIT .................................................. 179

IN-HOUSE DISCIPLINE ............................................... 165

Advance credit – Three types ............................... 180
Uniform Custom and Practice forDocumentary Credits – UCP 600 ......................... 180

Avoid over-trading .................................................. 165
Long and short at the same time ......................... 166
Volume limit............................................................. 166
Financial limit ......................................................... 166
Margin calls – A potential hedge liquidity trap .. 167
Currency risk .......................................................... 167
RISK AND CREDIT ....................................................... 167
Trend risks ............................................................... 168
Risk is not static ...................................................... 169
Changing risk and smaller operators ................. 169
Credit insurance as a (credit) risk
management tool ................................................... 170
Why is the availability (or absence) of credit
insurance important? ............................................ 170
Factoring ................................................................. 170
TRANSACTION SPECIFIC RISKS ............................. 171
Operational risks ................................................... 171
Transaction risks .................................................... 171
CONDITIONALITIES FOR CREDITS ......................... 171
General conditionalities for credits ..................... 171
Security structure ................................................... 171
Specific conditionalities ........................................ 173
The borrower’s balance sheet ............................. 174

ALL-IN COLLATERAL MANAGEMENT ...................... 181
Functions of the collateral manager.................... 181
Modern collateral management facilitates
credit ........................................................................ 181
Guarantees ............................................................. 182
TRADE CREDIT AND RISK – SMALLHOLDERS ...... 182
Credit channels in the smallholder sector ......... 182
Providing collateral can prove difficult forsmallholders ........................................................... 182
Risk management and smallholders .................. 183
Price risk management as pure insurance ........ 184
Price risk management as part of marketing .... 184
Microfinance ........................................................... 185

CHAPTER 11

187

COFFEE QUALITY......................................188
TWO SPECIES AND TWO PROCESSINGMETHODS .................................................................... 188
The definition of quality ......................................... 188
Quality and availability determine the target
market...................................................................... 188
Processing: schematic overview .......................... 189

xii

QUALITY SEGMENTATION – FOUR
CATEGORIES ............................................................... 190
Exemplary quality .................................................. 190
High quality ............................................................. 190
Mainstream quality ................................................ 190
Undergrades or lowgrades .................................. 190
QUALITY AND PRODUCTION.................................... 191
Variety, soils and altitude ...................................... 191
Rain fed or irrigated............................................... 191
Wet or dry processed ............................................ 191
Cost and yield versus quality ............................... 192
Estate or smallholder grown ................................ 192
HIGH QUALITY ARABICA ........................................... 192
Preparing high quality arabica – The basics ..... 192
Defining quality ...................................................... 193
High quality arabica (green) ................................ 193
High quality arabica (roast).................................. 199
High quality arabica (taste) .................................. 200
Mainstream quality ................................................ 202
ROBUSTA...................................................................... 203

The cup or liquor .................................................... 220
The coffee liquorer (the cupper) .......................... 221
CLASSIFICATION TERMS .......................................... 223
Glossary – Green or raw coffee ........................... 223
Glossary – Liquor or cup....................................... 224
Phenolic taste, Rio flavour and fermented.......... 225

CHAPTER 13

227

CLIMATE CHANGE AND THE COFFEEINDUSTRY...................................................228
RISING TEMPERATURES – CONSEQUENCES
AND CHALLENGES ..................................................... 228
Some considerations............................................. 228
Climate change and coffee production .............. 229
Possible effects of climate change on coffee
production ............................................................... 229
Climate change and soil degradation ................ 229
POSSIBLE INTERVENTIONS AND SUPPORTMEASURES .................................................................. 230

209

Adaptation and mitigation .................................... 230

QUALITY CONTROL ..................................210

Terminology ............................................................ 232

QUALITY CONTROL ISSUES..................................... 210

Measuring and forecasting climate change ...... 232

CHAPTER 12

ICO MINIMUM EXPORT STANDARDS ..................... 210
ISO QUALITY SYSTEMS ............................................ 210
HAZARD ANALYSIS CRITICAL CONTROLPOINTS – WHAT IS IT? ............................................... 211

Carbon credits........................................................ 231

Complexity mixed with uncertainty ..................... 232
Coffee species and climate change.................... 232
Helping producers prepare.................................. 233
Websites on climate change ................................ 233

HACCP: HOW TO MANAGE? .................................... 212

FROM STRATEGY TO ACTUAL RESPONSES ......... 234

HACCP AND THE UNITED STATES: FOOD
SAFETY AND BIOTERRORISM .................................. 212

What are the priorities? ......................................... 234

POTENTIAL HAZARDS ............................................... 213

Adapting to climate change in practice ............. 236

Mycotoxins, residues, contamination .................. 213
Pesticides: Maximum Residue Levels in the EU .. 214
Obsolete pesticides ............................................... 214
MOULD PREVENTION – OTA ..................................... 215
OTA – In coffee ....................................................... 216
OTA – Prevention during production,
harvesting and processing ................................... 216
OTA – Prevention during processing................... 217
OTA – Prevention during shipment ...................... 217
COFFEE TASTING (LIQUORING) .............................. 218
Blending .................................................................. 218
The roast ................................................................. 220

Realistically, what can be done?.......................... 235
CARBON CREDITS ...................................................... 237
Origin and limitations ............................................ 237
What does this mean? ........................................... 237
Carbon credits defined ......................................... 237
Product carbon footprints ..................................... 238
Clean Development Mechanism projects .......... 238
The voluntary markets for carbon offsets ........... 239
Voluntary market projects ..................................... 239
Environmental services ......................................... 239
Where to go, where to look? ................................. 240
ADDITIONAL RELEVANT WEBSITES ........................ 240

xiii

CHAPTER 14

243

QUESTIONS & ANSWERS AT
WWW.THECOFFEEGUIDE.ORG ................ 244
Answer to question 032 ......................................... 245
Answer to question 142 ......................................... 246

TABLES
Table 1.1 World coffee exports, by value and volume,
1990–2010 ...............................................................2

Table 2.8 Exports of soluble coffee by exporting countries,
2005–2010 .............................................................31

Table 1.2 Crop years in producing countries ..........................3

Table 2.9 Classification of coffee products tradedinternationally .........................................................35

Table 1.3 ICO qualiy groups....................................................4
Table 1.4 Illustration of a defect count for sun-dried(natural) coffee.........................................................6

Table 2.10 Tariffs for import of coffee in selected countries....36
Table 3.1 Total worldwide sales of FLO-certified coffee,
2004–2010 .............................................................55

Table 1.5 Overview of world production by type, coffee
years 2006/07–2010/11 ...........................................6

Table 3.2 Fairtrade premiums ...............................................56

Table 1.6 Domestic consumption in coffee producing
countries, crop year 2010/11 ...................................7

Table 3.3 Comparative overview of sustainability
schemes for coffee ................................................60

Table 1.7 Overview of world exports by type,2006/07–2010/11 .....................................................7

Table 3.4 Women’s employment in the coffee sector ...........61
Table 3.5 Women’s ownership in the coffee sector ..............61

Table 1.8 Opening stocks by type, crop years
2006/07–2010/11 .....................................................8

Table 5.1 Cost distribution between sellers and buyers .......87

Table 1.9 Consumption in importing countries/areas,
2006/07–2010/11 .....................................................9

Table 8.1 Annual turnover in futures compared withgross world imports, 1980–2010 .........................134

Table 1.10 Membership of the ICO .........................................12

Table 8.2 Annual turnover in options and futures,
1990–2010 ...........................................................134

Table 1.11 World production by country, 1995/96–2010/11 ...13
Table 2.1 World gross and net imports, disappearance
and inventories by form of coffee, 2005–2010 ......18
Table 2.2 Consumption of decaffeinated coffee as apercentage of total consumption, 2010 ................20
Table 2.3 Coffee consumption in North America, 2010 ........21
Table 2.4 Coffee consumption in Europe, 2010....................22
Table 2.5 Coffee consumption in selected countries
in Asia and Australasia, 2010 ................................25
Table 2.6 Coffee consumption in selected countries, 2010 ..26
Table 2.7 Coffee consumption in selected origins, 2010 ......27

Table 8.3 Tenderable growths and differentials at ICE ........137
Table 10.1 Operational risks ..................................................172
Table 10.2 Transaction risks ..................................................172
Table 10.3 What a borrower must show ................................179

xiv

FIGURES
Figure 1.1

Share of coffee in total exports by value,
2005–2010.............................................................2

Figure 2.6

Imports of soluble coffee by origin, average
2005–2010...........................................................33

Figure 1.2

Annual arabica production, 1981/86 and2006/11 .................................................................4

Figure 2.7

Figure 1.3

Annual robusta production, 1981/86 and2006/11 .................................................................4

Export value of soluble coffee from ICA
producing countries compared with the ICA
Composite Indicator Price, 1990–2010...............34

Figure 2.8

Export value of roasted coffee from ICA
members compared with the ICA Composite
Indicator Price, 1990–2010 .................................34

Figure 9.1

Example of a daily coffee futures pricechart (December 2011); Coffee – ICE,
4 November 2011..............................................161
Example of a monthly coffee futures pricechart; Coffee – ICE, 31 October 2011...............161

Figure 1.4

Total inventories in importing countries
and prices, 1990-2010 ..........................................9

Figure 2.1

Leading coffee trading companies worldwide,
2010.....................................................................16

Figure 2.2

Leading coffee roasting companies
worldwide, 2010 ..................................................18

Figure 9.2

Figure 2.3

World coffee imports, 1949–2010 .......................18

Figure 2.4

Consumption of soluble coffee – 2000, 2005
and 2010 .............................................................19

Figure 11.1 Processing of coffee cherries andgreen coffee beans ...........................................189

Figure 2.5

Imports of roasted coffee by origin, average
2005–2010...........................................................33

BOXES
Box 9.1

The selling hedge – an example..........................148

Box 11.1 Screen sizes ........................................................197
Box 12.1 Persistent Organic Pollutants ..............................214
Box 13.1 The Kyoto Protocol ..............................................228
Box 13.2 Carbon footprints and sinks ................................231

xv

NOTE
Unless otherwise specified, all references to dollars ($) andcents (cts) are to Unites States dollars and cents.
All references to tons are to metric tons. The term ‘billion’
denotes 1 thousand million.
The following abbreviations are used:

GHG

Greenhouse gas

GIS

Geographic information system

GP

General purpose (container)

GPS

Global positioning system

GSP

Generalized System of Preferences

GTC

Good till cancelled

HACCP

Hazard Analysis Critical Control Point

ICA

International Coffee Agreement

ICE

Intercontinental Exchange (New York)AA

Against actuals

ACPC

Association of Coffee Producing Countries

ASP

Applications service provider

B/LBill of lading

BM&F

Brazilian Mercantile & Futures Exchange

CAD

Cash against documents

CDM

Clean Development Mechanism

IPCC

Intergovernmental Panel on Climate Change

CFR

Cost and freight

ISOInternational Organization for Standardization

CFTC

U.S. Commodity Futures Trading Commission

ITC

International Trade Centre

CFC

Common Fund for Commodities

JIT

Just-in-time

CFSContainer freight station

LCH

London Clearing House

CHIPS

Clearing House Interbank Payment System

LCL

Less than container load

CIF

Cost, insurance, freight

L/C

Letter of credit

CM

Collateral manager

LIFFE

COE

Cup of Excellence

London International Financial Futures andOptions Exchange (NYSE Euronext Liffe)

COT

Commitment of traders

MFN

Most favoured nation

CSCE

Coffee, Sugar and Cocoa Exchange (New York)NCA

National Coffee Association (United States)

CY

Container yard

NCAD

Net cash against documents

DAF

Delivered at frontier

NCSE

New York Coffee, Sugar and Cocoa Exchange

ECC

European Contract for CoffeeNGO

Non-governmental organization

eCOPS

Electronic Commodity Operations Processing
System (at ICE, New York)NY 'C'

Coffee ‘C’ Contract (at ICE, New York)OTA

Ochratoxin A

ECF

European Coffee Federation

PTBF

Price to be fixed

EDK

Ex dock

RTD

Ready-to-drink

ETA

Estimated time of arrivalSAS

Subject to approval of sample

EU

European Union

SCAA

Specialty Coffee Association of America

EUREP

Euro-Retailer Produce Working GroupSCAE

Specialty Coffee Association of Europe

EUREPGAP

EUREP Good Agricultural Practice

STC

Said to contain

EWR

Electronic warehouse receipt

SURF

Settlement Utility for Managing Risk and Finance

FAO

Food and Agriculture Organization of the United
Nations

SWIFT

Society for Worldwide Interbank Financial
Telecommunication

FAQ

Fair average quality

TEU

Twenty-foot equivalent unit (container)

FCA

Free carrier

THC

Terminal handling charges

FCL

Full container load

UCP

FCM

Futures commission merchant

Uniform Customs and Practice for Documentary
Credits

FDA

U.S. Food and Drug Administration

UNCTAD

United Nations Conference on Trade andDevelopment

USDA

United States Department of Agriculture

VSA

Vessel sharing agreement

WTO

World Trade Organization

XML

Extensible mark-up language

FOB

Free on board

FOTFree on truck/train

FLO

Fairtrade Labelling Organizations

GAP

Good Agricultural Practice

GBE

Green bean equivalent

GCA

Green Coffee Association (United States)

ICO

International Coffee Organization

ICS

Internal Control System (organic)

IFOAM

International Federation of Organic Agriculture
Movements

xvi

CONVERSIONS TO GREEN BEAN EQUIVALENTIn accordance with internationally accepted practice, all quantity data in this guide represent bags of 60 kg net (132.276 lb)
green coffee or the equivalent thereof, i.e. GBE: green coffee equivalent. Green coffee means all coffee in the naked bean
form before roasting.
The International Coffee Organization has agreed the following conversion factors to convert different types ofcoffee to GBE: Dried cherry to green bean: multiply the net weight of the cherry by 0.5;
 Parchment to green bean: multiply the net weight of the parchment by 0.8;
 Decaffeinated green bean to green bean: multiply the net weight by 1.05;
 Regular roasted coffee to green bean: multiply the net weight of the regular roasted coffee by 1.19;
 Decaffeinated roasted coffee to green bean: multiply the net weight of the decaffeinated roasted coffee by 1.25;
 Regular soluble coffee to green bean: multiply the net weight of the regular soluble coffee by 2.6;
 Decaffeinated soluble coffee to green bean: multiply the net weight of the decaffeinated soluble coffee by 2.73;
 Regular liquid coffee to green bean: multiply the net weight of the dried coffee solids contained in the regular liquid
coffee by 2.6;
 Decaffeinated liquid coffee to green bean: multiply the net weight of the dried coffee solids contained in the decaffeinatedliquid coffee by 2.73.
Alternatively, for statistical purpose: 60 kg green coffee represents:
 120 kg dried cherry; 75 kg parchment.

CHAPTER 1WORLD COFFEE TRADE –AN OVERVIEW

THE IMPORTANCE OF COFFEE IN WORLD TRADE ...........................................................................................2
SUPPLY, PRODUCTION, STOCKS AND DOMESTIC CONSUMPTION .............................................................2
DEMAND, CONSUMPTION AND INVENTORIES.................................................................................................8
PRICES ...................................................................................................................................................................10
THE INTERNATIONAL COFFEE ORGANIZATION .............................................................................................10

2

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEWWORLD COFFEE TRADE –AN OVERVIEW
THE IMPORTANCE OF COFFEEIN WORLD TRADE
Coffee is an important commodity in the world economy,
accounting for trade worth approximately US$ 16.5 billion
in calendar year 2010, when some 97 million bags of 60 kg(5.8 million tons) were shipped. World production in coffee
year 2010/11 is estimated at 131 million bags (7.8 million
tons) while consumption in calendar year 2010 is estimatedat 135 million bags (8.1 million tons).
Table 1.1

World coffee exports, by value and volume,
1990–2010

Calendaryear
1990

average share of coffee exports in their total export earnings
exceeded 10%.
Figure 1.1 Share of coffee in total exports by value, 2005–
2010
Timor-Leste

70%

Burundi62%

Ethiopia

34%

Rwanda28%

Honduras

21%

Nicaragua

18%

Uganda17%

Guatemala13%

US$ billion

Million bags
(60 kg net)

Cts/lb (EUV)*

6.9

80.6

65

Colombia

6%
5%

El Salvador

9%

1995

11.6

67.6

130

U.R. of Tanzania

2000

8.2

89.5

69

Papua New Guinea

4%

2005

9.2

87.6

79

Kenya

3%

Costa Rica

3%

Viet Nam

3%

Brazil3%

Sierra Leone

2%

Côte d'Ivoire

2%

Peru

2%

Cameroon

2%

Panama2%

Jamaica

2%

2006

10.8

91.6

89

2007

12.8

96.3

100

2008

15.4

97.6

119

2009

13.3

96.2

105

2010

16.5

96.7

129

Source: ICO.
* Export unit value, rounded to nearest US cent.

Some 70 countries produce coffee. Three countries alone
have in recent years produced around 55% of the world’s
coffee: Brazil (32%–34%), Viet Nam (12%–13%) and
Colombia (8%–9%).
In 2010 the International Coffee Organization (ICO) estimatedtotal coffee sector employment at about 26 million persons in
52 producing countries. See Doc. ICC 105-5 at www.ico.org.
For many countries, coffee exports not only are a vital
contributor to foreign exchange earnings, but also accountfor a significant proportion of tax income and gross domestic
product. For eight countries, the average share of coffee
exports in total export earnings exceeded 10% in the period
2005–2010, although the importance of coffee in the economy
of many countries is diminishing over time. This can bedemonstrated by the fact that during the period 1995–2000,
there were 15 countries which fell into this category, i.e. theSource: ICO.

SUPPLY, PRODUCTION,STOCKS AND DOMESTICCONSUMPTION
DEFINITIONS RELATED TO SUPPLY
Supply is generally defined as the sum of production in agiven coffee year plus stocks carried over from the previousyear.

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Exportable supply, however, is defined as supply minus
domestic consumption and an amount deemed to berequired for working stocks.
Working stocks is not precisely defined. It relates to thevolume of coffee required to maintain a steady and planned
flow of exports to the market. It is generally perceived as theamount of coffee in the pipeline in an exporting country at any
one time. Harvesting and export patterns vary from country
to country. As a result, working stocks are not defined as afixed percentage or proportion of a country’s production orexport capacity, but rather as an individual amount uniqueto every country. In many respects the calculation of working
stocks is arbitrary, but it is generally based on historical data
for each country.
Exportable production is total annual production lessdomestic consumption in producing countries. Availability
for export is equivalent to the carry-over stocks from theprevious year plus exportable production of the current year.
Any difference between exportable production and actual
exports (surplus or shortfall) results in an adjustment up or
down of the carry-over stocks to the following year.
Crop year. Coffee is a seasonal crop. Seasons vary fromcountry to country, starting and finishing at different times
throughout the year. This makes statistics on worldwide
annual production very difficult to collate: any single
12-month period may encompass a whole crop year in one
country, but will also include the tail end of the previous
year’s crop and the beginning of the next year’s crop inothers. In order to compare supply aggregates as well
supply with demand, where possible supply data has been
converted from crop year to coffee year (which runs from
October to September). It should be noted that this is notalways possible.

Table 1.2

READINESS FOR EXPORTOf course there is a delay between the harvesting of coffee
and its readiness for export due to processing, drying,conditioning and so forth. The following is the estimatedtiming of the approximate crop availability for export inselected countries:
Arabica
Brazil:86% in July-December
Ethiopia:
75% in January – June
Honduras: 60% in January – June
Kenya:
70% in January – JunePeru:
68% in July – December
Colombia: availability is usually (but not always)
spread fairly equally throughout the coffee year.
Robusta
Brazil:Indonesia:
Uganda:Viet Nam:

75% January – June
65% July – December
64% January – June
55% January – June

COFFEE PRODUCING COUNTRIES BY ICOQUALITY GROUP
For administrative reasons, mainly related to the organizationof quotas in the past, the ICO divided coffee production into
four groups on the basis of the predominant type of coffee
produced by each member country.

Crop years in producing countries

1 October30 September

Benin
Cameroon
Central African Republic
Colombia
Costa Rica
Côte d’Ivoire
Democratic Republic of the Congo
El Salvador
Equatorial Guinea
Ethiopia
Gabon

Ghana
GuatemalaGuineaHonduras
India
Jamaica
Kenya
Liberia
MexicoNicaragua
Nigeria

PanamaSierra Leone
Sri Lanka
ThailandTogo
Trinidad and Tobago
UgandaVenezuela (Bolivarian Republic of)Viet Nam

1 April-31 March

AngolaBolivia (Plurinational State of)BrazilBurundiEcuadorIndonesia
Madagascar
Malawi
Papua New Guinea
Paraguay

Peru
RwandaZimbabwe

1 July-30 June

Congo
Cuba
Dominican Republic

Haiti
Philippines
United Republic of Tanzania

ZambiaSource: ICO.

3

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Table 1.3

ICO qualiy groups

Quality group

CONVERSIONS TO GREEN BEAN
EQUIVALENT

Producers

Colombian mild
arabicas

Colombia, Kenya, United Republic of
Tanzania

Other mild
arabicas

Bolivia (Plurinational State of), Burundi,
Costa Rica, Cuba, Dominican Republic,
Ecuador, El Salvador, Guatemala, Haiti,
Honduras, India, Jamaica, Malawi,
Mexico, Nicaragua, Panama, Papua New
Guinea, Peru, Rwanda, Venezuela(Bolivarian Republic of), Zambia,
Zimbabwe

Brazilian andother natural
arabicasBrazil, Ethiopia, Paraguay, Timor-Leste,
Yemen

Robustas

Angola, Benin, Cameroon, Central
African Republic, Congo, Côte d’Ivoire,
Democratic Republic of the Congo,
Equatorial Guinea, Gabon, Ghana,
Guinea, Indonesia, Liberia, Madagascar,
Nigeria, Philippines, Sierra Leone, Sri
Lanka, Thailand, Togo, Trinidad andTobago, Uganda, Viet Nam

GEOGRAPHICAL DISTRIBUTION
Coffee is indigenous to Africa, with arabica coffee reportedly
originating from Ethiopia and robusta from the Atlantic
Coast (Kouilou region and in and around Angola) and theGreat Lakes region. Today, it is widely grown throughout
the tropics. The bulk of the world’s coffee, however, is
produced in Latin America and in particular in Brazil, which
has dominated world production since 1840.
Brazil is the world’s largest grower and seller of coffee. Viet
Nam, which expanded its production rapidly throughout
the 1990s, now holds the number two position, bringing
Colombia into third place and Indonesia into fourth.
The figures below demonstrate the shift of regional sharesof arabica and robusta production since 1981.

Figure 1.2 Annual arabica production, 1981/86 and 2006/11
1981/86

In accordance with internationally accepted practice, allquantity data in this guide represent bags of 60 kg net(132.276 lb) green coffee or the equivalent thereof, i.e. GBE:
green coffee equivalent. Green coffee means all coffee in
the naked bean form before roasting.
The International Coffee Organization has agreed thefollowing conversion factors to convert different typesof coffee to GBE: Dried cherry to green bean: multiply the net weight of thecherry by 0.5;
 Parchment to green bean: multiply the net weight of theparchment by 0.8;
 Decaffeinated green bean to green bean: multiply the net
weight by 1.05;
 Regular roasted coffee to green bean: multiply the net
weight of the regular roasted coffee by 1.19;
 Decaffeinated roasted coffee to green bean: multiply thenet weight of the decaffeinated roasted coffee by 1.25;
 Regular soluble coffee to green bean: multiply the net
weight of the regular soluble coffee by 2.6;
 Decaffeinated soluble coffee to green bean: multiply thenet weight of the decaffeinated soluble coffee by 2.73;
 Regular liquid coffee to green bean: multiply the net
weight of the dried coffee solids contained in the regularliquid coffee by 2.6;
 Decaffeinated liquid coffee to green bean: multiply thenet weight of the dried coffee solids contained in thedecaffeinated liquid coffee by 2.73.
Alternatively, for statistical purpose: 60 kg green coffee
represents:
 120 kg dried cherry; 75 kg parchment.

Figure 1.3 Annual robusta production, 1981/86 and 2006/11
1981/86

2006/1135
30
25

Million bags

Million bags

4

20
15
10
5
0
BrazilSource: ICO.

Colombia

AfricaOthers2006/11

20
18
16
14
12
10
8
6
4
2
0
Viet Nam

Source: ICO.

BrazilIndonesia

AfricaOthersCHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEWGRADING AND CLASSIFICATIONGreen coffee is graded and classified for export with theultimate aim of producing the best cup quality and thereby
securing the highest price. However, there is no universal
grading and classification system – each producing
country has its own, which it may also use to set (minimum)
standards for export.
Grading and classification is usually based on some of thefollowing criteria:
 Altitude and/or region;
 Botanical variety; Preparation (wet or dry process = washed or natural); Bean size (screen size), sometimes also bean shape andcolour; Number of defects (imperfections); Roast appearance and cup quality (flavour,characteristics, cleanliness, etc.);
 Density of the beans.
Most grading and classification systems include (oftenvery detailed) criteria, e.g. regarding permissible defects,
which are not listed here. The Origins Encyclopaedia at
www.supremo.be is an example of a website which gives
information on the export classification of coffees of mostorigins. Terminology on size and defects as used forclassifications is also found at www.coffeeresearch.org.
The diversified classification terminology used in the tradeis illustrated with a few examples below. It should be notedthat descriptions such as ‘European preparation’ may differ
from one country to another. The examples refer primarily tothe trade in mainstream coffee and do not reflect the often
more detailed descriptions used for niche markets.
Brazil/Santos NY 2/3
Screen 17/18, fine roast, strictly soft, fine cup.
Brazil/Santos NY 3/4
Screen 14/16, good roast, strictly soft, good cup (often
seen quoted as ‘Swedish preparation’).
Colombia Supremo screen 17/18
High grade type of washed arabica, screen 17 withmaximum 5% below. Often specified with further details.
Côte d’Ivoire (Ivory Coast) Robusta Grade 2
Grade 2; scale is from 0 (best) to 4 based on screen sizeand defects.
El Salvador SHG EP
Strictly High Grown (above 1,200 m; High Grown from
900–1,200 m and Central Standard from 500–900 m).
Commonly used quality descriptions are European

Preparation (maximum 6 defects per 300 g) and American
Preparation (maximum 12 defects per 300 g).
Ethiopia Jimma 5
Sun-dried (i.e. natural) arabica from the Jimma region.
Type 5 refers to a grading scale based on screen, defectcount and cup quality.
Guatemala SHB EP Huehuetenango
Strictly Hard Bean is from above 1,400 m. Scale includes
five altitude levels from below 900 m (Prime washed) toabove 1,400 m. European preparation: above screen
15, allows maximum 8 defects per 300 g (American
preparation: above screen 14, allows 23 defects).
India Arabica Plantation A
Washed arabica, screen 17. Classification is PB, A, B
and C. Other classifications apply to unwashed (naturals)
and robusta.
Indonesia Robusta Grade 4
The export grade scale goes from 0 (best) to 6. Grade
4 allows 45–80 defects. Region or other details are
sometimes specified as quality, e.g. EK-1 and EK-Special.
Processing depends on the region (island).
Kenya AB FAQ even roast clean cup
Kenya arabica grade AB, fair average quality. Internal
grading system (E, AA, AB, PB, C, TT and T) is based onbean size and density, further detailed by liquor quality
into 10 classifications. Top cupping coffees are mostly
sold on actual sample basis.
Mexico Prime Washed Europrep
Prime Washed (prima lavado) from altitude between
600 m and 900 m, on a scale from 400 m to 1,400 m;
Europrep is retained by screen 17 and allows maximum
15 defects per 300 g.
Papua New Guinea (PNG) Smallholder Y1-grade
Y1 is one of the grades on a scale covering bean size,
defect count, colour, odour, roast aspects and cup
quality; AA, A, AB, B, C, PB, X, E, PSC, Y1, Y2 and T.
Viet Nam Robusta Grade 2 maximum 5% blacks andbrokenGrade 2 out of six grades: Special Grade and Grade 1
to 5, based on screen size and defects. (Descriptions
are often supplemented with further details on moisture
content, acceptable mix of bean types, bean size, etc.)

5

6

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Table 1.4

Illustration of a defect count for sun-dried(natural) coffee

DOMESTIC CONSUMPTION

1 black bean

1

2 sour or rancid beans

1

2 beans in parchment

1

1 cherry1

1 large husk

1

2–3 small husks

1

3 shells

1

1 large stone/earth clod

5

1 medium-sized stone/earth clod2

1 small stone/earth clod

1

1 large stick5

1 medium-sized stick2

1 small stick1

5 broken beans

1

5 green or immature beans

1

5 insect damaged beans

1

Table 1.5

Domestic consumption in producing countries is estimatedto have risen from about 26 million bags in 2000/01 to
over 41 million bags in crop year 2010/11. The bulk of thisincrease is attributed to growth in the internal market in
Brazil, which has increased from 13 million bags to morethan 19 million bags over the same period – about half of all
coffee consumed in producing countries. Industry sources
point to the growth in real disposable incomes in Brazil anda policy of using better quality coffee for the internal markets
as important factors behind this growth.
Elsewhere in Latin America, consumption is constrainedby relatively low urban income levels although there has
been some growth in Mexico and consumption remains
reasonably substantial in Colombia.
By comparison consumption in Africa is negligible withthe exception of Ethiopia, where there is a long and wellestablished tradition of coffee drinking.
In Asia, total consumption is reasonably high in India,
Indonesia and the Philippines, although per capita
consumption levels are relatively low. See table 1.6.

Overview of world production by type, coffee years 2006/07–2010/11 (in millions of bags)
2006/07

2007/08

2008/09

2009/102010/11*World

Coffee Year

127.1

127.8

126.7

128.6

131.1

ArabicasBrazilColombia
Other Americas
AfricaAsia and the Pacific

77.3
29.1
12.6
23.1
8.3
4.2

80.1
30.3
12.5
24.2
8.7
4.4

75.8
32.2
8.7
22.8
7.6
4.4

77.8
32.5
9.0
21.8
9.6
4.9

80.8
33.6
9.2
23.2
10.3
4.4

Robustas
BrazilOther Latin America
Viet Nam
Indonesia
Other Asia and PacificCôte d’Ivoire
UgandaOther Africa

49.7
10.2
0.5
19.3
6.4
5.4
2.8
2.2
2.9

47.7
10.7
0.4
16.5
6.9
5.3
2.6
2.6
2.7

50.9
10.6
0.4
18.5
8.1
5.5
2.4
2.6
2.8

50.8
10.9
0.4
18.0
8.6
6.2
1.9
2.4
2.4

50.4
12.7
0.3
18.5
6.8
4.9
2.2
2.2
2.8

Shares (%)
Arabicas
Robustas

60.8
39.2

62.7
37.3

59.8
40.2

60.5
39.5

61.6
38.4

Source: ICO and USDA.
* Preliminary.
Note: Totals may not add up owing to rounding. For more up-to-date statistics visit www.ico.org.

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Table 1.6

Domestic consumption in coffee producing
countries, crop year 2010/11 (estimated)(’000 bags)

Africaof which:
Côte d’Ivoire
Ethiopia

5 181

Asia and the Pacificof which:
India
Indonesia
Philippines
Viet Nam

8 328

Latin Americaof which:
BrazilColombia
MexicoVenezuela (Bolivarian Republic of)

27 501Total

41 010

317
3 383

1 800
3 333
1 080
1 583

19 130
1 400
2 354
1 650

Source: ICO and own estimates.
Note: Figures are rounded up to the nearest ’000.

Table 1.7

EXPORTS
Exports of coffee in all forms from producing countries havevaried significantly from year to year, reflecting, by and large,
the variations in world production. See tables 1.5 and 1.7.

STOCKS IN PRODUCING COUNTRIESExtreme caution must be exercised when looking at
producer-held stock figures, as the numbers involved do notnecessarily reflect true availability. In some cases the official
estimates will underestimate the amount held, as it is often
impossible for the authorities to record the total volume held
in private hands in a country, while in other cases the figures
will exaggerate the amount available. This was certainly thecase in the past when stocks played an important role indetermining a producing country’s quota at the ICO, as it
was to a country’s advantage to record the highest possible
stock figure. Consequently poor-quality coffee, which wasdifficult to sell and indeed had very little value, was often
included to inflate a country’s stock figure, although thistends not to be the situation today.

Overview of world exports by type, 2006/07–2010/11 (’000 bags)
Coffee years

2006/07

2007/08

2008/09

2009/102010/11*

Total exports

98 38896 03297 43392 521105 000

Arabicasof which from:
BrazilColombia
Other Latin America
AfricaAsia and the Pacific

59 90857 85458 63056 20264 02524 067
10 58617 0635 633
2 559

22 30310 84617 2485 131
2 326

27 3188 072
16 397
4 777
2 066

26 540
6 533
15 3174 953
2 859

29 6037 817
17 8036 231
2 571

Robustasof which from:
BrazilOther Latin America
Viet Nam
Indonesia
Other Asia and the PacificCôte d’Ivoire
UgandaOther Africa

31 11130 54132 26329 19133 277

1 571
236
18 066
2 934
2 243
1 807
2 144
2 110

2 025
107
15 751
4 696
1 991
1 423
2 711
1 837

1 377
339
17 381
5 905
2 067
1 122
2 407
1 665

1 082
253
14 578
5 320
2 576
1 819
1 960
1 603

2 127
329
17 105
4 880
4 059
955
2 116
1 706

Roasted coffee
Solubleof which from:
BrazilOther Latin America
AfricaAsia
Shares (%)
Arabicas
Robustas
RoastedSolubleSource: ICO.
*July/June.

204

287

255

223

200

7 165

7 350

6 285

6 905

7 498

3 313
1 941
885
1 026

3 508
2 142
525
1 175

2 849
1 926
414
1 096

3 162
1 965
270
1 508

3 142
2 206
310
1 840

60.9
31.6
0.2
7.3

60.3
31.8
0.2
7.7

60.2
33.1
0.3
6.4

60.7
31.5
0.3
7.5

61.0
31.7
0.2
7.1

7

8

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Furthermore, stock verifications ceased in 1989 with thesuspension of the quota system and although the figures
produced from the verification exercise were questionable,
they were the product of a reasonably rigorous procedure.
Since then the figures have been based on national
estimates and there has been no independent verificationof the accuracy or otherwise of these figures. As a result,published statistics are subject to frequent revisions, someof which are substantial going back over a number of years.
A degree of caution is therefore necessary when using
these figures in any analysis. See table 1.7.

DEMAND, CONSUMPTION AND
INVENTORIESFor countries, which are members of the ICO and for a few
non-member countries where the relevant statistics exist,
the figures relate to disappearance, whereas for the rest of
the non-member countries they relate to net imports. Strictly
speaking the two sets of figures are not the same, but areclose enough to be incorporated in the table 1.9.

CONSUMPTION TRENDS

Most of the statistical material on trends in imports, reexports and consumption of coffee worldwide is expressedin calendar years, which is largely how data on demandand consumption are reported and analysed by consuming
countries and trade bodies. The summary data below are
given in coffee years to facilitate comparisons with supply
data provided elsewhere.
A straight comparison between the two sets of data is notpossible as time lags produce differences between the basic
and aggregate figures. To complicate the issue even further,statistics on coffee consumption tend to be misleading
as no single set of statistics gives the whole picture.
Import statistics, for example, are not a good indicator of

Table 1.8

consumption as they do not take into account re-exports orchanges in the level of stocks held in importing countries. To
overcome this the ICO publishes figures on ‘disappearance’that take these factors into account, but it is still impossible
to allow for changes in the level of unreported stocks heldby traders, roasters and retailers.

It is estimated that global consumption in coffee year
2010/11 will total 130.9 million bags. Of this total, 69.4 million
bags were consumed in importing ICO member countries,
20.5 million bags were consumed in non-member countries,
and the remaining 41.0 million bags were consumed in
producing countries.
Consumption has grown by an average of around 1.2% a
year since the early 1980s. Probably the most spectacular
growth has been witnessed in Japan, where consumption
has grown by around 3.5% a year over the same period,
although it appears to have reached a plateau over the last
10 years. Japan is now the third largest importer of coffee
in the world.

Opening stocks by type, crop years 2006/07–2010/11 (’000 bags)
2006/07

2007/08

2008/09

2009/102010/11World

Coffee years

28 34327 72219 46320 48918 461

Arabicasof which from:
BrazilColombia
Other Latin America
AfricaAsia and the Pacific

21 32319 07614 36113 376

11 83816 503
855
2 292
1 168
505

15 200
819
1 314
1 253
490

11 294
366
1 021
1 315
365

10 714
25
791
1 383
463

8 486
27
910
2 193
222

Robustasof which from:
BrazilOther Latin America
Viet Nam
Indonesia
Other Asia and the PacificCôte d’Ivoire
UgandaOther Africa

7 020

8 646

5 102

7 113

6 623

4 737
8
500
129
992
282
264
108

6 639
4
833
24
812
124
120
90

3 336
3
526
45
660
458
20
54

3 942
4
640
541
535
970
23
458

2 592
6
2 716
573
97
418
11
210

75.2
24.8

68.8
31.2

73.4
26.6

65.3
34.7

64.1
35.9

Shares (%)
Arabicas
Robustas
Source: ICO.

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

There has been very little growth in coffee consumption in
Europe over the last five years, with consumption showing
signs of stagnation and possibly even decline. The situationis only slightly better in the United States, where overall
consumption, despite the boom in the specialty sector, hasremained virtually unaltered over the past five years.
The figures for consumption in non-ICO member countries
suggest that there has been a surprisingly large upsurge

Table 1.9

in consumption in these countries since the turn of the
century. On average, consumption has grown by over 6%
per annum, although the recent economic turmoil has
reduced coffee consumption in many of these countries –
possibly only temporarily. However, these figures should beread with some caution, as the data for exports and hence
consumption in these countries is not necessarily always
collected from the same source.

Consumption in importing countries/areas, 2006/07–2010/11 (’000 bags)

Importing countries/areas

2006/07

2007/08

2008/09

2009/102010/11*World

92 61993 56892 92291 39289 859North Americaof which:
United States

23 99424 50124 901

24 62424 06021 19921 42321 65621 33220 473

Western Europeof which:
FranceGermanyItaly

42 78042 34039 87440 65139 182

5 581
9 082
5 840

5 331
9 912
5 918

5 329
8 409
5 752

5 562
9 554
5 743

5 632
8 584
5 760

Eastern Europe

6 195

7 211

7 589

6 586

7 030

Asia and the Pacificof which:Japan

12 90813 78014 28013 56413 745

7 265

7 150

7 330

6 909

6 680

Others

6 742

5 736

6 270

5 967

5 842

Source: ICO.
* Preliminary estimate.

Stocks held in importing countries are usually referred to as
inventories to distinguish them from stocks held in producer
countries. Inventories tend to grow when prices are low anddeplete when prices are higher, although the relationship isfar from linear.
Consumer-held stocks were relatively stable throughout
the 1980s, but increased dramatically with the suspensionof quotas in 1989 and the collapse in prices. They fell in
response to the price hike in 1994, but began to expand
again with the collapse in prices during 2000 and 2001.
By the end of 2010 they totalled just over 18 million bags,
which is equivalent to about just over 10 weeks of consumer
demandOnce again, some caution is required when looking at thesefigures as much of the data on consumer-held stock either is
not published or is published only sporadically. Furthermore,
as for producer-held stocks, a certain proportion of thisshould be seen as working stock, that is, the amount ofcoffee in the system or pipeline at any one time.

In the past, most analysts worked on the basis that around 8
million bags were required as consumer-held working stock.
However, the adoption of the just-in-time stock management
system by most of the world’s major roasters, together with
the improvement in logistics, has meant that the volume
that probably should now be considered working stock has
been reduced to maybe as low as 4 million bags.
The figure below shows the evolution of inventories since1990 together with the composite indicator price.
Figure 1.4 Total inventories in importing countries andprices, 1990-2010
30 000

160
140
120
100
80
60
40
20
0

25 000Million bags

STOCKS OR INVENTORIES IN IMPORTING
COUNTRIES

20 000
15 000
10 000
5 000
0

Total

Source: ICO.

Prices9

10

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEWPRICES
There is no single price for ‘coffee’ because coffee, being a
product of nature, is not a homogeneous product. However,broadly speaking the international coffee-pricing scene canbe divided up as follows: Physicals – prices for green or physical coffee;
 Indicators – prices that track broad groups of comparable
coffees; Futures – that project prices forward for standard
qualities;
 Differentials – a system linking physical prices to futures
prices.
Day-to-day physical coffee prices are determined by supply
and demand. Price setting criteria are mostly quality (whatis the quality of a given coffee or origin), and availability(how much or how little is being offered of a particular typeof coffee). This confirms that not all coffee is the same.
In fact each parcel of coffee is unique with regard to its
characteristics, flavour and quality and hence attracts adifferent price. Of course other factors play a role as well, forexample market expectations, speculative actions, changes
in currency exchange rates and so on. However, by grouping
more or less comparable types of coffee together, average
prices can be calculated and even traded.
ICO indicator prices, published daily by the International
Coffee Organization in London, represent and track the fourmain types of coffee available in the international market: (i)Colombian mild arabicas, (ii) Other mild arabicas, (iii) Brazilian
and other natural arabicas, and (iv) Robustas. These indicator
prices represent spot or cash prices, quoted in the market forcoffee that is more or less immediately available (or within areasonable time-span). The four categories enable the ICO
to calculate market prices for these four broad groups andso monitor price developments for each. In addition, using
an agreed formula, the ICO publishes a Daily Composite
Indicator Price that combines these four into a single pricerepresenting ‘all coffee’. This probably represents the bestindication of a current ‘international price for coffee’. This andother price information, also historical, is freely available atwww.ico.org. For an overview of the ICO indicator pricing
system itself see www.ico.org/coffee_prices.asp.
Futures prices reflect the estimated future availability anddemand for coffee as a whole. Go to www.theice.com forarabica coffee futures prices in New York, and to www.
euronext.com for robusta coffee futures prices in London.
See chapter 8 for details of what average quality of coffee
these futures markets represent. Price charts depict past
price behaviour on these markets – a good source is foundat www.futures.tradingcharts.com.
However, as mentioned, the ICO price indicators (which
track prices) and the futures markets (which project prices)by necessity only do so for generally known, standard
qualities of coffee. Futures markets are used to offset pricerisk in the green coffee market where different qualities ofcoffee are traded. Traders therefore link individual prices
with the futures price by establishing a price difference,the differential. Briefly, this differential takes into account(i) differences between an individual coffee and the standard
quality on which the futures market is based, (ii) the physicalavailability of that coffee (plentiful or tight), and (iii) the terms
and conditions on which it is offered for sale.
An example follows. By combining the New York or London
futures price and the differential, one usually obtains the
FOB (free on board) price for a particular type of green
coffee. This enables the market to simply quote, for example,‘Quality X from Country Y for October shipment at New York
December plus 5’ (US cts/lb). Traders and importers know
the cost of shipping coffee from each origin to Europe,
the United States, Japan or wherever, and so can easilytransform ‘plus 5’ into a price ‘landed final destination’.
The study of physical coffee prices is complicated by thevariability in the quality and appeal of individual coffees,
making it extremely difficult to monitor the daily behaviourof differentials and physical prices. However, for general
research purposes the price information available from theInternational Coffee Organization and the futures markets
of New York and London often suffices. Nevertheless, it isimportant to appreciate that physical coffee price differentials
can be extremely volatile and that at the moment there isno established mechanism or tool that allows exporters
or indeed importers to hedge the risk inherent in physicalcoffee price differential volatility.

THE INTERNATIONAL COFFEEORGANIZATIONIDENTIFICATION OF EXPORTS
In the early 1960s the International Coffee Organization(ICO) instituted an identification code for coffee exports
to enable it to apply the export quota system that existed
at the time. However, this coding system has become an
important statistical tool in its own right and so remains valid
in today’s free coffee market.
Example: 002 – 1961 – 0978
 The first group (002, maximum three digits) identifies thecountry of origin, in this case Brazil. Other codes are 003
Colombia, 011 Guatemala, and so on.
 The second group (1961, maximum four digits) identifies
the exporter. Exporters are registered with the local
authority that issues ICO certificates of origin and receivea code number from such an authority.
 The third group (0978, maximum four digits) refers to
the individual shipment to which the bags in question
belong – in this example shipment number 978 made byexporter number 1961 during the coffee year in question.

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

To see the entire list of country codes and more on ICO
Certificates of Origin go to www.ico.org, look underDocuments – By meeting – Rules, where you can trace ICC
102-9. Coffee years run from 1 October to 30 September– individual shipment numbers recommence at 0001 every
year.
The system allows easy identification of individual bags: thecountry of origin, the exporter, and the shipment number
for that exporter. For shipment’s in bulk (see chapter 5), theshipping marks, including the ICO numbers, are marked
directly on the container liner, making them visible when thecontainer doors are opened. The container number itself ismarked on the ICO Certificate of Origin, thereby completingthe link.

MAIN ELEMENTS OF THE INTERNATIONAL
COFFEE AGREEMENT 2007
 It entered into force for 10 years on 2 February 2011,
on expiry of the International Coffee Agreement (ICA)
2001. The Council will however review the Agreement
five years after its entry into force and ‘take decisions as
appropriate’.
 Extension(s) of the Agreement for up to eight years canbe decided upon by the Council.
 The Council remains the supreme decision-making
authority within the organization, but it also operates
through a number of other bodies namely:– The Finance and Administration Committee;– The Projects Committee;– The Promotion and Market development Committee;– The Statistics Committee;– The Private Sector Consultative Board, with the power
to make recommendations on matters raised for its
consideration by the Council;– The World Coffee Conference, which is called upon
to discuss matters of interest to the industry at large
and to be self-financing, unless the Council decides
otherwise. World Coffee Conferences have been heldin London 2001, Salvador, Brazil 2005 and Guatemala
City 2010;– The Consultative Forum on Coffee Sector Finance, isa new institution created by the International Coffee
Agreement 2007 and aims to facilitate consultations
on topics related to finance and risk management in
the coffee sector with a particular emphasis on theneeds of small and medium scale producers and local
communities in coffee producing area.
 The ICO’s main objectives are to:– Promote international cooperation on coffee matters;– Provide a forum for consultations between governments
and with the private sector;– Promote consumption and coffee quality;– Encourage the development of a sustainable coffee
sector in economic, social and environmental terms;– Collect and publish economic, technical and scientificinformation, statistics and studies;– Provide a forum for the understanding of structural
conditions in international markets and long term
production and consumption trends that result in fair
prices to both producers and consumers;– Promote training and the transfer of technology
relevant to coffee to members;– Encourage members to develop appropriate foodsafety procedures in the coffee sector;– Develop and seek finance for projects that benefit
members and the world coffee economy;– Facilitate the availability of information on financial
tools and services that can assist coffee producers.
 The ICO’s headquarters are to remain in London, unlessthe Council decides otherwise.
 The ICO will continue to maintain the system of indicator
prices.
 Certificates of origin will continue to accompany allexports.
 The preamble acknowledges the exceptional importanceof coffee to the economies of many countries and to
the livelihoods of millions of people, as well as thecontribution that a sustainable coffee sector can make tothe achievement of the Millennium Development Goals.
It also recognizes that collaboration between members
can foster an economically diversified coffee sector andcontribute to its development, as well as recognizingthat increased access to coffee related information andmarket-based risk strategies can help avoid imbalancesthat give rise to market volatility, which is harmful to bothproducers and consumers.
Key events in the history of the International Coffee
Agreement (ICA). (Based primarily on F.O. Licht. International
Coffee Report, vol. 15. No. 21. See also www.ico.org/ico/history.htm.)
1963: First ICA comes into force at a time of low prices,
regulating supplies through an export quota system.
1972: Export quotas suspended as prices soar.
1980: Export quotas restored and producers agree
in return to abandon attempts to regulate the market
unilaterally.
February 1986: Quotas suspended after a boom
caused by drought losses to Brazil’s crop sends prices
soaring above the ceiling of the ICA’s US$ 1.20–US$ 1.40
target range.
October 1987: Quotas reintroduced.
4 July 1989: Indefinite suspension of quotas after thesystem breaks down under the pressure of competing
demands from exporters for market shares under the
new ICA then being negotiated. Backed by the UnitedStates, Central American states and Mexico press for amuch bigger slice of the market at the expense of Brazil(which resists this) and of African producers.

11

12

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

4 September 1989: Then-Colombian President Virgilio
Barco writes to United States President George Bushappealing for help to bring back export quotas under a
new ICA and receives an encouraging response on 19
September.
1 October 1989: ICA extension with its economic
clauses suppressed takes effect.

September 1994: New ‘administrative’ ICA without
economic clauses (drafted in March) enters into force forfive years.
March 1998: First talks open about the possibility of
replacing the 1994 ICA.
July 1999: ICA talks break down.

February 1990: President Bush at a Latin American
drugs summit in Colombia reaffirms commitment to
a new ICA and a document is released setting out theAdministration’s thinking on its possible shape.

September 1999: 1994 ICA extended for a further two
years. During the first year, it is agreed a further attempt
will be made to draw up a replacement treaty.

December 1991: During talks with Cesar Gaviria(Colombia’s new President) Brazilian President Fernando
Collor de Mello (elected in March 1990), agrees inprinciple to back efforts to restore quotas when the local
industry – given the lead role in formulating policy – canagree a common position.

October 2001: ICA 2001 enters into force for six years. It
has no provisions for price regulation.

March 1992: Brazil finally gives the go-ahead to thenegotiation of a new ICA with economic clauses.
June 1992: First round of the negotiations.
9 March 1993: Bill Clinton, victor in the November 1992
United States presidential elections, writes to President
Gaviria supporting a new ICA, although with no sign ofmuch enthusiasm.
31 March 1993: ICA negotiations collapse during thesixth round with little progress having been made andeach side blaming the other for the impasse.
September 1993: In Brazil, 29 countries sign a treaty
establishing the Association of Coffee Producing
Countries (ACPC) with powers to regulate supplies andprices. Citing this as a reason, the United States pulls outof the ICO.

September 2000: Drafting of a new ICA completed.

February 2005: The United States returns to full
membership.
January 2006: Negotiations to replace the ICA 2001
begin
September 2007: A new 10-year International Coffee
Agreement is approved and the 2001 ICA is extended,
initially for one year, to enable ratification procedures tobe completed.
September 2010: The 2007 ICA is extended for a fourthyear to provide further time for participating countries tocomplete their ratification procedures.
September 2010: Japan officially withdraws from theAgreement.
2 February 2011: ICA 2007 finally comes into force.

Table 1.10 Membership of the ICO
Exporting members
AngolaBrazilBurundiCentral African Republic
Colombia
Costa Rica
Côte d'Ivoire
Cuba
EcuadorEl Salvador
Ethiopia
Gabon
Ghana
GuatemalaHonduras
India
Indonesia

Kenya
Liberia
MexicoNicaragua
PanamaPapua New Guinea
Philippines
Sierre Leone
Thailand
Timor-Leste
Togo
UgandaUnited Republic of Tanzania
Viet Nam
Yemen
ZambiaImporting members
European Community
Austria
Belgium/Luxembourg
Bulgaria
CyprusCzech Republic
Denmark
Estonia
FinlandFranceGermany
GreeceHungary
IrelandItaly
LatviaLithuania

Malta
Netherlands
PolandPortugal
Romania
Slovakia
Slovenia
Spain
SwedenUnited Kingdom
NorwaySwitzerland
Tunisia
TurkeyUnited States of America

There are 11 countries (Benin, Bolivia (Plurinational State of), Cameroon, Democratic Republic of the Congo, Guinea, Madagascar, Malawi,
Nigeria, Paraguay, Rwanda and Zimbabwe) which have all signed the new Agreement but had not completed the required procedures for full
membership by November 2011.

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Table 1.11 World production by country, 1995/96–2010/11 (’000 bags)
Average

Coffee years

1996/97

2001/02

2006/07

2000/01

2005/06

2010/11TOTAL

106 623

113 423

Arabica group70 75773 816

North America
Costa Rica
Cuba
Dominican Republic
El Salvador
GuatemalaHaiti
Honduras
Jamaica
MexicoNicaragua
PanamaUnited States

20 034
2 347
306
641
2 241
4 653
433
2 379
42
5 472
1 127
190
203

South America
Bolivia (Plurinational State of)BrazilColombia
EcuadorParaguay
Peru
Venezuela (Bolivarian Republic of)

2006/07

2007/08

2008/09

2009/102010/11*

128 257

127 048

127 835

126 664

128 610131 14478 36477 31780 11075 81377 82080 77816 717
1 882
231
404
1 503
3 738
374
2 856
33
4 076
1 313
148
160

17 542
1 544
108
498
1 489
3 855
347
3 714
30
4 240
1 520
159
129

17 089
1 580
92
406
1 371
3 950
361
3 461
40
4 200
1 300
173
154

18 504
1 791
84
510
1 621
4 100
359
3 842
20
4 150
1 700
176
151

17 777
1 320
126
609
1 547
3 785
357
3 450
32
4 651
1 615
153
133

16 674
1 462
115
463
1 065
3 500
350
3 527
30
4 200
1 686
170
106

18 148
1 589
122
500
1 840
3 950
307
4 290
30
4 000
1 300
120
100

40 117170
25 07411 102
539
30
2 203
999

45 608146
29 241
11 705
540
33
2 929
1 014

47 320141
30 51010 382
492
24
3 658
1 114

47 725148
29 056
12 541
695
24
3 691
1 571

48 459137
30 29012 504
515
25
3 468
1 520

45 907139
32 175
8 664
384
21
3 594
930

46 564141
32 454
9 000
437
25
3 657
850

47 946139
33 577
9 200
427
23
3 880
700

AfricaBurundiCameroon
Democratic Republic of the Congo
Ethiopia
Kenya
MalawiMadagascar
RwandaUgandaUnited Republic of Tanzania
ZambiaZimbabwe

6 538
363
133
88
3 224
1 297
64
44
261
340
525
52
147

7 061
337
80
91
4 158
903
41
28
321
412
496
98
97

8 924
279
84
63
6 170
727
19
29
317
598
573
37
29

8 329
298
92
60
5 551
826
18
30
307
540
512
57
38

8 725
299
87
67
5 967
652
21
30
291
650
578
55
28

7 669
274
82
64
4 949
572
16
30
307
640
676
33
26

9 613
230
76
68
6 931
750
20
30
350
600
494
26
38

10 279
293
83
56
7 450
833
19
25
328
560
603
15
14

Asia and the PacificIndia
Indonesia
Lao People’s Democratic Republic
Papua New Guinea
Philippines
Sri Lanka
Timor-Leste
Yemen

4 068
1 855
790
145
1 138
54
7
n.a.
79

4 458
1 934
839
458
883
139
13
n.a.
193

4 486
1 563
1 677
50
959
35
10
39
193

4 174
1 754
1 263
50
863
35
9
46
200

4 422
1 561
1 628
50
988
35
10
36
150

4 460
1 311
1 899
50
1 005
35
10
48
150

4 969
1 593
2 139
50
992
35
10
47
150

4 405
1 595
1 457
50
945
33
10
64
315

Robusta group

35 86639 57849 89249 73147 72550 85150 79050 366

5 574
4 924
610
14
9
17

7 965
7 600
325
24
3
14

11 416
11 021377
10
3
5

10 705
10 23644410312

11 14210 742386
10
3
1

10 94010 557369
103
1

11 32410 88142010
3
1012 967
12 691264
10
20America
BrazilEcuadorGuatemala
GuyanaTrinidad and Tobago

13

14

CHAPTER 1 – WORLD COFFEE TRADE – AN OVERVIEW

Average

Coffee years

1996/97

2001/02

2006/07

2000/01

2005/06

2010/11AfricaAngolaBenin
Cameroon
Central African Rep.
Congo
Côte d'Ivoire
Democratic Republic of the Congo
Gabon
Ghana
GuineaLiberia
Madagascar
Nigeria
Sierra Leone
Togo
UgandaUnited Republic of Tanzania

10 340
59
0
1 174
191
5
3 864
666
3
39
139
5
644
52
45
286
2 949
219

7 390
32
0
710
62
3
2 591
315
1
17
281
19
461
49
26
129
2 405
285

Asia and the PacificIndia
Indonesia
Lao People’s Democratic Republic
Malaysia
New Caledonia
Papua New Guinea
Philippines
Sri Lanka
Thailand
Viet Nam

19 952
2 756
6 286
73
160
9
59
746
35
1 252
8 576

24 223
2 724
5 665
163
810
1
21
498
31
789
13 521

Source: ICO and USDA.
* Provisional.
n.a. = not available.

2006/07

2007/08

2008/09

2009/102010/11*

7504
30
0
680
82
3
2 370
330
1
26
403
29
584
45
54
157
2 392
319

7 860
35
0
744
87
3
2 847
317
1
29
473
53
587
51
31
134
2 160
307

7 908
37
0
708
70
3
2 598
349
0
31
323
40
614
42
42
125
2 600
326

7 856
26
0
667
79
3
2 353
335
1
27
394
30
726
51
87
138
2 560
380

6 689
24
0
614
75
3
1 850
357
1
25
375
10
467
40
30
140
2 400
278

7 208
29
0
668
100
2
2 200
294
0
20
450
10
523
40
80
250
2 240
302

30 973
3 100
7 346
375
716
1
20
41737031755
18 16131 167
3 404
6 367
400
500
1
25
331
33
766
19 34028 675
2 899
6 937
350
930
1
10
394
33
653
16 46732 055
3 060
8 093
350
952
1
10
382
32
675
18 500

3 277
3 234
8 553
350
1 000
1
10
669
30
930
18 00030 191
3 389
6 778
425
200
1
45
76
25
752
18 500CHAPTER 2

THE MARKETS FOR COFFEETHE STRUCTURE OF THE COFFEE TRADE .......................................................................................................16
STRUCTURE OF THE RETAIL MARKET ...............................................................................................................17
DEMAND .................................................................................................................................................................18
DEMAND BY GEOGRAPHICAL AREA..................................................................................................................20
FACTORS INFLUENCING DEMAND ....................................................................................................................28
LIFESTYLE, DIET AND COMPETING DRINKS ....................................................................................................28
ADDING VALUE – AN OVERVIEW ........................................................................................................................29
TRADE PRICES, INVESTMENT COSTS AND TARIFFS ......................................................................................33
PROMOTING COFFEE CONSUMPTION .............................................................................................................35

CHAPTER 2 – THE MARKETS FOR COFFEE

THE MARKETS FOR COFFEETHE STRUCTURE OF THE
COFFEE TRADEBroadly speaking, at the consumer level coffee can bedivided into three commercial categories.
 Exemplary quality: limited availability – fine to uniquetaste experience.
 Premium quality: moderate availability – good to very
good taste experience.
 Mainstream quality: very widely available – acceptable
taste experience.
Precise figures are unavailable, nor is the situation static,
but it is generally accepted that between 80% and 90% of all
coffee consumed worldwide is of mainstream quality.
Figure 2.1 Leading coffee trading companies worldwide,
2010

14
12
Million bags

16

10
8
6

13.5
10
8

7

6.5
5

4

4

3.5

25
2.5

2
0

Source: Trade estimates – subject to constant change.

The structure of the coffee trade in North America, most ofWestern Europe and Japan is very similar. Coffee is generallypurchased 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 orfrom specialized import agents who represent specificexporters in producing countries. The international trade
plays a vital role in the worldwide marketing and distributionof coffee. Coffee is generally sold FOB (free on board), butmany roasters, especially in the United States, prefer to buy
on an ex-dock basis. Small roasters often prefer to buy insmall 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 theincreasing 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 fromthe exporting country to the roaster. Traders and dealers takeresponsibility for discharging the coffee from the incoming
vessel and make all the necessary arrangements to havethe coffee delivered to the roaster. Using the futures markets
either for hedging or as a price guide, traders offer andprovide roasters spreads of physical coffee for shipment
one month to 18 months in the future. Many of these sales,
especially for later shipment positions, are short sales: theseller will source the required green coffee at a later date.
Such positions are typically 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 chapters 8 and 9 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. Someroasters 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 sometimes offer such forward positions as deliveriesof a basket of acceptable coffees rather than committing toa single growth. This is becoming less common today than it
was in the past, but it remains a significant feature of the tradein 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 theappropriate 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 theappropriate delivery months of the London futures market.
These baskets represent coffees that are acceptable for thesame purpose in many blends of roasted coffee; traders
can fulfil their delivery obligations by providing one of thespecified 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 inphysical 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 thecoffee trade, as it does with other commodities, by acting

CHAPTER 2 – THE MARKETS FOR COFFEE

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 physicalcoffee, although dealers do occasionally deliver coffee ortake delivery of coffee in respect of contracts that have notbeen closed out. Participants in the industry use the futures
markets primarily for hedging.
The structure of the trade in other importing countries isbroadly 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 theinternational trade houses based in the main coffee centresof Hamburg, Antwerp, Le Havre and Trieste.

WHY IS COFFEE TRADED IN UNITEDSTATES DOLLARS?
This question is often asked, particularly at times when
the United States dollar is weak. When local currencies
in coffee producing countries strengthen against a falling
dollar growers suffer, or do not benefit if global prices rise.
What are the possibilities of selling in currencies other than
United States dollars, for example the euro, considering theEuropean Union is by far the world’s largest consumer ofcoffee?
There are many sides to this issue, but the points below
suggest that although change is always possible, for thetime being it is unlikely.
 Coffee is a global commodity that is tradedworldwide on a daily basis. It would be very difficult tomaintain this global liquidity if some coffees were priced
in different currencies. Point in case: in 1992 the London
robusta market moved from using British pound sterling
to United States dollars for that reason, thereby also
facilitating arbitrage between the New York and London
futures markets.
 Price risk management would become very difficult
if the market had to interpret both futures pricemovements, and currency movements for each andevery hedging transaction. 80% to 90% of the market ismainstream coffee that is priced and/or hedged against
the New York and London futures markets, both priced in
United States dollars. Also, New York is by far the world’s
leading futures exchange and would be most unlikely tomove away from the United States dollar. Finally, using
different currencies in a single transaction could meanthat a correct decision on the coffee price might be totallyoffset by a wrong assumption on the currency front.
 The currencies of many countries are loosely linked
to the United States dollar in the sense that theyoften follow dollar movements, particularly so in Latin
America where the United States is the predominant
trading partner. This is not the case in most of Africa
where the European Union plays that role.

 The United States market will of course continue
to purchase in dollars and many, if not all, origins
will oblige. If elsewhere coffee were traded in a different
currency, this might possibly distort prices and add
currency-based arbitrage to an already quite speculative
coffee trade.
One should also bear in mind that buyers will always protect
themselves. If having to buy in a different currency means
more risk or a disadvantage, then this will be priced into thetransaction. Therefore, it is difficult for individual exporters
or smaller producing countries to pursue this unless sucha change was in the context of a general industry move,triggered by some external event or situation.

STRUCTURE OF THE RETAIL
MARKET
Retail sales of coffee (both roasted and instant) in the main
importing countries are channelled through a combinationof retail shops owned by the roasters themselves, their own
direct sales force supplying supermarkets and hypermarkets,
and wholesalers and food brokers. Supermarkets today playa much larger role in the retailing of coffee than they ever
did before and supermarket own brands now account for a
sizeable proportion of retail coffee sales. Roasted coffee issold in ground form or as whole bean and is packaged invarious types and sizes of cans and packets. Soluble coffee
is generally sold in jars, although sachets are becoming
increasingly popular, especially in emerging markets and inparticular, for the ‘3-in-1’ products where instant coffee ispre-mixed with sugar and a creamer.
Single-serve instant portions are also gaining ground inestablished markets, as are coffee pads or pods andcapsules for use in domestic filter coffee and espresso
machines. What these have in common is convenienceof preparation, consistency of quality and easy mess-free
disposal of spent coffee grounds. More recently there has
been a significant shift towards single-serve filter coffee
brewing methods in the United States and Europe with thedevelopment of new single serve filter machines as well as
the single-serve pour-over filter system, known generally
as the ‘chemex’ system. There is also a strongly growing,
although still small, market for ready-to-drink (RTD) liquid
coffee beverages sold in cans or bottles.
Roasters have two distinct market segments:
 The retail (grocery) market, where coffee is purchased
largely, but not exclusively for consumption in the home; The institutional (catering) market, where coffee isdestined for the out-of-home market e.g. restaurants,
coffee shops and bars, hospitals, offices, and vending
machines.
The percentage share of each segment varies from country
to country, but in most countries, retail sales for in-home17

CHAPTER 2 – THE MARKETS FOR COFFEE

consumption generally account for 70% to 80% of theoverall market. There are exceptions, especially in countries
where there is a well-established catering trade and eatingout is part of the country’s traditions, for example in Italy,
Spain and Greece.
Each segment accepts a wide range of products, the quality
and taste of which depend largely upon the coffee growths
that make up the blends, the degree of roast, the type of
grind, and so on. Most small roasters tend to specialize inone segment, while larger and in particular multinational
roasters usually service both. The major part of the retailmarket is, however, controlled by a handful of huge
multinational roasters and the degree of concentration isincreasing. Although this trend was temporarily halted by thegrowth in the specialty trade, it is once again acceleratingwith the rapid acquisition of small specialty roasters by themultinationals.
Figure 2.2 Leading coffee roasting companies worldwide,
2010

DEMAND
Coffee is one of the world’s most popular beverages. Gross
imports of all types of coffee have quadrupled from 33
million bags in 1949 to 132 million bags in 2010. However,statistics on gross imports are a poor indicator of demandas they ignore re-exports. In 2010 re-exports accounted
for some 38.9 million bags, although in the past they were
not as important as they are today. Data on re-exports is
not available prior to 1964, but figure 2.3 shows the growthin gross exports since 1949 and in total net imports since1963. Net imports reflect what is consumed in the countryof importation plus any surplus that goes into inventories.
A more accurate indicator of consumption is provided bystatistics on disappearance, which take into account reexports and changes in the level of stocks held in importing
countries. Table 2.1 shows world gross imports, net imports,
disappearance and inventories by form of coffee over theperiod 2005–2010.
Figure 2.3 World coffee imports, 1949–2010

14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0

13.5 12.8
140

8.5

120

5.5
3.5

2.8

2.7

2.4

100

2.0

1.9

1.8

Million bag
gsMillion bags
M

18

80
60
40
20
0
49 52 55 58 61 64 67 70 73 '76 79 82 85 88 91 94 97 00 03 06 09
Years
Gross imports

Net imports

Source: Trade estimates – subject to constant change.
Source: ICO.

Table 2.1

World gross and net imports, disappearance and inventories by form of coffee, 2005–2010(in millions of bags)
2005

2006

2007

2008

2009

2010

A.

Gross imports
Green
RoastedSoluble

116.3
89.7
10.9
15.7

121.7
93.3
12.3
16.1

126.5
95.9
12.9
17.7

130.1
98.2
14.0
17.9

127.4
97.3
14.0
16.1

131.6
99.4
15.2
17.0

B.

Gross re-exports
Green
RoastedSoluble

28.9
8.3
10.4
10.2

30.6
8.9
11.6
10.1

32.9
9.4
12.4
11.1

35.6
11.7
13.6
10.4

36.1
11.2
14.0
10.9

38.8
12.2
15.1
11.5

C.

Net imports
Green
RoastedSoluble

87.4
81.4
0.5
5.5

91.1
84.4
0.7
6.0

93.6
86.5
0.5
6.5

94.5
86.5
0.4
7.5

91.3
86.1
0.0
5.2

92.8
87.2
0.1
5.5

D. Disappearance

88.2

90.2

93.1

94.8

92.3

93.6

E. Inventories as at 31 December*

20.2

19.1

21.1

21.4

22.4

18.4

Source: ICO.
* Comprises all stocks in consuming countries including stocks in free ports.

CHAPTER 2 – THE MARKETS FOR COFFEE

Estimates suggest that some 100 million bags or 76% of
all coffee consumed in the world (including that consumed
in producing countries) is roast and ground. In importing
countries, about 75% of consumption is roast and ground,and of this about 87% is roasted in-country. The remainder
is imported from other consuming countries and also, but toa lesser extent, from producing countries.
In some regions the cross-border trade in coffee roasted
by importing countries themselves is growing strongly. The
European Union dominates this trade, and in 2010 had 77%
of world exports of roasted coffee. Producing countries
accounted for around 1.5% of this trade in roasted coffee.
The United States, Canada and a small number of othercountries made up the remaining 21.5%.
The market for roast and ground coffee is dominated bylarge multinationals (Kraft Foods, Nestlé and Sara Lee/DE),
despite the fact that in many countries there has been aresurgence in small, locally-based roasters. The bulk ofroast and ground coffee consumed in importing countries
is blended (usually before roasting) to ensure a certain
uniformity in the finished product. Blending increases theroasters’ flexibility, making them less dependent on a single
source of supply. It also allows them to compensate forseasonal changes in the taste of coffee beans and to switch
to other coffees if there are any problems with availability or
price.
Roasting develops the coffee’s flavour and fragrance; thehigher the roast the more the flavour is developed. Lightly
roasted beans produce a thin, almost straw-coloured liquidwith little flavour except perhaps acidity, although the weightloss is less. A darker roast will give a dark liquid, which may
have lost acidity but has gained body and stronger flavour,
although the weight loss will be higher. The darker the roast,
the greater the cell destruction and fragmentation. Thisfacilitates the extraction of solubles, but too dark a roast
merely leaves a burnt flavour.
Roast and ground coffee has a shorter shelf life than soluble
coffee. It loses quality the longer it is exposed to air, so it isfrequently packed in vacuum or gas-flushed packs.

INSTANT OR SOLUBLE COFFEE
The term ‘instant coffee’ or ‘soluble coffee’ encompasses
spray-dried powder, freeze-dried powder and liquefied formsof coffee such as liquid concentrates. All of these methods ofprocessing involve dehydrating brewed roasted and groundcoffee. The freeze-dried method produces a superior but
more expensive product.
Figure 2.4 shows that world consumption of soluble coffee isrising relatively strongly after a number of years of stagnation,
expanding from 22.8 million bags (green bean equivalent) in2000 to 31.1 million bags in 2010, although as a percentageof overall consumption it has remained relatively flat.
Figure 2.4 Consumption of soluble coffee – 2000, 2005 and
2010
35
30
25
Million bags

ROAST AND GROUND COFFEE

20
2000

15

2005

10

2010

5
0
WesternEuropeNorth
America

Japan

Total
Producing World total
importing countries
countries

Source: NKG Statistics.

In Europe, growth in demand has been relatively modest ataround 0.2% a year in recent years, which is considerablyslower than the overall growth in consumption for all typesof coffee. In the United Kingdom, where soluble coffee
accounts for around 75% of total consumption, demand
was beginning to show signs of actual decline, but has
been revitalized in recent years by the growing interest in
speciality instant coffees (such as instant cappuccino).
Elsewhere in Europe, however, the introduction of new
specialty instant coffee products also increased demand
for soluble coffee, but the trend appears to have beenshort lived. The Deutscher Kaffeeverband estimate that the
instant coffee share of demand in Germany rose from 6.2%
to over 7.5% between 1998 and 2005 reflecting this surge
in demand for these speciality instant products, only to fallback to 4.1% in 2010.
Much of the recent growth in soluble coffee consumption canbe attributed to a rise in demand in Eastern Europe, and Eastand South-East Asia – both regions where soluble coffee
enjoys a high market share. In East and South-East Asia there
has been tremendous growth in the demand for the productknown as ‘3-in-1’, a beverage that combines the convenienceof soluble coffee with a non-dairy creamer and sugar, usuallyin single-serve sachets purchased one at a time.
In 2010, just under 70% of the soluble coffee consumed inimporting countries was processed into soluble coffee inthose countries. The corresponding figure in 2000 was 83%,
which suggests that producing countries may be seeing
a significant increase in their share of the soluble coffee
market in importing countries. Imports of soluble coffee
are often referred to as offshore powder. Consumption of
instant coffee in producing countries themselves varies
considerably. In the Philippines and Thailand instantcoffee accounts for around 95% of coffee consumption.
In Brazil, the largest exporter of soluble coffee, domestic
consumption of instant coffee only accounts for around 5%of overall coffee consumption. In India most soluble coffee
is also exported, although it does account for around 35% of
local consumption. In Mexico the figure is about 47%.

19

20

CHAPTER 2 – THE MARKETS FOR COFFEE

Globally, Nestlé and Kraft Foods account for just under 75%
of the world market, with Nestlé alone supplying around half
the world demand for instant coffee.

DECAFFEINATED COFFEE
Decaffeinated coffee was developed in Europe, butachieved its first broad market in the United States during
the 1950s. World consumption of decaffeinated coffee isdifficult to gauge owing to the lack of separate data on thistype of coffee in many importing countries.
In the United States, consumption of decaffeinated coffee
was relatively stable from 2000 to 2005, accounting for 8%–
9% of mainstream sales and about 20% of sales of specialty
coffee. Sales thereafter increased significantly, but fell backto 13% in 2011 (from 16% in 2009) according to the latest
NCA Coffee Drinking Study. Consumption of decaffeinatedcoffee has been fairly static elsewhere since 2000, andin many countries low-caffeine coffee products are now
an established part of the manufacturers’ range. These
products are not caffeine free, but are either a mixture of
regular coffee and decaffeinated coffee or blends of coffees
with a naturally low caffeine content. These products are
sold as ‘light’ coffee.
Table 2.2

Consumption of decaffeinated coffee as apercentage of total consumption, 2010

Country%Countryarabicas towards Natural arabicas and robustas. A
significant proportion of this shifting supply pattern can beput down to changes in the availability and origin of supply
and in particular to supply problems in Colombia and Central
America but higher prices particularly in the last two to three
years has accelerated the switch to these other coffees. In
2005, 48% of United States imports of green coffee fromproducing countries came from the Colombian Milds andOther Milds groups. By 2010 this was down to just 43%.
Imports from Brazil vary from year to year and in 2010
increased to over 28% of green bean imports from 21% in
2005, while imports of robusta coffee (including estimatedimports of robusta from Brazil) have increased marginallyfrom just over 25% in 2005 to 27% in 2010. There is no doubtthat the initial increase in the use of robusta reflected thegreater consumption of espresso blends containing robusta
coffee, as well as its incorporation in many of the mainstream
blends as a means of keeping prices lower. However, thesomewhat constrained increase in robusta use is thoughtby some analysts to reflect consumer resistance to thealtered taste profile that the greater use of robusta created.
Roast and ground (or regular) coffee: Over 85% of the coffeesold for home consumption is roast and ground coffee. By
2011, 85% of total consumption, based on cups consumed
per person per day, takes place at home. According to the
National Coffee Association of USA the drip coffee makerdominates American coffee preparation, although thesingle-cup brewing systems are growing.

%

Australia

7

Italy

7

Austria

4

Japan

Low

Belgium/Luxembourg

8

Netherlands

12

BrazilLow

NorwayLow

Canada8

Portugal4

Denmark

6

Spain

16

Finland1

SwedenLow

France7

Switzerland

4

Germany

7

United Kingdom

10

Greece1

United States

13

DEMAND BY GEOGRAPHICALAREANORTH AMERICA
United States of America
Green coffee makes up the bulk of imports into the UnitedStates. Rather surprisingly given the growth in specialty
coffee consumption in the United States, the origin mix
of its green coffee imports has shifted away from washed

Specialty coffee: This sector has transformed and improved
the image of coffee in the eyes of the American consumer.
In 1991 it was estimated that there were just 500 gourmet or
specialty coffeehouses, yet by 2010 there were an estimated
10,000-plus. This number excludes other coffee venues
such as coffee carts, kiosks, vending machines and cafes
in bookstores, sporting arenas and transportation facilities,
which have also seen an explosion in numbers.
Even so, brewed coffee remains the most popular type ofcoffee consumed in the United States in 2011, accounting
for 92 out of every 100 cups of coffee consumed – up from85 cups per 100 in 2010. This reflects the surge in the
adoption of home-use single-cup filter brewing systems.
Soluble coffee consumption on the other hand, which had
witnessed something of a resurgence, now appears to be in
decline and in 2011 accounted for around eight cups per 100– down from 11 cups in 2010. Similarly gourmet or specialty
coffee beverages (both roasted and instant) appears to be
in decline, accounting for 36 cups per 100 cups consumed
in 2011, which is down from the 40 cups per 100 recorded in
2010, possibly reflecting consumer reaction to the downturnin global economic activity. The coffee sector in the UnitedStates has undergone radical change in the last decade.
Following the acquisition of Folgers and a sizable portionof Sara Lee/DE in the United States, J.M. Smucker is now
the largest coffee roasted and manufacturer in America
followed by Kraft Foods.

CHAPTER 2 – THE MARKETS FOR COFFEE

Table 2.3

Coffee consumption in North America, 2010

Country

Population(millions)

United States

CanadaNet imports (million bags)

Main suppliers(green bean)

Per capita
consumption(kg/year)

Additional information

Green
beans

RoastedSoluble

318

20.68

-0.64

1.15

Brazil 28%
Viet Nam 18%
Colombia 13%

4.1

83% of America’s re-exports ofprocessed coffee goes to Canada

34

2.14

0.91

0.53

Colombia 27%
Brazil 22%
Guatemala 14%

6.3

98% of Canada’s re-exports ofprocessed coffee goes to the UnitedState

Source: ICO and other trade sources.
Note: Green bean equivalents are used for roasted, soluble and per capita consumption figures.

CanadaThe coffee market in Canada is estimated to have increased
at a compound annual growth rate of 3.1% since 2004
with Kraft being the leading roaster. The market is fairly
fragmented with a large number of smaller roasters, but
is beginning to consolidate following a number of highprofile mergers and acquisitions. Roast and ground coffee
accounts for 72% of the total market.

EUROPEThe European Union has 27 member states with a populationof 500 million. According to the European Commission, theEU is the largest barrier-free market in the world, bigger thanthe United States, Canada and Mexico together.
In terms of green coffee imports, the 27 EU member statesaccounted for an estimated 51.3 million bags in 2010
(European Coffee Federation data), including intra-EU
trade, and 45.9 million bags excluding intra-EU trade. The
ICO’s figures are 52.2 million bags and 46.9 million bags
respectively.
One consequence of the EU’s single market is that there isno intra-EU import or export, only movement of goods. This is
more than just terminology. It means that the vast majority ofimports are declared at the point of entry into the EU and not
at the point of destination. This tends to increase gross importfigures for those countries with the major points of importation(in essence, the major ports). At the same time, the single
market means that the earlier documentary requirements forcross-border traffic no longer exist. Operators are required
to report cross-border traffic to the statistical bodies, but
only above a certain value and/or volume. Eurostat, the EU
statistical office, has developed models to extrapolate total
intra-EU movement of goods on the basis of the reported
data, but these models have their limitations.
For these reasons, data on the movement of green as wellas finished coffee within the EU have inevitably becomeless accurate. However, not only do many of the statistics
for individual EU country coffee imports produced by boththe EU authorities and the ICO not always present the total
picture, but there are also differences between them. Most

individual EU member country statistics must, therefore, betreated with some caution.
After deducting intra-EU trade, net total green bean imports
into EU for 2010 work out at some 45.9 million bags. The fivelargest suppliers were Brazil (33%), Viet Nam (20%), Indonesia(6%), Honduras (6%) and Peru (5%).
Sustainability: Since 2003, the European industry has beenworking on a comprehensive concept to ‘mainstream coffee
on its way to sustainability’, through an initiative known as theCommon Code for the Coffee Community or 4C. This aims
at establishing a scheme of continuous improvement of thesocial, ecological and economic principles in the production,
processing and trading of mainstream coffee (whichconstitutes between 80%–90% of all coffee traded). The 4C
Association was formally established in early 2007 with its
secretariat in Bonn, Germany. The first 4C coffee became
available in October 2007. See www.4c-coffeeassociation.
org.
Speciality: Although many Western European countries
have traditionally consumed high-quality coffees, in recent
years the speciality concept has gained considerable
acceptance amongst European consumers. See also
chapter 3, Niche markets, and www.scae.com.
Summary data on the coffee imports of individual EU
countries plus selected other European countries is shownin table 2.4.
In this context, green coffee means not-decaffeinated andfrom all sources – so also from other European countries.
Green bean imports are identified by country of origin, but
not all was necessarily imported directly from origin.
The source for most import/export data for the EU countries
that were members as at 31 December 2010, as well as for
Norway and Switzerland, is the European Coffee Federation’sEuropean Coffee Report 2010–2011, which itself draws
on data provided by Eurostat and member associations.
Other data are taken ex ICO and other trade statistics.
Luxembourg’s coffee statistics are combined with those for
Belgium, although it is an EU member. The full ECF 2010–2011 Coffee Report and earlier issues can be viewed anddownloaded from www.ecf-coffee.org.

21

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CHAPTER 2 – THE MARKETS FOR COFFEE

Table 2.4

Coffee consumption in Europe, 2010

Country

Population(millions)

Net imports (million bags)
Green
beans

RoastedSolubleMain suppliers(green bean)

Per capita
consumption(kg/year)

Additional information

European Union
Austria

8.4

0.55

0.25

0.11

Brazil 24%
Viet Nam 22%
Honduras 7%
Unidentified via
Germany 22%

6.4

Germany is Austria’s main trading
partner in processed coffee taking
62% of its imports of processed
coffee from Germany, but reexporting 30% of its output back toGermany.

Belgium/
Luxembourg

11

1.60

-0.37

-0.12

Brazil 28%
Viet Nam 16%
Honduras 10%
Peru 7%

5.9

One roaster, Sara Lee / DE, accounts
for around half of the market. Belgium
also has many small roasters,
particularly in the specialty sector.

Bulgaria

7.5

0.38

-0.04

0.54

Viet Nam 25%
Indonesia 22%
Brazil 10%
Honduras 9%

3.2

99% of roasted coffee imports were
ex EU sources, as were 69% of
soluble imports.

Cyprus

0.9

0.03

0.01

0.04

Brazil 92%

5.0

98% of soluble imports were ex EU
sources, as were 87% of roasted
coffee imports.

Czech
Republic

10

0.32

0.08

0.07

Brazil 27%
Viet Nam 16%
Indonesia 14%

2.7

99% of roasted coffee imports were
ex EU sources, as were 87% ofsoluble imports.

Denmark

5.5

0.66

0.11

0.09

Brazil 14%
Viet Nam 6%
Uganda 5%
Unidentified via
Germany 55%

9.5

Imports of roasted coffee were
almost exclusively ex EU sources
with 77% coming from Sweden. The
EU accounted for 82% of soluble
imports.

Estonia

1.3

0.01

0.08

0.02

Viet Nam 24%
Brazil 20%
Indonesia 12%
Uganda 11%

4.7

92% of its green coffee imports
are re-exported to the RussianFederation, similarly 40% of its reexports of soluble coffee go to theRussian Federation.

Finland

5.4

1.10

-0.06

0.04

Brazil 45%
Colombia 10%
Nicaragua 7%
Guatemala 6%

12.1

Four roasters account for around 97%of the market; 96% of its imports arearabica and 4% robusta.

France

63

4.28

1.62

-0.03

Brazil 21%
Viet Nam 11%
Ethiopia 5%
Honduras 4%

5.7

Kraft Foods and Sara Lee/DE
account for 60% or more of the roast
coffee market by volume. Nestlé
accounts for almost two-thirds of thesoluble market.

Germany

82

12.69

-2.24

-1.39

Brazil 35%
Viet Nam 19%
Peru 7%
Honduras 6%

6.8

Two roasters, Kraft Foods andTchibo, account for about 55% of themarket. The market share of single
serve pods and espresso coffee
now accounts for 21% of the overallmarket.

Greece

11

0.40

0.15

0.45

Brazil 69%
Viet Nam 9%
India 9%5.3

Soluble coffee accounts for justover 45% of the market. 99% ofroast coffee imports and 74% of
soluble coffee imports come from EU
countries.

Hungary

10

0.21

0.09

0.09

All imports of green
coffee come via theEU with Germany
accounting for 92%
of these imports

2.3

India and Brazil apart, soluble imports
were almost exclusively ex EU
sources.

CHAPTER 2 – THE MARKETS FOR COFFEECountry

Population(millions)

Net imports (million bags)
Green
beans

RoastedSolubleMain suppliers(green bean)

Per capita
consumption(kg/year)

Additional information

Ireland

4.6

0.04

0.02

0.09

Nicaragua 6%
Colombia 5%
Indonesia 5%
unidentified via theUnited Kingdom
60%

2.0

Over two-thirds of total imports areprocessed coffee, 63% of whichcomes from the United Kingdom.

Italy

60

7.71

-2.06

0.15

Brazil 34%
Viet Nam 19%
India 13%
Indonesia 6%

5.8

Five roasters, of which Lavazza
is the largest, account for around
70% of the market. The single serve
segment, which is growing by 20%
per annum, is changing the dynamics
of the market. Italy re-exports 28%of what its imports – reflecting its
success in marketing Italian espresso
brands overseas.

Latvia

2.2

0.05

0.02

0.03

Virtually all importsof green coffee
come via the EU– with 80% from
Germany

2.6

99% of its imports of roasted coffee
and 62% of its imports of soluble
coffee come from the EU.

Lithuania

3.3

0.01

0.20

0.02

Virtually all importsof green coffee
come via the EUwith Germany
accounting for 64%
of these imports

4.1

84% of re-exports of roasted coffee
and 58% of re-exports of soluble
coffee go to other EU countries, mostnotably Latvia.

Malta

0.4

0.00

0.01

0.01

Indonesia 40%
Costa Rica 40%

1.8

Green bean imports are less than
1,000 bags and virtually no re-exports
recorded.

Netherlands

17

0.99

0.22

0.12

Brazil 33%
Viet Nam 15%
Guatemala 6%
Honduras 6%

4.8

ECF data puts imports of green
coffee almost double that of the
ICO at 1.91 million bags, reflecting
the problems of collecting accurate
import data for individual EU
countries.

Poland

38

1.65

-0.17

0.61

Viet Nam 4%
Lao People's
Democratic
Republic 3%
Unidentified via
Germany 83%

3.3

99% of its roasted coffee imports and
65% of its imports of soluble coffee
originate in the EU.

Portugal

11

0.76

-0.08

0.08

Viet Nam 19%
Brazil 15%
Uganda 10%
Cameroon 9%

4.1

Nestlé’s market share is around33%, with approximately 70 roasters
covering the balance, many operatingin small, local niche markets.

Romania

21

0.36

0.30

0.14

Viet Nam 29%
Indonesia 14%
Brazil 13%
Uganda 8%

2.2

Over 99% of its imports of roasted
coffee and 58% of its imports ofsoluble coffee are from the EU.

Slovakia

5.4

0.06

0.25

0.04

Brazil 27%
Viet Nam 24%
Ethiopia 17%

3.7

Over half of its imports of roasted
coffee is re-exported mainly to EU
destinations; similarly 59% of its
imports of soluble coffee are also
re-exported mainly to the Czech
Republic.

23

24

CHAPTER 2 – THE MARKETS FOR COFFEECountry

Population(millions)

Net imports (million bags)
Green
beans

RoastedSolubleMain suppliers(green bean)

Per capita
consumption(kg/year)

Additional information

Slovenia

2.0

0.14

0.04

0.03

Brazil 46%
Viet Nam 22%
India 6%
Unidentified via
Italy 11%

6.1

72% of its imports of soluble coffee
come from Austria, while 50% of its
roasted coffee imports come from
Italy.

Spain

45

4.02

0.17

-0.95

Viet Nam 35%
Brazil 21%
Uganda 6%
Colombia 5%

4.3

The top three roasters control about
60% of the market. Some 300 smaller
roasters cover the remainder anddominate the out-of-home market,
where espresso is in high demand.

Sweden

9.3

1.66

-0.46

0.01

Brazil 44%
Peru 10%
Colombia 8%
Ethiopia 7%
Kenya 7%

7.9

Dominating roasters are Kraft Foods
with about 40% of the market, Zoegas
20%, Lofbergs Lila 15% and Arvid
Nordquist 10%. A small number ofroasters share the balance.

UnitedKingdom

62

2.21

0.55

0.34

Viet Nam 19%
Brazil 16%
Indonesia 15%
Colombia 12%

3.0

Soluble coffee accounts for around
80% of the market, but tea still
dominates the hot beverage market.
Nestlé accounts for around 50%of the soluble coffee market; Kraft
Foods just over 20%.

Other European countries
Norway

4.8

0.59

0.08

0.07

Brazil 46%
Colombia 17%
Guatemala 12%

9.2

Almost 85% of the market is sharedby six roasters, some of which arealso importers.

RussianFederation

142

1.44

0.15

2.07

Viet Nam 37%
Brazil 30%
Indonesia 11%

1.6

Roasted coffee is expanding rapidly
and accounted for 29% of the market
in 2010, but soluble still dominates;
40% of the instant coffee consumed
in the Russian Federation is produced
locally.

Switzerland

7.7

1.99

-0.48

-0.50

Brazil 30%
Viet Nam 15%
Colombia 9%
India 7%8.0

The main roaster, Migros, accounts
for around 45% of the market. The reexport of processed coffee continues
to grow strongly with both roasted
coffee and soluble coffee growing byaround 20% over the year.

Source: ICO, ECF and other trade sources.
Note: Green bean equivalents are used for roasted, soluble and per capita consumption figures.

Data on Eastern European countries mostly originate fromthe ICO and F.O. Licht’s International Coffee Report.

ASIA AND AUSTRALASIA
Coffee consumption is growing strongly throughout Asia
and Australasia, primarily as a result of rising disposable
income, but also as a result of the adoption of a more
Western lifestyle throughout the region. In particular,
consumption is showing exceptional growth in many ofthe producing countries of the region, most notably India,
Indonesia, Viet Nam and Malaysia as well as China. In the
more mature markets of the region, i.e. Japan, Australia
and New Zealand, consumption is also expanding, but at
a much lower rate.

China (including Hong Kong, China andMacao, China)
China (population 1.34 billion) is a producer as well as aconsumer, consuming an estimated 700,000 bags in 2010,
with internal production, primarily in the Yunnan Province, ofaround 500,000 bags in 2010. Chinese arabica is becoming
fairly well known abroad and certainly in Europe, where thebulk of the green bean exports were destined.
Nestlé, which is the market leader and accounts for around
68% of the retail value of the coffee market in China, hasbeen active in promoting internal production and obtains asmuch as it can of its raw material requirements from local
sources. It has achieved very good market penetration and
its Nescafé brand, including ready-to-serve coffee mixes, iswidely available throughout the country.

CHAPTER 2 – THE MARKETS FOR COFFEE

However, over the last 10 years or so there has also been
an explosion in the number of new American-style coffeebars opening up in all the major cities. Starbucks alone
has opened more than 470 new shops in different cities
throughout China since 1999, and other similar companies
have also been expanding at the same rate. As a result,coffee is acquiring a more modern image and is becominga very popular beverage with the young.

the explosion of speciality coffee shops, both local andoverseas owned, and a definite shift towards espressobased coffee has helped to push consumption ahead very
positively by around 7% annually over the past four years.
Nevertheless, instant coffee still accounts for 85% of thetotal market, which a recent survey put at 22.8 billion cupsof coffee or 452 cups for every Korean per year.

Japan

OTHER IMPORTING COUNTRIESDemand for coffee continues to grow in Japan with average
weekly consumption amounting to 10.9 cups in 2010 upfrom 10.0 cups in 2002. Instant coffee remains the mostpopular form of coffee accounting for 4.8 cups per week,
while roasted coffee accounts for 3.3 cups, canned coffee
1.9 cups and liquid coffee 1.0 cups.

Other importing countries combined account for
approximately 11 million bags. Data for selected countries
from this group appear in table 2.6. This is a diverse groupin which consumption levels per capita vary significantly. In
some of these countries per capita consumption exceeds
those recorded in a number of the more mature markets.

Republic of Korea
The Republic of Korea has had a thriving coffee market fora number of years based primarily on instant coffee, but
Table 2.5

Coffee consumption in selected countries in Asia and Australasia, 2010

Country

Population(millions)

Australia

Net imports (million bags)

Main suppliers(green bean)

Per capita
consumption
kg/year

Additional information

Green
beans

RoastedSoluble

22

1.08

0.06

0.23

Viet Nam 25%
Papua New Guinea
17%
Brazil 17%
Indonesia 8%

3.5

Instant coffee accounts for +80% of
all coffee sales. Nestlé, Cantarella andSara Lee dominate the market.

China

1 338

0.08

0.09

0.13

Production =500 000 bags; grossimports of green
bean = 540 000
bags from Viet Nam
75%, Indonesia 10%

0.03

Almost all production is exported, mainly
to Germany and Japan. The UnitedStates is largest supplier of roasted
coffee, 30%; Malaysia largest in soluble
coffee, 32%. Consumption: 700 000
bags (est.).

Japan

127

6.84

0.11

0.31

Brazil 30%
Colombia 19%
Indonesia 14%
Viet Nam 13%

3.4

Instant coffee sector is dominated by
Nestlé, 60%, and Ajinomoto, 30%.
Largest suppliers of roasted coffee
are UCC and Key Coffee.

Malaysia

28

0.99

0.01

-1.49

Production = 1.1
million bags; grossimports of green
bean = 1.0 million
bags from Viet Nam
48%, Indonesia 45%

1.3

Malaysia exports 1.8 million bags of
instant coffee a year to the Philippines
34%, Singapore 21% and Indonesia
10%.

New
Zealand

4.4

0.16

0.08

0.09

Viet Nam 26%
Brazil16%
Papua New Guinea
10%
Colombia 10%

3.5

Instant coffee dominates the market.
Nestlé accounts for +40% of all coffee
sales.

Republicof Korea

49

1.73

0.08

-0.14

Viet Nam 31%
Brazil 19%
Colombia 13%
Honduras 11%

2.0

Exports of instant coffee exceed
278,000 bags to China 29%, Israel 14%,
Russian Federation 13% and Australia
10%.

Source: ICO and other trade data.
Note: Green bean equivalents are used for roasted, soluble and per capita consumption figures.

25

26

CHAPTER 2 – THE MARKETS FOR COFFEE

Table 2.6

Coffee consumption in selected countries, 2010

Country

Population(millions)

Net imports (million bags)

Main suppliers(green bean)

Green
beans

RoastedSoluble<0.01 Côte d’Ivoire 50%
Viet Nam 25%
Indonesia 11%

Algeria

35

2.01

<0.01

Argentina

40

0.50

0.01

Israel7.6

0.45

Morocco32

SerbiaPer capita
consumption(kg/year)

Additional information

3.4

Algeria has potential to significantly
increase consumption inlight of its installed roasting capacityof around 4 million bags of green
coffee. However, consumption is only
growing at around 0.5% annually.

0.10 Brazil 98%

0.9

Roasted coffee accounts for around
60% of the market in Argentina with
Grupo La Virginia the largest roasterin the market. The instant coffee
market is dominated by Nestlé
Argentina SA.

0.03

0.08 Viet Nam 38%
Brazil 8%
Uganda 7%
India 5%

4.4

Israel enjoys a thriving café culture
based largely on espresso-based
drinks, although the more traditional
Turkish style coffees still account fora significant part of the consumption.
Coffee consumption in Israel is
growing at just over 6% annually.

0.55

0.01

-0.09 Indonesia 25%
Viet Nam 25%
Guinea 17%
Uganda 10%

0.9

Nestlé was the leader in value terms
in coffee in 2010, accounting for 29%
value share, but roasted coffee stillaccounts for the bulk of consumption.

7.3

0.51

0.01

0.03 Brazil 64%
Viet Nam 18%
India 10%

4.0

Two companies dominate the market,
Grand Prom with a 48% share of themarket by value and Straus Adriaticwith 30%. One survey suggests that
90% of coffee consumers in Serbia
drink black or Turkish coffee.

South Africa

50

0.40

0.02

0.14 Viet Nam 58%
Indonesia 16%
Brazil 5%

0.7

Instant coffee dominates the coffee
market in South Africa, with ashare of 92%. The leading player is
Nestlé. The roasted coffee market ischaracterized by a large number of
medium and smaller roasters.

Tunisia

11

0.25

<0.01

0.05 Brazil 40%
Cameroon 31%
Viet Nam 11%
Indonesia 10%

1.7

Reports suggest that coffee
consumption is increasing among
young people, but tea remains themost popular beverage.

Turkey

73

0.30

0.02

0.28 Brazil 98%

0.5

Although Turkish coffee is importantin the out-of-home market, instantcoffee dominates the in-home market
accounting for over 90%. The leading
player is Nestlé.

Ukraine

46

0.10

0.29

1.10 Viet Nam 22%
India 16%
Cameroon 8%

1.9

Soluble coffee and coffee-based
mixes, imported mainly from Brazil
and the European Union, account for
more than 70% of Ukraine’s coffee
consumption. Green coffee
represents only a small share ofimports.

Source: ICO and other trade data.
Note: Green bean equivalents are used for roasted, soluble and per capita consumption figures.

CHAPTER 2 – THE MARKETS FOR COFFEE

than that of the United States and more than double the lowthat Brazilian per capita consumption fell to in 1985 (2.3 kg).
Consumption stagnated around this level until steps weretaken in 1989 to improve the quality of coffee available on
the domestic market. In particular, the industry introduced
what became known as the Selo de Pureza or purity seal.
This, together with an active marketing policy aimed at
encouraging consumption by providing more informationon the product, formed the basis of a successful push toincrease consumption. Coffee products are only eligible for
the Purity Seal if they comply with certain basic conditions. In
addition, ABIC continues its Coffee Quality Program, aimed
at educating consumers about aroma, body, flavour, degreeof roasting and grinding. Participating roasters display the
Quality Seal on their retail packaging. ABIC also runs aninternal accreditation programme for coffee shops, hotels
and restaurants that use quality beans and in so doing helps
promote the coffee culture in Brazil. Finally, the promotion ofsustainability in the coffee chain is also actively pursued.

PRODUCING COUNTRIES
Domestic consumption in producing countries is estimatedto have totalled 41 million bags in 2010 – up from justover 26 million bags in 2001. The bulk of this increase isattributed to growth in the internal market in Brazil, which
is not only the world’s largest coffee producer, but also theworld’s second-largest consumer, accounting for 19 million
bags in 2010.
The structure of Brazil’s domestic industry is relatively
diverse, characterized by a large number of small to
medium-sized roasters, possibly as many as 1,400.
Nevertheless, concentration is a continuing process. The
top five roasters are, in order of importance: Sara Lee, Santa
Clara, Marata, Melitta and Damasco. Roast and groundcoffee dominates the market with over 90% of all sales andalthough the country is a large exporter of soluble coffee,
instant coffee accounts for only approximately 5.5% of theoverall domestic market in Brazil.

Brazil’s success in raising domestic consumption is ofinterest to many other coffee producing nations hoping toraise their domestic use. In response the ICO commissioned
A Step-by-step Guide to Promote Coffee Consumption in
Producing Countries, which uses the Brazilian experienceand that of a few other countries to create a methodology
to promote consumption. See www.ico.org/promoting_consumption.asp.

Consumption in Brazil
The industry association (ABIC) puts domestic consumptionin Brazil at approximately 6.0 kg per person in 2010, whereas
the ICO puts it at 5.8 kg. This is now considerably higher
Table 2.7

Coffee consumption in selected origins, 2010
Imports (million bags)

Populationin millions

Production(million
bags)

Green
beans

RoastedBrazil

195

48.10

0

0.01

0.01

5.8

Domestic consumption 19 million bags. Total
imports only amount to 21,000 bags – mainlyof roasted coffee from Europe.

Ethiopia

83

7.45

0

0

0

2.3

Domestic consumption 3.4 million bags,
which is around 40% of overall production.

1 171

4.98

0.38

<0.01

0.01

0.1

Domestic consumption 1.8 million bags,
growing at 6% annually. The rapid growthis attributed to (i) rising disposable income,(ii) shifting urbanization, and (iii) growth inpopulation with 54% aged under 25.

Indonesia

240

8.86

0.20

0.01

0.31

0.9

Domestic consumption 3.3 million bags. Outof-home consumption accounts for 22% of
the total market. Roasted coffee dominates
the market, but 3-in-1 preparations are
rapidly gaining market share with 30% of themarket.

Mexico

113

4.00

0.50

<0.01

0.10

1.2

Domestic consumption 2.4 million bags.
Almost 60% of consumers consume soluble
coffee, 23% consume roasted coffee and
15% a combination of both. Nestlé is themarket leader.

Viet Nam

87

18.50

0.05

<0.01

0.05

1.1

Domestic consumption 1.6 million bags.
Instant coffee accounts for the bulk ofconsumption with Nestlé as the market leader.

CountryIndia

Per capita
consumption
Solublekg/year

Additional information

Source: ICO and other trade data.
Note: Green bean equivalents are used for roasted, soluble and per capita consumption figures.

27

28

CHAPTER 2 – THE MARKETS FOR COFFEE

Elsewhere in Latin America, consumption is constrainedby relatively low urban income levels although there has
been some growth in Mexico and consumption remains
reasonably substantial in Colombia. By comparison,consumption in Africa is negligible with the exception of
Ethiopia, where there is a long and well-established traditionof coffee drinking.

is to be drunk or not. It is interesting to note that coffee ismore likely to be consumed at breakfast, lunch or dinner
if these are taken as family meals rather than eaten alone.
However, as meals are becoming less formal and structured
in many countries, more coffee is being consumed out of
home, although the home remains the most popular place
to consume coffee.

In Asia, total consumption is high in India, Indonesia andViet Nam, although per capita consumption levels are still
relatively low.

The type of food consumers prefer may also have an effecton the amount of coffee they drink. Either through habit
or taste, coffee seems to complement some foods morethan others. This might explain why coffee is generally lesspopular in restaurants serving Asian foods than in thoseserving traditional Western European cuisine.

FACTORS INFLUENCING
DEMAND
Income is an important factor affecting the demand forcoffee. In many ways this is not surprising, especiallyas coffee is still perceived by many to be a luxury item,
especially in low-income countries. There is clear evidence
that consumption is highly dependent not only on absoluteincome levels, but also, and probably more importantly, onchanges in real-income levels.
In countries that have a history of drinking coffee, there
seems to be a direct correlation between the level of income
and the level of consumption. The highest consumption percapita is found in the Nordic countries: Denmark, Finland,
Iceland, Norway and Sweden – all of them at around 10
kg per person per year. Other European countries such as
Germany, Switzerland, the Netherlands and Austria also
have a history of drinking coffee and also enjoy relatively
high personal incomes. It is noticeable that countries
with a tradition of drinking coffee and lower personal
incomes, such as Spain, Portugal and Greece, have aconsiderably lower rate of consumption. Given that coffee
is still considered to be a luxury item in many consuming
countries, it is not surprising that as a general rule, changes
in real incomes have a greater effect on consumption in lowincome countries than in high-income countries.

LIFESTYLE, DIET AND
COMPETING DRINKS
While price and incomes obviously play a major role indetermining the demand for coffee, it is difficult to ignore theeffect other factors may have on overall consumption – forexample competition from alternative beverages, adverse
publicity as a result of various health studies, advertising,or lifestyle. Coffee is traditionally recognized as an everyday
beverage that is frequently seen as a stimulant and an aid toalertness, but also seen as a social lubricant fulfilling a very
necessary function enabling people to socialize. ‘Let’s havea coffee’ is a phrase often used to cover a general request
for an informal get-together, regardless of whether coffee

Competition from other beverages has also been an
important factor affecting the demand for coffee. Over thelast 30 years or so, soft drinks have become more popular,
invariably at the expense of coffee, especially among young
people. However, the situation is far from static and the
new American-style coffee bars appear to reversing thistrend, although the situation varies from country to country.
Consumption of soft drinks in the United States has shown
rapid growth since the mid-1960s: the percentage of the
population drinking soft drinks grew from 47% in 1975 to
58% in 2011. It does, however, appear to have reached aplateau as very little growth has been achieved over thelast four years. However, In Germany coffee remains themost popular beverage and although the consumption of
herbal teas, fruit juices and mineral water is rising, it does
not appear to be doing so at the expense of coffee. In Japancoffee is gaining ground at the expense of other beverages,
but more slowly than in the early 1980s.
Price may be a major factor in the change to alternative
beverages, but health worries and advertising also provide
strong motives to switch to other beverages. Over the years
a number of studies have suggested that coffee – in fact
invariably caffeine, but the stigma attaches to coffee rather
than to all beverages containing caffeine – is linked in some
way to some cancers and other diseases.
The publicity given to the findings of these studies has
contributed significantly to the decline in the consumptionof coffee in some developed markets. A number of thecola drinks on the market contain high levels of caffeine –but not as high as most coffees. Studies have found thatcoffee may have some beneficial health effects, e.g. helping
to relieve stress and inhibiting the viruses that cause coldsores, measles and polio, as well as preventing some typesof cancer and possibly delaying the onset of Parkinson’s
disease. Unfortunately, this positive information does notgain wide publicity and does not yet appear to counteract
the effects of the adverse publicity. The Institute for Scientific
Information on Coffee (ISIC) is highlighting some of thesebenefits of coffee through its Positive Communication on
Coffee Programme. Visit www.coffeeandhealth.org and see
also ICO’s www.positivelycoffee.org.

CHAPTER 2 – THE MARKETS FOR COFFEE

ADDING VALUE – AN OVERVIEW
Downstream processing is often seen as a way of adding
value to a raw product at origin. Unfortunately, this is not as
straightforward as it at first appears if it were, there would bea far greater trade in processed coffee products from origin
than there is today.
In 2010 (calendar year) just 7.6% of all coffee exports fromproducing countries were processed coffee. This is almost
40% higher than 10 years ago, but given the low starting point
this is still fairly slow progress. The bulk (97%) of this export isinstant coffee, as roasted coffee exports have never exceeded
0.3% of total coffee exports from producing countries.
The consuming market for coffee is dominated by a few
very large companies, mainly multinationals, which sell theirproduct by promoting their brand name and image throughlarge-scale advertising. Normally advertising expenditure isequivalent to between 3% and 6% of sales revenue.
Most coffee is sold through supermarket chains, which
generally, stock a relatively limited range of brands thatmeet their criteria for sales per unit of shelf space. In thatenvironment it is difficult and costly for new brands and new
suppliers to penetrate the market, but it is not impossible as
there are always some openings for new suppliers.
Smaller packers and roasters, however, have managed tosecure a place in practically every consuming country to agreater or lesser degree, often selling coffee under either theirown brand names or providing supermarket chains with own
label (also known as private label) coffee to be sold underthe brand name of the supermarket. Own label or secondary
brands generally sell at a substantial discount and are notusually advertised in the media. Instead they are promoted
in store.
In the past such brands were usually considered to be inferior
in quality, but that is no longer the case and as a result, ownlabel coffees have been able to capture a significant shareof the market. The own label area offers the best opportunity
for coffees processed at origin because such coffees cannot
afford large advertising expenditure. But with increasing
concentration at the retail level the scope for new entrants is
becoming more limited. Furthermore, the own label market isfiercely price competitive.
Soluble coffee packed for supermarkets retails at a discountof typically 10%–30% on the price of the leading comparable
brands. For spray-dried soluble coffee the retail market is not
only oversupplied, but is also shrinking as consumers switch
to better quality freeze-dried and agglomerated soluble
coffees.

SOLUBLE COFFEE
The soluble coffee market is dominated by two multinationalfirms: Nestlé and Kraft Foods. One or the other or both havea presence in every main consumer market and probably inmany producing country markets as well. In addition there isoften a third large supplier in each main market. For example
in the United States Procter & Gamble enjoys a reasonably
large share of the market, while the Ueshima Coffee
Company (UCC) is of some significance in Japan. The larger
companies manufacture soluble coffee in their own plants
and rarely obtain soluble coffee from outside suppliers.
Nestlé also operates a small number of soluble processing
plants in producing countries, primarily aimed at supplying
the domestic market, but also nearby regional markets.
The scope for outside manufacturers lies in supplying
product for:
 Secondary (own label) brands that have no manufacturing
facilities (although this market tends to be rather
sluggish); Specialist packers of own label coffee in consuming
countries.
Most supermarket chains prefer to buy from a specialist
packer rather than direct from origin, and usually insist thatbulk supplies are repacked in retail jars. For all practical
purposes, an origin supplier seeking to enter the own label
market would be best advised to trade through a specialist
packer in a consuming country, especially as in most cases
the finished retail product is a blend of coffee from several
sources.
There are several specialist packers of soluble coffee for own
label product in consuming countries. Some operate their own
processing plants, but also often purchase soluble coffee forblending from other sources to fulfil contracts that are beyond
their capacity, or when imported soluble is cheaper than theirown product. Other specialist packers have no processing
capacity of their own and merely blend and repack products
from other sources.
The retail market for soluble coffee has three generalsegments:
 Premium brands of freeze-dried soluble. Nestlé andKraft Foods dominate in this segment, but there is somesignificant participation by other brands, particularly
supermarkets’ own labels. Both Brazil and Colombia
supply freeze-dried soluble coffee to this market, whichis still growing. Although not the most popular form ofsoluble coffee, in general freeze-dried is gaining market
share in every consuming country at the expense of othertypes of soluble coffee. It has obtained 40% to 45% of thesoluble coffee market in Japan, the United States andthe United Kingdom and a little over 30% in Spain andAustralia. Extra premium blends of freeze-dried coffeecomposed solely or mainly of arabica and sometimes
from a single origin are also marketed in this sector.
 Standard brands of spray-dried soluble. These
generally consist of coffee that has been agglomerated.
Agglomeration is a process that not only improves
solubility, but also transforms the coffee powder into
more attractive granules. Agglomerated coffee is themost popular form of soluble coffee. It accounts for more

29

30

CHAPTER 2 – THE MARKETS FOR COFFEE

than half the sales in the majority of consuming markets,
although it is losing market share to freeze-dried coffee.
 Cheap blends of spray-dried powder. This is often
soluble coffee that has been imported from origin andrepacked. Considerable excess manufacturing capacity
has resulted in extreme price competition and although
this is by far the cheapest type of soluble coffee available
in many markets, it is losing market share to all othertypes of instant coffee. It does, however, constitute thelarger share of the market in the Russian Federation andmany other Eastern European and Asian markets as wellas in producing country markets.
The total market for soluble coffee is showing signs of strong
growth after being relatively flat in the 1990s. Estimatedconsumption in countries that do not produce coffee was 21
million bags GBE in 2010, of which 30% was manufactured in
producing countries.

SOLUBLE COFFEE – OUTLOOKThe bulk of the soluble coffee exported from producing
countries is spray-dried powder. Brazil accounts for justunder half of all soluble coffee exports. Intense pricecompetition coupled with diminishing demand has led to amarked reduction in the spray-dried powder manufacturing
capacity in many consuming countries, although a significant
proportion of that reduced capacity has been transferred
to other, usually emerging, markets. It does not appear,
therefore, that there is a very secure future for new entrants
planning to supply spray-dried powder.
Freeze-dried soluble continues to make significant progress,
although processing is comparatively expensive and the
product quality demands a high proportion of the more
expensive arabica. The process is therefore unsuitable forcountries that produce only robusta. The market has primarily
been developed by Nestlé and Kraft Foods, although anumber of other companies are actively involved in the sector,
particularly those producing own labels. Brazil and Colombia
are important suppliers and while the market for freeze-driedcoffees is growing there are concerns that there is alreadytremendous manufacturing over-capacity in both Brazil anda number of consuming countries such as Germany. Freezedried coffee accounts for around 30% of all sales of soluble
coffee. Trade opinion suggests that the market for soluble
coffee as a whole is likely to grow only slowly over the next
10 years; by contrast, the market for freeze-dried coffee is
expected to continue growing at a much faster rate.
The opportunity for new suppliers must be weighed against
current excess manufacturing capacity, which is probably
sufficient to cover most, if not all, the anticipated increasein demand for a number of years. Although most exportsof soluble coffee are as finished product (in primary or bulk
so not retail packaging) some sales are made as frozen
concentrate for finishing in the country of destination.
Exports of soluble coffee by coffee producing countries forthe period 2005–2010 are shown in table 2.8. Most of thecoffee exported was produced in the country of shipment.

Soluble coffee is also produced in Malaysia for use in regional
markets and in the Philippines for domestic consumption.

SOLUBLE COFFEE – MANUFACTURING
METHODS
Extraction. Optimum extraction of soluble coffee solids
depends on the temperature of the extraction water andits rate of flow through roasted, ground coffee. In practiceincoming water can be approaching 200° C under highpressure. Extraction requires a row of interconnecting
percolators or cells, using a continuous reverse flow
principle. Each cell is filled in turn with fresh coffee.
Incoming hot water is introduced into the cell containing theleast fresh, most extracted coffee, where it collects thosesoluble solids that are vulnerable to the high temperatureand carries these to the next cell in the cycle, and so on. In
each cell the coffee liquor collects more soluble solids.
By the time the sixth cell in a cycle has been reached theliquor’s temperature has been reduced and so inflicts
minimum damage on the delicate flavour constituentsof the freshest roast coffee that are essential to the final
quality. The liquor is then drawn off and cooled. It now
consists of approximately 85% water and 15% soluble
coffee. Meanwhile, the first cell in the cycle (that underwent
extraction with the hottest water), is emptied of the spent
grounds and is recharged with fresh coffee to start the cycle
again. Thus, there is always one cell outside the process,which requires seven cells altogether.
Evaporation is necessary to reduce the liquor’s watercontent to 50%. But first the liquor is centrifuged to remove
non-soluble particles. To evaporate liquor at normalpressure would require very high temperatures that would
cause the liquor to acquire off flavours and lose valuable
coffee aromas as well. Consequently, evaporation takes
place under low vacuum and low temperature conditions.
Spray-drying requires a large cylindrical tower with a conicalbase. The concentrated liquor is introduced into the top
under pressure, with a jet of hot air. The falling droplets dry
into a fine powder that cools as it descends. These particles
may then be agglomerated into granules by wetting them in
low-pressure steam, allowing them to stick together. The wet
granules are then dried as they descend through a second
tower and are sifted to provide a uniform final granule size.
Freeze-drying consists of freezing the coffee liquor into a¼ inch (about 6 mm) thick cake on a moving conveyor at atemperature of -45° C. The frozen cake is then broken into
small particles and the ice crystals are removed under very
high vacuums, being converted directly to water vapour by
a process known as sublimation. Freeze-drying is moreenergy expensive but is gentler on the product as less heatis applied to evaporate the water content. Consequently,
freeze-drying is used for the finer and more expensive
blends of instant coffee.

CHAPTER 2 – THE MARKETS FOR COFFEE

Table 2.8

Exports of soluble coffee by exporting countries, 2005–2010 (in bags, green bean equivalent)
2005

2006

2007

2008

2009

2010

6 121 305

5 547 293

6 845 865

7 217 775

6 244 132

7 124 876

Colombian Milds

632 648627 111585 465697 653585 451613 004

Colombia

626 690622 731583 173696 494584 461603 390

5 958

4 380

2 292

1 159

990

9 614

1 451 597

1 528 089

2 286 563

2 192 170

2 256 260

2 750 631

Total

United Republic of Tanzania
Other Milds
Ecuador597 189599 174

749 271746 025659 875

806 744

El Salvador

458

54

241

51

108

404

Guatemala

23

478

1 605

2 679

2 535

2 337

Guyana

394

1 665

1 851

1 510

0

600

Haiti

0

0

0

0

52

702

India

338 377409 397

829 496

770 263937 587

1 205 765

Jamaica

586

760

1 823

2 091

1 840

2 484

Mexico444 319430 176624 842601 930

610 151687 671

Nicaragua

57 48160 79553 52342 59339 51143 583

Peru

14

0

0

0

0

0

Panama

8

222

61

1 653

237

302

12 71425 36823 84823 375

4 416

39Venezuela (Bolivarian Republicof)Zimbabwe

34

0

2

0

0

0

Brazilian Naturals

3 547 915

2 957 191

3 384 918

3 366 521

2 881 018

3 226 267

Brazil

3 525 169

2 948 212

3 372 692

3 364 816

2 881 018

3 226 267

Nepal

43

43

43

43

0

0

22 7038 933

12 183

1 650

0

0

0

3

0

12

0

0

Robustas489 145434 900

588 918961 522519 838

534 973

Côte d’Ivoire

Paraguay
Yemen

192 755

165 113381 343

340 017350 922276 775

Guinea

0

0

236

0

0

0

Ghana

139

89

78

225

48

22

223 384

192 029

149 283

602 804

154 005

234 201

0

31

21

86

0

58

Madagascar

182

0

0

0

0

0

Nigeria

160

0

2

140

0

0

33 63635 31432 105

4 435

6 656

6 338

31

16

0

23

15

2

Sri Lanka

300

1 657

703

58

53

468

Trinidad and Tobago

692

408

313

576

607

660

37 86640 24324 83413 1587 532

16 449Indonesia
Lao People's Democratic
Republic

Philippines
Sierra Leone

Viet Nam

Source: ICO. For more up-to-date statistics go to www.ico.org.

DECAFFEINATED COFFEE
Caffeine is a natural substance found in the leaves, seeds
or fruits of more than 60 plant species worldwide. The
level of its presence in non-decaffeinated coffee depends
on a number of factors: different types of coffee containvarying levels of caffeine. Factors determining this include
the variety of the coffee tree itself and where grown, soil,
altitude, climate etc.
The decaffeination process is applicable to both soluble
coffee (spray-dried and freeze-dried) and roasted coffee.
Decaffeinated coffee enjoyed a considerable rise in

31

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CHAPTER 2 – THE MARKETS FOR COFFEE

popularity during the 1980s, especially in the United States,
but its performance in the market during the 1990s has notbeen very strong.
Decaffeinated coffee is seen as having to compete with otherspecialty coffees and although consumers of decaffeinatedcoffee tend to be very loyal to the product, caffeine no longer
appears to be an issue that most consumers are particularly
concerned about.
Despite technological improvements in the decaffeination
process over the last 15 years, and in particular thedevelopment of what many see as better processes which
use water and carbon dioxide rather than methyl chloride,the product is losing market share. It is estimated that
decaffeinated coffee currently accounts for around 10%of all coffee sales. Usually, it commands only a small
premium over non-decaffeinated coffee and frequently issold for the same price. Consequently the economics of thedecaffeination are tight.
In 2010, trade sources estimated that the cost of the process
ranged from US$ 0.50/kg–US$ 0.65/kg of green bean,
for the cheapest process using methyl chloride, to about
double that for the more expensive methods. Incidentally,
there is a substantial market for extracted, crude caffeine inindustries such as pharmaceuticals and soft drinks.

THE DECAFFEINATION PROCESS
Arabica coffee beans contain 1%–1.5% caffeine, whereas
robusta contains more than 2%. Caffeine is an alkaloid withstimulant properties that are pleasing to the majority of coffee
drinkers, but not to all. Decaffeination caters for those who do
not want the stimulant effect of caffeine.
The caffeine in the green coffee beans has to be extracted.
Different processes are used. The solvents are water, organic
extraction agents or carbonic acid. The processing steps arevaporization, decaffeination and drying. All these steps arecarried out using the green coffee bean.
First, the green coffee is treated with vapour and water toopen up the bean surface and the cell structure to accessthe crystalline caffeine taken up on the cell walls. The second
step is extracting the caffeine by an extraction agent thatextracts only the caffeine. The caffeine extraction is not a
chemical process, but a physical one. No chemical changes
take place. Instead differences in the characteristics of theextraction agent, which has to absorb the caffeine, and thebeans containing the caffeine, are used. The extraction agent
absorbs the caffeine selectively. Once the extraction agent
is saturated with caffeine the next processing step removes
the caffeine and the extraction agent can be used again. This
cycle is repeated until practically all the caffeine is removed
from the coffee bean. Then the wet coffee, from which thecaffeine has been removed, is dried until once again itreaches its normal moisture content. It can then be roasted
as usual.

The following decaffeination agents are allowed in theEuropean Union: methylene chloride, ethyl acetate, carbon
dioxide and watery coffee extract from which the caffeine isremoved by active carbon. All conventional decaffeination
methods have undergone intensive scientific examination
and are considered safe. In the European Union the absolute
caffeine content in roasted, decaffeinated coffee may notexceed 0.1%, or 0.3% in soluble coffee. In the United States,‘decaffeinated’ is generally taken to mean that the caffeine
content has been reduced by 97%, or to less than 3% of theoriginal content.

ROASTED COFFEE
The market for roasted coffee is somewhat less concentrated
than that for soluble coffee. Although market concentrationin the roast and ground sector increased significantly,
particularly during the 1980s and in the late 1990s, thedevelopment of the specialty sector has slowed the trend
and the number of small roasters operating worldwide did
increase significantly again for a while. Small roasters rarely
buy direct from origin, but make their purchases throughimporters who are able to offer some security of supply andcost savings for small lots. In many cases importing directfrom origin involves buying a full container load of around
300 bags (18 tons), which is simply too large an order for
most small roasters.
As a result of the development of the specialty and gourmet
sectors in many countries, single origin roasted coffee is
now widely available. However, blends of roasted coffee
from different origins remain the most predominant roasted
coffee product in the overall market today and this makes
it difficult for producers to enter the retail market on theirown. The trade in roasted coffee from origin is limited:in 2010 only 222,500 bags were exported from origin inroasted form compared to 7.1 million bags GBE of soluble
and 89.3 million bags of green coffee. In total, roasted
coffee accounted for just 0.23% of all coffee exports, but the
published statistics on this trade are notoriously inaccuratewith reported imports from producing countries greatly
exceeding reported exports from those origins. Even so,and perhaps hardly surprisingly, Brazil was recorded as thelargest exporter of roasted coffee in 2010, a position it has
held undisputed for the past five years, although prior tothat the Dominican Republic and occasionally Colombia
vied with Brazil for the top place.
There are several obstacles to exporting roasted coffee
from origin. None of them are insurmountable, but together
they form a significant barrier to this trade. Roasted coffee
rapidly loses its flavour unless it is vacuum packed or gas
flushed. A supplier wishing to export must therefore install
an appropriate packing facility.
Furthermore, consumers are becoming increasingly
sophisticated and demand high quality packaging that
requires a significant level of investment. Additionally,

CHAPTER 2 – THE MARKETS FOR COFFEEREADY-TO-DRINK AND EXTRACTS OR
CONCENTRATESCanned, ready-to-drink (RTD) coffee was originally developedby the Ueshima Coffee Company. In 2010, it accounted
for close to 20% of total consumption in Japan, where it issold mainly through vending machines. RTD liquid coffee inplastic bottles and in PET packs is also very popular and isgenerally sold in supermarkets. It currently accounts for justunder 10% of all coffee consumption in Japan.
Canned coffee products are also finding a good market
in many emerging markets in Asia, particularly in China,
although the success of the product depends very muchon its availability in vending machines. RTD coffee products
are particularly suitable for iced coffee drinks, and as suchare beginning to make inroads in the North American andWestern European markets.
Originally the obvious requirement for success was accessto vending machines and vending sites. As a result, softdrink manufacturers currently dominate this sector of themarket. But the major roasters are now pushing hard as well,
not least because market sources consider the prospects
for RTD coffee excellent because of its convenience.
Sales of shelf-stable (i.e. not refrigerated or frozen) coffee
products for use as iced coffee etc. are the most likely
area of growth because such products can be sold off
supermarket shelves like any other dry goods. Anotherpotential winner could be concentrated liquid coffee. The
frozen concentrate is designed for commercial and out-ofhome consumers such as hotels, restaurants and offices forwhich, it is reported, it will produce a ‘fresh’ cup of coffee ina few seconds.

IMPORTS AND PRICES OF ROASTED AND
SOLUBLE COFFEE
Average imports of roasted and soluble coffee of the seven
leading importing countries and the origin of those imports
are shown in figure 2.5 and figure 2.6.
Figure 2.5 Imports of roasted coffee by origin, average
2005–2010
2,000,000
Bags (G
GBE)

Transporting the product to market from origin can take aconsiderable amount of time and this puts the exporter at
a disadvantage compared to a local roaster that is able tooffer the retailer a product with a longer shelf life. Exporters ofroasted coffee therefore need to develop speedy distribution
systems in order to minimize this disadvantage. This usuallyrequires the active collaboration of agents or specialized
importers or roasters in the target market(s).

TRADE PRICES, INVESTMENTCOSTS AND TARIFFS

1,500,000
1,000,000
500,0000

Producer

These seven countries account for the bulk of the imports ofboth roasted and soluble coffee. And as can be seen, withthe exception of the United States and France, imports ofroasted coffee from producing countries barely register on
the chart. Imports of roasted coffee into the United States
have been increasing significantly from 2005 to 2010, witha noticeable increase in imports of roasted coffee from
Mexico, Colombia and more recently Viet Nam. Imports ofsoluble coffee from producing countries are clearly moresignificant and form a larger share of the trade in the UnitedStates, Germany, Japan and the United Kingdom.
Figure 2.6 Imports of soluble coffee by origin, average
2005–2010
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200 000
200,0000

Producer

How much these developments do for coffee consumption
or indeed coffee quality is debatable – the coffee content isusually not very high and the coffee taste is often masked
by flavouring. Nevertheless, it is a new and growing nichemarket. Brazil and Colombia are the main manufacturersof concentrate at origin. Unfortunately, it is difficult to see
how smaller producers without a substantial home market
to support a manufacturing capability can participate.

Others

Source: ICO.

Bags (GBE)

legislation in importing countries frequently insists thatpacks are marked with a ‘sell by’ or ‘use by’ date.

Others

Source: ICO.

The average export unit-value of soluble coffee is comparedwith the ICO composite indicator in figure 2.7. Generally
the export unit value tracks the indicator, usually at a lower
level, but occasionally at a premium. However, because of
intense competition, the value added, on an FOB basis, isless than popularly supposed.

33

CHAPTER 2 – THE MARKETS FOR COFFEE

Figure 2.7 Export value of soluble coffee from ICA producing
countries compared with the ICA Composite
Indicator Price, 1990–2010

Cents/lb

160
140
120
100
80
60
40
20
0

Composite Indicator Price

Soluble coffee export unit value

Source: ICO.

Export unit-value statistics show that the prices of Braziliansoluble are generally lower than both the New York market
prices for Brazilian green coffee and, at times, the London
market prices for robustas. On the other hand, Colombian
prices correspond more closely with New York prices,
although the unit-value of exports of Colombian soluble (anaggregate of spray-dried and freeze-dried) remains for themost part just slightly above the quoted green coffee price.
One of the reasons for producing countries to continue withthis is that coffee transformed in the country of origin does nothave to possess all quality characteristics of coffee which canbe exported in green form. The transformation into soluble
may therefore allow the use of lower grades. Nevertheless,the value added by the manufacture of soluble at origin is
likely to be, at best, marginal and a run of low prices may notallow the speedy recovery of costs of new installations.
As is seen in figure 2.8, roasted coffee sells at a premium
over both the ICO composite indicator and the New York
market for Other milds, but this trade is more specialized
and export prices may include the provision of retail packs.
Nevertheless, the trade remains negligible.
Figure 2.8 Export value of roasted coffee from ICA members
compared with the ICA Composite Indicator
Price, 1990–2010

Cents/lb

34

Significant progress in reducing tariffs and taxes on coffee
imports into consuming countries has been made throughthe various rounds of the General Agreement on Tariffs andTrade (GATT) and more recently through negotiations under
the auspices of the World Trade Organization. However, whilemost tariff barriers have been removed for green coffee,
there remain a number of tariffs imposed on processed
coffee that continue to act as a barrier to importation ofprocessed coffee into consuming countries. In addition, there
are also a number of non-tariff barriers still in place, such as
quantitative restrictions and internal taxes that continue toinhibit consumption.

CLASSIFICATION OF COFFEE PRODUCTS
TRADED INTERNATIONALLY
Among the trade-related product nomenclatures, thefollowing three are of particular interest to coffee:
 HS – Harmonized System: The Harmonized Commodity
Description and Coding System (Harmonized System)
is the system for classification of goods in international
trade and for customs tariffs. It has been developed
under the auspices of the World Customs Organization.
HS assigns a six-digit code to general categories. In
most countries, these codes are broken down to a moredetailed level referred to as the tariff line. Details at www.
wcoomd.org.
 CN – Combined Nomenclature: This is the European
Union’s eight-digit coding system. It is based on the HS.
Details at www.europa.eu.int.
 SITC – Standard Industrial Trade Classification: SITC
was developed by the United Nations. It is commonlyused for trade statistics and by trade analysts. The
current version is Revision 4.

TARIFFS IMPOSED ON COFFEE AND
COFFEE PRODUCTS

400
350
300
250
200
150
100
50
0

Composite Indicator Pricefor example in Article 24 of the 2007 International Coffee
Agreement).

Roasted coffee export unit value

Source: ICO.

TARIFFS AND TAXES
It has long been recognized that tariffs and taxes influence
coffee consumption. The coffee community considers tariffs
and taxes to be part of a broader group of legal, political andadministrative barriers to coffee consumption (as mentioned

The world’s leading coffee importing countries and regions(United States, Canada, European Union and Japan) do
not levy any import duties on green coffee imports. The
United States and Canada also do not levy import duties
on processed coffee (roasted, soluble). The RussianFederation no longer levies any general import tariff on green
coffee imports, but roasted coffee imports are rated at 10%with a minimum of EUR 0.20 per kg. The European Union
applies different import tariff regimes for processed coffee,
depending on an individual producing country’s status interms of the Generalized System of Preferences (GSP),
Economic Partnership Agreements (EPA) or Bilateral Trade
Agreements. For information on selected individual importcountry regimes visit www.ecf-coffee.org and look for their
2010/11 Annual Report under Publications. Alternatively visit
www.exporthelp.europa.eu/index_en.html.

CHAPTER 2 – THE MARKETS FOR COFFEE

Value added tax (VAT) is levied on both roasted andsoluble coffee sales by most European countries with thepercentage ranging from 3% in Luxembourg to 25% in
Denmark and Hungary. Of course these are internal taxes
and do not directly concern exporters, but it is neverthelessuseful to know. Excise duties are also levied by Belgium,
Denmark, Germany, Latvia and Romania. For a full list see
the ECF 2010/11 Annual Report as well as www.exporthelp.
europa.eu.

PROMOTING COFFEECONSUMPTION

campaigns had very positive effects on consumption inboth countries. By 2011 the ICO no longer had the funds tofinance such campaigns.
The ICO does offer A Step-by-step Guide to Promote
Coffee Consumption in Producing Countries, which uses
primarily the Brazilian experience and methodology on how
to promote consumption in producing countries and any
emerging coffee market. This comprehensive guide can be
downloaded from www.ico.org.
The annual United States Winter Coffee Drinking Study isa good example of a survey on coffee consumption. See
www.ncausa.org for details.

The promotion of coffee consumption worldwide is vital forthe entire coffee industry. Competition from other beverages
is intense and the total amount of money spent on advertising
soft drinks, for example, far exceeds the amount spent on
coffee. Well-coordinated national and international generic(general) campaigns are necessary not only to encourage
people, particularly in emerging markets, to take up coffee
drinking, but also to retain the loyalty of existing consumers.
This is not to ignore the fact that roasters worldwide invest
tens of millions of dollars in brand promotion, the costsof which are estimated to be between 3% and 6% of total
sales. Although such promotion is not generic, it does
encourage consumption of coffee in general. Nevertheless,there is a distinct need for the entire industry to engage in
generic promotion of the type as undertaken by the ICO
in the Russian Federation and China in the 1990s as the
Table 2.9Classification of coffee products traded internationally
HS codeCN codeSITC Rev.4

Coffee in green form (not roasted)

0901.100901 10 00

07110

Not decaffeinated0901.100901 11 00

07111

Not decaffeinated, arabica

0901 11 10

Not decaffeinated, robusta

0901 11 20

Not decaffeinated, other0901 11 90

Decaffeinated0901.120901 12 00

Decaffeinated, arabica

0901 12 10

Decaffeinated, robusta

0901 12 20

Decaffeinated, other0901 12 90

Roasted coffee

0901.200901 20 00

Not decaffeinated0901.210901 21 00

Decaffeinated0901.220901 22 00

07112

07120

Coffee husks and skins

0901.900901 90 00

07113

Coffee substitutes containing coffee

0901.900901 90 00

07132

Extracts, essences and concentrates of coffee (Various CN codes for a rangeof sub-products)

2101.112101 11 xx

07131

Preparations with a basis of these extracts, essences or concentrates or witha basis of coffee (Various CN codes for a range of sub-products)

2101.122101 12 xx

07131

35

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CHAPTER 2 – THE MARKETS FOR COFFEE

Table 2.10 Tariffs for import of coffee in selected countries (in percentage unless otherwise indicated)
Productcode

Description

Category

EU

NorwaySwitzerland

Japan

United States

0901.11.00

Green coffee notdecaffeinated

MFN
GSP
LDC
General

0
0
0
0

0
0
0
0

0
0
0
0

0
0
0

0
0
0

0901.12.00

Green coffee
decaffeinated

MFN
GSP
LDC
General

8.3
4.8
0
0

0
0
0
0

0
0
0
0

0
0
0
0

0
0
0

0901.21.00

Roasted coffee notdecaffeinated

MFN
GSP
LDC
General

7.5
2.6
0
0

0
0
0
0

SwF 63/100 kg
0
0
0

12
10
0
20

0
0
0

0901.22.00

Roasted coffee
decaffeinated

MFN
GSP
LDC
General

9
3.1
0
0

0
0
0
0

SwF 63/100 kg
0
0
0

12
10
0
20

0
0
0
0

0901.90.10

Coffee husks and skins

MFN
GSP
LDC
General

0
0
0
0

0
0
0
0

0
0
0
0

0
0
0
0

0
0
0
10

0901.90.90

Coffee substitutes
containing coffee

MFN

11.5

0

SwF 70/100 kg

12

GSP

8

0

0

0

LDC
General

0
0

0
0

0
0

0
20

US cts 1.5/kg
US cts 1.5/kg
0
US cts 6.6/
kg

MFN

9

0

8.8 – 24

0

GSP
LDC
General

3.1
0
0

0
0
0

SwF 182/100
kg
0
0
0

0
0
12.3 – 16

0
0
0

11.5

0

15 – 29.8 +¥1 159/kg

8.5 – 1080

0

0 – 1000000
12.3 – 35 +¥1 363/kg

0 – 100 – 102101.11.00

2101.12.00

Extracts, essences andconcentrates of coffee

Preparations with a basis MFNof extracts, essences orconcentrates or with abasis of coffee
GSP
LDC
General

SwF 80.8– SwF
123.45/100 kg
SwF 0 – SwF
79.45/100 kg
00

Note: The tariff headings contain several sub-categories – hence the range of tariffs is given. The Generalized System of Preferences (GSP) is a
specific additional measure aimed at the lowering of tariffs for imports from developing countries. It formally exempts WTO member countries fromso-called most favoured nation (MFN) for the purpose of lowering tariffs for developing countries, without also doing so for developed countries. The
preferential GSP tariff rates are beneficial but still present a barrier in the majority of coffee importing countries. LDC refers to least developed country.

CHAPTER 3

NICHE MARKETS,
ENVIRONMENT AND SOCIALASPECTSTHE SPECIALTY MARKET .................................................................................................................................... 38
ORGANIC COFFEE............................................................................................................................................... 43
MAPPING TECHNOLOGY IN COFFEE MARKETING: GPS AND GIS ............................................................ 49
TRADEMARKING AND GEOGRAPHICAL INDICATIONS IN COFFEE ............................................................ 51
SUSTAINABILITY AND SOCIAL ISSUES IN THE COFFEE INDUSTRY ........................................................... 52
THE MAIN SUSTAINABILITY SCHEMES IN THE COFFEE SECTOR ............................................................... 54
CERTIFICATION AND VERIFICATION ................................................................................................................ 59
SUSTAINABILITY AND GENDER ......................................................................................................................... 61

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

NICHE MARKETS, ENVIRONMENTAND SOCIAL ASPECTS
THE SPECIALTY MARKET
It is often neither viable nor possible to add value to green
coffee by processing at origin. Many coffees are suitable only
for blending or processing into neutral or anonymous end
products, including soluble. For such coffees it is not possible
to add monetary value as prices are determined solely bymarket conditions. However, reliable and consistent grading
procedures, strict compliance with contractual obligations
and regular delivery will add value in the sense that the
product will be preferred by primary buyers over those fromless consistent origins. Certain growths of coffee, on the other
hand, may be highly prized for their flavour characteristics
and attract a suitable premium. Examples include JamaicanBlue Mountain, Hawaii Kona, Top Kenya AA and Guatemalan
Antiguas.
Some of these growths regularly attract extremely highpremiums. For example, in the early 2000s Jamaican Blue
Mountain attracted such a large premium that the unit valueof coffee exported from Jamaica was over 13 times higher
than the average of all ‘Other milds’ producers and morethan 16 times higher than the average achieved by all origins.
The top Kenyan grades regularly achieve prices more thandouble that achieved by other growths with some small
parcels selling in early 2011 for as high as US$ 20/lb.
Coffees, especially the winning coffees, sold through the Cupof Excellence programme, www.cupofexcellence.org, attract
exceptionally high premiums, but the lot size is generally
very small. The programme involves much more than justpromoting the winning lots. The Cup of Excellence programme
offers the origin the chance to highlight its coffee quality
and focus marketing attention on the country concerned.
Colombia has managed to consistently command sizeable
price premiums for its coffee because it has always adopted
an active marketing and publicity policy, which over time
resulted in many brands throughout the world being labelled
as 100% Colombian. Over time, other producers could also
try to ensure that the label of the blend containing their coffee
at least carries a reference to the composition of the blend.
Unfortunately, very few roasters are actually willing to do this.
In any case, a roaster who markets such a blend will need to
be assured of consistent quality and regular delivery.
Consumer awareness of the origins they drink does lead to
product loyalty and the development of a brand image. This
results in some, albeit limited, protection from the vagariesof the market. But if roasters are unable to obtain regularsupplies from one exporter, they will of course be encouraged
to seek alternative sources.

THE MEANING OF SPECIALTY
The term ‘specialty coffee’ originated in the United States. It
was initially used to describe the range of coffee products
sold in dedicated coffee shops, in order to differentiate these
coffees from coffee generally available through supermarkets
and other retail outlets. The term ‘gourmet’ is also used, but is
now applied to so many products that it has lost all relevance.
Specialty today refers both to whole bean sales and to coffee
beverages sold in coffee bars and cafés, as opposed torestaurants and other catering establishments. The range
includes higher quality coffees, both single origin and blends,
unconventional coffees such as flavoured coffees andcoffees with an unusual background or story behind them.
However, with the rapid growth in the number of specialty
coffee retail outlets and more particularly the expansion of
the specialty coffee product range into more mainstream
outlets such as supermarkets, the term has become muchlooser. It is fair to say that ’specialty coffee’ has become ageneric label covering a range of different coffees, which
either command a premium price over other coffees or are
perceived by consumers as being different from the widely
available mainstream brands of coffee. The term has becomeso broad that there is no universally accepted definition ofwhat constitutes ’specialty coffee’, and it frequently means
different things to different people.
Given this lack of precision in definition it is extremely difficult
to describe the market in a global way. The best approach
appears to be to look at the specialty market from different
country or regional viewpoints. However, the very notion’gourmet’ or ’specialty’ suggests some degree of exclusivity.
It is unlikely that one could market thousands of tons of aparticular coffee and still call it ’exclusive’.
The first lesson: one should not ‘overdo it’. It is, and always
has been, a mistake to consider specialty coffee a different
industry from the rest of the coffee business. Supply anddemand will not only determine the general level of coffee
prices, but will also determine the premium paid for ‘quality’.
The second lesson: producers need to target any special
coffee very carefully because the term ‘specialty’ covers alarge and growing number of different products, each ofwhich has its own niche.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

NICHE MARKETS – DEFINITION
A niche combines a set of conditions that enable a single
species or a single product to thrive within the greater
ecological or commercial environment. Much of global coffee
production consists of mainstream-type coffees. However,there are many other coffees, often of limited availability, withgreatly varying taste characteristics that appeal to different
groups of consumers, and which sell at a premium overmainstream coffees. Simply put, where the producers orexporters of such a coffee and such a group of consumers
get together, a niche market is created.
Two main factors determine whether a coffee can find aniche market: quality and availability. ‘Availability’ is easily
understood, but ‘quality’ is a subjective term which means
different things to different people. See chapter 11, Coffee
quality.

QUALITY SEGMENTATION OF COFFEES
Broadly speaking, coffees can be divided into threecommercial categories.
 Exemplary quality coffees have a high intrinsic value witha fine or unique cup. Usually of quite limited availability.
Mostly retailed under straight estate or origin names.
Usually very well presented washed coffees, including
some superior washed robustas, but also includes
some naturals (Ethiopian Harar, Yemeni Mochas, someIndonesian arabicas) and top organic coffees, which areusually, but not always, roasted by comparatively small
firms and marketed through fairly exclusive outlets, e.g.
retail coffee shops or bars and upmarket delicatessens.
 High quality or premium brands, good cupping
coffees, well presented, but not necessarily visuallyperfect. Retailed both as straight origins and as blends.
Includes good quality, well prepared organic coffees,
and washed as well as superior quality natural robustas.
The market for this quality band is much broader
and includes a good percentage of today’s specialty
coffee. Also produced by leading multinational coffeecompanies and marketed through normal retail outlets
such as supermarkets.
 Mainstream quality, average quality, reasonably wellpresented, but certainly not visually perfect. Will offer adecent, clean but not necessarily impressive cup.
In today’s specialty market all three types of coffee arerepresented: exemplary and high quality coffees either asstand-alone or as a named blend component, and mainstream
quality in many of the ready-to-drink and flavoured drinks thatare sold alongside filter coffee and espresso.
Obviously, for smaller exporters of top quality coffee, theexemplary segment initially offers more promise. However,producers or exporters of good quality coffee have threebasic options open to them.

 Sell to the leading roasters (through the usual tradechannels) if volume sales are required and the coffeesold lacks the flavour characteristics necessary to bemarketed on its own.
 Sell to specialty roasters either direct or throughimporters or agents. The latter in most cases is the more
realistic option as these importers or agents have a wide
coverage of the small roasters and other retail outlets,
which are too small to import direct.
 Focus on specialty coffee retailers either by selling direct(for roasting in store) through specialty wholesalers or by
selling through specialty roasters. However, the numberof specialty coffee retailers importing direct is extremely
small.
Premiums for specialty coffee can be considerable at theretail level, but the premiums available for producers areinevitably much lower, although they can still be significant.
It is sobering to realize that mainstream qualities, including
robusta, account for an estimated 85%–90% of world coffee
consumption, while the share of exemplary and high quality
coffee is no more than 10% or perhaps 15% of the world
market. This suggests that for many producers it would be
inadvisable to ignore the mainstream market altogether.
Instead, they should concentrate on both: specialty for
their top quality and mainstream for the remainder of theirproduction.
A further point to note is that sales to small roasters are mostly
on extended credit terms, something only an importer caneasily afford. Inventory costs, late payment costs and eventhe risk of payment defaults are therefore part of the costequation. Also, most roasters purchase subject to approval of
the quality on delivery. This means the importer will be left withany coffee that does not meet the roaster’s expectations. In
other words, the premium for specialty coffee at the wholesalelevel includes many more factors than just the quality.

EXCLUSIVE MARKETING ARRANGEMENTS
There are times, especially with a new and limited coffee,that a producer may agree to sell this coffee only to aparticular company, or to only a few companies that do
not compete in the same geographic region. Importers
and roasters at times like to have such an arrangement
because it prevents their competitors from marketing theidentical name at a different price in the same marketplace.
They can then create a marketing strategy that sets, themand the coffee – sometimes called ‘partnership coffee’ or‘relationship coffee’ – apart from the competition.

Potential benefits for the producer
 The agreements are usually long term and as such canhelp create price stability. This expectation of premiums
allows producers to focus on the coffee instead of themarketplace, and to be able to pay for the extra effort ittakes to maintain the quality.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

 An exclusive arrangement generally means roasters willbe spending marketing dollars in introducing the coffee
to their clients, i.e. a roaster will promote this particularcoffee rather than just blend it. Promotional dollars
behind the coffee mean increased consumer awareness,
which can lead to longer term loyalty.
 Exclusivity creates a certain sense of loyalty andcommunication between the producer and the importer/
roaster that may otherwise not be possible. It is also inthe best interest of the receiving company that the quality
is optimal – as such it may provide technical help andother assistance that would otherwise not have been
available to the producer.

Potential disadvantages for the producer
 An exclusive arrangement may limit the coffee’s
exposure. If it is with a smaller company or companies
with limited market share, then the chance to create abroader consumer base is lost. This could imply thatwhen the agreement comes to an end the producer isleft with a coffee that enjoys only limited awareness andrequires further effort to build market share.
 An exclusive arrangement usually contains priceconstraints. Sometimes beneficial for the producer, but
depending on market movements and the demand
for this particular coffee, this could also have negative
effects. One can find oneself locked in with one buyer
when in reality a better price might be available elsewhere.
 The producer is relying on one or a few companies topromote his coffee, but generally has no guarantee thiswill in fact happen, or that it will be enough to be effective.
Even though it is also in the buyer’s best interest to ensure
this, he or she may in fact not do so.
In conclusion, producers entering into such arrangements
must make every effort to know their business partner. Therecertainly are companies that are less than serious, that makepromises they cannot keep, and that sometimes may evenforego the agreed payment structure when this suits them.
It is imperative therefore that all contractual arrangements
are reviewed by a legal adviser, both in the producer’s own
country and in the buyer’s country.
To be effective these agreements must be true partnerships.
The producer must do his or she share to deliver the quantityand quality the buyer requires. The buyer must do his or her
share to pay a timely, fair price and to promote the coffee
to his or her consumer base in a way that ensures ongoing
demand. In other words, create relationships that can beformalized in a marketing agreement.

THE SCOPE FOR SPECIALTY COFFEE
On the consumption side the potential for specialty coffee
appears to be almost limitless, mostly because of constantproduct innovation. But not all of today’s specialty products

necessarily use very good coffee, and some contain very
little coffee indeed. Also, there is no universal agreement on
what constitutes specialty coffee, and it frequently means
different things to different people. But without a clear
understanding of what is really specialty coffee, an accurate
market assessment becomes extremely difficult.
In the United States the Specialty Coffee Association ofAmerica (SCAA – www.scaa.org) describes true specialty
grade coffee as having maximum five defects in a standard
sample with all cups free of all taints and showing distinctive
positive characteristics. Go to www.scaa.org and/or www.
coffeeinstitute.org/scaa.html for more on the SCAA’s definitionof what constitutes specialty grade coffee, defect counts, etc.
On the above basis we would estimate that no more than
5% of green coffees could make specialty grade. If we wereto include what the SCAA calls high-end premium coffee(eight defects, clean cup) then maybe the specialty market
is 10% of all of the green coffee business in the UnitedStates, a percentage that many trade sources consider
realistic. On the other hand, Daviron and Ponte in theirbook The Coffee Paradox (ISBN 1 84277 456 5 hb – ISBN
1 84277 457 3 pb, published by www.zedbooks.co.uk)
estimated the total size of the specialty market in the UnitedStates in calendar year 2000 at 17%. The National Coffee
Association’s National Coffee Drinking Survey 2011 puts
Gourmet coffee beverages at 36% of the market, including
both roasted coffee and specialty instant coffee products.
But the difficulty with specialty or gourmet coffee is toproperly define it. For example, is average Starbucks quality
specialty coffee or is it high-quality mainstream coffee?
In Western Europe many countries have traditionallyconsumed high quality coffees, at least equal to the goodpremium types that are produced by mainstream roasters.
This is perhaps why the Speciality Coffee Association ofEurope (SCAE – www.scae.com) describes specialty (orspeciality) coffee as an end product, rather than as a green
bean product, by saying that ‘speciality coffee is defined asa crafted coffee-based beverage, which is judged by the
consumer (in a limited marketplace at a given time) to havea unique quality, a distinct taste and personality different
from, and superior to, the common coffee beverages
offered. The beverage is based on beans that have beengrown in an accurately defined area, and which meet thehighest standards for green coffee, and for its roasting,storage and brewing.’
This interpretation then places the emphasis more on thefact that specialty coffee is not only expected to be different,
but also a more luxurious and superior product with acertain element of exclusivity. It also suggests that the term
‘specialty coffee’ is really a generic label covering a rangeof different coffees, which either command a premium priceover other coffees, or that are perceived by consumers
as being different. In Europe, the term often tends to be
associated with coffee for the American market, and thename also conjures up images of flavoured coffees.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

Therefore, until such time as there is general agreementon what constitutes specialty coffee it is not possible toaccurately quantify how much is produced, or how muchis consumed. The general consensus appears to be thatspecialty coffee in all its different forms may account foraround 10% of world consumption. It certainly is gaining
market share fairly rapidly, but of course world consumption
as a whole is rising as well, which makes it likely that the
10% will probably remain the upper limit for some time tocome.

The specialty market in the United States
The United States specialty market has seen strong
development over the past 20 years or so, which has helped
not only arrest the fall in United States consumption, butalso grow the overall market. Much of this has been driven
by the Specialty Coffee Association of America, which haspromoted the whole concept of quality. In the last three tofour years there has been tremendous growth in single serve
brewing systems, which allow consumers to experimentwith different coffees. They are frequently single origin, butalso flavoured and other manipulated products, so much sothat according to the latest survey from the National Coffee
Association of USA, (NCA – www.ncausa.org), single-cup
brewing systems are now the second most frequently cited
brewing method, with 7% past day penetration. This number
is significantly higher than in 2010, when it was 4%, whichindicates that single-cup brewing systems are actively
growing and at the same time expanding the market for
specialty coffees. The only downside is the fact that thesesystems significantly reduce product waste (i.e. reduce
excess brewing) and thus do not necessarily immediately
expand the market volume wise.
Increasing sales of espresso-type drinks also mean growing
demand for low-acid coffees, such as Brazils and robustas,at the expense of traditional specialty mild arabicas. Notealso that espresso drinks generate higher profit margins
than do traditional cups of coffee. Furthermore, on theroaster/retailer side – coffee bars and shops ranging insize from international chains at one extreme, to firms
with just a few stores at the other – the trend has been tofollow the example of the Starbucks operation. Not only to
get bigger, mostly through merger or acquisition, but also
to ‘commoditize’ and simplify business. This can meaneliminating or reducing the number of ‘straight’ origin
coffees that are carried, resulting in increasing dependenceon blends because higher sales mean larger and more
centralized buying requirements. This makes it increasingly
cumbersome to deal with many small suppliers.
So-called ‘signature blends’ are often used in the branding
strategy of larger companies. At the same time, mainstream
roasters have been upgrading their image by offering ‘quality’coffees, but many have very different perceptions of what
this means. Some of the large United States mega-discountstores have installed 30-pound capacity computerized coffee
roasters and are selling freshly roasted ‘specialty’ coffee atmuch lower prices than the traditional specialty stores. The

quality may not always be there, but the coffee is fresh. Somesuch chains have also started importing roasted beans directfrom some producing countries in partnership with roasters
at origin. Major restaurant chains such as McDonald’s andDunkin’ Donuts are now offering specialty coffees and thisline appears to be enjoying good sales growth. Given thisstrong industry growth and the accompanying proliferationof specialty coffee products, the SCAA together with the
Coffee Quality Institute (CQI – www.coffeeinstitute.org) has
created the Q Grading System, which effectively establishesa standard for certified specialty coffee. See details inchapter 12, Quality control. The aim is to provide producers,
exporters, importers, roasters and retailers of specialty coffeewith the means to have the quality and authenticity of theirproduct independently certified. The programme builds onthe existing SCAA Green Coffee Classification System andGrading Chart; see www.scaa.org and www.coffeeinstitute.
org.

The specialty market in JapanThe specialty market in Japan is not dissimilar to the market
in the United States, and it too has distinctive segments:
 Almost mythical name coffee: Blue Mountain, Hawaiian
Kona etc.;
 Good quality, straight origin estate or area coffees; Decent standard qualities;
 Branded blends.
There are no dedicated specialty importers, but mostimporters handle at least some specialty coffees andincreasingly service smaller downstream buyers directly;
although there is also a network of coffee dealers andwholesalers. Interestingly, larger roasters maintain their own
coffee outlets within large department stores – in so doing,
they of course achieve widespread exposure.
The Japanese market basically offers producers thesame sales prospects as does the United States with the
exception that it is very difficult to gain recognition for new
individual coffees. This is because creating a stand-alone
brand image for an individual coffee would be enormously
expensive and without guarantee of success. Disclosure oforigin at retail level is provided for in consumer legislation,
but as the composition of blends is flexible and they are soldunder the roasters’ own brand names, usually only the main
components are identified by country of origin (and never by
individual grower or producer). As a result, price resistancein Japan, other than for a few stand-alone top coffees, isprobably greater than in the United States specialty market.
For more information visit the website of the Specialty Coffee
Association of Japan (SCAJ – www.scaj.org).
Other emerging specialty markets would appear to bestrongly influenced by trends in the United States. Operatorsin the United States have opened or franchised specialty
stores in Australia, China, Republic of Korea, Singapore andelsewhere.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

The specialty market in Northern Europe
The Northern European specialty market is part of the world’s
largest market for coffee. Europe’s total imports are double
those of the United States. But the great concentrationof buying power in the hands of very few roasters has notmade it easy for small producers to add value throughimproved quality, or through promotion in Europe. This ismainly because their production is deemed insufficient tobe considered for sale as straight origin coffee, but also
because specialty coffee in Europe is a true niche market in
a continent where much good quality coffee is already readily
available.
The true specialty target segment consists mostly of real
enthusiasts searching for something different, rather thanlarge numbers of people who are disappointed in their daily
cup of coffee, as was the case in the United States.
The entry of Europe’s mega-roasters into this fielddemonstrates that they appreciate its potential. Competition
between them and smaller specialty roasters will probably
limit the latter’s potential market more than has been thecase in the United States, where until fairly recently the large
roasters did not have any real ‘quality’ to offer.
In many European countries the opposite applies and bothsides are therefore targeting more or less the same nichemarket, with large operators benefiting from economies ofscale the smaller ones cannot match. The establishment in1999 of the Specialty Coffee Association of Europe was animportant innovation in this somewhat uneven playing field.
By the middle of 2011, the SCAE had almost 1,600 members
in 77 countries, so not only in Europe, and had established
35 national chapters. It now organizes regular trade shows,training events and competitions, and offers a growing rangeof member services. It is also interesting to note the recent
massive increase in the number of micro-roasters operatingin Europe. They usually either serve a very local area or, as is
becoming more frequent, a select clientele via the Internet, oroccasionally both.
Exporters should note that the area to be covered is vast,with hugely varying quality preferences. Smaller producers inparticular will almost certainly have to depend on specialty
importers or agents to access the European market efficiently.

The specialty market in Southern Europe
The Southern European specialty market, mainly Italy, isentirely different from that of most other European countries.
Italy is a gateway into a number of Eastern European
markets. Many Italian importers and roasters traditionallysupply ready-made specialty blends (green or roasted,
for roast and ground or for espresso) to nearby countries
in Eastern Europe as well as the many small roasters that
operate in Italy itself.
The Italian market counts over 1,500 individual roasters.
There is a substantial mainstream segment, but many small

specialty roasters exist and flourish. Many of these buy readymade, ready-to-roast green coffee blends from the specialty
importers, especially for the strong espresso segment. But
many of these smaller roasters are facing strong competition
from the larger and medium sized roasters through theintroduction of the singleserve pod systems that have been
growing at an annual rate of around 20% over the last four
years.
Larger specialty roasters, such as Lavazza and Illy, export
substantial quantities of Italian espresso blends all over
Europe and the United States, so the sales opportunities for
specialty type coffee that meets the quality requirements forthe espresso trade are quite substantial.
For a review of those requirements and how they differ fromtraditional specialty coffee see the section on coffee tastingin chapter 12, Quality control.

THE DIFFERENCE BETWEEN MAINSTREAM
AND SPECIALTY ROASTERS
Many people and articles, as well as this guide, attempt
to differentiate between what they call the mainstream
and the specialty coffee industry. But it is not entirely clear
where the one stops and the other begins. For example,
if the Swiss multi-national roaster Nestlé is considered tobe mainstream, what then is its single-serve R&G capsulemaking subsidiary Nespresso? Alternatively, if size or
turnover are the criteria, where then to place Starbucks?
Large or mainstream roasters are moving into the specialty
market, for example, by offering organic and single-origin
coffees or by establishing their own specialty operation,
sometimes under a different name. Such moves reflect thegrowing importance of the specialty segment, but somewhat
blurs the distinction between the two. It is therefore better
perhaps to ask what causes different retail products to beclassified as mainstream or specialty.
‘Mainstream’ simply reflects the fact that an estimated 85%
to 90% of all coffee roasted is of fair average quality, massproduced and marketed. Such coffees are available inquantity and are usually presented as blends, often throughsupermarkets, etc. Roasters who are predominantly activein this market segment are therefore known as ‘mainstream
roasters’. Their buying capacity is huge and there is strong
concentration in this market with Kraft and Nestlé currently
the world’s leading roasters.
‘Specialty’ usually refers to individually presented coffees,
often but not always of somewhat limited availability. With
the exception of the Starbucks Company in the UnitedStates, the turnover of most specialty roasters is relatively
limited but, in recent years the number of small roasters
worldwide has shown strong growth. However, the term
specialty increasingly also refers to coffees that are different,
for example, in the way they are presented. This is part ofthe specialty attraction, although it is fair to say that for theCHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

average latte one does not require top-grade coffee. A
simple blend will do.
To complicate matters further there is also no denyingthat the output of some of the larger European roasters
has always included top-quality coffees, often far superior
to the average specialty coffee. Yet such roasters areusually classified as mainstream because of their size andthe conventional marketing methods most employ. Theirproducts are not perceived as being ‘different’. At the sametime, other retail products elsewhere may be classified as
specialty even though they may be based on averagequality or mainstream-type coffee.
The specialty market itself is divisible in three sub-segments:
Exemplary coffees, usually presented as single origin or
single source, High quality coffees that may include blends,
and Average quality coffee that is presented ‘differently’,for example lattes. Therefore, one should probably classify
individual roasters by the products they market, rather thanby the type of coffee they may be buying.
The Nespresso Company combines technical innovation(special home brewing equipment) with high-quality
coffees. It stands alone from the Nestlé Group, and both thecompany and its products should definitely be classified as
being part of the specialty segment.
In a way, the Starbucks Company does the same because
it relies on innovative retail and presentation methods thathave set it apart from other roasters/retailers. This includes
the constant promotion of high-quality origin coffee, but it isincreasingly selling blends as well as its new instant coffee
brand ‘Via’. However, the company firmly belongs to thespecialty segment because it is marketing specialty type
coffees.
The Swedish roaster Gevalia is a different example. The
company ranks amongst the major specialty sellers (mostly
by mail order) in the United States, yet is owned by themulti-national mainstream roaster Kraft Foods.

ORGANIC COFFEE
Organic products have come a long way since small
groups of consumers started buying organic food directlyfrom farms or from small health food shops, where quality
was secondary as long as the products were organic. But
then in the early 1990s supermarket chains started paying
systematic attention to organic food. Year after year they havetaken over market share from the specialized shops, to thepoint where they drive most of the growth in the market shareof organic food today.
It is estimated that almost 10 million hectares of land inEurope is cultivated organically. Austria is leading withas much as 20% of the total farm area under organic
cultivation. The market share for organic products in
Western countries ranges between 0.5% and 8% for foodgenerally, but varies widely for different product groups. The
United States remains the largest single market for organic
products, followed by Germany. Consumption growth rates
have been slowing since 2008 in some countries, especiallyin the organic sector in the United Kingdom. However, theUnited States is continuing to grow (almost 10% to US$ 27
billion in 2010, which is about 4% of all food and beveragesales in that market).

WHAT ARE ORGANIC PRODUCTS?
Organic agriculture means holistic production management
systems that promote and enhance agro-ecosystem health,including biodiversity, biological cycles and soil fertility.
Organic production systems are based on specific andprecise production, processing and handling standards.
They aim to achieve optimal agro-ecosystems that aresocially, ecologically and economically sustainable. Terms
such as ‘biological’ and ‘ecological’ are also used in aneffort to describe the organic production system moreclearly.
Requirements for organically produced foods differ fromthose for other agricultural products. The production
procedures, and not just the product by itself, are an intrinsic
part of the identification and labelling of, and status claims
for, such products. See the FAO/WHO Codex Alimentarius
Commission Guidelines for the Production, Processing,Labelling and Marketing of Organically Produced Foods(1999) at www.codexalimentarius.net.
Advocates of organic agriculture believe that conventional
agriculture, with its use of chemical inputs, will not besustainable in the long run as it leads to soil degradation andpollution of the environment, and poses health risks for bothconsumers and producers. Therefore, organic agriculture
replaces manufactured inputs (fertilizers, pesticides,
herbicides, etc.) by natural compost and vermiculture,
biological pest controls and the growing of legumes andshade trees. (Vermiculture is the raising of earthworms toaerate soil and/or produce vermicast: the nutrient-rich byproduct of earthworms, used as a soil conditioner.)
The International Federation of Organic Agriculture
Movements (IFOAM; founded 1972) has formulated basic
standards for organic products. See www.ifoam.org for thefull text. These standards are at the base of the legislationthat has been introduced in the European Union (1992), theUnited States (2000), Japan (2001), and a number of othercountries (including Argentina, Bolivia (Plurinational Stateof), India and Mexico) that have created national legislation
to regulate the market for organic products.
Western countries have developed extensive legislationfor organic products. The conditions that must be met
before coffee may be marketed as organic are bothcomprehensive and well defined. No coffee may bebrought to the marketplace and labelled organic unless
it is proved to conform to the regulations. In other words,

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coffee can be marketed as organic only when it is certified
as such by a recognized organization or certifier, based on
regular inspection of all stages of production, processing,transporting and roasting of the coffee.
The first organic coffee cultivation was recorded at the Finca
Irlanda in Chiapas, Mexico (1967). The first organic coffee tobe imported into Europe from a small farmers’ cooperativecame from the UCIRI cooperative in Oaxaca, Mexico (1985).

WHY BUY OR GROW ORGANIC COFFEE?
Why do consumers choose organic coffee?
 Health considerations. Many consumers perceive
organic foods as healthier. However, this motive is lessimportant for coffee than it is for some other crops in thatroasted coffee hardly ever contains harmful residues.
But there is also a growing number of consumers
whose health worries extend to the workers who have towork with the chemicals that are used in the traditional
production system.
 Demand for specialty coffee. Although the qualityof organic coffee is not necessarily better than that ofconventional coffees, the market for organic coffee isincreasingly demanding higher quality, which is whyorganic coffees are often positioned in the specialty
segment. The first organic coffees to appear on themarket in the 1980s were good quality arabicas from
Mexico, but nowadays organic robusta, as well as lower
grades of organic arabica are also available. Somequality estates or exporters have their coffees certified
as organic to underline their quality, hoping it will beperceived as truly special.
 Environmental concerns. Other consumers areconcerned about the negative impact of agro-chemicals
on the environment. They are not necessarily concerned
only about health issues, but primarily want to be sure thatthe products they buy are produced in an environmentallyfriendly way in order to prevent pollution, erosion and soil
degradation.

Why produce organic coffee?
In principle producers are motivated by the same concerns
as consumers, but in addition they want to secure theirsocial and cultural future by realizing the premium thatcertified organic coffee obtains. This benefit depends onthe demand for organic coffee, which in turn determines theamount of the premium that can be obtained and the extra
costs involved in organic production.

Growing organic coffee
Growing any organic product, including organic coffee,
is more than just leaving out fertilizers and other agrochemicals. Coffee produced in this way should instead

be called ‘natural’ coffee and, to the surprise of many, theindustry looks upon this as non-sustainable production.
This is because in the long run the soil will be depleted
by natural production, which is often referred to also as‘passive cultivation’ or ‘organic by default’.
To achieve sustainable production it is necessary to makeactive use of various organic agriculture techniques, including
the composting of organic material, mulching of the soil
under the trees with organic material, use of biological pest
control, and investing in shade regulation. The principle ofsustainable agriculture is that a value corresponding to thatharvested should be returned to the soil. All possible methods
have to be used to enhance the fertility of the soil. This is why
passive production of coffee, even when no chemicals areused, is viewed as non-sustainable and not as organic.
Usually, a producer may simultaneously grow bothconventional and organic coffee, although this is notrecommended. There must be a clear separation between
the two types and adequate barriers to prevent contamination
with agro-chemicals from neighbouring fields.
Coffee may normally be sold as organic only once organic
cultivation has been practised for at least three years before
the first marketable harvest. This also means three years ofinspection. These years are called the conversion period.
In specific cases, depending on previous agricultural
practices, this conversion period may be reduced, but only
after approval of the certifying organization, which in turn has
to report such a decision to the authority granting the required
import permit. For a producer who can prove that no agrochemicals have been used in the past, it is important to try to
reduce the conversion period. If a producer can documentthat no agro-chemicals have recently been used, it is certainly
worthwhile discussing the possibility with the certifier.

PROCESSING AND MARKETING ORGANICCOFFEE – THE AUDIT TRAIL
Not only coffee cultivation, but also all subsequent steps in the
production chain, have to be certified. On-farm processing,storage, transport, export processing, shipping, export,
import, roasting, packaging, distribution and retailing all haveto be certified organic. Contact with conventionally produced
coffee must be excluded and so there has to be a separationin space and/or time. Spraying or fumigation with toxic agentsis never permitted and special measures must be taken toprevent contact with areas where fumigation has taken place.
Adequate records are to be kept of incoming and outgoing
coffee so that the entire product flow can be documented andaccounted for, often referred to as traceability. All the steps inthe chain should therefore be documented and administeredin a way that makes it possible to trace back the origin of the
product from one step to the next (track and trace), ensuringthat no contamination with conventional coffee has occurred.
This traceability minimizes the risk of fraud at all stages andis a very important part of the inspection process by certifying
organizations.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

The flavouring of roasted coffee is permitted when natural
flavouring substances or preparations are used. For
packaging roasted coffee, flushing with nitrogen or carbon
dioxide is permitted. For the decaffeination of coffee, chemicalsolvents (e.g. methylene chloride) are not permitted, but thewater method or the supercritical carbon dioxide method (theCO2 method) may be used.

org for more information on this accreditation programme
and for links to other publications, e.g. the differences
between European Union and United States regulations fororganic agriculture. In the third development phase, different
countries or states (e.g. Germany, California) developed lawson organic agriculture and processing, which were eventually
incorporated in formal EU or United States regulations.

ORGANIC CERTIFICATION AND IMPORT

Today (late 2011), the bulk of organic coffee is certified
against one of the following standards:

As already indicated, the importation and sale as organic of
both green and processed coffee must comply with the legal
regulations of the consuming countries. This complianceneeds to be verified by a third party; the procedure is calledcertification. It is important to realize that different rules apply
in different countries.

 Council Regulation (EC) No. 834/2007 of 28 June 2007
on organic production and labelling of organic products
and repealing Regulation (EEC) No. 2092/91 that cameinto force 1 January 2009 for the European Union; National Organic Program for the United States (NOP); Japan Agricultural Standard (JAS).

The certification procedure includes a number of steps. Notethat there is a clear distinction between the certification of an
operator to produce organic coffee and the certification of anexport shipment to be imported as organic coffee.
 Registration. The producer selects a certification
organization (certifier for short) and signs a contract. The
producer provides information on their farm/processing
facilities and is registered.
 Inspection. At least once a year the certifier inspects the
production and processing facilities.
 Certification. The inspection report is the basis for
deciding whether a master certificate can be granted.
 Control certificate (formerly called transaction
certificate). This must be issued for every export shipment
to the European Union, the United States and Japan,
indicating the exact quantity and organic origin, after
which the goods may be exported/imported as organic.
The certification process includes an assessment of thegrower’s production and export capacity against which theauthenticity of future export transactions will be tested. This
is to ensure that sellers of organic products do not exceed
their registered capacity. Also, in the European Union,
organic products can be labelled as such only once the entire
production and handling chain, from the grower through tothe importer, has been inspected and certified.

Organic regulations
In the initial development stages there was no legal definitionof organic food and so farmers’ organizations and others
formulated their own standards and issued certificates andseals to offer consumer guarantees. The next phase waswhen IFOAM united these different standards into its ‘Basicstandards for organic production and processing’. Thesestandards provide a framework for certification bodies
and standard-setting organizations worldwide to develop
their own certification standards. In an effort to harmonize
standards and certification, and to provide a universal quality
seal for organic products, IFOAM also has an accreditation
programme for certification organizations. See www.ifoam.

Importing organic coffee into Europe
In the European Union, the market for certified organic foodis regulated by Council Regulation (EC) No. 834/2007 andsubsequent amendments thereto. (Visit www.eur-lex.europa.
eu and type 2007 (year) and 834 (document number) into thesearch function to see Regulation 834/2007 and subsequent
additions.) All major European certifying organizations are
subject to this regulation, although in some respects some,such as Naturland in Germany or Soil Association in the United
Kingdom, apply stricter standards. For more information see
also www.ifoam.org.
Equal values. The international trade in organic products andregulations for their certification are based on equivalenceor ‘equal values’. That is to say, organic products imported
into the EU must have been produced in accordance withstandards that are equivalent to those applicable within the
EU itself. This is clearly stated in Article 33 of EC 834/2007.
But equivalence is not always interpreted in the same way,for example, when an individual competent body insists on
the foreign standard being identical, rather than equivalent,to the corresponding EU regulation. In some instances suchdifferences could be considered as non-tariff or technicaltrade barriers.
The same article provides that a non-EU country can beapproved by the European Commission if its production
system complies with principles and inspection measures,
equivalent to those laid down in EC 834/2007. Such a country
is then added to a list of approved countries.
Accreditation of certification organizations. The European
standard known as EN 45011 and the corresponding ISO 65
guide both stipulate that certification organizations shouldbe accredited by a recognized accreditation body. Aspiring
exporters of organic coffee to the European Union should
therefore verify that: The proposed certifying organization has an EN 45011/
ISO 65 accreditation, which they should be able to submit
on request. It is important to note that the European
Union does not recognize certifiers that certify clients
against organic standards that do not conform to EU

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specifications. For example, the use of sodium nitrateis permitted by some non-EU certifiers, but is prohibited
under EU regulations.
 The proposed certifier can certify directly against EU
regulations because a certifier may certify against anumber of different standards.
Importation and inspection. Aspiring exporters should
satisfy themselves that the proposed importer is fully awareof and follows the required EU customs documentation, i.e.
that importer is certified against EU regulations. But exporters
must also be aware of the fact that for each shipment EU
customs will demand to see an original inspection orcontrol certificate (formerly called transaction certificate) for
verification and endorsement. Therefore, exporters must
apply for these on time because without such documentation
EU customs will only clear a shipment as conventional coffee.
Inspection certificates are issued by the certifying body andthis is where the earlier inspection of production capacity
comes in, i.e. the master certificate that was issued by thecertifier to confirm the seller’s authenticity and capacity. At
the end of a year it can then be seen whether the total exports
for which inspection or control certificates were issued
correspond with the production capacity stated in the mastercertificate.
Once cleared through EU customs the organic productenjoys free movement to other member states. But when allor part of a consignment is to be re-exported as organic toa destination outside the EU then, depending on the countryof destination, the original EU importer may have to obtaina new inspection certificate from a competent EU certifying
organization. This is by law, but because the market requiresit.
EU organic production logo. Most certifying bodies havetheir own quality labels. As a result, many different labels
exist in the European Union for the designation of organic
products. Increasing trade in roasted coffee within theEuropean Union therefore forces roasters to display several
labels on their retail packets, an arrangement that does notprovide the clarity one would expect.
Regulation EC 834/2007 now stipulates that the EU organic
production logo shall be obligatory for all organic prepackaged food produced within the European Community.
However, the simultaneous use of national or private logos
shall not be prevented.
For more information on organic certification and regulationsin the EU, in addition to www.ifoam.org, also visit to www.
intracen.org/exporters/sectors. Click on Organic Products
and then Certification. The site also provides a useful glossaryof organic certification concepts.

As a result, there were no guarantees that ‘organic’ meant thesame thing from state to state, or even locally from certifier
to certifier. Consumers and producers of organic products
therefore jointly sought to establish national standards toclear up confusion in the marketplace, and to protect thetrade against mislabelling or fraud.
As required by the Organic Foods Production Act (OFPA),
the National Organic Standards (part of the National Organic
Program, NOP) became effective on 21 October 2002. OFPA
itself was adopted in 1990 to establish national standards forthe production and handling of foods labelled as ‘organic’.
Today organizations that are fully NOP-compliant (certified)
may label their products or ingredients as organic, and may
use the ’USDA Organic Seal’ on organic products in the
United States, irrespective of whether they are produced
domestically or are imported. As a result of NOP, there is asingle national label in the United States to designate organic
products, thereby avoiding the label confusion that exists in
Europe. A list of accredited certifying agents can be found on
the websites of the United States Department of Agriculture,
www.ams.usda.gov/nop and the Independent Organic
Inspectors Association, www.ioia.net.
Like the European Union, the United States also requires acontrol or transaction/export certificate for each shipment,
showing date, weight/quantity, and origin. However, unlike toEuropean Union, NOP does not require the ‘master certificate’for the processing unit.
Information on trade in organic products can also be found atwww.ota.com, the website of the Organic Trade Association –look for about/sectorcouncils/coffee/index.html.

Importing organic coffee into JapanThe Japan Agricultural Standard (JAS) for Organic
Agricultural Products entered into force in April 2002. Enacted
by the Ministry of Agriculture, Forestry and Fisheries, JASregulates the production and labelling of organic food items
produced in Japan. Although coffee is not grown in Japan,
JAS nevertheless also covers organic coffee (and tea) under‘organic agricultural products’. The JAS standard has beenfurther revised in 2005. For more information visit www.maff.
go.jp/e/jas/index.html.
Only ministry-accredited certifying bodies may issue JASorganic certification for coffee to be imported into Japan.
Interested certifying bodies in producing countries may
also apply for accreditation under JAS. Subject to meeting
the JAS standard for their products, set by the Agriculture
Ministry, suppliers of organic coffee and tea may display the
JAS mark, which also gives Japan a single organic label forthe entire Japanese market.

Importing organic coffee into the UnitedStatesWORLD MARKET FOR ORGANIC COFFEE

Prior to 2002, private and state agencies certified organic
practices and national certification requirements did not exist.

Different trade sources have varying views on the size ofthe market for certified organic coffee. This is not helped

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

by the fact that few consuming countries register organic
coffee imports separately. To note also that the 27 EU
member countries increasingly report coffee imports asa single market, making provision of individual country
data even more difficult. Nevertheless, indications are that
consumption of certified organic coffee in North America
and Europe has been growing fairly strongly since 2005,
with growth figures averaging 5% to 10% annually, although
this has slowed in the last couple of years.
A 2010 study by ITC (Trends in the Trade of Certified Coffees
by J. Pierrot, D. Giovannucci and A. Kasterine; March,2011 – See www.intracen.org/exporters/organic-products– Information and Technical Papers) puts 2009 imports ataround 1.7 million bags or almost 1.4% of the 126 million
bags of 2009 world gross imports (excluding re-exports). Of
this, 45% went to Europe, 41% to North America and 14%
to Asia and elsewhere. Estimates for 2010 suggest that themarket might have grown by around 3% to 1.75 million bags.
Peru remains by far the leading exporter, with exports of
406,000 bags in 2009 and 423,000 bags in 2010. Other
leading producers include Colombia, El Salvador, Ethiopia,
Guatemala, Honduras, Indonesia and Mexico, with Ethiopia,
Honduras and Mexico currently each exporting over 100,000
bags annually. However, it should be noted that official orrecorded export figures are not always complete as not allexporting countries provide the necessary data, making it
difficult to be precise.
Growth in Japan is very much linked to quality: organic
coffee of excellent quality generates increasing consumer
interest, something that augurs well for further growth in
this segment. Growth potential for average quality organic
coffee on the other hand is limited.
North American growth is also linked to quality. The factthat profit margins on certified products as organic usuallyare higher plays a role as well, so mainstream roasters andretail chains are showing increasing interest. Almost halfof all Fairtrade certified coffee is certified organic as well,whereas certification by both the Rainforest Alliance and Utz
Certified is not only growing strongly, but also includes a
substantial amount of certified organic.
On the production side there remains the mistaken belief
amongst some that organic coffee does not need toshow quality. As a result, some organic production simply
cannot find premium buyers and ends up being exported
uncertified, i.e. as conventional coffee.
Nevertheless, premia for decent quality organic coffee
have probably stabilized somewhat and, under normal
market conditions, may range from about 10% upward,
however always depending on quality. Therefore, moving
into organic coffee continues to remain out of bounds for
producers who are unable to provide the required quality, or
who underestimate the cost (fees, learning costs, workload
and sometimes lower yields, at least in the first few years)
that go with making the move.

ORGANIC COFFEE AND SMALLPRODUCERS
Numerous grower organizations and smallholders are awareof the market for organic coffee. Because many of them do
not use, or use a minimum of agro-chemicals, conversion
seems a logical option especially when coffee prices arelow. As well as the problem of possible oversupply, potential
producers should also carefully consider the costs ofcertification. They have to assure themselves not only that
their future output will be in accordance with the rules oforganic production, but also that the proposed inspection
system is in accordance with the regulations in the importmarkets that are to be targeted.
To assist in this regard the organic sector has developed aninternal control system (ICS) that provides a practical andcost-effective inspection option. Generally, if a grower group
has more than 30 members it qualifies for an ICS. Althoughan ICS can be quite burdensome, it is a means to reducethe costs of inspection. Otherwise each individual member
must be inspected every year, which is extremely expensive,
especially for larger groups with a geographically far-flung
membership. With a proper ICS, only a random sample ofthe total number of producers has to be inspected by anindependent certifying organization. Major ICS elements
include: Internal standards, including sanctions; Personnel;
 Infrastructure; Training and information;
 A 100% internal farm control at least once a year; Monitoring of product flow.
The magnitude of the random sample to be taken by theexternal inspection body under an ICS system is a major itemof debate within the European Union, but as a rule of thumbmost competent authorities seem to accept the square root
method for external inspections, i.e. 100 members = 10
inspections, 400 members = 20 inspections and so forth.
Note also that some roasters submit random green coffee
samples for chemical analysis to verify the accuracy of theinspection and certification process.

CERTIFICATION COSTS AND VIABILITY
Production and export
It is impossible to give a precise indication of the cost ofcertification. It depends on the time needed for preparation,
travel, inspection, reporting and certification, and thefees the certification organization charges. Not only the
agricultural production of the coffee, but also the wet anddry processing as well as the storage and export process
have to be inspected and certified. Fee structures vary

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considerably and it is therefore advisable to review in detailwhich inspection and certification organization offers thebest service at the lowest price. Some charge a fee perhectare, others a percentage of the export value. As a norm,
the cost of inspection and certification should not exceed
3%–4% of the sales value of the green coffee, although it
should be noted that some grower organizations pay morethan this.
Local certifiers (i.e. those established in the same producing
country or region) are usually, but not always, cheaper than
the international agencies. However, local certificates are
not necessarily or easily recognized by importing countries,
so their validity has to be carefully checked. A number ofinternational certifiers have branch offices in producing
countries and locally employed staff carry out inspections atlower expense than external personnel. Another option forinternational certifiers is to use a recognized local inspection
body with which they have a cooperation agreement.
Also to be taken into account are increased production
costs and sometimes a fall in the yield per hectare. So, notonly does the producer have to bear the inspection andcertification costs, but production might also fall, at least fora couple of years. Some sources suggest yields may fall bysome 20%.
Inspection costs tend to be higher in the initial phase as
the certifiers need time to get to know the producer andto register fields and facilities. To overcome the start-up
problems during the conversion period, coffee growers ina number of countries can have access to funds to financethe costs of certification. Nevertheless, if the average annual
inspection and certification cost for example comes to US$
5,000 or more there is little financial point in convertingto certified organic if the annual exportable production
amounts to only two or three containers. These costs are
extremely difficult to assess because they depend entirelyon the nature and intensity of the conventional cultivation
practices before the conversion to organic agriculture.
A further cost and a real problem for the producer is theconversion period from conventional to full organic production.
During this time the coffee cannot be sold as organic andso does not realize any premium. Meanwhile, premiums fororganic coffee are difficult to indicate because they dependon the quality of the coffee and on the market situation at
a given moment. In recent years premium quotations haveranged from 10 cts/lb to as high as 75 cts/lb, depending
on quality and availability. As a rule of thumb, however, thepotential producer premium (FOB) for the organic version ofa particular coffee compared to the equivalent non-organic
quality can probably be put at 10% to 20%. This compareswith consumers generally accepting to pay retail prices
of around 20% more for organic coffee than they do forconventional coffee. Some exceptional coffees realize higher
premiums ,but there is a strong feeling in trade circles that,realistically, this is the maximum that should be expected.
Consumer interest tails off rapidly if premiums go beyond thisunless the coffee’s quality is absolutely outstanding.

The high of 20% is an indication only. Actual producer
premiums fluctuate alongside coffee prices as a whole: highcoffee prices probably reducing the premium percentage
and, conversely, low coffee prices probably encouraging
somewhat higher premium percentages. It remains to be
seen therefore whether or how the much higher coffee
prices ruling in early 2011 may alter this picture (Fairtradeoffers a fixed premium for organic coffee over its minimum
guaranteed price for conventional coffee that meets
Fairtrade criteria). See table 3.2 for details.
Contrary to popular belief the liquor of organic coffee is notnecessarily better than that of its conventional equivalent.
Where it is not, the premium over conventional coffee has
to be justified purely by the organic aspect and is therefore
strictly limited by supply and demand unless and until
the quality is such that the organic coffee in question canachieve a true stand-alone position in the market – its own
niche. Then the premium potential becomes entirely demand
driven, just as is the case for some well-known conventional
specialty or gourmet coffees, and such organic brands
achieve premiums of 25% or even higher over conventionalcoffee.
But as the supply of organic coffee grows, so growers should
be more cautious when venturing into this field. Just as
producers of conventional specialty coffee have experienced,
it is equally difficult to launch new stand-alone brands oforganic coffee. Organic coffees that do not offer quality as
such, or that are available in large quantities, will sell at much
lower premiums over their conventional equivalent, perhaps
as low as 5% because, just like any other standard type
coffee, they end up as bulk blenders. Chapter 11, Coffee
quality, makes it clear that to produce good quality coffee ofany kind takes much work and strict management. Organic
certification will always complement such efforts, but cannot
replace hard work and integrity.
Remember: Check which certifier is the most acceptable and themost appropriate for the target export market. If possible,
determine which certifier the prospective buyer(s) may
prefer. Make sure the preferred certifier is accredited andapproved in the target market.
 Obtain quotations from various certifiers and ask for clear
conditions (especially how many days will be charged)
and timelines. Conditions are usually negotiable.
Remember certifiers are offering a service, not favours,
and should serve their clients, not the other way around.
 Ensure your potential export production warrants theconversion cost, i.e. calculate the opportunity cost of
converting to organic production.
Information on costs and current sales prices for comparable
coffees is available on many websites and can relatively
easily be compared.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

Importing, roasting and retailing
The green coffee importer and the coffee roaster also have to
be inspected and certified. Inspection costs in the European
Union vary from US$ 500 to US$ 900 per year per import/
production location. In addition, the importer (who does notprocess the coffee, but only trades it) pays a licence fee of
0.1% to 0.7% of the sales value or US$ 0.20/kg to US$ 0.50/kg, depending on turnover. Roasters pay a licence fee of 0.1%
to 1.5% of the sales value of the roasted coffee, depending on
turnover. As already mentioned, every EU importer of organic
coffee must apply for an individual import permit for each of
their suppliers and for each consignment.
See ITC’s website at www.intracen.org/exporters/organicproducts for more general information on organic products
and organic certification.

MAPPING TECHNOLOGY IN
COFFEE MARKETING: GPS AND
GISUSING GPS AND GIS – THE PRINCIPLE
Modern agricultural mapping technology is one of the key
elements in the implementation of efforts to reduce poverty
and to monitor agricultural activities in developing countries.
Remote sensing technology in the form of multi-spectral
satellite imagery, geographical positioning systems (GPS)and digital aerial photography has improved dramaticallyin recent years and forms the foundation of geographicalinformation systems (GIS).
GIS and remote sensing, in combination with geographicalpositioning systems, are the instruments that are being
used to measure and audit agricultural activities. The
importance of mapping agricultural activities in developing
countries is firstly to assist in monitoring and calculating
agricultural activities on an ongoing basis. Secondly,
land use and land management forms an integral part ofagricultural development but this process can only reallybe successfully managed using GIS and updated remotesensing technology.

If you cannot measure it, you cannot
manage it
Using GIS as part of the mapping process assists in thecreation of spatial models that indicate the most viable
agricultural activities in particular areas. This in turnenables authorities to improve infrastructure around viable
agricultural activities, whereas GIS web map capabilities
can be used as a marketing tool to encourage investment
and create agricultural concession areas. Finally, GIS
platforms to monitor agricultural activities, land use andland management enable both governments and the donor
community to plan ahead in the fight against poverty.
A number of governments, most notably in the coffee sector
in Brazil and Colombia, combine satellite imagery information
with data collected regularly from a large number of groundstations in order to reduce the margin of error in their coffee
crop estimates. Apart from coffee, satellite imagery also
assists in the collection of information on soya, maize, rice,sugar cane, citrus, wheat and cotton crops.

MAPPING TECHNOLOGY IN COFFEEMARKETING
Not only can authoritative information about where or howa coffee is grown contribute to making it a successful
specialty or organic coffee, but it can also help prevent
misrepresentation. Modern technology enables one to show
on a map not only where a coffee is grown, but also thespecial characteristics of that area such as altitude, soils,
vegetation type, slope, rainfall and special environmental
attributes. By demonstrating this information in maps orgraphics, producers can show why their coffee is unique,or at least different from the majority of other coffees intheir country or region. If, in addition, producers seek anauthorized, enforceable ‘appellation’ for their coffee thenthey also need the spatial information necessary to legallyor formally define the extent of the appellation zone and thus
lead to the authentication of the appellation and the coffee
in question. A growing number of consumers also demands
more assurance that the coffee was produced in anenvironmentally friendly way, that it was properly harvested
and processed, and that it actually comes from a specificregion or farm. Technologies are now available and arebeing applied in the field to help producers’ and farmers’organizations address these issues and many more.

Actual projects
The United States Agency for International Development(USAID) is funding projects in Peru, Guatemala, Costa Rica,
the Dominican Republic and some African countries that
use the following approach to address these issues.
 The physical location of each farm (longitude, latitude andaltitude) is mapped and recorded by project extension
agents using a global positioning system (GPS) unit.
 Data are collected on how producers grow their coffee
including varieties, altitude, application of pesticides,
and other details that may be important for marketing or
certifying. Extension agents also collect data on practices
and quality and whatever else defines the ‘uniqueness’of the coffee at the farm, farmers group, or ‘appellation
zone’ levels. Socio-economic data are collected as well.
 This information (production and location) is entered intoa spatial database or geographic information system(GIS). This works like a more traditional database, but
includes location information for each record.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS Maps are created showing not only where the farms arelocated, but also whatever characteristics are of interest
about each farm and the coffee produced on that farm.

(specific non-spatial information). These data are enteredinto the device and downloaded into the database at theend of each day or week.

These projects are implemented by the US Geological
Survey’s National Center for Earth Resources and Science(EROS), national coffee agencies and agricultural research
institutions, and the Tropical Agricultural Centre for Training
and Research (CATIE) for Costa Rica. The initiative is called
GeoCafe due to its combination of geographic and coffee
information. The GeoCafe systems being developed lead
to better overall production management; promote theestablishment of mechanisms that facilitate coffee monitoring
and trace-back; and facilitate access to information over theInternet on coffee production, processing and marketing. At
the same time, they provide information about the coffee topotential buyers, thereby assisting the marketing effort. For
example: Where is a particular type of coffee produced andby whom? Which farms are located at a certain altitude? What
are the climatic and soil conditions on these farms? Whatforest cover is there?

Ongoing initiatives open the way for online querying,
information access, and mapping projects in otheragricultural areas and sectors, not only in Latin America but
also elsewhere, for example in Africa. And also for products
as cocoa, cashew nuts, or bananas to name a few.

Although for individual small farmers the need for such
systems is limited, it is a very useful information andmanagement tool for farmers’ organizations, cooperatives
and estates, particularly those promoting their coffee under
specific logos or appellations.
The results of the GeoCafe projects can be viewed on theInternet. Any user can look at the maps, zoom in and out tosee details, or even ask to see all of the farms meeting somecriteria (e.g. ‘show me all farms in this zone growing arabica
at an altitude over 1,000 m’).
Visit the sites below to view actual maps and other information:www.dominicancoffee.com, www.guatemalancoffees.com,
www.edcintl.cr.usgs.gov/ip/geocafe.
The technology behind GeoCafe is well known and mature.
GeoCafe is fully customizable and no complex programmingis needed to operate and maintain a basic application. The
costs of implementation are not high, since the technologicalplatform has been already developed, and most of thedata acquisition is done by partner agencies using internal
resources (when available). With minor adaptations, the
GeoCafe system can be adapted to other crops or otheruses (e.g., watershed management and conservation, andenvironmental monitoring).
The website of the US Government Geological Survey, www.
usgs.gov, provides information on a large number of different
applications that are of interest to those working with GPS
and GIS.

FUTURE USES OF GPS AND GIS – THE
WAY FORWARD
New technologies are being developed to aid in datacollection. Handheld devices already exist that combine
spatial data (GPS locations) and traditional data collection

In the area of authentication – proving that a coffee or a
product actually comes from a specific area or source –technologies such as smart tags are also being developed.
Such tiny computerized tags, attached to each bag orcontainer, can contain any set of information required tomeet the market’s authentication requirements, and could
even be tracked by satellite if such control was necessary.
Remote sensing and spatial mapping today provide
information on natural vegetation, watersheds, landcover, land-use, forestry and other crop areas, etc. But ofcourse, the benefits are not limited to agriculture. The same
technologies assist with urban development and town
planning, infrastructure verification, protection of wetlands,
and mapping of informal settlements. The list is almost
endless and covers matters of interest to developed anddeveloping countries alike.
As an example see www.geospace.co.za. For more
information, a search on Google using the words
Geographic Information Forum produces a lengthy list of
relevant websites like, for example, www.ppgis.net – theOpen Forum on Participatory Geographic Information
Systems and Technologies. Advanced users of mapping
technology and related subjects will find www.registry.gsdi.
org/index.php of interest.

Potential sources of geographicalpositioning equipment
This guide does not recommend any particular equipment
or supplier. But a quick search on the Internet, using the
key words: GPS equipment manufacturers or suppliers,
produces a huge amount of information.
The amount of available information is overwhelming andthe best approach would probably be to make contact withthe projects mentioned earlier to determine their preferredchoice of equipment. Sources close to these suggest thatGarmin International, www.garmin.com/us supplies many
sets to coffee producing areas. Another leading supplieris Magellan System Corporation, www.magellangps.com.
Both of them supply simple but robust models – some ofthem at a few hundred dollars or less. Other sites offering
a selection of equipment include www.tvnav.com and www.
thegpsstore.com, but the list of potential supply sources
is almost endless. For use in the coffee sector one should
always select a model with altimeter. Some mobile phones(cell phones) have a GPS facility built in.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

In most countries, institutions such as the National Mappingor Geographical Survey Service and others, including somegovernment departments, already use GPS equipment
and should be able to offer advice on local experienceand preferences. Especially for use in remote areas,
simplicity and durability of the equipment are of paramountimportance. In other words, do not invest in unnecessarily
sophisticated features that are unlikely to be used.
GIS software – for creating a spatial database and mapping– is primarily used by groups of cooperatives and large
estates. See ESRI at www.esri.com as an example.

Latitude, longitude and altitude
For an introduction to latitude/longitude visit, for example,
www.istp.gsfc.nasa.gov/stargaze/Slatlong.htm. For detailed
educational and technical information on GPS/GIS use any
Internet search engine combining the words GeographicalPositioning Systems or visit www.trimble.com/gps/index.
shtml.
Here is a GPS reading example from Ethiopia:
N 07 01 44.0;
E 038 50 16.1;
1,720 m.
 The latitude North of Equator. 07 are degrees (from 0
to 90), 01 refers to minutes (from 0 to 59) and 44.0 are
seconds (from 0 to 59);
 The longitude East of the Greenwich line (which goes
North-South through Greenwich in London, United
Kingdom), also in degrees (from 0 to 180), minutes andseconds; and The altitude above sea level.

TRADEMARKING AND
GEOGRAPHICAL INDICATIONSIN COFFEETRADEMARKS AND LOGOS
A registered trademark or logo can help protect a successful
product from being fraudulently duplicated. The Colombian
Juan Valdez trademark needs no explanation or description.
It is virtually known worldwide and is protected against
fraudulent use because it is registered in all the main
import markets. But the cost of developing and registeringa trademark can be high and prospective applicants may
even find that their favourite choice is already in use, or is
too close to an existing registration to be accepted.
It is advisable therefore to begin by conducting a searchof existing registrations to see if anyone else has alreadyclaimed your proposed mark or name. Searches can bemade over the Internet on the sites below that also provide
information on procedures and regulations pertaining totrademarking and related matters generally in the EU, theUnited States and Japan:
 European Union: www.oami.europa.eu
 United States: www.uspto.gov
 Japan: www.jpo.go.jp
The EU and US sites also provide information on the Madrid
Agreement that deals with the International Registration ofMarks. Information on trade related aspects of intellectual
property rights (TRIPS) generally is found at www.wto.org –look for TRIPS under trade topics, then Intellectual property.
For the registration of both trademarks and geographic
indications (or appellations of origin, which is possibly more
appropriate for coffee) an application will have to be filed
first of all with your national authorities. These authorities
will also be able to advise whether anyone else has alreadyregistered what you wish to protect because you cannot
register the same (or even a similar) mark or name thatsomeone else may have registered before you. This principle
of prior verification applies to foreign countries as well.
Eventually one will have to employ a legal firm to conduct
a search of existing registrations. Note also that the degreeof protection offered by trademark legislation varies fromcountry to country. These considerations suggest that
trademarking should be considered only where the productwarrants it, and where the degree of protection is suchas to make the effort and cost worthwhile. But certainly,
where a producer goes to the trouble and cost to create anappellation for their coffee and backs it up with registration
in a GIS database, then trademarking of the name willcomplete the safeguarding process.

TRADEMARKS VERSUS GEOGRAPHICALINDICATIONS
A trademark provides protection to the owner of the markby ensuring the exclusive right to use it to identify goods
or services, or to authorize another to use it in return for
payment. The period of protection varies, but a trademark
can be renewed indefinitely beyond the initial time limit on
payment of additional fees. Trademark protection must
be enforced by the registered owners of the mark at theirown expense, utilizing appropriate legal redress where
necessary. In most legal systems courts have the authority
to enforce trademark ownership rights against infringement.
In a larger sense, trademarks promote initiative andenterprise worldwide by rewarding the owners of trademarks
with recognition and financial profit. Trademarks also hinder
the efforts of unfair competition. For further details visit
www.wipo.org, the website of the World Intellectual Property
Organization (WIPO) Geneva, Switzerland.

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Almost all countries in the world register and protect
trademarks by maintaining a register of trademarks.
Trademarks may be one or a combination of words, lettersand numerals. They may consist of drawings or logos,
symbols, three-dimensional signs such as the shape andpackaging of goods, etc.
A geographical indication (GI) provides an indication ofwhere something comes from. It can be used on goods
or services that have a specific geographic origin andthat possess qualities or a reputation that are intrinsically
due to that place of origin. As we know, all agricultural
products typically have qualities that derive from their placeof production and are influenced by specific local factors,
such as climate and soil but some have acquired a certain
distinctiveness and recognition. As such, GIs may be used
for a wide variety of agricultural products, such as forexample ‘Tuscany’ for olive oil produced in a specific areain Italy; or ‘Champagne’ for sparkling wines from a welldefined region in France, or Jamaica Blue Mountain for its
coffee.

to obtain officially sanctioned approval for the applicationfrom a relevant governmental or semi-governmental bodyfrom the target geographic region, area or district. Anotherapproach could be to use a graphic (i.e. decorative) logothat refers to the area, and which would be used by manyin that area subject to specified requirements. Rather than ageographic ‘word mark’, the graphic trademark is then filed
as a collective mark for goods produced from that area, bymembers of the area.
For a complete overview on the subject of geographicalindications, including several coffee case studies, look for
ITC’s Guide to Geographical Indications on the ITC website
www.intracen.org/publications where the book can be
downloaded free of charge in pdf format.
Presentations made during a seminar on Geographical
Indications for Coffee held at the International Coffee
Organization in May 2008 can be viewed at www.dev.ico.
org/event_pdfs/gi/gi.htm.

A geographic name itself is not necessarily a GI. In order
for a geographic name to function as a GI, it must indicate
more than just origin; it must communicate that the productfrom this region has a particular quality or has a particular
reputation that is specifically connected to the noted region.

SUSTAINABILITY AND SOCIALISSUES IN THE COFFEEINDUSTRY

Appellation of origin is a special kind of geographicalindication. It is used for products that have a specific qualitythat is exclusively or essentially due to the geographic
environment in which the products are produced. The
concept of geographical indications encompasses
appellations of origin. Wines from France are maybe theproducts most frequently associated with appellations, e.g.
AOC Alsace means Appellation d’Origine Controlée Alsace.
This certifies that the wine is from the Alsace region.

Coffee has always been connected with emotions andopinions; therefore the debate about socio-economic
aspects of coffee production is decades old already. One
regular topic, especially in times when coffee prices are low
or when there is political turmoil in coffee producing areas,is the working and living conditions of coffee farmers andworkers on coffee plantations.

Logos used for trademarks andgeographical indications
A trademark is a sign (logo) used by an enterprise todistinguish its goods and services from those of otherenterprises. It gives its owner the right to exclude othersfrom using that trademark.
A geographical indication tells consumers that a product is
produced in a certain place and has certain characteristics
that are due to that place of production. All producers whomake their products in the place designated by a geographic
indication, and whose products share typical qualities,
may use it. Producers outside the geographic indication
may not use the name or logo, even if the quality of theirproduct is the same or better. Usually it is more difficult (butnot impossible) to register trademarks that lay claim to ageographic name. This because of the realization that it is notalways obvious that an applicant for such a mark can claim
to represent all potential interested parties from the region,area or district in question. One way around this could be

Advocacy groups and NGOs lobby for improved livelihoods
and fair treatment of coffee growers and plantation workers.
Some consumer activists wanted to change the system fromwithin and started constructing alternatives to the dominant
free market coffee economy. They began to import coffee, tea
and other commodities from small producer organizations,which they sold through so-called ‘Third World’ shops.
These early steps blossomed, boosted by an initiative in the
Netherlands in 1988 when an NGO, Solidaridad, took the
initiative to start the Max Havelaar certification system for
Fairtrade coffee (and subsequently also for other products)
with the goal of bringing these coffees into conventional
supermarket channels. This in turn spurred the creation of othercertification labels orientated towards sustainability, which
retailers and manufacturers embraced, seeing such causerelated marketing as a means of product differentiation, but
at the same time promoting sustainability as well as fulfilling
their corporate social responsibility objectives. Producers inturn generally receive better prices for their coffee, although
not all schemes necessarily guarantee a better return.
A more recent general development is that the mainstream
coffee industry is increasingly accepting responsibility for theconditions under which the coffee is produced. Coupled with

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

growing interest in and support for environmental causes inimporting countries generally, this has led to the introductionof terms such as responsibly produced or environmentfriendly or environmentally sustainable coffee. For a good
introduction to the subject go to www.conservation.org,
the website of Conservation International, and look for
the Conservation Principles for Coffee Production, which
are listed as sustainable livelihoods for coffee producers;
ecosystem and wildlife conservation; soil conservation; water
conservation and protection; energy conservation; waste
management; and pest and disease management.
All these and related aspects gained considerable public
interest during the years 2001-2005 when the ICO Composite
Indicator Price fell below 50 cts/lb. This period of shockingly
low producer prices became known as the Coffee Crisis andmotivated the appearance of new initiatives as, for example,
the 4C Coffee Association that promotes a mainstream
verification standard
As a result differentiation of coffee products throughsustainable certification labels now comes in many forms,
but the main agencies are as follows: Fair Trade; www.fairtrade.net
 Rainforest Alliance; www.rainforest-alliance.org
 Utz Certified; www.utzcertified.org
 The Common Code for the Coffee Community (4C
Association) www.4c-coffeeassociation.org
These various initiatives are rapidly gaining market shareand by 2010 it was estimated that they represented around
5% of the total world trade in coffee.

SUSTAINABILITY, CERTIFICATION,
VERIFICATION, CORPORATE GUIDELINES
Sustainability has been defined by some as ‘meeting theneeds of the present generation without compromising theability of future generations to meet their needs’. It can thenbe further defined in environmental, economic and social
dimensions with biodiversity perhaps as the key measureof environmental sustainability in the natural world. This
concept appeals to coffee growers and consumers who are
not necessarily interested in, or who see no rationale to the
production of organic coffee as such, perhaps because they
believe that low yields coupled with increasing availabilityof organic coffee will always prevent small growers fromgenerating the high incomes that some proponents oforganic coffee production believe can be achieved. Others
do not see the market potential as sufficiently large, andstill others simply believe that it is possible to achieve moreor less the same objectives without going the organic way,
which for mainstream producers would be very difficult if notentirely impossible to do.
This is not the place to pronounce for or against any ofthese arguments, but if a production process maintains

biodiversity presumably one may consider that it sustains
rather than harms the environment. If so, and when linked
with consideration for social and ethical issues, this concept
presents a broad alternative for the more directly focused
objectives of some individual labels.
Sustainability in itself, of course, does not need the guaranteeof a certification or verification. Often, producers are already
improving performance and efficiency significantly throughthe use of good agricultural practices (GAP) and/or goodmanagement practices (GMP). Certainly, this does not imply
the need for an audit procedure. Nevertheless, consumers
generally wish to be able to place a certain trust in claims
such as ‘this is an environmentally friendly’ or ‘socially
responsible’ product. Hence, the existence of different
ways and means to provide such guarantees to roasters
and retailers alike that allow them to offer what is sometimes
also called ‘no-worry coffee’.
Certification guarantees (through a certificate) that specificrules and regulations of voluntary standards are met in acertain environment (e.g. individual producer, producergroup, cooperative or even region). These producers
have to meet certain requirements – social, economical,
environmental – and certification calls for independent
third-party confirmation of this status, conducted by anaccredited auditor. Mostly, certifications have to be renewedon an annual basis.
Roasters buying certified coffee benefit from the guarantee
provided by the certificate and by using the logo and related
information on their retail packaging. Certification protects
both buyer and supplier, often also resulting in better
marketing opportunities because there is a specific demandfor certified products.
Verification also ensures that certain agreed criteria andpractices are met, but does not use a certificate to market
the claim to the final consumer. Instead, company standards
or internal supply chain standards rely on verification
processes that are not as rigid and costly as a certification
process that has to be conducted by appointed auditors.
Instead, local third-party actors such as NGOs – or evensecond-party actors – may be asked to verify adherence
to specific criteria. In addition, the timing between repeat
verifications may be significantly less onerous than anannual re-certification process. In the coffee sector themost prominent example of a verification scheme is the 4C
Association – the Common Code for the Coffee Community.
4C offers guidelines for better coffee farming that link up with
GAP and GMP, while aiming at continuous improvement.
The claims 4C makes are therefore not as specific as thoseof certification schemes and it refrains from using an onpack (retail) logo.
Corporate guidelines or buying standards broadly pursue
the same objectives and also set standards that aim at
improving sustainability. Different from open certificationand verification schemes, corporate guidelines orstandards are company-specific. That is, retail credit can

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only be claimed by the buyer that initiated the standard.
By far the best-known examples of such standards are theStarbucks C.A.F.E. Practices Program and the Nespresso
AAA Sustainable Quality™ both of which, in addition to theusual sustainability issues, also deal with coffee quality.
For more on this see: www.scscertified.com/retail/rss_
starbucks.php and www.nespresso.com.
The quest for sustainability does not end with coffee
production. The end objective for the coffee industry is toextend sustainability throughout the entire supply chain.
In this respect it is noteworthy that in March 2011 the wellknown roaster Illycaffé (www.illy.com) in Trieste, Italy, wasformally awarded the certification of Responsible Supply
Chain Process by the certifiers DNV Business Assurance,
a unit of Det Norske Veritas (www.dnv.com). The event
marked the 20th anniversary of the introduction of theErnesto Illy Brazil Award for Coffee Quality. The certification
marks the organization’s ability to provide a sustainableapproach to processes and stakeholder relations all along
the production chain, and specifically in the supply chain.

INTEGRATED FARMING SYSTEMS
Integrated farming systems, which are one such linked
approach and might in the end perhaps be the mostpromising, focus on minimizing the use and negative effects
of agro-chemicals. Basically this means that in all phases of
production and processing one tries to minimize the impact
on the environment. This approach does not exclude the useof agro-chemicals, but rather attempts to reduce their use toa minimum. Moreover, more attention is given to the reductionof energy consumption, packaging materials, and so on.
Documentation and certification can be achieved within
the framework of the ISO 14001 system, with the producer
or processor documenting where and how in each step of
the production and processing system they are reducing theenvironmental impact (see www.iso.org). See also chapter
12, Quality control, which covers the ISO 9001 standard usedby some coffee estates and commercial coffee growers.

THE EUROPEAN RETAIL PROTOCOL FOR
GOOD AGRICULTURAL PRACTICE
The European Retail Protocol for Good Agricultural Practice(Eurepgap: see www.eurep.org) was originally introducedby European retail chains for sourcing their fresh produce
purchases.
Eurepgap forms the basis of this code. The protocol wasestablished by over 30 leading European retailers working
together in the European Retailers Produce Working Group(EUREP) to harmonize their agricultural standards for fruits
and vegetables. The protocol is now an established part oftheir sourcing strategy and enjoys wide acceptance. It isconsumer-driven and provides an assurance of basic good
agricultural practices and social conditions.
Work was completed in 2004 to allow green coffee supplies
to be brought under the same principles, more appropriately
called a code of conduct or a code of practice. See www.
eurep.org/newdesign/index_html.

CODES OF CONDUCT
Codes of conduct or codes of practice such as Eurepgap
are a good example of how purchasing power translates intochange at the producing end. The retailer demands certain
assurances of the roaster, who in turn requires their suppliers
to conform. This is not to say that all this has come about
entirely spontaneously. The 1990s saw a number of foodscares that have undoubtedly focused consumer attention
on the how and what of the food and drink they consume.
But even so, as in some other industries, one can probably
mark the 1990s as a turning point for the policies of thelarger roasters with respect to social responsibility. Pressure
through lobbying and campaigns may have contributed tothis attitude change.
An increasing number of individual companies andassociations such as the Specialty Coffee Associationsof America and of Europe are engaged in a variety ofactivities related to what may broadly be called codes ofconduct or initiatives which address social accountability,
i.e. the Starbucks Coffee Company C.A.F.E. Practices, theNespresso AAA Sustainable Quality™ Program, and someof the initiatives undertaken by Coffee Kids Organization.
For further information on social accountability issues(SA8000 framework) see www.sa-intl.org, the website
of Social Accountability International. See also www.
saiplatform.org.

THE MAIN SUSTAINABILITYSCHEMES IN THE COFFEESECTORFAIRTRADE LABEL ORGANIZATIONThe Fairtrade initiative aims to enable organizations ofsmallholder producers of coffee (and cocoa, tea, honey,
bananas, orange juice and sugar) to improve theirconditions of trade, e.g. more equitable and more stableprices. Currently, Fairtrade efforts in coffee and otherproducts like cocoa, honey and rice are concentrated on
smallholder producers only. Conversely, in products liketea, sugar, bananas and other fruits the emphasis is also on
estates (improving conditions for the labour force).

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The Max Havelaar Foundation was established in the
Netherlands in 1988, and since then another 25 countries
have followed suit. In 1997 the different national institutions
established an umbrella organization known as the Fairtrade
Labelling Organizations International (FLO) with offices inBonn, Germany.
Their objective is to provide the necessary instruments toassist and enable small growers to take their development
into their own hands. This is achieved by incorporatingin the producer price not only the cost of production,
but also the cost of providing basic necessities such as
running water, healthcare and education, and the costof environmentally-friendly farming systems. Consumer
support for this more equitable trading is then linked toparticipating growers through the Fairtrade labels on retailpackaging in consuming countries. Simply put, the higher
prices consumers pay for Fairtrade products reach thegrowers’ organization through a combination of guaranteed
minimum prices and premiums.

image of quality, reliability and respect for socio-economicand environmental concerns that consumers recognize andappreciate.
Fairtrade does not aim to replace anyone in the traditional
marketing cycle and works on the basis that there is a placefor each, provided all accept the Fairtrade goal of selling
the largest possible volume of smallholder coffee at a fair
price: fair for growers and consumers alike. The labels
provide a guarantee to the consumer of adherence to thisprinciple while leaving production, purchasing, processing,marketing and distribution where it belongs, in the coffeeindustry.

Using Fairtrade labels
Coffee to be sold under a Fairtrade label must be purchased
directly from groups certified by FLO. The purchase pricemust be set in accordance with Fairtrade conditions ofwhich the following are the most significant: Promote Fairtrade coffee in consumer markets (this isdone by the national labelling initiatives);

 The purchase price should be the reference market priceor the Fairtrade minimum price (whichever is higher),plus the Fairtrade premium, plus the organic differential
where applicable.

 Identify and assist eligible groups of small growers to
become inscribed in the FLO coffee producers’ register,i.e. to obtain FLO certification;

 Reference market prices are those of the New York(arabica) and London (robusta) futures markets, as
described below:

 Verify adherence by all concerned to the Fairtradeprinciples, thus guaranteeing the label’s integrity;– Arabicas: the New York ‘C’ market at NYSE: ICE shallbe the basis plus or minus the prevailing differential forthe relevant quality, FOB origin, net shipped weight.
The price shall be established in United States dollars
per pound.

The FLO’s role is to: Fairtrade is a certification programme that all smallholders’organizations and roasters who satisfy the criteria canjoin. But in the end success in the retail market depends
on consumer support.
The Fairtrade labels aim to make the initiative and thegrowers behind it visible and therefore marketable on asustained basis. The labels enable FLO and others to provide
sustained publicity and support where it counts most – inthe consuming countries – for example, by building a public

Table 3.1

– Robustas: the London terminal market at NYSE
Liffe shall be the basis plus or minus the prevailing
differential for the relevant quality, basis FOB origin,
net shipped weight. The price shall be established in
United States dollars per metric ton.
 Fairtrade minimum prices are guaranteed minimum
prices. They have been set as per the table below,

Total worldwide sales of FLO-certified coffee, 2004–2010 (60 kg bags)
Not comparable to new (green bean) data

New and comparable

Estimated

2004

2005

2006

2007

2008

2009

2010

Europe279 400

352 065429 915521 065

767 300

855 717950,000

North America

123 385

210 685

430 600

504 565578 567

636 917700,000

Australia/New Zealand

n.a.

1 650

4 765

7 500

18 50026 56735,000

Japan

915

2 165

2 450

3 685

5 833

6 533

7,300

483

600

403 700

566 565867 730

1 036 815

1 370 200

1 526 216

1 692 900

Others
Total
Source: FLO/Bonn and TransFair USA.

NB: Due to reporting differences, the data for 2008 and 2009 are green bean equivalent and comparable with other certifications. However,
2004-2007 are not. 2010 figures are estimates based on extrapolated growth rates. Calculations are based on FLO consumer country sales
rather than coffee exported from origin with average distribution being roasted (97%) and soluble coffees (3%) – converted to GBE.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

differentiated according to the type of the coffee. If thereference price is below the Fairtrade minimum pricelevel, then the Fairtrade minimum price applies.

will actually be monitored. (Look for Generic FairtradeStandards for Small Farmers’ Organizations on the same
website.) Criteria include: These prices (either reference price or minimum price)
shall then be increased by a fixed premium of 20 cts/
lb (of which at least 5 cts for productivity and/or quality
improvements).

 Minimum entry requirements, which all must meet when
joining Fairtrade, or within a specified period;

 For certified organic coffee with officially recognizedcertification, that will be sold as such, a further organic
differential of at least 30 cts/lb per pound of green coffee
will be due.
 This calculation took effect on 1 April 2011.
Table 3.2

Fairtrade premiums

Type of coffee

Fairtrademinimum
price
regular orconventional
cts/lbFairtradepremium
cts/lbOrganic
premium
cts/lb

Washed arabica

1.40

20

30

Natural arabica

1.35

20

30

Washed robusta

1.05

20

30

Natural robusta

1.01

20

30

The Fairtrade price formula can effectively be summarizedas (a) the Fairtrade minimum price or, if market prices arehigher, the relevant futures market price (plus or minus thenormal differential that would apply to that coffee) plus (b)the Fairtrade premium (listed in the above table) plus (c) any
differential that might be applicable for organic coffee.

Minimum tonnage
Mention has already been made of the difficulty of shipping
small lots that do not fill an entire container. FLO itself does
not impose minimum volumes on grower organizations, but
for practical reasons shipments must be in container size
lots, meaning a minimum exportable production of about
18 tons.
In practice, small producer groups in some countries domanage to combine shipments so as to fill a container,
for example by establishing an umbrella organization tocoordinate this and other activities to achieve the necessary
economies of scale. FLO’s start-up requirements also servea developmental objective. Taking into account membershipand other characteristics, producer groups should at least
have the potential to reach a volume of business that willachieve sustainable development impact.

Applying for FLO certification
FLO certification provides access to all FLO member
organizations.
See
www.fairtrade.net.
Participatingorganizations of small coffee growers must meet criteria
consisting of requirements against which the producers

 Progress requirements, i.e. show improvement over the
longer term.

Application procedure
The applying organization directs its request to FLO
International. The certification unit of FLO sends anapplication pack to the applicant containing general
information on FLO and the Fairtrade market, FLO standards,
detailed information on the initial certification process
and the application form. If the first evaluation, based on
the application form, is positive, the applying organization
will be visited by an FLO inspector who will examine theorganization on the basis of the minimum requirements of
FLO. All relevant information is then presented to the FLO
Certification Committee charged with the certification of new
producer groups. Once approved the certification will beformalized by means of a signed producer agreement with
FLO and a certificate indicating the duration of validity of thecertification (to be renewed every two years).

UTZ CERTIFIEDUTZ CERTIFIED – Good inside (UTZ) was until early 2007
known as Utz Kapeh = ‘good coffee’ in a Maya language
from Guatemala. UTZ is one of the largest sustainability
programmes for responsible coffee production and sourcing
in the world. Founded as a producer-industry initiative, UTZ
is an independent organization. By setting a ‘decency
standard’ for coffee production and helping growers toachieve it, UTZ recognizes and supports responsible
producers.
The UTZ sustainability programme is centred on the UTZ
CERTIFIED Code of Conduct. This Code is based oninternational production standards and contains a set ofstrict product specific criteria for socially and environmentally
appropriate coffee growing practices and economicallyefficient farm management. Independent third-party
auditors are engaged by UTZ CERTIFIED to check whether
the producers meet the code requirements.
UTZ CERTIFIED believes that increasing sustainability
should also reinforce the independent position of farmers,
which is why farmers are trained in the professionalizationof their agricultural practice and operational management toimprove the quality, volume and value of their crops.
UTZ certification is available to any interested parties,
roasters and growers alike. Interested growers (individuals
or groups) receive technical assistance to help them
implement the changes necessary to achieve certification.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

A web-based system, the traceability system, monitors the
UTZ CERTIFIED coffee throughout the coffee chain, allowing
roasters and brands to always trace back where and how
their coffee was produced. The UTZ certification provides
roasters with the assurance that coffee they have purchased
was grown and harvested in a responsible way. In 2011
UTZ CERTIFIED joined the 4C Association with the aim ofincreasing cooperation and aligning the two organizations’
codes of conduct in order to create a mechanism or meansof support to enable producers to step up from the 4C
baseline standard to the UTZ CERTIFIED level.
Different from some other certification schemes, UTZ
CERTIFIED offers a way forward towards a type of marketdriven recognition that is open to all who can qualify, that isavailable to both mainstream and specialty coffee, and that
precludes no one from participating. As a result, the agency
is increasing its penetration and in 2010 over 121,000 metrictons of UTZ CERTIFIED coffee was sold by registered UTZ
CERTIFIED companies in 42 countries. This represents anincrease of almost 50% in the volume sold the previous
year. By the end of 2010, a total of 162 individual producers(in groups – mostly smallholders) and 476 others (estatesand others) had been certified by the agency in 23 origin
countries.
Visit www.utzcertified.org for more information.

RAINFOREST ALLIANCE
In terms of environmental and sustainability requirements
the Rainforest Alliance (RA) certification scheme is certainly
amongst the more ambitious. Based on multi-crop farmmanagement guidelines continuously developed since 1992
by the Sustainable Agriculture Network, or SAN, a coalitionof independent NGOs, its work has attracted considerable
support, including substantial grant funding from the United
Nations Development Program.
Rainforest Alliance coffee production standards incorporate
the ten Social and Environmental Principles of the
Sustainable Agricultural Network: Social and Environmental Management System.
Agriculture activities should be planned, monitored
and evaluated, considering economic, social andenvironmental aspects and demonstrate compliancewith the law and the certification standards. Planningand monitoring are essential to efficacious farmmanagement, profitable production, crop quality andcontinual improvement.
 Ecosystem Conservation. Farmers promote theconservation and recuperation of ecosystems on andnear the farm.
 Wildlife Conservation. Concrete and constant measures
are taken to protect biodiversity, especially threatened
and endangered species and their habitats.

 Water Conservation. All pollution and contaminationmust be controlled, and waterways must be protectedwith vegetative barriers.
 Fair Treatment and Good Conditions for Workers.
Agriculture should improve the well being and standardsof living for farmers, workers and their families.
 Occupational Health and Safety. Working conditions mustbe safe, and workers must be trained and provided withthe appropriate equipment to carry out their activities.
 Community Relations. Farms must be “good neighbours”
to nearby communities, and positive forces for economic
and social development.
 Integrated Crop Management. Farmers must employ
Integrated Pest Management techniques and strictly
control the use of any agrochemicals to protect the healthand safety of workers, communities and the environment.
 Soil Conservation. Erosion must be controlled, and soil
health and fertility should be maintained and enrichedwhere possible.
 Integrated Waste Management. Farmers must have awaste management programme to reduce, reuse andrecycle whenever possible and properly manage all
wastes.
SAN standards are based on an internationally recognized
IPM model, which allows for some limited, strictly controlled
use of agrochemicals. Farmers certified by the Rainforest
Alliance do not use agrochemicals prohibited by the US
Environmental Protection Agency and the European Union,
nor do they use chemicals listed on the Pesticide Action
Network’s ‘Dirty Dozen’ list.
RA considers that by following the standards, farmers can
reduce costs, conserve natural resources, control pollution,conserve wildlife habitat, ensure rights and benefits forworkers, improve the quality of their harvest, and earn the
Rainforest Alliance Certified seal of approval. The seal
allows producers to distinguish their coffee. This is helpful inestablishing long-term marketing relationships because thecertification guarantees that the farm is managed according
to the highest social and environmental standards. The
certification process includes: (i) preliminary site visit by
SAN technicians to determine the changes necessary toachieve certification (diagnostic); (ii) a comprehensive
audit of farm operations (certification audit); (iii) based onan evaluation report, the certification committee determines
whether the farm merits certification; and (iv) a contract thatgoverns and monitors the use of the Rainforest Alliance
Certified seal of approval, the handling of certified products
and marketplace promotion.
In 2010, sales of RA-certified coffee were 114,884 metrictons green bean and are the culmination of phenomenal
annual growth for the past eight years. RA-certified coffee
is now produced on 44,648 coffee farms around the world
For more information on RA and SAN visit www.rainforestalliance.org.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

THE 4C ASSOCIATION – MAINSTREAMINGSUSTAINABILITY IN COFFEE
Like other major food sectors, the mainstream coffee sector
witnesses growing general concern over issues as foodsafety, import security, producer well-being, environmental
and climate change related problems, and transparency,
and how final consumers react to some of these topics. Even
though mainstream consumers are not necessarily looking
for labelled products, they are increasingly interested in socialand environmental conditions generally. These consumers
believe and expect that their suppliers are taking care toprovide them with ‘no worry products’ that are both safe andof good quality. They certainly would not want to hear one daythat they have been ‘buying’ child labour, forced evictions or
the application of prohibited chemicals.
Inspired by these facts and developments such as the
UN Millennium Goals, the 4C Association (www.4Ccoffeeassociation.org) emerged as an initiative of important
stakeholders across the entire coffee sector in 2003 and wasofficially established in December 2006. The 4C Association
is an inclusive, membership driven organization of coffee
farmers, trade and industry, and civil society. Members work
jointly towards improving economic, social and environmental
conditions in the coffee chain through the promotion of moresustainable and transparent practices for all who make aliving in the coffee sector.
The main pillars of the 4C Association are a Code of Conduct,
Rules of Participation for trade and industry, Support Services
for coffee farmers, a Verification System and the participatory
Governance Structure.
4C has three membership chambers: Producers, Trade andindustry, and Civil society. Chamber members elect theirrepresentatives to the 4C Council, the Association’s managing
body. The council in its turn appoints a small Executive Board.
This democratic arrangement ensures that the Association’s
decision-making organs are under the control of its memberswith guaranteed equal representation for all three categories.
The Association is funded through membership fees andpublic contributions, including co-funding from government
agencies. Membership fees are weighted according tofinancial means, thus differentiating significantly between
small-scale producers and industry members such as coffee
traders, roasters, soluble manufacturers or retailers withprivate label coffee.
4C’s Common Code for the Coffee Community introduces
baseline criteria for the sustainable production, processing
and trading of green coffee and eliminates unacceptable
practices. Through its global network, the 4C Association
provides support services to coffee farmers, including
training, access to tools and information. Many tools andsupport services are free of charge for coffee producers as
they are funded in large parts from the membership feesfrom the trade and industry members and complemented
by public contributions. In addition, 30% of the membershipfees of industry and 50% to 70% of those of the intermediarybuyers go directly to the 4C Support Services budget.

Through the continuous improvement concept of its CodeMatrix and the Support Services, 4C helps farmers of all sizes,
particularly also smallholders, and their business partners
to access a baseline level of economic, environmental andsocial sustainability.
The 4C Standard is a pure business-to-business concept forthe coffee supply chain, offering an entry level sustainability
baseline for producers from which they might step up towards
more demanding sustainability standards. Conceptualized
as a business-to-business standard and not as a consumerlabel, the 4C Association is pre-competitive and does notprovide a label to market 4C Compliant Coffee towards the
final consumer on the coffee pack.
Instead, 4C industry members may communicate theircommitment and membership using a membership statementon coffee packs. The membership statement does not referto the quality or quantity of roasted coffee, but is a meansfor 4C industry members to emphasize their support of the
4C Sustainability Approach. Except on coffee packs, the logoof the 4C Association may be used widely in publications,
websites, brochures etc.
4C Units are the suppliers of 4C Compliant Coffee. The 4C
Association believes that sustainability is not in the handsof coffee farmers alone – all actors along the chain needto join forces to make sustainability happen. Therefore, 4C
verification is performed at the 4C Unit level and a 4C Unit
may be established at any stage of the coffee chain, fromproducer/producers’ groups to roaster level. 4C Units haveto be located in producing countries. The managing entityof the 4C Unit assumes responsibility and coordinates
the implementation of 4C with its individual suppliers. Thismechanism actually allows the 4C Association to also
address and include the manifold unorganized smallholders
who would otherwise not have access to the market forsustainable coffee. Everyone in the coffee market chain fromproducers to transporters, collectors and warehouses, millers
and processors, traders and exporters, roasters, and retailers
can register as a 4C Unit.
4C Verification is the backbone of credibility for the 4C
system. In the 4C system, 4C Verification checks complianceagainst the baseline standard of 4C, consisting of 28
parameters that represent a mix of environmental, socialand economic considerations. All defined 10 Unacceptable
Practices must be excluded and at least a minimum level ofcompliance (called ‘average yellow’) is required within eachdimension of sustainability to successfully pass verification.
All 4C verification is conducted by independent third party
verification or certification organizations that have successfully
participated in 4C verifier training and are accredited to ISO/
Guide 65.
4C and other standards are benchmarking that benefits
the coffee industry. Being designed as a baseline standard
for the mainstream sector, and therefore complementary
to more demanding standards, the 4C Association aims atbenchmarking with other standards in order to reduce theburden of multiple certification/verification for producers,
while also directing its support services to those producers

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

that are not certified. The first benchmarking was achieved
with the Rainforest Alliance in mid-2008. The 4C Code of
Conduct being a baseline standard, benchmarking with theRainforest Alliance’s Sustainable Agriculture Network (SAN)
standard is non-reciprocal. This means that holders of the
Rainforest Alliance Certificate may apply for a 4C License
without additional costs or verification procedures, whereas
4C License holders need to step up to SAN standards in order
to become Rainforest Alliance certified. Being 4C Compliantof course makes it easier for such growers to make the move
upwards. As a result of the 2008 benchmarking exercise, 4C
members holding Rainforest Alliance certification are now
being offered an additional marketing window because they
can sell any surplus production as 4C Compliant Coffee.
As mentioned earlier, UTZ Certified began the process ofbenchmarking in 2011.

OTHER SUSTAINABILITY LABELS
Biodynamic coffee usually is high-quality arabica at highpremiums with a low market share. A well-known example
is coffee from the Finca Irlanda (Chiapas, Mexico) whereorganic cultivation began in the 1960s. Biodynamic
products are organic and can be marketed as such, butthey meet even higher production standards and represent
a true niche market. For more see www.demeter-usa.org.
Especially in the United States and Canada, there is a market
for so-called bird-friendly or shade grown coffee. Limited
use of agro-chemicals is permitted and the emphasis is puton the conservation of shade trees on plantations in order topreserve bird life and biodiversity. Shade grown coffee is not
the same as organic coffee, but there are specific standards
and a certification system has been developed by theSmithsonian Migratory Bird Center, www.nationalzoo.si.edu/
scbi/migratorybirds/coffee, and other institutions and NGOs
in Canada, the United States and Mexico. Shade grown
represents a step along the way towards environmentally
sustainable coffee. So far the market for such coffees issmall and mostly limited to North America.

CERTIFICATION AND
VERIFICATIONCERTIFICATION AND MARKETABILITY IN
COFFEEOver time certification has become an almost indispensable
marketing tool for many agricultural products, particularly
perishables such as fruit and vegetables. The flower label
required on principle by many Western retail chains forimported fruit and vegetables is a good example.
However, these are products that are sold directly to theend-consumer, i.e. they are not transformed, and, as such,the certification is used to ensure market access. This isbecause the label proves to the end-user that producers
subscribe to good agricultural and management practices;protect the environment; practice safe pesticide use; andengage in resource protection generally. Thus, the productis accepted as both safe and environmentally friendly. For
coffee the situation is rather different because coffee growers
in the main provide green coffee to overseas roasters who
in turn produce and retail the finished product. Therefore, inmost instances the identity of the producing countries, letalone the individual producer, is not known to the end-user.
Consequently there is much less consumer awareness of the
production process and whether certification (or verification)by itself enhances a coffee’s marketability, is therefore apertinent question.
In the coffee industry, certification schemes also guaranteethat specific rules and regulations of voluntary standards are
met. On-pack labels then make this known to the end-user
on the producer’s behalf and, often, the end-user is expectedto pay a premium to recompense the grower for this specificeffort.
Verification similarly ensures that certain agreed criteria andpractices are met, but does not use certificates or on-packclaims to market this to the end-user. Typically a mainstream
market tool that offers market access rather than premia,
verification is meant to improve efficiency, sustainability andprofitability for growers on the one hand, whilst enablingbuyers to make more informed decisions on the produce
they purchase and process. Currently, the mainstream
market accounts for between 85% and 90% of all green
coffee exported from producing countries.
Over time, it may be expected that buyers of mainstream
coffee will increasingly insist on certain guarantees asregards the manner in which the coffee they buy is produced,
perhaps to the gradual exclusion of those producers unable
or unwilling to provide them. Verification would appear tobe the most likely tool for this, in many cases enhanced bycertification for a particular type of niche market.
It should also be noted that the scope for premium priced
coffee, purely based on quality, is in theory unlimited because
it has direct and universal appeal to many more end-users.
The market for quality or specialty (gourmet) coffee isincreasing constantly, i.e. this market segment is demand
driven and is showing strong growth.
However, the scope for premium prices based on certification
rather than on quality is limited because of demand reasons.
This is so because for many if not a majority of end-users
the intrinsic quality of a product is of more importance thanis certified compliance with a code of conduct or standard.
Therefore, the potential for certified coffees that require to
be sold at a premium mostly lies in niche markets. However,the supply of such coffees is not necessarily always demand
driven and over time some may be subject to oversupply.
While certification definitely adds to a coffee’s image andmay enhance its value, in the longer term certification by
itself (so without the ‘quality’) is no guarantee for premium
prices. But it can add to a coffee’s marketability.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

Table 3.3

Comparative overview of sustainability schemes for coffee

AspectOrganic

Fairtrade

Rainforest
Alliance*UTZ CERTIFIED

Common Code
4C

Premium

No assured premium paid
– it varies considerably frommarket to market (but 15
to 20 cts was paid in somecountries in 2011, if double
certified with Fairtrade thenit gets an automatic 20 cts
premium).

Fixed premium always
assured (but overall levelof demand not always intandem with production).

No assured
premium (but 5 to
8 cts range wascommon in 2011).

No assured
premium paid(but 2 to 5 cts wascommon in 2011).

No assured
premium (but may
be paid in certain
circumstances if
seller/buyer soagree)

Yield andquality

Short-term impact on yields
may be negative; possibly
positive impact on quality.

Only indirect (and possibly
positive) impact on yields
and quality (through higher
income, thus increased
possibility of purchasing
inputs and hiring labour).

Potentiallynegative yield
impact; positive
impact on quality.

Possibly positive
but limited.

Possibly positive
through improved
farming andprocessing
methods.

Labour inputs

Higher labour inputs.

Higher labour inputs linked
to collective processes suchas coordination, meetings
etc.

Higher labour
inputs.

Moderately higher
labour inputs.

Moderately higher
labour inputs.

Other income
impacts

Possibility of selling otherorganic products from thefarm; income diversification.

Possible indirect impact
through wider trade
networking offering
possibility of selling other
Fairtrade products.

Possibility ofselling forest byproducts and fruit.

Increasing visibilityof UTZ may
improve conditionsof trade.

Over time improved
conditions of trade
may be possible.

Marketaccess,networking

Access to well-establishedand reliable market.

Access to well-established,reliable market; technicalassistance from Fairtrade
importers.

Buyers andmarketsincreasing
steadily.

Number of buyers
and markets
increasing steadily.

Potentially easieraccess to large
segment of themainstream market.

Extension,creditPossibly more effective
extension from field staff
supported by NGOs andsome buyers, but limited
support from public system.

Access to trade financing
and traditional credit
sources due to Fairtrade
membership and improved
financial position ofcooperatives.

More effectiveagro-forestry
extension fromsupportive
NGOs, but limited
support frompublic system.

Potentially better
extension services
from supportive
NGOs and somebuyers, but limited
support from public
extension services.

Potential support
from 4C-support
platform andparticipating
buyers; limited
support from public
extension services.

Organizational
capacity;
community
impactPotential increase in mutual
support among farmers tosolve farming management
problems.

Increased organizational
capacity of participating
farmers; access to training;
better organizational
ability to serve members;
community projects.

Mutual support
amongst farmers
for forest
management.

Strengtheningorganizational
capabilities (ifregistration is done
via farmer groups
rather than as
individuals).

Strengthening oforganizational
capabilities throughpotential assistancefrom 4C-support
platform; access totraining.

Environment

Potential adoption of new
farming techniques toimprove soil fertility as wellas drought and erosion
resilience.

Limited environmental
benefits.

Improved biodiversity andagro-ecologicalconditions;enhancement ofsoil fertility.

Limitedenvironmental
benefits through thegradual eliminationof inappropriate
farming andprocessing
methods.

Limitedenvironmental
benefits throughthe gradualelimination of
inappropriate
farming andprocessing
methods.

Risk, planningcapabilities

Risk reduction throughreduced external inputs; nomono-cropping; improved
soil resilience; planning may
improve.

Better planning for coffee
production, personaland household needs;
guaranteed price reduces
risk.

Reduced pest
management
and social risk;planning may
improve.

Potential for some
reduced pest
management andsocial risk; planning
may improve.

Better planningand reduced risk
through improved
market access may
be possible.

Source: Based on original work and further input from Daniele Giovannucci and Stefano Ponte; 4C table by Jan van Hilten.
* Also applies to most shade grown coffee.
For more information on these and other standards visit ITC’s www.standardsmap.org.

CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTSSUSTAINABILITY AND GENDER

Table 3.5

Women’s ownership in the coffee sector

Women’s ownership in % of total(including co-ownership)

Variations
low – high‘Typical’

WOMEN’S EMPLOYMENT AND
OWNERSHIP IN THE COFFEE SECTORLand used for coffee production –including user rights

5 – 7020

Coffee – when harvested

2 – 7015

Most if not all sustainability initiatives pay considerable
attention to social and labour issues, but the status of
women in the coffee sector is generally not singled out. The
2010 Stanford Social Innovation Review, www.ssireview.org
found that only 1 out of the 10 initiatives it assessed listed
gender governance as a requirement, four listed women’slabour rights and three listed women’s health and safety.
The assumption may well be that general attention to labour
rights and other social aspects in the coffee sector also takes
care of this. But even so, this does not really do justice to theimportant role so many women actually play.

Coffee – when traded domestically

1 – 7010Companies in the coffee sector(exporters, laboratories, certifiers,transportation, etc.)

1 – 3010

In 2008, ITC conducted a survey on the role of women in
the coffee sector. Twenty-five persons, mainly women, in 15
coffee producing countries in Africa, Asia and Latin America,
provided information. The survey showed considerable
differences between individual countries with, for example,
women doing little of the field and harvest work in Brazil(highly mechanized and often alternative jobs for women),but as much as 90% in some African countries (nearly all
manual). Women play only a small role in in-country trading
in most countries, whereas in Viet Nam this is around 50%.
The data gathering was limited to 15 very different countries
only, but at least made it possible to indicate a kind of ‘typical’role of women in the sector.
Female ownership in the value chain in coffee producing
countries is also variable, but generally modest at all levels.
Ownership is difficult to describe for several reasons, forexample, the distinction between ownership and user-rights
is sometimes unclear as is co-ownership for married couples.
The findings showed significant variations, but simplified one
could say that women typically own around 15% of land, oftraded products (coffee) and of companies related to coffee
in coffee producing countries.
Table 3.4

Women’s employment in the coffee sector

Women in the workforce
in % of total

Variations
low – high‘Typical’Field work

10 – 90

70

Harvest20 – 8070

Trading in-country

5 – 5010

Sorting

20 – 95

75

Export

0 – 40

10

Other (certifications,laboratories, etc.)

5 – 3520

WOMEN’S ASSOCIATIONS IN THE COFFEESECTOR
Possibly the most opportune way to advance women andpromote women’s rights in the coffee sector is throughwomen’s associations where there is joint agreement on
objectives, where issues and matters of particular interest
to women can be discussed freely, and where there is anabsence of peer pressure. Topics at the top of the agenda
in the associations are typically (i) lack of access to land
(linked to heritage legislation), (ii) lack of education andskills, (iii) lack of access to capital and options for savings,
and (iv) the inability to locate good markets for coffee.
The potential of such associations is receiving increasing
attention from donor organizations with an interest in genderissues and it is becoming more common to find specificgender components in coffee sector projects. In addition,
the need to economically empower women in coffee isseen as a major opportunity by women who participate inassociations.
Women’s coffee associations were first initiated in the UnitedStates in 2002. The most prominent are today the following: International Women’s Coffee Alliance, IWCA, www.
womenincoffee.org coordinates information sharing andtraining of women. It has establishes so-called chaptersin primarily Central America (Costa Rica, El Salvador,
Guatemala and Nicaragua), the Caribbean (Dominican
Republic) and South America (Colombia and Brazil (information)). New chapters were established in 2011 in
Africa (Burundi, Kenya and Rwanda) where more arein preparation, including Ethiopia, Uganda and United
Republic of Tanzania. Chapter members include womenand men representing various segments of the coffee
supply chain. They are legalized entities that have avoice in their countries and seek the support of national
trade support institutions, corporations and not-for-profit
organizations.
 Café Femenino Foundation, www.coffeecan.org andwww.cafefemeninofoundation.org,
commencedbyassisting poor communities in Peru. It currently works inaround 10 countries in Latin America and is now turning
to Africa.

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CHAPTER 3 – NICHE MARKETS, ENVIRONMENT AND SOCIAL ASPECTS

 The Coffee Quality Institute, CQI, www.coffeeinstitute.org
offers a leadership programme with mentors (from theUnites States) and fellows primarily in Central America
and South America. Availability depends on funding
which, currently, is restricted.
A few countries have small national or in-country regional
associations or women’s groups in the coffee sector, forexample in Mexico, Colombia, Peru, Kenya and India.
Worth mentioning here is also the valuable work done by
Grounds for Health (GFH), www.groundsforhealth.org. GFH
is a not-for-profit organization founded to provide healthcare
services to women in coffee-growing communities. GFH
offers cervical cancer screening and treatment in several
Latin American countries and more recently in East Africa.

CHAPTER 4CONTRACTS

INTRODUCTION TO CONTRACTS .....................................................................................................................64
COMMERCIAL OR ‘FRONT OFFICE’ ASPECTS ................................................................................................65
DOCUMENTATION OR ‘BACK OFFICE’ ASPECTS............................................................................................70
STANDARD FORMS OF CONTRACT ..................................................................................................................73
ECF AND GCA CONTRACTS...............................................................................................................................75
UCP 600 IN SALES CONTRACTS ........................................................................................................................80
INCOTERMS® .................................................................................................................................. 81

64

CHAPTER 4 – CONTRACTSCONTRACTS
INTRODUCTION TO
CONTRACTS
International trade in coffee would not be possible without
general agreement on the basic conditions of sale.
Otherwise it would endlessly be necessary to repeat eachand every contract stipulation for a proposed transaction,
essentially very time consuming and open to mistakes. To
avoid this the coffee trade has developed standard formsof contract of which the most frequently used are thoseissued by the European Coffee Federation (ECF – www.
ecf-coffee.org) in the Netherlands and the Green Coffee
Association (GCA – www.greencoffeeassociation.org) in the
United States. Although many individual transaction details
must be still agreed before a contract is concluded, thebasic conditions of sale, unchanging conditions that apply
time and time again, can be covered simply and easily by
stipulating the applicable standard form of contract. Evenso, an offer to sell (or a bid to buy) must stipulate the quality,
quantity and price, the shipment period, the conditions ofsale, the period during which the offer or bid is firm (valid),and so on.

WHEN THINGS GO WRONG
There will always be problems and mistakes, delays andeven disasters, both avoidable and unavoidable. The mostimportant rule is: Keep the buyer informed! If a problem isadvised in time the buyer may be able to re-position thecontract and resolve the problem. If buyers are not promptly
informed it becomes impossible for them to protect
themselves and, indirectly, often the exporter as well. If
it is clear the quality is not quite what it ought to be, do
not hope to get away with it – tell your buyer. If a shipment
will be delayed, do not wait to announce this but tell thebuyer immediately. Article 11(v) of the European Contract
for Coffee (ECC) specifically requires that the buyer be kept
informed without delay. If a claim is reasonable, settle it,
promptly and efficiently. The buyer is not an enemy but apartner, and should be treated as such.
Arbitration (chapter 7) always dents reputations and usuallyspells the end of a business relationship. Correctly settled
claims can help to cement relationships. Bear in mind
that many buyers will not bother to lodge smaller claims
or pursue them through to arbitration – their time is too
expensive. Instead they will simply strike the name of theoffending party off their list of acceptable counterparts,
often without saying so.

MITIGATION OF LOSS
When loss is likely, both the seller and the buyer are required
to mitigate the loss as much as possible: that is, they must
keep the loss to a minimum. Regardless of who is liable
to pay, both parties are responsible to keep the loss to aminimum. A good example is when documents are lost.
Yes, it is the responsibility of the seller to trace and present
them as soon as possible. Yet, the buyer cannot just let thecoffee sit on the dock incurring late penalties (demurrage,
container charges, etc.). The buyer is required to take allreasonable action necessary to keep the late charges to aminimum and when claiming damages has to prove both
the reasonableness of the claim and that all possible action
was taken to keep the loss to the unavoidable minimum.

VARIATIONS TO STANDARD FORMS OF
CONTRACT
Commercial contracts can be and often are concluded
with conditions other than those of the standard forms ofcontract, as long as these are well understood and areclearly set out in unambiguous language (leaving no roomfor differing interpretations). For example, one might agree
to change the shipment quantity tolerance in Article 2 of the
ECC from 3% to 5%. In this case the contract should theninclude a paragraph to the effect that ‘Article 2 of ECC isamended for this contract by mutual agreement to read atolerance of 5%’.
If a modification to an existing contract is agreed it should
be confirmed in writing, preferably countersigned byboth parties. Adding the words ‘without prejudice to theoriginal terms and conditions of the contract’ ensuresthat the modification does not result in unintended or
unforeseen change to the original contract. If a modification
is not confirmed in writing then one of the parties could
subsequently repudiate or dispute it. Human memory is
fallible and there is nothing offensive in ensuring that all
matters of record are on record.
The same applies to business under GCA contracts. Some
North American roasters have small booklets containing
their proprietary terms and conditions, which all suppliersmust sign on to before they can be approved vendors. In
the GCA XML (electronic) contract there is a huge field (350
characters) of entitled exceptions.

CHAPTER 4 – CONTRACTSCOMMERCIAL OR ‘FRONTOFFICE’ ASPECTS
SPECIFYING ‘QUALITY’: ON DESCRIPTION
Quality can be specified in any one of a number of ways.
On description: The quality will usually correspond to a
known set of parameters relating to country of origin, green
appearance and liquor quality. Most of the descriptive
parameters are open to varying interpretations. For example,
in the description ‘Country XYZ arabica grade one, fairaverage quality, crop 2012, even roast, clean cup’, the only
real specifics are that the coffee must be of the 2012 crop in
country XYZ and that the bean size and defect count should
correspond to what country XYZ stipulates for grade one
arabica.
Fair average quality (FAQ): This essentially means thecoffee will be representative of the average quality of thecrop, but there is no defined standard for this.
Even roast: This implies that the roasted coffee will notcontain too many pales (yellow beans) and will be ofreasonably even appearance.
Clean cup: This indicates that the liquor should not present
any unclean taste or off-flavour, but otherwise says nothing
about the cup quality. Nevertheless, buyers know roughly
what the cup quality ought to be and, for example, if the cup
were to be completely flat or lifeless, they would argue that
this is not consistent with fair average quality for country XYZ.
The trade in robusta is largely based on descriptions. These
convey the quality being sold fairly well because the liquor
quality of robusta does not normally fluctuate as widely as thatof arabica. Descriptions greatly facilitate the trade in coffee,
but it should never be forgotten that the roaster (the end-user)
will always consider the liquor quality when assessing theoverall quality of a coffee. The quality represented by FAQ willvary from season to season. ‘FAQ of the season’ means thequality must be comparable to the average quality shipped
during that crop year; arbitrators will judge any claims on thatbasis. If quality tends to vary widely within a country and aseason, the seller may go further and stipulate FAQ of theseason at the time and place of shipment.

SPECIFYING ‘QUALITY’: ON SAMPLE BASIS
Because descriptions provide a minimum of detail concerning
quality they are seldom if ever used for the trade in highquality coffee. In addition, buyers know that different sellers
have their own interpretation of FAQ and so prefer to deal
with shippers whose interpretation is acceptable to them.
However, traders wishing to short-sell XYZ arabica grade one
FAQ forward does not necessarily know in advance whichshipper or exporter they will later buy from.

In this case the term ‘first class shipper’ can be added tothe description, thereby implying that a reputable exporter willship the coffee. But the term first class is open to interpretation
as well and so the contract may instead stipulate the namesof exporters of whom the buyer approves, one of whom must
eventually ship the coffee. Large roasters are quite flexible
about the origin of standard or commercial grade coffee, andto widen their purchasing options often leave the seller, often
a trade house, free to deliver an agreed quality from one of anumber of specified origins and shippers.
Subject to approval of sample (SAS): This is one way toeliminate most of the quality risk inherent in buying unseen
coffee from unknown shippers, as buyers are not obliged toaccept any shipment that they have not first approved. SAS
obliges the exporter to provide an approval sample before
shipment. There are three generally recognized possibilities:
 SAS, no approval no sale. If the sample is not approved
the contract is automatically cancelled.
 SAS, repeat basis. If the first sample is rejected, asecond or even a third sample may be sent. Sometimes
the contract will mention how many subsequent samples
can be submitted. This option provides maximum quality
security without immediately jeopardizing the contract,
and works well in long-standing relationships.
 SAS, two or three samples for buyer’s choice. When thebuyer’s quality requirements are very specific, and inorder to save time, multiple samples may be submitted at
the same time. To avoid confusion such contracts should
stipulate whether repeat samples may be sent or whether
no approval means no sale.
Theoretically, an exporter who feels aggrieved by what seems
to be an unreasonable (intentional) rejection and cancellation
could declare a dispute and proceed to arbitration (chapter
7). However, the chance of success would be extremely slim if
not non-existent, not least because an arbitration panel mightrule it has no jurisdiction over what was in essence a purely
conditional contract that never became binding (because thebuyer did not approve a sample). Exporters should therefore
be fairly selective when agreeing to sell subject to approvalof sample.
Stock-lot sample: Selling on stock-lot sample avoids
potential approval problems. The sample represents a parcel
that is already in stock so there should be no discrepancy
between the sample and the shipment, including the screen
size (even if the screen size was not stipulated). Day-to-day
business would become too cumbersome if one insisted
on stock-lot samples for all deals, but for newly establishedexporters or for those wishing to break into a niche market
or to trade top quality coffees, stock-lots usually are the bestroute.
Once a satisfactory delivery has been made, an exporter
may wish to sell a similar quality again. Rather than send new
samples, the exporter may offer ‘quality equal to stock-lot
X’; this guarantees that the coffee is of comparable quality,
suitable for the same end-use as the original purchase. The
words ‘equal to’ must be used because the sample was not

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drawn from the new lot of coffee. If the exporter feels that thequality is very similar, but that a little latitude is needed as tothe coffees bean size or green appearance, they may say‘quality about equal to stock-lot X’. Usually, such businessis only between parties in a long-standing relationship who
know each other well.

(named vessel, immediate or prompt shipment, first half of amonth) is a marketing handicap.

Type: Once a few transactions have been satisfactorily
concluded, buyer and seller may decide to make the quality
in question into a type. Both parties are now confident thatthe quality will be respected and business can proceedwithout samples (although some roasters will still insist on
pre-shipment samples). Usually the quality of a type (likea recipe) is kept confidential between shipper and buyer.
Top or exemplary coffees are mostly sold on sample or typebasis, whereas medium and standard qualities are more
often traded on description.

Offers and contracts must stipulate the point at which theexporter will have fulfilled its commitment to deliver, that is,
the point at which risk and responsibility are transferred tothe buyer.

THE SHIPPING PERIOD
The most often-encountered trade terminology includes:
 Date of shipment: the ‘on board’ or ‘shipped’ date of
the bill of lading. Contracts should always stipulate fromwhich port(s) shipment is to be made. For FCA contracts
the date of delivery is the date of the carrier’s receipt.
 Spot goods: have already arrived overseas, e.g.
available ex warehouse Hamburg.
 Afloat: coffee that is en route, i.e. on board a vessel thathas sailed but has not yet arrived.
 Named vessel (or substitute): shipment must be
made on a specified vessel. Adding ‘or substitute’
ensures that shipment can also be made if the shipping
line cancels the named vessel or replaces it with another.
Many contracts simply stipulate the shipping line thatshall carry the goods.
 Immediate shipment: shipment within 15 calendar days
counted from the date of contract.
 Prompt shipment: shipment within 30 calendar days
counted from the date of contract.
 Shipment February (or any other month): shipment
is to be made on any day of that month (single month);‘February/March seller’s option’ means shipment will bemade on any day within those two months (double month).
The shorter the shipping period, the shorter the roaster’s
exposure to market fluctuations and the more precise
physical and financial planning can be. Buyers generally look
for less exposure, and double months are not popular. For
example, shipment March/April means that shipment canbe made at any time during a 61-day period, which does
not go well with the increasingly prevalent just-in-time (JIT)
philosophy (see chapter 5). Sellers in landlocked countries or
those with inefficient shipping connections are often forced
to sell on double months. By contrast, countries as Brazil andColombia can guarantee coffee to be available in Europe
within 21 days from the date of sale (10 days or so for theUnited States). Inability to offer precise shipping options

DELIVERY COMMITMENT

Free on board (FOB): the goods will be loaded at theseller’s expense onto a vessel at the location stipulated in
the contract, e.g. FOB Santos. The seller’s responsibilities
and risk end when the goods cross the ships rail, and fromthen on the buyer bears all charges and risk. Under the
ECC contract the price to seller is expressed as FOB, but
the buyer is currently responsible for insuring the goods fromthe last place of storage ahead of loading on board, e.g.
the port warehouse, which is not the case under the GCA
FOB contract. Most coffee contracts stipulate the price to thesellers in terms as FOB, but the ECC can be described as an
ill-defined cost and freight contract. The use of FCA contracts
seems to be on the increase.
Free carrier (FCA): in landlocked countries the sale is often
FCA, with buyers themselves arranging transport to thenearest ocean port and onward carriage by sea. Internationaltransporters, usually linked with shipping lines, often offer
one-stop services, taking the goods in hand in Kampala,
Uganda, and delivering them to Hamburg, Germany, forinstance, using a single document known as a combined billof lading covering both inland and maritime transportation.
Risk of loss is transferred when the coffee is delivered to thefreight carrier at the place of embarkation. All freight charges,
including loading onto an ocean vessel, railcar, trailer ortruck (combined bill of lading), are payable by the buyer. The
exporter provides the customs clearance documentation.
Unless special arrangements have been made with thecarrier, such shipments must be re-stuffed at the port of
shipment if an LCL (less than container load) bill of lading isrequired.
Cost and freight (CFR, previously called C&F): the seller
is responsible for paying costs and freight (but not insurance)
to the agreed destination.
Cost, insurance, freight (CIF): the seller is also responsible
for taking out and paying the marine insurance up to theagreed point of discharge. Very rarely used nowadays.
In all cases it is the seller’s responsibility to deliver the
shipping documents to the buyer. When a parcel is loaded
on board ship, a mate’s receipt is issued to the ship’s agent.
This is the legal basis for the bill of lading, which should be
prepared and issued immediately. Shippers are entitled to thebill of lading as soon as the goods have been loaded. Some
agents release them only once a vessel has sailed, but this isincorrect and causes unnecessary cost.

CHAPTER 4 – CONTRACTSThe International Chamber of Commerce’s Guide to
Incoterms® 2010 contains a more detailed description ofthese and other shipping terms. However, the standard
contracts used in the coffee trade all state or imply that also
under an FOB sale the seller is responsible for booking
freight space, arranging shipment and producing a full setof shipping documents. These stipulations in standard
coffee contracts differ from, and supersede, the Incoterms®’
definition of FOB.

plant. However, shipping in bulk has greatly reduced weightloss and as a result such a franchise has been reduced to aminimum (0.5% under both the ECC and the GCA contracts).
Net shipped weights: the weights established at the time of
shipment are final, subject to the stipulations of the underlying
standard form of contract. Under an FCA contract the parties
can also agree that the net delivered weight be final together
with the procedures and conditions that shall apply.

OCEAN FREIGHTNet delivered weights or net landed weights: the goods
will be reweighed upon arrival and final payment will be madeon the basis of the weights then established.

Most coffee contracts are effectively FOB – in that thereceivers pay the freight. Receivers prefer this because they
can negotiate rates of freight that individual exporters or
producing countries may be unable to obtain. For this reason,bills of lading do not always indicate the freight charge, or
simply state ‘freight as per agreement’.

If buyers are suspicious about the accuracy of the shipping
weights they may require an independent weigher tosupervise the weighing. Sellers may stipulate the same
when selling basis net delivered weights or when weights are
disputed and reweighing is ordered.

As they are liable to pay the freight, receivers consider thatthey should also negotiate the rates (and argue, indirectly,that they are in fact better placed to do so). This may be
so, but whenever the freight from a particular port increases
buyers adjust their cost calculation for the origin in question
as they calculate the cost of all coffee on the basis landed
port or roasting plant of destination. If the freight rate froma particular country increases, the prices bid for coffee fromthat origin will eventually compensate for this – if freightsfrom comparable origins have not also risen. This is because
the market compares like with like, that is, the landed cost.
Ultimately therefore it is the producers who pay the freightcharges. However, without the current arrangements somefreight rates would likely be higher. See also chapter 5,
Logistics.
Terminal handling charges (THC): are an important part ofcontainer transport costs and can vary considerably between
shipping lines, sometimes to the point where an apparently
attractive rate of freight is in fact not attractive at all. Shippers
should keep themselves informed of the THC raised directly
or indirectly by individual shipping lines at the ports they loadfrom as they can face unexpected costs if buyers specify aline whose freight is low (buyers’ advantage) but whose THC
are high (shippers’ disadvantage).

WEIGHTS
Most standard forms of contract stipulate that natural loss inweight exceeding a certain percentage is to be refunded by
the sellers. This is known as the weight franchise. Coffee ishygroscopic, which means that it attracts or loses moisturedepending on climatic conditions. It may therefore lose a little
weight during storage and transport. To counter this weight
loss, a number of exporters have traditionally packed a little
more per bag than they invoice. This helps to ensure that
arrival weights are as close to the agreed shipping weightas possible. Buyers know from experience what losses inweight to expect from most origins and take this into accountwhen calculating the cost landed destination or roasting

PAYMENT: CONDITIONSUsually, and advisedly so, the conditions of payment will havebeen agreed in advance and will therefore already be known
to both parties, especially if the business relationship hasexisted for some time. But when offering to a new buyer thepayment conditions must be specified.
Letters of credit – Uniform Customs and Practice. In thecontext of this guide a letter of credit is a contract between
a bank and a seller whereby the bank undertakes to pay theseller an agreed sum against delivery of an agreed set ofshipping documents.
Terms and conditions governing letters of credit are laid downin what is known as the Uniform Custom and Practice forDocumentary Credits, issued by the International Chamber ofCommerce. The most recent version, the UCP 600 became
effective from 1 July 2007. Because of its importance, UCP isdiscussed at the end of this chapter.
Payment against letter of credit (L/C) requires the buyer toestablish an L/C before shipment is effected. A letter of credit
is an undertaking from the buyer’s bank to the exporter’s bankthat payment will be made against certain documents suchas the invoice, certificate of origin, weight note, certificate
of quality and bill of lading (for sea transport) or waybill (forroad or rail transport). The exporter should check that the
documents specified in the letter of credit are obtainable.
Sometimes buyers require verification of documents by anembassy or consulate not located in the exporter’s country, or
they may include documents the exporter is not contractuallyrequired to provide.
The timing of letters of credit is very important. The L/C must
be available for the exporter’s use from day one of the agreed
shipping period, and it must remain valid for negotiation for
21 calendar days after the last date that shipment is permitted
to be made. Watch the timing very carefully: once the expiry

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date has passed, the letter of credit is only as good as thebuyer’s willingness to extend it.

19(d), European Free Carrier Contract for Coffee (EFCACC)
18(c) and the relevant section in the GCA contract.

If the terms and conditions of an L/C are not met, the exporter’sbank will not pay the exporter until the buyer has confirmedthat all is in order. This may involve sending the documents
abroad without payment. If at that stage the buyer refuses
to make payment, the exporter may be left with an unpaid
shipment in some foreign port. The importance of conforming
to all the conditions in a letter of credit cannot be stressedenough. Exporters should always consult their bankers
before they assume that a letter of credit is acceptable.

In this way, the documents remain within the banking system
until payment has been received, thus ensuring that theexporter does not lose control of the goods. If the exporter
is in need of prompt payment it can ask their own bank toadvance them all or part of the invoice value. This is known as
negotiation of documents. The exporter remains responsible
for the transaction – if the buyer does not pay, the exporter’sbank will demand its money back.

An ordinary (i.e. revocable) or unconfirmed letter of credit
is nothing more than an uncertain promise to pay if certain
documentation is submitted. However, the UCP 600 have
moved away from revocable credits, i.e. with effect from
1 July 2007 all credits became by default irrevocable.
An irrevocable letter of credit cannot be cancelled once
established. The exporter can be certain that funds will
be available if valid documents are presented. Even so,
the exporter’s bank may pay the exporter only when it hasreceived the funds from the bank that established the letterof credit. This can create problems if, for example, the buyer
argues that the documents are not correct or the buyer’sbank is slow in making payment.
Under a confirmed and irrevocable letter of credit theexporter’s bank confirms that payment will be effected upon
the timely presentation of valid documents without reference
to the establishing bank. By adding its confirmation, theexporter’s bank therefore guarantees payment. If thenegotiating bank discovers a minor discrepancy in the
documents, such as a spelling error, it may still negotiatethem providing the exporter signs a guarantee that in caseof refusal by the buyer, the exporter will refund the payment
received until the matter is settled.
Whenever exporters feel that letters of credit are required,
they should insist that they are confirmed and irrevocable.
Even then, extreme care must always be taken to ensure thatall details are respected, even to the spelling of words andshipping marks.

ALTERNATIVE PAYMENT METHODS
Payment net cash against documents (NCAD or CAD)
on first presentation. The buyer is expected to makepayment when the documents are first presented. Exporters
will agree to this method of payment if they know theirbuyers well and have confidence in their financial strengthand integrity. An exporter can submit the documents
through the intermediary of its own bank, which then asksa correspondent bank abroad to present them to the buyer,collect the payment and remit the funds, less all collection
costs, to the instructing bank for the account of the exporter.
(This includes the [reasonable] charges raised by the buyer’sbank because that bank is now acting on the instructions of
the seller’s bank and, therefore, the seller.) See ECC Article

Documents in trust. Assuming the exporter’s bank does not
object, documents may also be sent direct to the buyer withthe request to make payment upon receipt of the documents.
This is known as sending documents in trust. As the term
implies, the decision to do this depends entirely on the trust
the two parties place in each other.
Payment net cash against documents upon arrival:
payment is due when the goods arrive at the port ofdestination. When selling on this basis an exporter should
always stipulate that payment must be made after expiryof a certain period, whether the goods have arrived or not.
Otherwise there will clearly be problems if for some reason
the goods arrive six months late or do not arrive at all because
the vessel has been lost. Contracts should therefore always
stipulate ‘payment net cash against shipping documents
upon arrival of the goods at [destination] but not later than 30[or 60] days after date of bill of lading’.

PAYMENT: CREDIT POLICY
Exporters must decide for themselves which payment
conditions to accept. They must assess the financial statusof their buyers and act accordingly. Some information canbe obtained from bank references that indicate a client’s
creditworthiness. Although such reports are useful, theycannot provide all the desired information nor do they place
any responsibility on the bank that issues them. Exporters
using borrowed working capital are usually subject tostringent conditions concerning the buyers they can sell to,and on what payment conditions.
When entering into contracts and deciding on payment
terms, sellers should investigate the identity of their buyers.
International trading groups often work through foreign andlocal subsidiaries whose commitments are not necessarily
guaranteed by the parent firm, even though they may tradeunder the same or similar names. When in doubt a seller
can demand a guarantee from the parent firm that it accepts
responsibility for the contracts with, or documents handed to,a given subsidiary.
In some countries the monetary authorities dictate payment
policy for exports, for instance by insisting that all exports must
be covered by letters of credit to avoid possible loss of foreignexchange. This kind of blanket regulation results in some of
the world’s largest corporations with impeccable credentials
being asked to establish L/Cs. Many buyers simply refuse toCHAPTER 4 – CONTRACTS

establish letters of credit, and those that do establish themcalculate the cost and inconvenience involved. Ultimately it is
the grower who pays for such bureaucratic attitudes.

SCOPE AND VALIDITY OF AN OFFER
The scope and validity of an offer (or bid) must be specified– when does acceptance constitute a firm commitment for
both parties?
An exporter wishing only to publicize a potential availability at
an approximate price uses terminology such as price idea or
we offer/quote subject to availability or subject unsold. To thebuyer this suggests there is a good chance of obtaining thecoffee in question if the indicated price is agreed to. Although
the exporter is not bound to sell, the buyer has some reason
to be annoyed if the exporter refuses to do so for no obvious
reason (e.g. was simply fishing for price information).
A firm offer, however, does commit the seller if the buyer
accepts the offer within a reasonable time. ‘Reasonable’ isopen to interpretation, so sellers must stipulate a time after
which the offer lapses. The same applies to bids from buyers:these too must be specific. ‘Subject to immediate reply’ saysthat the reply should be immediate, but even ‘immediate’ isnot precise. It is always better to say, for example, ‘subject
to reply here by 3 p.m. our time’. The choice of time limit
depends on the situation of the exporter and the type ofbuyer to whom the offer is addressed. An exporter who iskeen to sell may wish to try various markets at the same time.
If they have only limited stocks of the coffee in question theycannot make multiple firm offers and will instead offer subject
to availability or subject unsold. Alternatively, they can makefirm offers for short periods to individual buyers by telephoneor, increasingly, by e-mail. Conversely, they can give a buyer
or, more probably, an agent an entire day to work an offer,
but the exact time at which the offer expires should always
be stated.
Modern communications offer almost instantaneous
exchanges, especially through e-mail and other electronicmeans, enabling exporters to contact many potential buyers
within short periods of time. It is not only the face of trade thatis changing, but also the methodology and terminology. (Seechapter 6, E-commerce and supply chain management.) But
what will not change is that acceptance, verbal or otherwise,
within the time limit of a firm offer or bid constitutes a firm andbinding contract. Disputes can be submitted to arbitration,
but the best approach is to ensure that the wording of offers
or bids is clear and precise.
Example: ‘We offer firm for reply here today by 5 p.m. ourtime 1,000 bags XYZ arabica grade one as per sample 101 at
170 cts/lb, FOB [port], NSW (net shipping weight), shipment
November/December 2012 our option, payment NCAD firstpresentation’. This assumes that the applicable standard
form of contract has previously been agreed by the parties;
for a new buyer the applicable standard contract should
therefore be mentioned as well.

Counter offers: if a buyer counter bids a lower price against
a firm offer this automatically releases the seller. The offer
is no longer binding, because the buyer has rejected it bycounter offering. If the seller rejects the counter offer thebuyer cannot subsequently revert to the original offer: when
they countered, that firm offer lapsed unless of course theseller agrees to reinstate it.

USING INTERMEDIARIES – WHO IS WHO
Agents. Modern communications, especially e-mail, permit
regular contact with many more clients than was the casejust 10 years ago and the traditional agency function isincreasingly making way for direct trade. Even so, it is notalways feasible to deal directly with individual buyers in morethan just a few markets, especially when time differences
come into play, and many exporters still use agents.
A local agent is on the spot, speaks the language, knows
the buyers and usually can discuss more than just the one
origin most exporters represent. This makes an agent aninteresting conversation partner who is more likely to get abuyer’s attention. And for exporters, agents provide a twoway information flow because they know local conditions andoften gain insight into the activities of competitors.
Agency agreements must make it clear what each party ispermitted and expected to do. If an agent is given exclusivity
in a given market (sole agency) then the exporter can demandthat the agent does not market also for any of the exporter’s
direct competitors. Larger agency firms sometimes represent
a stable of exporters, including some from the same origin,and smaller exporters may have to accept this because theycannot generate sufficient business to make a sole agency
worthwhile for the agent. Such firms that do not work underan actual agency contract really function more as preferredsales channels than as true agents.
Brokers work within a given geographical area, bringing
local buyers and sellers together. Like agents they declare
the name of both the buyer and the seller, and receive acommission but do not represent a party. Traders buy orsell in their own name and for their own account. Agents or
brokers who do not declare the buyer’s name operate as
traders because they ‘take the coffee over their own name’.
Importers and traders. Growing interest in niche products
and markets, accompanied by the reappearance of small
roasters (e.g. in the United States), has revitalized many
importers that are once again increasingly fulfilling the
traditional function of sourcing specific types of coffee(specialty, organic, but also mainstream qualities) in
producing countries and bringing these to market. Today,
many importers represent single estates and individual
exporters under agreements where, in exchange for exclusivityof supply, they undertake to stock and promote particular
types of coffee. This potentially attractive alternative to thecommission agency option mentioned above is discussed
further in chapter 3. Their ability to carry stocks is of great
importance, as it also enables less widely traded coffees to

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be immediately available in the main import markets. Larger,
more vertically integrated trade houses usually handle moreeasily traded coffees, standard qualities that are relatively
widely bought and sold. Some of the very large houses attimes almost operate as market makers in that their pricing
becomes a reference point, even for origin, as shown below.
First and second hand. Coffee sold direct from origin is‘first hand’ (there were no intermediate holders). If the foreign
buyer then re-offers that same coffee for sale, the market willknow it as ‘second hand’. But international traders also offer
certain coffees for sale independent of origin: in so doing they
are going short in the expectation of buying in later at a profit.
To achieve such sales they may actually compete with origin
by quoting lower prices than the producers themselves.
Market reports then refer to ‘second hand offers’ or simply the‘second hand’. Traders can buy and sell matching contracts
many times, causing a single shipment to pass through anumber of hands before reaching the end-user, a roaster.
Such interlinked contracts are known as ‘string contracts’.

DOCUMENTATION OR ‘BACK
OFFICE’ ASPECTS
INTRODUCTION TO DOCUMENTATIONInternational coffee transactions are executed by transfer of
title rather than by the physical handing over of coffee. Title
to goods shipped under contract by sea from one country toanother is represented by the bill of lading, accompanied by aset of additional documents, together known as the shipping
documents. The document of title for goods already stored in
the port or place of delivery under a spot contract can be awarehouse receipt or storage warrant issued by a recognizedpublic warehouseman. The only difference between the
traditional chain of paper documents and electronic
documentation is that the paper is largely eliminated. This
is why electronic documentation is sometimes also called
paperless trading. Using electronic documentation does
not change the contractual responsibility of the seller or thebuyer. The only differences are in how and when documents
are issued, and how and when they are made available to thebuyer. However, as yet electronic bills of lading are not widelyused in the coffee trade.
Shipping documents must always comply in all respects
with the conditions of the contract between the parties. Ifthey do not, a seller may not be paid on time, or, in extreme
circumstances, may lose the money altogether. The shipping
documents must therefore show or state that (i) they represent
the contracted and shipped coffee, (ii) a known series ofshipping rules has been complied with, and (iii) they conformin all respects to the sales contract between the parties andto the standard form of contract on which that sales contract
is based. Shipping documents must also be presented ontime. Nothing is more annoying than late documents.

LETTERS OF CREDIT
Where payment against a letter of credit is stipulated the seller
should obtain full details of the buyer’s letter of credit as soon
as possible. This is to ensure that the required documentation
is in fact obtainable, that there will be sufficient time to obtainsuch documentation, and that there are suitable shipping
opportunities to the named port of destination within the
stipulated period of shipment. The European Contracts for
Coffee only require a full and complete letter of credit to beavailable for use from the first day of the contractual period
for shipment, even though the letter of credit may well containstipulations on what must be done before loading. Therefore,
it may be wise to provide specifically in the contract for earlier
receipt of the full and complete letter of credit. Sellers should
also ensure that the letter of credit remains valid for thenegotiation of documents for at least 21 days after the date ofshipment. See also chapter 10.
Both ECF and GCA stipulate this. If the length of validity is notcarefully checked one could fulfil all the L/C conditions only
to find it has lapsed.
Buyers calculate all costs (from FOB through to delivery at finaldestination) to arrive at the final cost ‘price landed roasting
plant’, taking into account any extra costs. For example, anorigin that habitually delivers documents late (i.e. after thevessel has arrived) is penalized as the buyer will provide forthis eventuality in the calculation to ‘landed plant’. In fact theimporter actually saves money by not having to finance thegoods for the expected period of time, but should the goods
arrive before the documents then serious trouble will arise. If
a letter of credit is demanded, the bid price will be lowered
correspondingly to cover the costs. Such a bid would also be
lower than that for similar coffees from other origins that do
not require a letter of credit.

DESTINATIONS, SHIPMENT AND SHIPPINGADVICE
If the port of destination is not known it is not easy forthe seller to organize shipment. For forward shipment or
FCA contracts the ECC currently stipulates that the port of
shipment must be declared by the 14th calendar day prior
to the first day of the contractual shipping period (GCA
stipulates 15 days’ notice). Otherwise it might not be possible
to complete the processes required for shipment within theagreed period. See also ‘Port of destination’ for more on how
the GCA approaches this particular aspect. For immediate
and prompt shipment or FCA contracts the destination must
be declared at the latest on the first calendar day following
the date of sale (and at the time of contract by GCA).
Shipment must be made during a vessel’s last call at theagreed port of loading during that particular voyage. This
rule is intended to exclude vessels that trade up and down
the coast of a country with several ocean ports until enoughcargo has been accumulated to make the main journey more
profitable.

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The coffee must be shipped on a port to port or a
combined transport bill of lading issued by a shipping
line which, using one or more vessels, will carry the goods
throughout the voyage without further intervention by seller
or buyer. The line issues a bill of lading at the port of origin tocover the entire voyage, enabling the buyer to see the detailsof shipment on the first vessel and to claim the coffee at finaldestination from a subsequent vessel. See also chapter 5,
Logistics.
Transshipment: the first vessel discharges at anintermediate port and the goods are reloaded onto anothervessel to the final destination. This is increasingly frequentas shipping companies rationalize operations and container
vessels become larger. In particular, the use of containers
has encouraged the development of shipping hubs: larger ormore central ports that are fed containers from outlying portsby smaller or feeder vessels for loading onto large container
vessels.
Shipping advice: as soon as the required information isavailable, the seller must advise certain specific details of theshipment. However, note that under the ECF’s FCA contract
sellers have just two calendar days to transmit advice ofdelivery.
For a shipment on terms other than CIF (which the seller
insures), the shipping advice enables the buyer to insure theshipment and either to make the necessary arrangements
to receive it at the port of destination or (where the bill of
lading allows such a choice) to declare an optional portof destination in time for the shipping company to arrange
discharge there. A series of time limits in ECC are designed
to ensure that these objectives are met, and to give the buyer
the freedom to procure a replacement parcel elsewhere if noshipment is forthcoming.
The details to be included in the advice of shipment ordelivery are listed in the ECF contracts. The buyer is entitled
to receive such advice, or an advice of delayed shipment/delivery, or an advice of force majeure. Failure to receive anadvice theoretically entitles the buyer to take the drastic stepof cancelling the contract and claiming recompense for any
loss suffered.
More stringent security measures at ports of entry in boththe United States and the European Union require shippers
to provide more detailed shipping advices. For example,
GCA states that for FCA, FOB, CIF, CFR or EDK shipment
contracts the shipping advice must include all U.S. Food andDrug Administration (FDA) required information.

DELAYED SHIPMENTS
The seller must advise the buyer of delayed shipment as soonas, for example, they become aware that a vessel may notload within the contracted period due to problems connectedwith the operations of the vessel itself such as a delay on theinbound voyage. Sellers must also show, using independent
documentary proof, that a late shipment is not their fault.

If a problem of a much wider scope and of a more serious
nature arises that prevents the seller, as well as other shippers,
from shipping within the contracted period then, in addition
to sending the notification of delayed shipment immediately
this becomes evident, under certain circumstances the seller
may be able to claim force majeure. Under ECF contracts
the effect of both an advice of delayed shipment (or delivery)
and an advice of force majeure is initially to extend the period
allowed for shipment. Cancellation of the contract follows if
the problem continues after that period (although cancellation
would be rather unusual). However, GCA does not specify
any extension and explicitly excludes events taking place
before arrival of the goods at port of shipment.
Experienced exporters know that quick and frank admissionof shipping problems usually helps them to reach anamicable settlement with their buyers. Failure to ship is badenough, but failure to keep buyers informed is even worse
as it prevents them from making alternative arrangements intime.

THE BILL OF LADINGThe bill of lading usually contains: The name of the seller at origin (the shipper); the nameof the buyer (the consignee); and, specified by the buyer,
the name of the party to whom delivery is to be made andwho is to be notified of the arrival of the shipment (thenotify address);
 The bill of lading’s unique number, the name of the vessel,
the port of loading, the destination, and the number oforiginals that have been issued;
 Details of the cargo and whether shipped LCL/LCL or
FCL/FCL, together with the container and seal numbers,
where shipment is in containers;
 A statement that the coffee is on board or shipped, i.e. notsimply received by the shipping company for shipment,
and that there is no record of damage to the coffee (aclean bill of lading), and the date of onboard shipment.
A ‘received for shipment’ LCL bill of lading may be acceptable
if this has previously been agreed by the buyer.
Bills of lading are issued in sets of identical originals, normally
two or three, with a variable number of non-negotiablecopies for record purposes only. Each original can be used
independently to claim the coffee shipped, although noteveryone holding an original bill of lading will automatically behanded the goods by the shipping company at destination.
Who is allowed to claim the goods depends on how the bills
are made out.

TITLE TO AND ENDORSEMENT OF A BILL
OF LADING
When bills of lading are made out or endorsed to a named
consignee, then only that consignee can take delivery of the

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shipment. A bill of lading made out to a named consignee
can be endorsed only by that consignee, not the shipper.
Once a consignee has been named the original shipper nolonger has any power to alter the bill of lading in connection
with title to the shipment.
If the consignee is not known at the time the shipper instructs
shipment on a particular vessel then the bills of lading may
also be made out to order. In this case, only the party to whomthey are endorsed with the words ‘deliver to …’ or ‘deliver tothe order of …’ can take delivery. This endorsement is madeby the shipper who is named on the bill of lading. Occasionallybuyers stipulate in their shipping instructions that the goods
be consigned to order.
A bill of lading is a negotiable instrument and can bepassed from a shipper through any number of parties,
each party endorsing it to assign title to the next party. The
only condition is that title can be assigned only by the party
shown on the bill as having title at the time. Any failure torespect this condition breaks what is known as the chain of
title; all purported assignments of title after such a break areinvalid. Before paying for documents a buyer will therefore
carefully examine the bill of lading to see that they are named
on it as consignee, either on the face or on the reverse in
an endorsement. In the latter case, the buyer will also makesure that the endorsements show an unbroken chain of title
through to them.
There is one exception to the general rule that a consignee
must be named on a bill of lading to take delivery of a
shipment. This is when the bill is a bearer bill. In this case,anyone holding (or bearing) the bills (or one bill of the set) cantake delivery. Bills are considered bearer bills when the word
bearer is entered in the space marked consignee when thebills are first made out. Alternatively a title-holder endorses thebills with the words deliver to bearer, or a named title-holder
endorses the bills in blank, i.e. by stamping and signing themwithout naming any other party in his endorsement. Although
this may be simple and convenient, it means that anyone
who obtains all or any of the originals (including a thief or abuyer who has not yet made payment) can take delivery of
the shipment. Bills of lading are therefore usually made out toor endorsed to a named consignee.
The greatest security of all is afforded by issuing or endorsing
a bill to a buyer nominated bank with an instruction to thebank to endorse and hand the bill over to the buyer when,and only when, payment has been made.

DISPATCHING BILLS OF LADING
Because in theory each original bill of lading in a set can beused to claim the goods at destination, a buyer will want to
be in possession of all the originals in a set before making
payment. Documents are often sent in two dispatches withthe bills of lading split between them, simply to minimize
the risks of all of them being lost or delayed. Only when thebuyer has received both dispatches will payment be made,unless the first contains a bank guarantee for any missing billof lading. Many exporters use courier services and send all
documents at once.

CERTIFICATESICO certificates of origin are issued for every international
shipment of coffee from producers to consumers (whether
the importing country is an ICO member or not), and areused to monitor the movement of coffee worldwide. The
forms contain details of identity, size, origin, destination andtime of shipment of the parcels in question. ICO certificateswere particularly important when ICO export quotas were inforce as they were also used to enforce the quota limits forindividual exporting countries. The certificates are now lessimportant and some consumer countries no longer insist on
them. But it is in the interest of exporting countries to comply
with ICO regulations on certificates of origin as they enable
the ICO to monitor coffee movements and produce accurate
statistics on each country’s exports.
Moreover, all ICO exporting members are required to ensurethat all coffee issued with certificates of origin complies withthe minimum quality standards indicated by ICO resolution
407. See also chapter 11, Coffee quality.
Preferential entry certificates: Countries that levy duties
or taxes on coffee imports sometimes grant duty exemptions
to certain exporting countries. Entitlement to remission of
duty or tax is obtained by submitting an official certificate
of exemption (EUR1, GSP and others). Individual sales
contracts often state that an exemption certificate must be
provided where appropriate. This certificate must accompany
the shipping documents, failing which the buyer is entitled todeduct the duty difference from the invoice and pay only thebalance. The seller will be able to obtain refund of the shortfall
by submitting the required certificate retroactively, but only if
the buyer in turn is able to obtain this within the applicabletime limit from the authorities in the country of importation.
Sellers who are in doubt about whether such a certificate
is required should ask their local chamber of commerceor trade authority. Note also that under ECC a buyer may
stipulate a country of importation other than that of the portof destination.
Insurance certificates: Under a CIF contract the seller
must provide an insurance certificate, issued by a first-classinsurance company, showing that insurance has been takenout in accordance with the terms of the sales contract. The
certificate must enable the buyer to claim any losses directlyfrom the insurance company. The certificate entitles theholder to the rights and privileges of a known and stipulated
master marine insurance policy that may cover a numberof shipments. The certificate represents the policy and istransferable with all its benefits by endorsement in the samemanner as bills of lading.
Other certificates: There are an increasing number of othercertificates available for special contractual requirements.
Some, such as weight and quality certificates, are suppliedby recognized public or private organizations in the country

CHAPTER 4 – CONTRACTS

of origin, and have various formats. Others, such as health,phytosanitary and non-radiation certificates, are often
supplied on application by government bodies, in a set
format prescribed by local law and regulations. The variety offormats available for special purpose certificates is so greatthat it is not practical or useful to discuss them here.
Shippers should be familiar with the format of local certificatesand should investigate their availability and cost before
entering into any contractual obligation. Otherwise they may
be unable to supply a document at all or may require a priceincrease to cover costs.

MISSING AND INCORRECT DOCUMENTS
ECC states that, provided the missing document does notprevent the importation of the coffee into the country ofdestination, a European bank guarantee shall be accepted
for the missing document(s). Sellers under the GCA contract
must provide a guarantee issued by a bank in the UnitedStates. Exporters who have not arranged with a bank inEurope or the United States to issue such guarantees should
consider specifying in all their contracts that guarantees
issued by a first-class international bank will be accepted.
In principle, a set of shipping documents made up of somedocuments and some guarantees can be acceptable, and it
is possible for payment to be made and delivery to a buyer
to take place even though no original documents and only
guarantees have passed between seller and buyer. But
when the absence of documents prevents the importationof a shipment, buyers will not make payment on the basisof a guarantee as they will be unable to gain access to theshipment. While bank guarantees from seller to buyer are
generally acceptable for missing contractual documents,
guarantees for missing bills of lading must be made out tothe shipping company and forwarded to the buyer for use.
Shipping companies provide their own pre-printed guarantee
forms for this purpose.
A buyer may also accept the seller’s personal guarantee formissing documents without a bank’s involvement. The seller
may take steps to rectify errors in documents, especially when
the documents relate to prompt landing and importation ofa shipment (e.g. bills of lading) and when the time savedby amending them on the spot either benefits the buyer or
prevents charges to the seller. The buyer can give the bills of
lading to the shipping company’s agent at destination who
will amend them on receipt of authority from the seller via theshipping company’s agent at the port of shipment.
Occasionally an entire set of documents is lost or destroyedin transit. The shipping company can then be requested toissue duplicate bills in return for an unlimited bank guarantee
as indemnity against possible future liability to a holder of the
supposedly lost documents.
As far as incorrect documents are concerned, obvious clericalerrors that do not materially affect a document do not entitle
a buyer to delay or refuse payment under ECC. If mistakes

invalidate a document or affect its reliability, the document
is regarded as a missing document and a guarantee can besubmitted in its place. The seller then returns the document
itself for re-issue or amendment.

STANDARD FORMS OF
CONTRACT
Changes to standard forms of contract are rare but
do occur. For ECF contracts (under review by the endof 2011) see the latest version at www.ecf-coffee.
org – look for Contracts under Publications. For GCA
contracts go to www.greencoffeeassociation.org andlook for Contracts under Resources.

OVERRIDING PRINCIPLE
The standard forms of contract set out generally acceptedrules, practices and conditions in the international trade incoffee for which the terminology and precise meaning havebeen standardized under the aegis of leading coffee tradebodies (for Europe the ECF, and for the United States the
GCA). The GCA contracts are also available in an electronicor XML (extensible mark-up language) version, together witha price fixing letter, a price fix rolling letter and a destination
declaration letter. The data files are available, free of charge,
from the GCA at www.greencoffeeassociation.org. For more
information on using the XML versions exporters should
contact their American buyers or agents.
Both ECF and GCA publish a number of contracts dealing
with different types of transactions. Most coffee is tradedusing these standard contracts. Others exist but are rarelyused.
All ECF and GCA contracts state expressly that nocontract shall be contingent on any other and that eachcontract is to be settled between buyers and sellers
without reference to any other contracts covering thesame parcel.
Although intended to cover ‘string contracts’ this alsomeans exporters cannot claim inability to ship because
someone else, say an interior supplier, let them down.
(Traders sometimes buy and sell matching contracts manytimes, causing a single shipment to pass through a numberof hands before reaching an end-user. Such contracts arecalled string contracts.)

EUROPEAN COFFEE FEDERATIONCONTRACTS
There are four ECF contracts in all, of which the ECC and the
EFCACC are relevant for exporters as they cover coffee to bedispatched from origin. The other two contracts mostly deal
with the trade in coffee within import markets: the European

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Contract for Spot Coffee (ECSC) and the European Delivery
Contract for Coffee (EDCC). While important for importers
and traders they are of little direct interest to exporters. Go towww.ecf-coffee.org for the full contracts.
ECC and EFCACC cover both coffee shipped in bags andcoffee shipped in bulk using lined containers. Note that
although hardly any bagged coffee is still shipped without
the use of containers, ECC does not stipulate that containers
must be used. It allows it, provided the bill of lading statesthat the shipping company is responsible for the number ofbags. Parties wishing to conclude individual transactions on
a different basis must therefore ensure that the sales contract
stipulates on what basis containerization shall be permitted.
EFCACC on the other hand stipulates that delivery of coffee inbags shall be made in containers, under LCL/FCL conditions,whereby the carrier is responsible for the number of bags andthe condition and suitability of the containers.
Incoterms®. Both ECF and GCA contracts make noreference to these, not because of any disqualification ordisagreement, but because Incoterms® are a general (i.e.
not coffee-specific) set of international trade definitions. The
exclusion is purely to safeguard the stand-alone status andclarity of the ECF and GCA contracts that have been written
by and for the trade in coffee.
See Exclusions in this chapter and go to www.iccwbo.org/
incoterms/understanding.asp for more on Incoterms®.
The main implication of this exclusion is that, as for CFR or
CIF contracts, under an FOB contract the seller is acquittedof responsibility only once the goods pass the ship’s rail. Thisis the same for GCA contracts. Under ECC the stipulationmeans that any buyer wishing to impose the use of aparticular shipping line or vessel must make this known at
the time of concluding the contract. But under GCA this has
already been formalized in that the standard GCA conditions
state that for FCA and FOB sales the buyer reserves the rightto nominate the carrier. EFCACC also stipulates that buyers
shall nominate the carrier.

GREEN COFFEE ASSOCIATIONCONTRACTS
Many North American roasters purchase coffee ‘ex dock’:
the importer/trade house deals with all the formalities ofshipment and landing, including customs clearance andpassing the obligatory sanitation check of the FDA. Thislatter check is particular to the United States and all contracts
for importation into the United States carry the stamp-overclause ‘No pass – no sale’. This means that if any or all of
the coffee is not admitted at port of destination in its original
condition by reason of failure to meet the requirements ofgovernmental laws or acts, the contract shall be deemed nulland void as to that portion of the coffee which is not admitted
in its original condition at point of discharge. Further, that any
payment made for any coffee denied entry shall be refundedwithin 10 calendar days of denial of entry. For more on thisgo to www.cfsan.fda.gov or apply for the information booklet

Health and Safety in the Importation of Green Coffee into theUnited States from the National Coffee Association of USA.
If coffee is refused entry under a contract that does not bear
this over-stamp, in addition to having to refund payment asabove the seller may also be required to make a replacement
delivery within 30 days.
Effective 1 January 2006, contracts should stipulate whether
they cover Commercial Grade or Specialty Grade coffee.
This will determine the type of arbitration that would be held
– if nothing is specified, then the contract is automaticallyassumed to cover Commercial Grade coffee.
There are nine GCA contracts. Four of them deal with coffee
that is sold outside of the country of destination, four deal
with coffee sold inside the country of destination, and one
deals with coffee delivered at the border or frontier. The main
distinction between the contract types is based on how
cost and risk are allocated between the parties. Go to www.
greencoffeeassociation.org for the full contracts.
Free carrier (FCA). Risk of loss is transferred when the coffee
is delivered to the freight carrier at place of embarkation. All
freight charges, including loading onto an ocean vessel,
railcar or trailer, are payable by the buyer.
Free on board (FOB). Risk of loss is transferred when thecoffee crosses over the ships rail. Terminal handling costs at
the place of loading are for account of the shipper. Free on
railcar (FOR) and free on truck or trailer (FOT) are variations of
FOB, the only difference being the type of conveyance. The
buyer pays the freight charges.
Cost and freight (CFR). As for FOB except that freight isincluded in the price and paid by the seller.
Cost, insurance and freight (CIF). As for CFR, but theseller also pays marine insurance and provides a certificate
of insurance.
Delivered at frontier (DAF). Under DAF contracts, risk ofloss is transferred when the coffee is delivered to a named
point at the frontier. Delivery takes place on arriving means oftransport (trailer, truck, rail car), and is cleared for export, but
not cleared for import.
Ex dock (EDK or xDK). When coffee is sold ex dock, risk ofloss transfer takes place on the dock at port of destination,
after all ocean freight and terminal handling charges are paid,
and customs entry and all government regulations have beensatisfied.
Ex warehouse (EWH or xWH), delivered (DLD) andspot (SPT) contracts are outside the scope of normal export
business and not discussed here.
Price to be fixed (PTBF). This does not feature in ECC but
GCA stipulates that such contracts shall specify the differential(value) that is added to or subtracted from an agreed pricebasis. When applicable the number of lots of coffee futures
should also be mentioned, as well as whether buyer or seller
has the right to execute the fixation. If there is margin payable

CHAPTER 4 – CONTRACTS

between time of fixation and time of shipment/delivery, it must
be determined at time of contract. Finally, the earliest and thelatest fixation date shall be specified at time of contract. Anychanges are to be by mutual agreement and in writing.

ECF AND GCA CONTRACTS
THE MOST IMPORTANT ARTICLES AND
CONDITIONS
Quantity
Tolerance to ship 3% more or less than the contracted
weight. Applicable to both ECF and GCA. The intention is
not to frustrate shipment if on arrival in port five bags are
missing out of 500. But the tolerance applies only if the cause
is beyond the sellers control. If buyers suspect deliberate
manipulation they may lodge a claim.

Weights at shipment
Weight franchise of 0.5% on coffee sold ‘net shippedweight’ in ECC and EFCACC. Any weight loss on arrival inexcess of 0.5% is to be refunded by the seller. Until the endof 1997 the tolerance was 1%. The present figure is a directconsequence of the growth in bulk shipments, in the sensethat there should hardly be any weight variation if coffee iscorrectly shipped in lined and sealed containers. Shippersof bagged coffee often include a small tolerance (excess
weight) per bag to avoid claims. GCA standard contracts
state that for coffee sold on a shipped weight basis, andunless otherwise specified on the contract, the franchise is
0.5%.
Independent evidence of weight. The shipping weight
shall be established at the time and place of shipment, orat the time and place of stuffing if the coffee is stuffed into
the shipment containers at an inland location. In either case,sellers shall provide independent evidence of weight. This
stipulation in both ECC and EFCACC provides buyers withsome independent evidence that a container for which the billof lading or waybill states ‘said to contain’ in fact does holda certain amount of coffee. This does not alter the shipper’s
responsibility in any way unless the parties agree thatshipping weights shall be final (together with the procedureand conditions that shall apply). GCA does not make thisstipulation. The requirement to provide independent evidenceof shipping weights applies equally to coffee sold ‘delivered
weights’.
Supervision by buyer’s representatives (independent
weighers). Buyers can demand this under both ECC andGCA provided they give due notice and pay the costs.
The seller is obliged to provide the certificate together withthe shipping documents but the buyer cannot withhold
payment if the seller does not provide it. It is possible thatthe supervising weigher failed to hand the certificate to theexporter, or omitted to attend the weighing when asked to
do so.

Weights on arrival (landed weights)
Establishment of arrival weights. ECC and EFCACC
require that weighing (and sampling) take place no later than
14 calendar days (15 for GCA) after discharge at the final
port of destination or, in case of unforeseen complications,from the date the goods become available for weighing.
Under both ECC/EFCACC and GCA shippers have the rightto appoint supervisors at their expense.
ECC and EFCACC stipulate that on arrival containers(bagged and bulk) may be on-carried to an inland destination
and weighed there provided they are on-carried not later than
14 calendar days from the date of final discharge at the portof destination, and provided weighing (and sampling) takeplace under independent supervision, at buyer’s expense,
not later than seven calendar days after arrival at the inland
destination. The point of containerization is to minimize
handling and the object of this clause is to permit receivers tobring the coffee without unnecessary handling as near to its
final destination as possible, for example a roasting plant. (Ifcoffee is weighed at a roasting plant then such weights may
also be called ‘factory weights’.) GCA provides that coffee inbags is to be weighed either within 15 days of availability at
port of destination (landed weights), or within 15 days of dateof tender at buyer’s plant (plant weights). Coffee in bulk is tobe weighed during unloading within 21 days of availability atfinal destination, or 21 days after all United States government
clearances have been received (silo weights).
But the GCA approach is quite different from that of the ECF
contracts in that it requires that the actual transaction contractstate when, where, how and by whom, coffee is to be weighed
for settlement purposes, that is, weighing responsibilities
including liability for costs must be specified at the time ofcontract. If coffee is removed from the stipulated place of
weighing or the time limits expire before the weighing takes
place, then the net shipped weight will stand.

Packing
ECC and EFCACC state that the coffee shall be packed insound uniform natural fibre bags suitable for export and in
conformity with the legal requirements for food packaging
materials and waste management within the European Union
valid at the time of conclusion of the contract. This is importantand exporters must know what types and quality of bags
are acceptable, not only in the European Union but also inother countries. Be careful not to confuse ‘port of destination’with ‘country of destination’ as the two may not always be
the same. To read the EU Packaging and Packaging Waste
Disposal Directive go to www.europa.eu (official publications,use EUR-Lex).
See also the Draft Code of Hygienic Practice for the Transportof Foodstuffs in Bulk and Semi-Packed Foodstuffs of theCodex Alimentarius Commission at www.codexalimentarius.
net and chapter 12, Quality control.

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CHAPTER 4 – CONTRACTSGCA stipulates that coffee bags shall be made of sisal,
henequen, jute, burlap or similar woven material, without
any inner lining or outer covering. Bulk coffee shall be in abulk container liner. Depending on the contract so-calledsuper sacks (jumbo bags) made of synthetic fibre may also
be used. Soluble coffee is commonly shipped in cardboard
cartons with a plastic liner. All forms of packaging must
conform to food grade packaging standards at the countryof destination.

Quality
The quality of the coffee must be strictly as per contract. If
there is a difference and the resultant claim cannot be settled
amicably then it will go to arbitration. A buyer cannot lodge
any formal claim before paying for the shipping documents.
Effective 1 January 2006, GCA contracts should stipulate
whether they cover Commercial Grade or Specialty Gradecoffee. This will determine the type of arbitration that would beheld – if nothing is specified, then the contract is automaticallyassumed to cover Commercial Grade coffee.
Claims are usually settled by granting an allowance thatthe seller must pay, together with the buyer’s costs andexpenses. But if the coffee is unsound or the quality isradically different from that specified then the buyer may seek
to have the contract discharged by invoicing back the coffee.
In awarding invoicing back the arbitrators shall establish
the price bearing in mind all the circumstances concerned.
Basically this means they may order the contract cancelled
and instruct the sellers to refund the entire cost of the coffee
plus any relevant damages.
Note that an excessive moisture level is one factor towards
declaring a coffee unsound. See also chapters 5 and 12.
Under GCA all quality issues FCA, FOB, CFR, CIF and DAF
are settled by allowance, except gross negligence and fraud.
In the latter case the arbitration will be a technical arbitrationthat might convene a quality panel to verify negligence or
fraud.

Freight
Where coffee is sold CFR/CIF the costs of bringing thegoods to the port of destination are for the account of theseller. If the rate of freight increases between the time ofsale, and the time of shipment then the increase is for thesellers account. Only increases that enter, into force after the
shipment took place shall be for the buyers account. This isindicative of the trade’s wish to control freights and shipping
through the use of FOB contracts. Exporters who have to
use national flag carriers therefore also have to accept they
are potentially liable to pay for such freight increases.
Place of embarkation. ECC does not speak of this, but
GCA states that for FOB, CFR and CIF contracts this shallbe defined as the named seaport of the country of origin;for both the GCA and ECF FCA contracts it is defined as
the place where custody of the coffee is turned over to thecarrier for transport. The place of embarkation or point ofdelivery must always be clearly noted on the bill of lading or
carrier’s receipt.
Port of destination. If this is not advised when the contract
is concluded, the buyer must declare it at the latest by thedeadline stipulated by either ECC or GCA. Otherwise a buyer
could simply refuse to declare a port of destination and sofrustrate the execution of a contract (for example, if the price
had become unfavourable due to change in the market). Notethat the ECC text states that the deadline is met when the
declaration is made at the buyer’s place of business, i.e. all thebuyer has to do is send the declaration by cable, fax, e-mail,telex or other means of written electronic communication. The
shipper cannot declare the buyer in default simply because
no declaration has been received; if a declaration is overdue,
the shipper should make inquiries rather than just let events
unfold. GCA does not say this but clearly the same principleof due diligence applies. However, whereas ECC sets a clear
deadline for lodging a technical claim, GCA sets a limit of
one year from the date the issue arises. Note also that ECC
Article 27 states that communication by fax, e-mail or othermeans of written electronic communication is at the parties’
own risk (basically because proof of dispatch and receipt is
not automatic).
Sometimes by the time the declaration (of destination) falls
due the coffee has not yet been sold on and the buyer may
not be in any position to declare a final destination. In thepast the buyer would then declare a range of ports (e.g.
Rotterdam, option Bremen/Hamburg), called options or
optional ports. Then the goods would be stowed on board
in such a way as to make discharge possible at any of thenamed ports, with the cost or option fees for buyer’s account.
But on modern container vessels such stowage is difficult if
not impossible. Exporters should satisfy themselves therefore
that the shipping line will in fact accept such cargo before
they agree to ship to optional ports. Transshipment is amuch more frequently used option but current transshipment
practices often make it difficult to confirm the final vessel.
Shipping advices against FOB contracts, and indeed billsof lading, can only mention the vessel that first loads the
goods, leaving tracking of the goods to the buyer. Note alsothat bills of lading may stipulate the place of delivery as CFS(a container freight station) at or associated with the port ofdestination, regardless of the port of discharge.
NB: To note that GCA also states that, in the case of acontract for forward shipment, if the buyer fails to declarethe destination then the seller may ship to New York. ECC
does not include any such provision.
What this means in fact is that where a buyer fails to declarethe destination in time, this GCA clause offers the seller the
choice whether to make shipment or not, always provided
that such shipment is made within the contracted period.
The underlying philosophy is to give a shipper an alternativeif the buyer totally refuses to cooperate. The shipper willthen ship to New York and, if the buyer refuses to honour

CHAPTER 4 – CONTRACTS

the documents, the goods are sold in the open New York
market. The shipper then sends an invoice to the original
buyer for any loss. If the buyer refuses to settle the shipper
then goes to arbitration and wins a judgment that will be
relatively easy to enforce in the Unites States, based on New
York law. When a buyer refuses to give a destination, contract
performance becomes secondary to legal action. New Yorkis a coffee market with major liquidity and the assumption isthat just about any coffee can be sold there. However, withthe exception of Japan and Canada, little coffee is traded on
the GCA contract to non-American destinations. The entire
procedure is a last resort, but it gives possible finality to anargument that otherwise could go on forever.

Shipment
Shipment must be made at the vessel’s last scheduled callat the port of shipment before commencing the final voyage.
This is reminiscent of when traditional break bulk vessels
used to discharge and load cargo at a range of ports in thesame region and in so doing might call at the same port on
the way in and on the way out. Modern container vessels
rarely if ever do so but the stipulation is nevertheless a valid
one and applies to both ECC and GCA.
Shipment must be made by conference line or otheracceptable vessel (ECF), or metal-hulled, self-propelled
vessels which are not over 20 years of age and not less than
1,000 net registered tons, classed A1 American Record orequivalent, operating in their regular trade (GCA). This preventsshippers from using any old tramp vessel that happens to
be available. (Tramp vessels make irregular port calls todischarge and look for new cargo, i.e. the exact opposite ofliner vessels.) Note also that at some future stage European
Union authorities may introduce legislation covering the type,class, condition and age of ships that may enter European
Union ports. Information on vessel registration and vessels
themselves is available at www.lloydslistintelligence.com, by
subscription only.
Shippers will pass on to the shipping line all relevant
instructions received from buyers. These apply equally toshipment in bags in containers, and to shipments in bulk.
This is important – in case of subsequent problems shippers
may be asked to furnish proof they did so.

Shipment in bags
Shipment in containers, suitable for the transport of coffee,
shall be permitted under LCL/FCL conditions, whereby theshipping company is responsible for the number of bags andthe condition and suitability of the containers.
However, shipping lines increasingly discourage LCL/FCL(or LCL/LCL) and in future shippers may not always beable to satisfy buyer’s wishes in this regard. In this casetheir only option will be to effect weighing and stuffing
under independent supervision at their expense as all othershipments in containers shall require agreement of theparties. Again, GCA leaves the matter of the shipment basis
to the parties to the contract.
LCL, or less than container load: the shipping line accepts
responsibility for the number of bags. FCL, or full containerload: the line accepts responsibility only for the container, notfor the contents, by stating for example, ‘STC (said to contain)
300 bags of coffee’ on the bill of lading. See also chapter 5,
Logistics and insurance.

Shipment in bulk
Unless otherwise agreed, shipment shall be made under
FCL/FCL conditions. This reflects the move from break bulk
to almost universal containerization. Unless otherwise stated,
FCL/FCL is now the norm. This means that bulk is increasingly,
if not always, loaded and weighed under independent
supervision, but shippers still have to pass on to the shipping
line all relevant instructions received from buyers, and in caseof damage may be asked to provide proof of having done
so. GCA leaves the matter entirely to the parties, who muststipulate the agreed shipping basis in the contract.

Delay in shipment
Sellers shall not be held responsible if they are able to provetheir case. The most important point this article makes isthat the buyer must be kept informed at all times without
undue delay. This is absolutely essential. Delays in shipment
usually affect buyers adversely and they must be enabled totake measures to protect themselves. Failing to respect thisclause not only is entirely unprofessional but can also resultin unforeseen consequences, possibly even cancellation of
the contract.

On-carriage of containers
Buyers may discharge containers at inland destinations. The
point of containerization is to minimize handling and the only
object of this clause is to permit receivers to bring the coffee
without unnecessary handling as near to its final destinationas possible, for example a roasting plant. In case of weightclaims buyers have to prove weighing took place under
independent supervision. GCA permits the same. In addition
it defines the port of entry as all dock and warehouse facilities
within a 50-mile radius of ships berth that are used for thedischarge of ships cargo (or all freight facilities within a 50mile radius of a border crossing).

Advice of shipment
Both ECC and GCA require that advice of shipment mustbe transmitted as soon as known. In practice only grossnegligence could explain why one would not advise buyers
as soon as possible, which only leaves the question ofwhether or not the advice actually reaches them promptly.
But ECC and GCA approach this question very differently.
ECC considers it may not be within the seller’s control andso, in theory, it suffices if buyers receive the notice before thevessel arrives at the port of destination. Only someone with

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no interest in good business relationships would consider
this normal practice, however.
EFCACC on the other hand stipulates that advice of delivery
must be transmitted within two calendar days of the date ofdelivery.
There is an important provision in the ECC articles dealing withadvice of shipment and/or delivery. If a shipping or delivery
advice is not received by noon on the fourteenth calendar
day after the expiry of the contractual shipping or delivery
period, and if there has been no notification of a delay andno force majeure has been pleaded, then damages may beclaimed or the buyer may cancel the contract altogether. This
could leave a forgetful exporter with an unsold and most likely
uninsured shipment. See Article 13(d) of the ECC and Article
12(d) of the EFCACC for full details.
GCA on the other hand states that for FCA, FOB, CFR, CIF
and EDK contracts, written advice with all details must betransmitted not just as soon as known, but not later thanon the day of arrival of the vessel at destination and/or fivebusiness days from bill of lading date, whichever is later. The
advice may be given verbally with e-mail or fax confirmation
to be sent the same day. This is included because of theclose proximity of many Latin American producing countries
to the United States, but it applies to all contracts.

Shipping documents
Sellers must provide shipping documents in good time(including a full set of ‘clean on board’ bills of lading, i.e.
bills stating that the goods were received on board ship
in apparent good order), enabling the buyer to clear the
goods upon arrival. Failure to provide documents in time
will incur demurrage and other costs, and could even leadto cancellation of the contract under both ECC and GCA.
Delivery documents under EFCACC are to be made available
promptly but latest within 14 days of the carrier’s receipt,
otherwise penalties or in extreme cases cancellation may
apply.
ECC Article 18 and EFCACC Article 17 stipulate thedocuments buyers are entitled to receive and those they areentitled to request.

Insurance
The vast majority of the trade in coffee today is on FOB
terms. In this regard ECC Article 15 contains three extremely
important stipulations.
In the case of CFR and FOB contracts the buyers have tocover the insurance ahead of the contractual shipment
period. Without this stipulation the coffee might be loaded
without any insurance cover in place, leaving the exporter at
risk. In case of doubt an exporter should insist on proof of
insurance.
The current (late 2011) version of the ECC stipulates that theinsurance shall commence from the time the coffee leaves

the ultimate warehouse or other place of storage at the portof shipment. This is because it can be extremely difficult todetermine at what point the marine insurer became liable forany damage or loss incurred once the goods have left theultimate place of storage. If after leaving the ultimate placeof storage but before crossing the ship’s rail the goods weredestroyed by fire, or fell into the water, then the seller might
receive no bill of lading at all and would be unable to submit
shipping documents for the buyer to pay. This is why ECC
also states that the sellers have the right to the benefit of thepolicy until the documents are paid for.
In the above example the buyer would have to claim the loss
or damage under their insurance cover on the seller’s behalf.
But even if a vessel sinks immediately after loading the seller
will receive a bill of lading and the buyer will have to pay for
it. Until payment is made, the benefit of the insurance coverremains contractually vested in the sellers.
GCA on the other hand relies instead on the transfer of risk
stipulation that applies for each contract: shippers and buyers
must cover insurance accordingly.
EFCACC stipulates that insurance shall be covered prior tothe contractual delivery period, that sellers shall have theright to the policy until the documents are paid for, and that
insurance shall extend from the time the coffee is delivered tothe carrier for an amount 5% above the contract price. (Prior
to delivery insurance is of course seller’s responsibility). See
also chapter 5.

Export licences
Under both ECF and GCA contracts the exporter is not only
responsible for obtaining export licences but also for theconsequences if such a licence is later cancelled or revoked.
Similarly, buyers are responsible for obtaining any importlicences required.

Duties, fees and taxes
Both ECF and GCA contracts stipulate that all and any suchcosts in the country of export are always for the account of theexporter, irrespective of whether they already existed at thetime of concluding the contract or were imposed afterwards.
At the import end such costs, if any, are for account of thebuyer unless the seller is in breach by not supplying required
documentation (see below).

Certification of preferential entry
Certificates entitling the coffee to completely or partially dutyfree entry into the stated country of destination (which may bedifferent from that of the port of destination) must accompany
the shipping documents. If they are not available the buyers
are entitled to deduct the duty difference from the payment
to the seller. They will only be obliged to refund this (less any
expenses) if the subsequent submission of the certificate isaccepted by the customs authorities in the country of import.

CHAPTER 4 – CONTRACTS(The United States and Canada do not levy import duties ortaxes on green coffee.)

Payment
The coffee remains the property of the sellers until it has been
paid for in full. No third party can lay claim to any coffee thathas not been paid for. This is important when documents
are sent in trust. If a buyer is declared insolvent after the
documents are received but before they have been paid,
then the judicial authorities (or liquidators) have no claim to
the goods, although in some countries national insolvency
law takes precedence over individual contract stipulations.
How far sellers can enforce this clause in European Unionand other importing countries therefore depends on local law.
In the United States there are no doubts in this respect. When
invoked, bankruptcy law (11 USC § 365 (e)(1) overrides all
GCA terms and conditions. Most coffee is sold on payment
terms in the United States and Canada and the risks are
great. Selling ‘net 30 days from delivery’ means the seller isgranting the buyer possession 30 days before payment. If
the buyer goes bankrupt, the seller may lose the value of thecoffee.
There can even be problems with payments that are madewithin the 90 days prior to a bankruptcy. This is called thepreference period and if the liquidator or trustee can showthat the payments were not normal (i.e. extraordinarily late or
extraordinarily early), then a supplier might be forced to return
the payments to the bankruptcy pool.
ECF and GCA contracts both state that letters of credit
must conform exactly to the contract, must be available foruse from day one of the agreed shipping period, and mustremain valid for negotiation for 21 calendar days after the lastdate shipment can be made. This allows time for the seller
to obtain all the required documents and possible consularvisas.

Force majeurePartial performance, non-performance or delayed
performance of a contract can be justified only as a resultof unforeseeable and insurmountable occurrences, but only
if these arise after the conclusion of the contract and before
the expiry of the performance period allowed by the contract.
And furthermore only if the seller informs the buyer as soon
as the impediment arises, provides evidence and keeps thebuyer fully informed of developments. In other words, makesure your buyer knows what you know yourself. Under ECF
contracts a successful plea of force majeure can extend theperformance time limit by up to a maximum of 45 calendar
days, after which the contract lapses. Disputes have to besettled by arbitration.
GCA follows the same principle but does not specify any
extension. It also states that in no case shall the seller be
excused by any such causes intervening before arrival of theaffected portion of the coffee at the point of embarkation of
the original shipment. Thus, delays within producing countries

do not constitute force majeure. Disputes dealing with force
majeure will by nature be technical and as such are subject toa one-year filing time limit (see also chapter 7).

Submission of claims – ECF contracts
Quality claims. Not later than 21 calendar days from thefinal date of discharge at the port of destination.
All other claims (technical claims). Not later than 45
calendar days from: The final date of discharge at the port of destination,
provided all the documents are available to the buyer (i.e.
the coffee has been shipped); or The last day of the contractual shipping period if thecoffee has not been shipped.
These limits may be extended if the arbitral body at theplace of arbitration (mentioned in the contract) considers
that one or other of the parties will suffer undue hardship.

Submission of claims – GCA contracts
Under GCA rules time limits are based instead on the filingof a demand for arbitration, not on when the defending party
is notified.
Quality claims. A demand for arbitration must be filed with
the GCA within 15 calendar days from date of discharge
or after all government clearances have been received,
whichever is later.
Other claims (technical claims): The only time limit is thata demand for arbitration must be filed with the GCA not later
than one year from the date the dispute first arose. Usually
one would expect to see a number of exchanges between theparties to the contract before this but there is no contractual
obligation on either of the parties to do anything but file ademand for arbitration within the year. (Depending on thetype of contract dispute, the United States legal systemallows three-to-seven years for the filing of judgement.
Quality claims are subject to a 15-day limit because quality
deteriorates over time.)

Default
Default occurs if one of the parties does not execute its partof the contract. After declaring the offending party to be in
default the injured party can claim discharge of the contract
with or without damages (but excluding any consequential,
i.e. indirect, damages). If the offender fails to pay these or
disputes them then the matter shall be decided by arbitration.
The default clause is stipulated separately in the ECF
contracts, mainly because the notion of a claim assumes
an incorrectly executed contract. Default on the other handdeals with the cost and damage to the injured party of thetotal and possibly wilful non-execution of a contract.

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As in the case of invoicing goods back for a radical differencein quality, there are no fixed rules for determining default
damages. In the European Union the process depends on
the arbitral body under whose jurisdiction the arbitration isheld. The GCA contracts provide for arbitration in different
American locations provided a location other than New Yorkhas been specified in the contract. If no location is specified
then arbitration will automatically be held in New York with thearbitrators setting the damages if any are awarded.

Arbitration
Any dispute that cannot be resolved amicably shall be
resolved through arbitration at the place stated in the contract.
Unless a different American location has been specified in thecontract, the GCA contracts automatically place arbitration in
New York, to be held in accordance with the law of New YorkState. However, the ECF is the umbrella body for a numberof national coffee associations in sovereign countries, quite
a few of which have their own arbitral bodies, rules and legal
systems (see chapter 7, Arbitration).
In this context the most important are the United Kingdom(London), Germany (Hamburg) and France (Le Havre),followed by Italy (Trieste), Belgium (Antwerp) and theNetherlands (Amsterdam). All ECF contracts provide that
disputes shall be resolved by arbitration but the actualcommercial contract must state where this shall takeplace. If not then arbitration will be delayed while the ECF
Contracts Committee determines where it will be held and thedefending party may find itself having to deal with arbitration
proceedings in a location it is not familiar with.

Communications
Article 27 of ECC (26 in EFCACC) lists the Notices that are
required to be given under different Articles – and how they
can be given (fax, e-mail etc.) and should be recorded. GCA
allows fax and e-mail or equivalent electronic message.

Exclusions
The following laws and conventions do not apply to ECF
standard forms of contract:
 The Uniform Law on Sales and the Uniform Law on
Formation to which effect is given by the Uniform Laws
on International Sales Act 1967;
 The United Nations Convention on Contracts for theInternational Sale of Goods of 1980; and The United Nations Convention on Prescription(Limitation) in the International Sale of Goods Act 1974
and the amending protocol of 1980.
GCA’s Legal Framework and Contract Rulings simply statethat ‘The UN Convention on Contracts for the International
Sale of Goods shall not apply to this contract’.

UCP 600 IN SALES CONTRACTSThe Uniform Customs and Practice for Documentary Credits
or UCP 600 is a set of internationally recognized rules
and standards published by the International Chamber ofCommerce (ICC – www.iccwbo.org).
Where the rules are incorporated the seller has the advantagethat he will know in advance the criteria against which thebanks will examine the shipping documents in deciding
whether or not to pay under a letter of credit. For the buyer
the major advantage of incorporation is that he will know inadvance the criteria against which the price for the goods will
be paid against tender of documents. However, for the buyer
to be under an obligation to open a letter of credit governedby the UCP 600, the sale contract needs to include an express
condition imposing such an obligation on the buyer. Only withsuch a condition in place can the seller object if the buyer
were to open a letter of credit that is not governed by the UCP,
e.g. ‘Payment by irrevocable letter of credit, incorporating
UCP 600’.
However, buyers may still stipulate in the credit that certain
aspects of the UCP rules are excluded, provided of course
this was laid down in the sales contract.

IRREVOCABLE AND CONFIRMED CREDITSThe UCP 600 have moved firmly away from revocablecredits and Article 2 defines a credit as ‘any arrangement,
however named or described, that is irrevocable and thereby
constitutes a definite undertaking of the issuing bank tohonour a complying presentation’. Moreover, Article 3,
headed ‘Interpretations’, states that a credit is irrevocableeven if there is no indication to that effect. Finally, Article 10
makes it clear that a credit cannot be cancelled without theagreement of the beneficiary.
However, it is not impossible for revocable credits to beopened since Article 1 of the UCP 600 allows any part of
the rules to be modified or excluded. It is consequently still
possible for a buyer to establish a revocable credit. It remains
prudent, therefore, for sellers to continue to stipulate intheir sale contracts that the buyer will open an irrevocable,
confirmed letter of credit. Sellers should, of course, also
make sure when the credit arrives that it incorporates UCP
600 or expressly describes itself as irrevocable.
A ‘confirmed credit’ brings the advantages of ‘a definite
undertaking of the confirming bank, in addition to that of
the issuing bank’. However, UCP 600 does not assume acredit to be confirmed where the text does not say otherwise.
Consequently, as before, if a seller wants to impose upon hisbuyer an obligation of a confirmed letter of credit, he must
impose such an obligation in the sale contract (e.g. ‘Payment
by irrevocable letter of credit to be confirmed by first class
New York bank acceptable to the Sellers…’) and – when theletter of credit is received – to make sure that it has been
confirmed by an acceptable confirming bank.

CHAPTER 4 – CONTRACTS

NON-DOCUMENTARY REQUIREMENTS

FORCE MAJEURE

It is a common occurrence for documentary credits to contain
instructions that are not expressly attached to a documentthat needs to be tendered. However, if for example the credit
stipulates shipment on a vessel of a particular class, butdoes not require the tender of a classification certificate, thenunder UCP 600 the bank is under no obligation to inquire as
to the age of the vessel named in the bill of lading. Thismeans that if a buyer is particularly anxious to ensure thatpayment is only made if the bank is satisfied, say, that thevessel carries a particular classification, the buyer should:

This Article (36) is largely unchanged although express
reference is now made to terrorism. The stipulation that
under UCP the expiry date of a credit is not extended as aresult of force majeure remains unchanged, i.e. a credit will
simply expire even though force majeure may prevent theseller from utilising it.

 Stipulate in the sale contract for the tender of a copy ofthe classification certificate under the letter of credit; andBut something sellers may not always be aware of is that
documents under letters of credit may also be presented
for payment at the issuing bank (as well as any nominatedbank) – see Article 6a. This can be important if the nominatedbank is affected by force majeure and, for example, may beclosed.

 Stipulate for the tender of the same document in the letterof credit.
In this way, the buyer ensures, first, that the seller cannot
complain that the letter of credit requires more documents
than does the sale contract and, second, that the seller
will only be paid on tender of a conforming classification
certificate. The seller needs to consider, when agreeing theterms of the contract, whether he or she will be in a position
to satisfy the obligation the buyer is seeking to impose uponhim. For example, how easy will it be to get hold of a copy ofsuch a classification certificate?

TIME ALLOWED TO BANKS TO EXAMINE
THE DOCUMENTS
Time to examine documents is vitally important. UCP 500
gave each bank involved in the credit a ‘reasonable time, notto exceed seven banking days following the day of receiptof the documents’ to examine the documents. Acceptanceor rejection of the documents was therefore required within
this period.
Under UCP 600 this has been changed to five banking days
following the day of presentation. However, if a bank decides
on the second day that the documents are in order, must
payment then be made immediately or can the bank wait till
the full five days are up? Whereas Article 14(b) gives eachbank five banking days to decide whether to pay, Article 15
says that a bank must honour the credit (pay) or give noticeof refusal immediately it comes to that decision. See also
Articles 14(b) and 16(d) – and note that a ‘banking day’ isdefined in Article 2. It is not simply a day the bank is open,
but ‘regularly open at the place at which an act subject tothese rules is to be performed’.
To avoid becoming ensnared in disputes of this kind, sellers
could stipulate in the sales contract that a condition be
included in the letter of credit stating, for example:‘Payment by confirmed irrevocable letter of credit,
incorporating UCP 600, providing for payment within threebanking days of presentation of the following documents …’

INCOTERMS®
Incoterms® are standard international trade definitions usedevery day in countless numbers of contracts for the sale ofgood – both domestic and international. ICC model contracts
facilitate trade especially for smaller companies that may lackaccess to adequate legal advice on issues relating to thewriting of contracts. However, they do not apply to the standalone standard forms of contract for green coffee shipmentsof the ECF and the GCA of New York.
Nevertheless, there are exporters who prefer to apply atleast some of the definitions used by Incoterms® to theirgreen coffee shipments (for which they of course require thebuyer’s agreement) whereas the ECF/GCA standard formsof contracts do not cater for the export of manufactured
goods such as roasted and packaged coffee. It is therefore
appropriate to provide at least an introduction to Incoterms®.
The Paris-based International Chamber of Commerce wasestablished in 1919. Since then, it has expanded to becomea world business organization with thousands of member
companies and associations in around 120 countries
representing every major industrial and service sector.
Today’s ICC is also the main business partner to the United
Nations and its affiliated agencies in matters of international
trade.
ICC publishes various sets of internationally recognizedrules and standards since 1936. The most well known to thecoffee trade are probably Incoterms® themselves, and UCP
600 or the Uniform Customs and Practice for Documentary
Credits.
The Incoterms® rules have been developed and maintainedby experts and practitioners brought together by ICC andhave become the standard in international business rules
setting. They help traders avoid costly misunderstandings
by clarifying the tasks, costs and risks involved in thedelivery of goods from sellers to buyers. Incoterms® rules
are recognized by the United Nations Commission on
International Trade Law (UNCITRAL) as the global standard

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for the interpretation of the most common terms in foreign
trade. UNCITRAL (www.uncitral.org) is the Commission that
formulates and regulates international trade in cooperation
with the World Trade Organization (WTO).
The terms are updated from time to time – the latest version(Incoterms® 2010) came into effect on 1 January 2011.
However, parties to a contract could agree to continue using
an earlier version. In this case they should specify which one
the contract is based on, for example Incoterms® 2000. The
full set of Incoterms® 2010 rules can be obtained from the
ICC website: www.iccwbo.org/incoterms. Guidance Notes
explain the fundamentals of each Incoterms® rule, such as
when it should be used, when risk passes, and how costs
are allocated between seller and buyer. The GuidanceNotes are not part of the actual Incoterms® 2010 rules, but
are intended to help the user accurately and efficiently steer
towards the appropriate Incoterms® rule for a particulartransaction. The ICC also offers a helpful wall chart that
illustrates the obligations of each party under different
delivery conditions.

TWO DISTINCT CLASSES OF RULES
1. Rules for any mode or modes of transport:
EXW: Ex Works
FCA: Free Carrier
CPT: Carriage Paid To
CIP: Carriage and Insurance Paid to
DAT: Delivered At Terminal
DAP: Delivered At Place
DDP: Delivered Duty Paid
This class includes the seven Incoterms® 2010 rules thatcan be used irrespective of the mode of transport selected
and irrespective of whether one or more than one mode oftransport is employed. They can be used even when there
is no maritime transport at all. It is important to remember,
however, that these rules can be used in cases where a ship
is used for part of the carriage.
2. Rules for sea and inland waterway transport:
FAS: Free Alongside Ship
FOB: Free On Board
CFR: Cost and Freight
CIF: Cost, Insurance and Freight
In this class of Incoterms® 2010 rules, the point of delivery
and the place to which the goods are carried to the buyer areboth ports, hence the label ‘sea and inland waterway rules’.
Under the last three Incoterms® rules, all mention of the ship’s
rail as the point of delivery has been omitted in preference
for the goods being delivered when they are ‘on board’ thevessel. This more closely reflects modern commercial reality
and avoids the rather dated image of the risk swinging to andfro across an imaginary perpendicular line.

TERMINAL HANDLING CHARGES
Under Incoterms® rules CPT, CIP, CFR, CIF, DAT, DAP, and
DDP, the seller must make arrangements for the carriage ofthe goods to the agreed destination. While the freight is paidby the seller, it is actually paid for by the buyer as freightcosts are normally included by the seller in the total selling
price. The carriage costs will sometimes include the costsof handling and moving the goods within port or container
terminal facilities and the carrier or terminal operator may wellcharge these costs to the buyer who receives the goods. In
these circumstances, the buyer will want to avoid paying forthe same service twice: once to the seller as part of the total
selling price and once independently to the carrier or theterminal operator. The Incoterms® 2010 rules seek to avoid
this happening by clearly allocating such costs in articles
A6/B6 of the relevant Incoterms® rules.

RULES FOR DOMESTIC AND
INTERNATIONAL TRADE
Incoterms® rules have traditionally been used in international
sale contracts where goods pass across international
borders. In various areas of the world, however, trade blocs,
like the European Union, have made border formalities
between different countries less significant. There is also
greater willingness in the United States to use Incoterms®
rules in domestic trade. Consequently, the subtitle of the
Incoterms® 2010 rules formally recognizes that they areavailable for application to both international and domestic
sale contracts. As a result, the Incoterms® 2010 rules clearlystate in a number of places that the obligation to comply
with export/import formalities exists only where applicable.

CHAPTER 5

LOGISTICS AND INSURANCEBASIC SHIPPING TERMS..................................................................................................................................... 84
SHIPPING IN CONTAINERS................................................................................................................................. 91
CONTAINERS AT THE RECEIVING END ............................................................................................................ 97
INSURANCE......................................................................................................................................................... 102
INSURANCE: THE COVER ................................................................................................................................. 105
WAR RISK INSURANCE IN SHIPPING .............................................................................................................. 107

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CHAPTER 5 – LOGISTICS AND INSURANCELOGISTICS AND INSURANCEBASIC SHIPPING TERMS
Break bulk: means coffee is stowed in the ship’s hold inbags – the cargo is loose. Sometimes the bags are left in
the loading slings to speed up discharge at destination, atthe expense though of less freight capacity per cubic metre.
The disadvantages of break bulk shipping are numerous:
the goods can be exposed to the weather during loading
and discharge; the bags can be torn; there is a risk ofcontamination from other cargo during the voyage; and bags
may be lost or mixed with other shipments. Marine insurance
is usually higher for break bulk cargo.
Containerized cargo: (both in bags and in bulk) remains
in the container throughout the journey, often to the final
inland destination. Most, if not nearly all, coffee now travels
in containers and break bulk services are no longer on
regular offer. As a result, shipping small (less than container
load) parcels has become a problem (discussed later in thischapter).
Container transit in general is faster, more efficient and moresecure than break bulk. Modern container vessels spend
only short periods in port as all cargo is assembled before
arrival, and container handling can proceed irrespective ofweather conditions. Strict schedules can be maintained, andturnaround times are shorter. Ro-ro (roll-on roll-off) vessels
carry containers on trailers that are simply driven on and off
the ships. This does away with the need for gantry cranes.
Ro-ro vessels are mostly used between smaller ports, forexample in Europe, although some bagged coffee is also
exported from West Africa on so-called flatbed trailers.
Nowadays, most if not all, coffee is shipped internationally incontainers with break bulk only occurring on some coastal
stretches, for example from ports that lack the required lifting
equipment or that use lighters to transfer cargo to coasters
waiting offshore. But such cargo (coffee in bags) would thenbe containerized at the port where transfer to the deep ocean
going vessel takes place.
NB: For an extensive glossary of shipping and shippingrelated terminology visit www.safmarine.com and look for‘Glossary of Terms’ under Support – Useful information. Other
shipping lines offer similar information.

SHIPPING SERVICES
Liner services: are regular, scheduled shipping services
between fixed groups of ports that operate regardless ofcargo availability. Tramping vessels, however, make irregular,
opportunistic calls at ports when cargo is available. In theory

importers can also charter vessels for larger tonnages, but
chartering is a complex business and conditions for eachcharter must be negotiated individually. However, major
shipping lines themselves often include chartered vessels
in their scheduled liner services, using standard charter
contracts.
Unless specifically stated to the contrary, all coffee contracts
automatically stipulate that shipment will be by liner vessel,
operated under a regular, scheduled service.
Conferences: are groups of ship owners who jointly offer
regular sailings by guaranteeing the number of vessels to beavailable during the year between different ports and theirschedules. Most scheduled ocean liners used to operate
under liner Conferences (known simply as Conferences)through which they scheduled and guaranteed sailings
to and from an agreed range of ports, thereby eliminating
duplication among their members. The system was thought
to benefit both sellers and buyers because freight rates werefairly stable, schedules were published well in advance, andregular and dependable services were provided. However,in October 2008 the European Union discontinued its block
exemption from anti-trust rules for shipping line Conferences.
This means that shipping lines may no longer deal with freightrate negotiations en block and instead must now negotiate
freight rates and schedules separately with their individual
shippers and/or receivers. Similar moves appear to be afootin the United States and elsewhere.
Vessel sharing agreement (VSA): or alliances are avariation on the traditional Conference system. In VSA, several
carriers may offer a joint service by agreeing a frequency andcapacity from and to certain ports. The lines share the vessels
each contributes but each carrier markets and sells freightspace on an individual basis. Individual freight contracts canstill be negotiated with each line and depending on the space
available receivers can also nominate a choice of carriers forthe goods. (For most shipments, the receiver rather than the
shipper is the freight payer and negotiator.) The advantage
for the shipping lines is better cost-control and increased
efficiency; for receivers there is more flexibility in that they
can negotiate rates and in a sense ‘play the market’. But the
number of sailings is not necessarily guaranteed and may bevaried, for example to stabilize freight rates.

SHIPPING HUBS
Shipping hubs and container feeder vessels are becoming
increasingly important as the shipping industry evolves tomeet the demands of globalization and the proportion of
bigger vessels in world fleets is growing. Already somevessels can carry as many as 11,000 to 15,000 TEU (20-footCHAPTER 5 – LOGISTICS AND INSURANCE

equivalent units) and some major shipping lines announced
in 2011 having placed orders for a new class of container
vessel that will carry 18,000 TEU. These ships will be longer
and wider than anything ever built before but it is statedthat their revolutionary design and propulsion systems
would considerably reduce costs and cut CO2 emissions
per container carried. This latter aspect fits well with theincreasing interest in ‘green supply chain management’ andforecasts are that still larger vessels may become operationalin the foreseeable future. However, such mega-vessels willcall only at ports with the required deep water and offeringboth the cargo and the mechanized capability to handle itquickly and efficiently. As a result, smaller ports increasingly
feed cargo to the nearest regional hub, in rather the same
way as airlines have been doing for years. In some origins
this practice is already well established, but elsewhere it iscreating some problems for the industry, also because thesupply of smaller feeder vessels is not necessarily keeping
up with the growing number of very large container ships(VLCS).
It is not uncommon for receivers of coffee to have proper
advice of shipment, within contract terms, but still not know
the name of the vessel that will deliver at the final port ofdischarge. This is because the name of the transshipment
or mother vessel is not always known at the time of loading.
Internet-based track and trace services offer solutions
provided the shipping advice includes the container numbers(which shippers are obliged to provide in the shipment
advice). Larger receivers working on the just-in-time supply
system require carriers to inform them direct by e-mail,within a given time limit, of all transshipment arrangements,
including the name of the mainline vessel and its estimatedtime of arrival (ETA) at destination. Not immediately obvious
perhaps, but other issues can arise when authorities in atransshipment port impose certain conditions on cargo thatis to be transshipped there.
For example, in late 2006 Panama directed that any ventson containers carrying green coffee for transshipment inPanamanian ports (Balboa and Manzanillo) must be secured
with insect-proof netting and must be accompanied by aphytosanitary certificate. A green placard with the words
GREEN COFFEE in capital letters also has to be affixed to
all four container walls. This is to safeguard against Broca(borer) infestation being transmitted from other coffee
producing countries. Non-compliance means a container
will not be allowed to be discharged for onward shipment,a potential cause of considerable logistical and financial
problems.

by the shipping line and cost included in the freight rate) or
FCL/FCL. The cost of loading and discharging containers
varies between container terminals and between shippinglines, sometimes considerably, and can be an important cost
item.
Ocean freight includes variable elements beyond the controlof shipping companies. The most important are the cost offuel and exchange rate fluctuations. If a European shipping
line agrees a freight rate expressed in United States dollars,
movement in the rate of exchange of the dollar against
the euro will be reflected in its income. To avoid having to
speculate on potential fluctuations in fuel prices or currencies,
freight contracts instead allow for price adjustments whenevernotable changes occur.
Surcharges: due to adjustment of fuel costs are calledbunker surcharge (BS) or bunker adjustment factor (BAF).
They are usually applied as a sum per container. A surcharge
due to currency fluctuations is called currency adjustment
factor (CAF), expressed as a percentage of the freight sum.
BS or BAF is applied to the basic rate of freight and CAF to
the resulting sum. Contracts may also provide for surcharges
when other costs change, such as port usage charges or
tolls on seaways and canals. Shipping lines may also levy
special increases on freight from or to ports where congestion
causes excessive delays to vessels. ‘All in’ rates of freight arealso available, particularly to large shippers and receivers.
These remain fixed for specific periods during which no BAF
or CAF surcharges can be applied.
War risk: is another potential cause for surcharging freights
as ship owners pass on higher insurance premiums forvessels operating on difficult or dangerous trade routes.
Such unforeseen costs are a result of force majeure and may
be passed on to shippers or receivers, usually at a flat rate
per container. More about insurance later in this chapter.
Other surcharges may be levied as well, depending on
the carrier and the voyage. These may include cargo
documentation/customs fees, piracy surcharge, stacking
charges, transshipment fee etc.
Freight charges are of great importance to producing
countries, because for the roaster the real cost of coffee is theprice ‘landed roasting plant’. If coffees bought from country A
and from country B are used for the same purpose, the twoqualities are substitutional and should therefore be priced thesame.

OCEAN FREIGHT AND SURCHARGES

If for example the freight from country A is notably higher
than freight from B, then A’s asking price has to be lower tomatch the landed cost of B. And if freight rates from country
B were to fall then the FOB price or differential for that coffee
will eventually rise accordingly if freight rates elsewhere do
not follow suit.

Ocean freight: is mostly quoted as a lump sum per container,
regardless of the payload. Coffee in bulk containers is usuallyshipped under FCL/FCL conditions (loading and discharge
costs are not included in the freight rate), whereas bagged
coffee in containers is shipped LCL/FCL (loading supervised

Freight rates fluctuate all the time and are also negotiable.
It is very likely that different companies will apply different
rates during the same time period, making it pointless to list
actual rates in this guide. It is much more important to havea good grasp of the general principles governing freights.

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Freight rates are often governed by factors more numerous
and complex than, for example, the distances involved.
Currently, the dominant practice is for shippers and receivers
to negotiate individual freight agreements with shipping lines,
sometimes on a worldwide basis. As a result, actual freightrates for many receivers are not general knowledge withmany bills of lading simply stating ‘freight as per agreement’or ‘freight payable at destination’.
It remains advisable, however, for industry bodies, bothin exporting as well as importing countries, to meet on aregular basis with individual shipping lines that are importantin the transport of coffee to review issues of mutual interest.
These include shifts in coffee production and demand, port
developments in origin and at destination, technical andphysical issues (such as hygiene and food safety), andother topics relating to coffee logistics and levels of service.
Freight portals on the Internet: can match available cargowith available space, and vice versa. Trucking and freightrates can be sought and offered so large shippers andreceivers can relatively easily ask transporters and shippinglines to tender for certain land and sea cargoes. These arefast moving developments that enable large users of sea
and land transportation to strike competitive deals.
Increasing security concerns place more and moreemphasis on the creation of an audit trail by the tracing
and tracking of all containerized cargo, including coffee. As
a result, the importance and range of functions of freightportals is growing, also as part of the general move towards
seamless electronic documentation and information sharing
in transport and the bulk commodity trade in general. For an
example go to www.inttra.com or to any major shipping line
website.

TERMINAL HANDLING CHARGES
Terminal handling charges (THC) and post-terminal charges
are important components of the cost of transporting
containerized coffee. (THC cover the cost of the loading anddischarge of containers, not charges for inland transportationetc.) A freight quotation by itself may be attractive, but thecost of bringing a container on board or getting it to theroasting plant after discharge may well be higher than thenorm and so offset any perceived advantage. Receivers
keep a close watch on terminal charges; these charges are
an important part of their evaluation of the competitivenessof individual carriers.
Remember that unless stated otherwise in the contract,
under an FOB contract the shipper is liable for THC at
origin and the receiver is liable at destination. If a receivernegotiates a lower rate of freight but at the same time theterminal handling costs at origin increase, the outcome isthat freight costs are being moved around the supply chain– in this case to the detriment of the exporter. (Under an FCA
contract the receiver is liable for both sets of THC so this is
not an issue.)BILLS OF LADING AND WAYBILLS
A bill of lading is firstly a receipt: the carrier acknowledges
that the goods have been received for carriage. But it is also
evidence of the contract of carriage and a promise to deliverthat cargo. The contract commences at the time the freightspace is booked. The subsequent issue of the bill of lading
confirms this and provides evidence of the contract, eventhough it is signed by only one party: the carrier or its agents.
A bill of lading is also a transferable document of title. Goods
can be delivered by handing over a bill of lading provided theshipment was consigned ‘to order’ and all the subsequent
endorsements are in order. See also chapter 4, Contracts.
If a bill of lading is lost, or does not arrive in time for thereceiver to take delivery, for example when transit times
are short, then the carrier will usually be able to assist by
delivering the goods against receipt of a guarantee. The
guarantee safeguards the carrier in case the claimant is
not the rightful owner of the goods. Wrongful delivery would
constitute a breach of contract and the carrier will therefore
insist on a letter of indemnity (LOI) from the receiver backed
by a bank guarantee whose wording meets the carrier’s
specifications, usually for an amount of 150% to 200% of
the actual CIF value of the goods, valid for one to two years.
Although there is no express time limit beyond which theholder of a bill of lading can no longer claim the goods,
a guarantee good for one or possibly two years shouldadequately cover the carrier’s obligations. Nevertheless, aletter of indemnity can never invalidate the actual contract ofcarriage which is the bill of lading.
However, carriers are not obliged to deliver goods against
guarantees. That decision is entirely at their discretion andthe receiver may have to negotiate the terms with the carrier,
who may wish to consult the original shipper. Note that ECF
contracts clearly state that buyers are under no obligation totake delivery under their guarantee and if 28 calendar days
after arrival the bill of lading is not available then the buyer
may declare the seller to be in default. The remedy here
would be for the exporter to provide the guarantee instead.
GCA does not specifically refer to missing documents andleaves settlement of any unresolved claim or dispute in thisregard entirely to arbitration.

DIFFERENT TYPES OF BILLS OF LADINGThe carrier’s responsibility commences on the physicalacceptance of the goods for carriage. If this occurs at an
inland point a combined transport bill of lading will be issued.
If the handover is in a port then a port-to-port bill of lading will
be issued.
The term ‘through bill of lading’ should not be used, as itmeans that the issuing carrier acts as principal only during
the carriage on its own vessel(s) and acts as an agent at allother times. This implies that the responsibilities and liabilities
may be spread over more than one carrier under different(possibly unknown) conditions at different stages of thetransport chain.

CHAPTER 5 – LOGISTICS AND INSURANCE

Under a combined transport bill of lading the carrier accepts
responsibility, subject to the normal stipulations in the billof lading, for the whole carriage, inland and marine: fromdoor to door, or from door to container yard or container
station. The carrier arranges both the marine and theinland transport, but it should be noted that marine andoverland transport are governed by different international
conventions. This can have an effect on the settlement ofclaims – the financial liability of the carrier for inland carriage
is not necessarily the same as it is for the marine voyage (onboard ship, i.e. ‘from tackle to tackle’). Usually the carrier
will assist in any claims procedure initiated by the receiver
and/or insurance company, but will not necessarily accept
responsibility for settlement if the damage occurred during
the overland stage. For example, a truck is stopped at
gunpoint and the driver is asked to ‘disappear’: no liability.
Or an accident occurs because of driver negligence: liability
may exist depending on local jurisprudence.
Obviously, large receivers will find it easier to solve suchmatters than will smaller companies. Note that for FCA
contracts (also known as ‘free on truck’ in some origins) itis the buyer’s responsibility to lodge the necessary claims
under their insurance policy, and insurance cover should
therefore commence at the inland point of loading.
Whether a bill of lading is of port-to-port or combinedtransport depends on whether the box ‘place of receipt’ (or‘place of delivery’) has been filled in.

SEA WAY BILLS
Like a bill of lading, a sea way bill is a receipt and evidenceof a contract of carriage, often used for through cargo. But
such a bill is not a document of title. Unlike bills of lading,sea way bills cannot be issued ‘to order’, they cannot be
negotiated, i.e. they cannot be endorsed. The advantage
is that there is no need to transmit paper documentation to
the point of destination to secure delivery because delivery
is made, automatically and only, to the named consignee.
They can be used when payment does not depend on
the submission of documents, for example because theshipment is between associated companies or because
payment has been made in advance. Thus, sea way bills
can facilitate paperless transactions. See also chapter 6,
E-commerce and supply chain management.

CONTRACT OF CARRIAGE: FOB, FCA AND
CIF/CFRThe coffee trade uses three basic contract conditions:
FOB, FCA and CIF (or CFR), of which the first two are mostcommon.
FOB – free on board. The seller’s obligations are fulfilled
when the goods have passed over the ship’s rail at the portof shipment. For contracts stipulating FOT (free on truck)
and FOR (free on rail) this occurs when the goods havepassed over the truck’s tailgate or the railcar’s loading gate.

Under present-day FOB contracts it is nearly always the buyer
who arranges the contract of carriage and who is liable for all
costs and risk from that point onwards. Nevertheless, ECC
clearly states that it should in fact be considered as an illdefined cost and freight contract even though the price may
be defined in FOB terms, i.e. the freight being for account of
the buyers. The exporter’s contractual responsibility effectively
still ends only when the coffee crosses the ship’s rail. ECC
also states that the buyer is responsible for insuring thegoods from the time the goods leave the ultimate warehouseor other place of storage at the port of shipment. This isimportant because it is increasingly difficult to establish theprecise time a container leaves the stack on the quaysideand is transferred across the ship’s rail. Under GCA contracts
the risk of loss transfers upon crossing of the ship’s rail andexporters must insure accordingly.
FCA – free carrier. The seller’s obligations are fulfilled when
the goods, cleared for export, are handed to the carrier orthe carrier’s official agent(s) at the named place or pointof handing over. (Sometimes also called free in container
or free in warehouse.) The buyer’s responsibility starts here
and they are liable to pay all and any inland transportation
costs as well as the cost of loading at the port of shipment.
The total freight cost takes all this into account. Not
everyone is willing to purchase on the basis of FCA though,especially if the goods are not handed over at the carrier’s
own premises or at a recognized container filling station.
Remember that inland and marine transports are coveredby different international conventions and even though ashipping line may arrange for the inland transport it will notnecessarily accept liability for events occurring before thegoods reach the port of shipment or cross the ship’s rail.
CIF – cost, insurance and freight (or CFR – cost andfreight). The shipper arranges and pays the contract ofcarriage but otherwise the transfer of risk is as under FOB.
Table 5.1

Cost distribution between sellers (S) andbuyers (B)

S
S

CIF/
CFR
S
S

S
S
S

S
S
S

S
S
S

S

S

B

B
B

S
B

B
B

FOB
Loading at sellers’ premises
Inland transport (from the named
place)
Trade documentation at origin
Customs clearance at origin
Export charges
Loading terminal handling charges(THC)
Ocean freight
Unloading terminal handlingcharges (THC)

FCA
S
B

In the United States, a considerable amount of business istransacted FCA (or perhaps also FOT) because of the coffee
imported from Mexico through the land border between thetwo countries (around 2 million bags a year). Seller and buyer
should be clear on the difference between the two terms.

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Basically, in the case of FCA risk of loss transfers to the buyer
the moment the goods are received by the carrier, whether
for overland or maritime transport, whilst in the case of FOT(or FOR) that risk transfers to the buyer when the goods areplaced on the truck or railcar.
Customs documentation charges or Cargo declaration
fees. These are a new type of charge, introduced by shippinglines to cover the cost of complying with maritime cargo
security regulations now in force for both the United States
and the European Union. Cargo that does not comply withthese regulations may not be loaded and the lines have toensure only correctly documented cargo is loaded. Whilst
there is no denying that there is an administrative and IT costto this, many exporters consider these charges to be linked
to importation and therefore should be paid by the receiver.
However, so far the general consensus on the receiving sideis that these charges are part of the cost of bringing cargo to
FOB, i.e. they form part of the export charges and as such are
to be paid by shippers.

CARRIER’S LIABILITY – BURDEN OF PROOF
FCL – full container load. This simply means the seller/
shipper was responsible for stuffing the container and thecost thereof. But the contents of a sealed container cannot
be verified from the outside.
The FCL bill of lading simply states ‘received on board one
container STC [said to contain] X number of bags [or for bulk:kg] of coffee, shipper stow and count’. In other words, in an
FCL bill of lading the shipping line acknowledges receipt of
the container, undertakes to transport it from A to B without
losing or damaging it, and to deliver it. But the shipping line
does not commit itself as regards the contents. See also
chapter 10, Risk and the relation to trade credit.
There is no clear connection between FCL or LCL andIncoterms®. The terms FCL and LCL are common in mostcoffee producing countries but do not always have exactly thesame meaning. Combining FCL with the term CY (container
yard: container is received), and LCL with CFS (container
freight station: goods are received), removes any room for
confusion. However, CY and CFS are not freight terms, but
represent delivery locations.
LCL – less than container load. This means the carrier is
responsible for the suitability and condition of the container,
and the stuffing thereof. The carrier pays for this and thencharges an LCL service charge. The bill of lading will state‘received in apparent good order and condition X numberof bags said to weigh Y kg’. Now the carrier accepts
responsibility for the number of bags but still not for thecontents of the bags, nor for the weight.
In the interests of service to clients, although not in all coffee
producing countries, shipping lines will agree to carry coffee
as LCL provided the containers are filled or stuffed on the
carrier’s premises, ideally at a container freight station(CFS). It has become accepted practice in some countries

for containers to be stuffed at the seller’s premises at theirexpense, under the supervision of the carrier or the carrier’s
appointed agent. A higher rate of freight will still apply than for
an FCL shipment, but this arrangement is nevertheless of greatvalue to smaller shippers or to those who are still relatively
unknown. Importers and their bankers increasingly check on
the credibility of exporters, including the documentation they
supply, and do not accept unknown FCL bills of lading.
For some exporters and origins, the stuffing and weighingof containers ‘under independent supervision’ is now theorder of the day, not only for LCL shipments, but also for
FCL in order to satisfy the legitimate security concerns of all
involved in the coffee trade. Such services are often provided
by collateral managers who verify correct procedure in an
exporter’s operations on behalf of the bank that finances thebusiness, sometimes right through to delivery at the receiving
end. See also chapter 10.
Claims on shipping lines have dropped as a result of these
services, suggesting that past discrepancies in containerizedcargo were at least partly the result of inadequate supervision
during stuffing. The main cause of claims on containerized
coffee in bags has, however, always been condensation
damage, which is much less likely to occur when coffee isshipped in bulk.
The term LCL is something of a misnomer in that containers
are nearly always full and freight is charged per container, notby weight. The reason the term is often used is that it permits
marine insurers and/or receivers to lodge insurance claims
directly on shipping lines.
But just as roasters argue that roasting and distribution is theircore business, not the transporting, storing and financing ofgreen coffee stocks, so shipping companies consider theirbusiness is to carry sealed containers safely and efficiently
from A to B, and not to be concerned with the contents.
Shipping lines have to eliminate the LCL bill of lading entirely,
in time. This in turn will see increased use of independent
weighers and supervisors, although the reliability of suchservices will still vary from port to port, and from country tocountry. If after such inspections weight or quality claims stillarise there will be serious differences of opinion between
shipper and receiver. This is mainly because it is not always
understood that providing a certificate of weight or quality
does not absolve the shipper from contractual obligations.

CARRIER’S OBLIGATIONS – THREE
CONVENTIONSEach case of damage to goods needs to be examined on its
own circumstances and merits, but it is useful to understandthe background. International conventions governing
maritime contract of carriage issues include the The HagueVisby Rules, the Hamburg Rules and now the Rotterdam
Rules adopted by the UN General Assembly in 2009. The
first two define a Contract of Carriage as referring only tothe carriage of goods by sea, whereas the newly adopted

CHAPTER 5 – LOGISTICS AND INSURANCE

Rotterdam Rules define a Contract for Carriage as one that
may combine carriage by sea and other modes of transport.
These conventions define a carrier’s obligations, forexample such as having to exercise due diligence to makethe vessel seaworthy and to care for the cargo. In general
the Rotterdam Rules strengthen the rights of shippers andowners of cargo but of course this type of convention covers
many aspects and some of the texts may even be open
to different interpretations. However, in terms of who has
to prove what, it still remains for the claimant to prove any
loss or damage is due to the carrier’s failure to adequately
perform its duties. Shippers and receivers alike should
be familiar with the numerous clauses and conditions
contained in the fine print on bills of lading, but this is notalways the case.
This means a shipping company will accept responsibility
only if it can be conclusively proven that damage to thegoods occurred during transit, i.e. en route while the goods
were under its control. However, unless the cause of suchdamage is obvious it may be very difficult to prove the pointand exporters can fully expect that receivers of damaged
goods will hold them responsible. But at the same timereceivers are duty bound to preserve and exercise all rights
against third parties. They must also always lodge claims
with the shipping company, with their underwriters and anyother involved party. There is more information on marine
insurance and claims later in this chapter.
Nevertheless, the burden of proof rests with the exporter/
shipper, unless there is concrete evidence that the loss ordamage was due to an external event, an event that took
place after the container was handed over for shipment. Of
course, if an FCL shipment is lost or destroyed in its entirety
then in most instances everyone will have little option but toaccept the exporter’s declaration as to the original contents
and their condition.
However, if upon discharge containerized goods are foundto be damaged without any obvious link to an external event
then the burden of proof can become very heavy.
On a separate but related issue: If really serious damage
occurs en route, due to unforeseen events beyond anyone’s
control – force majeure or Acts of God – then under thecontract of carriage (bill of lading) a shipping company
may decide to declare what is known as General Average.
Such a declaration will result in proportional claims being
lodged against all the owners/receivers of all the goods thatwere on board at the time the event took place. This kind of
situation can become extremely complicated and may attimes result in lengthy litigation.

TRANSSHIPMENT ISSUES
The growing size and capacity of container vessels toalready up to 15,000 TEU, and in future rising to as many as
18,000, is resulting in increased incidences of transshipment

whereas transshipment routings may also become morediverse. Increased transshipment also means that evermore strict instructions must be given, in writing, as to thetype of ‘cargo care’ that is required whereas details of theshipment’s routing must be known and agreed in advance.
From some origins it is now not at all unusual for shipments
to be transshipped three times, in some instances even fourtimes. For example, from the local port by feeder vessel
via a larger national port to a regional shipping hub where
the large ‘mother vessels’ call. Or, from the national port
to the regional hub and then transshipment again abroad,for example discharge at Antwerp and onward shipment to
Helsinki. This means increased transit times, particularly if afeeder vessel is late and misses the mother vessel’s slot at
the hub port.
Modern container vessels spend the vast majority of time atsea – days in port are kept to a minimum and ‘late cargo’simply gets left behind. Such events make it difficult forimporters to guarantee ‘on time delivery’ to their roasterclients and causes additional costs (particularly financing),
which they will wish to recoup.
However, because most, if not nearly all, green coffee
shipped from origin is sold basis FOB (free on board) or
FCA (free carrier) the exporter’s responsibility usually ends
when the goods cross the ship’s rail or are handed to the
stipulated carrier. Naturally this presupposes that shipment
is made in accordance with the terms and conditions of
the contract, i.e. those of the under-lying standard form ofcontract as well as those that may have been stipulated by
the buyer, including any ‘cargo care’ notes. But, of course,
quality and other claims always remain a possibility. See
also chapter 4, Contracts.
Even though selection of the carrying vessels is sometimes
left up to the exporter, especially FOB buyers should also
engage with the process by being well informed about
shipping opportunities from a particular port and by insistingthat the most suitable options and routings are chosen.
Once the goods are on board ship they have become thebuyer’s responsibility in the sense that he or she has toensure the goods are insured, will have to settle the freight
and, of course, will have to take delivery. If any claims arise
after loading due to delays and/or damage then it is for thebuyer to lodge these with the shipping company if he or she
thinks there is a case for doing so.
However, the exporter is duty-bound to make sure that hekeeps the buyer informed of all and any changes to theshipping process, also when information reaches him aboutchanges in transshipment dates, vessels or schedules after
the goods were shipped. All parties to a transaction must
always exercise due diligence: that is, they must be able
to prove that at all times they acted correctly. The shipping
agents at origin should monitor transshipment cargo andkeep their principals fully informed – this is not always thecase though. Nevertheless, in the vast majority of cases
it is the buyer who, at least initially, is liable to cover any
extra costs although, where appropriate, an exporter might

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perhaps be asked to assist with the lodging of claims etc. It
would make good sense to assist where possible.
NB: Once a buyer realizes that shipping delays are
becoming a regular occurrence for goods shipped from aparticular port then the buyer will adjust his cost calculationfrom FOB origin port of shipment to Ex Dock at destinationaccordingly. On a case-by-case basis, usually it is thebuyer who suffers the consequences but, in the longer run,it is always exporters who bear the cost because they will
receive lower bid prices. Which of course are passed on to
the grower.
Unfortunately, there are no magic solutions to thetransshipment issue. A port can drop off the internationalschedules of the major shipping companies, i.e. mainor ‘mother’ vessels no longer call there, for example due
to insufficient deep water; insufficient cargo on offer; orinefficient cargo handling. If so, then that port and everyone
utilizing it will have to adjust and make the best of it throughimproved efficiency and other cost saving measures. For
example: Keep up to date and make sure your buyer knows not only
what you know, but also as soon as you come to know it.
 Ensure you choose the right shipping agent. One who will
not simply book on ‘friendly’ vessels, but who will offer themost efficient routing and transshipment connections.
 Make sure all appropriate ‘cargo care’ details are statedin the cargo booking. Do not rely on the shipping agent
to take care of this.
 Demand the origin shipping agent monitors the cargo
all the way, keeping you informed. Liaise closely withthe shipping companies, both coastal/regional andinternational. Usually, this is best achieved through theforum of an exporters’ association, a coffee authority, achamber of commerce or other such body that brings
together a number of parties with individual but similarinterests.
 Conduct regular reviews of recent shipping experiences,highlight buyers’ concerns and claims/comments, etc.
 Stress the fact that, in the final analysis, all extra costs
come off the producer price, meaning this is an industry
issue – not just one concerning exporters.

SMALL LOT LOGISTICS
Exporters and buyers of small lots that are less than acontainer load face both logistical and cost constraints.
Indeed, many importers will not consider anything less thana container load: 19 to about 21 tons in a 20-foot container
depending on the type of coffee.
This effectively bars many potential small producers ofspecialty or organic coffee from direct participation in theoverseas market. As a result, many small pockets of quality
or exemplary coffee in producing countries go unrecognized,
simply because they vanish in the mainstream of a country’s
total exports. Yet, improved and simplified processing

technology today allows even very small grower groups
to produce quality coffee. But if this cannot be marketed
successfully, then what is the point?
The Cup of Excellence programme, www.cupofexcellence.
org (see chapter 6), and the specialty industry as a whole
have identified many pockets of excellent quality in different
countries but the logistics of getting small lots from A to
B are daunting. Few if any carriers today will even quote
freight rates per ton, let alone accept mini-lots. Simply put:on container vessels there is no room for break bulk or loose
cargo, only for containers.
Within modern shipping there are few alternative options
and it is true to say that transport now represents the one
great limitation on smaller producers wishing to access the
specialty market.

OPTIONS FOR SMALL LOTS
Combine or consolidate cargo. Finding compatible
cargo to fill a standard container at least close to capacity
can be difficult, and still means having to wait until a fullload is assembled. Organic coffee may not be shipped in
the same container with other coffee because of the risk ofcontamination.
Mini-containers within a single, large container could be asolution but these would probably have to be disposable
because of the difficulty of attracting suitable return cargo.
This is where flexible intermediate bulk containers (FIBCs orbulk bags, super bags, jumbo bags – go to www.fibca.com)
can possibly play a role. However, most roasters, especiallysmaller ones, are not equipped to handle bulk bags. But,
when hermetically sealed such bags also help to preserve
quality, which is especially important for the more expensive
specialty coffees. See for example www.grainpro.com.
In many countries freight consolidators (specialized freight
forwarders) do arrange for the consolidation of compatible
cargo to utilize containers more effectively, but this may not
be so easily done from smaller ports in producing countries.
Also, one would have to be absolutely certain that the othergoods in such a consolidated container load will not impact
on the coffee and that the buyer is in agreement.
Another and probably less complicated variant, dependingon the buyer, is to combine a small parcel of top coffee witha parcel of easily sold, cheaper quality, for example 50 bags
exemplary and 250 bags of a generally traded, run-of-themill coffee, together in one container shipped as FCL.
In some countries (Nicaragua for example) producer
associations help growers of certified exemplary coffee tocreate container loads by combining different shipments
for specific markets. There are also instances where
specialty buyers join together in combining shipments. But
this requires much organization and great support fromexporters and importers alike.

CHAPTER 5 – LOGISTICS AND INSURANCE

Pay for dead freight. Some buyers or shippers sometimes
simply absorb the cost of dead freight (the cost of any
empty space in a container) especially when the coffee inquestion is of high value. How much dead freight can beabsorbed will vary from transaction to transaction but there
is little doubt that producers of very small quantities standlittle chance of becoming regular exporters if they cannot
consolidate with others. It does not really make sense toship a container FOR 25 or 50 bags.
Air freight. Alternatively, if a small lot of expensive‘exemplary’ coffee can bear the cost of paying freight
for a full container then it may sometimes be just as costeffective to use airfreight instead. However, Customs andsecurity issues play a role here – coffee is not normally
exported/imported in this way and so airlines and airfreightcompanies do not always know how to handle the attendantadministrative procedures.
Finally, yet another problem facing shippers of small lots of
top quality coffee is that quality can be lost if transit times
are too long, for example due to multiple transshipments.

SHIPPING IN CONTAINERS
Bagged coffee in 20-foot ‘dry containers’ (and today evenin 40-foot containers) is a major improvement over the oldbreak bulk method, but still involves extensive handlingand does not fully exploit a container’s carrying capacity.
This is important as transport and freight costs are charged
per container rather than by weight. The cost of handling
bagged cargo is also escalating continuously, especially inimporting countries.
When correctly lined with cardboard or sufficiently strong
Kraft paper, and if properly stuffed, standard 20-foot dry
containers are suitable for transporting bagged coffee. This
is not to suggest they are suitable for prolonged storageof coffee, because they are not. Some receivers do specify
ventilated containers for shipments from certain areas.
These provide ventilation over their entire length, usually top
and bottom, but not all shipping lines offer them. They are
expensive, and at the same time more and more coffee isshipped in bulk instead.
Bulk shipments were first experimented with in the early
1980s. After a period of exhaustive trials, mostly on coffees
from Brazil and Colombia, the conclusion was that standard
containers are perfectly suitable for the transportation ofcoffee in bulk. But they must be fitted with appropriate liners(usually made of polypropylene) and the coffee’s moisture
content must not exceed the accepted standard for thecoffee in question.
Some container facts:
 TEU stands for twenty foot equivalent unit: maximum total
weight 30.48 tons, maximum gross payload 28.28 tons
(i.e. including the weight of packaging, liners, etc.).

 FTE stands for forty foot equivalent unit: maximum total
weight 30.4 tons, maximum payload 26.4 tons. Newer andsomewhat taller FTE’s have a slightly higher payload at
maximum 27.5 tons. FTE’s are becoming more common
in the carriage of bagged coffee as they are easier to stow
on board ship. However, shippers should bear in mind thatas yet not all end-receivers are equipped to handle FTE’s.
 GP in the United States stands for general purpose
container – the European Union equivalent is DC or dry
container, i.e. both are the same. The net load of a standard,
general-purpose, steel TEU container is on average about
21,000 kg green coffee. However this varies, dependingon the type of coffee being shipped. Large beans canbe as low as 19,000 kg – small beans perhaps as muchas 24,000 kg. It is impossible to use the entire theoretical
payload capacity of a TEU because coffee is relatively
bulky and so space is the limiting factor here. For a FTE
the limitation is not space but the maximum permissible
weight.
 Ocean freight for coffee shipments is always charged percontainer. As such it is entirely up to the shipper to decide
how much of the available space to use and respectively
how much space to leave empty (dead space).
 Wooden container floors (where fitted) must have beentreated against infestation – details of the treatment
method is found on the CSC (Container Safety Convention)plate on the container door. This is important because ofrules on Wood Packaging Material (WPM) that is used ininternational shipments. See for example www.aphis.usda.
gov – Importation of Wood Packaging Material. Note alsothat materials other than wood for use as container flooring
are under development.
 When making a booking with a shipping line always givethe instruction ‘stow away from heat, cool stow and sun/weather protected’ or ‘stow in protected places only/awayfrom heat and radiation’, i.e. no outer or top position. ‘Stow
under deck’ or ‘under waterline’ is not appropriate withmodern container vessels, since the fuel tanks are often
situated in the hull and can radiate heat. Abbreviations
also used are AFH = Away From Heat and KFF = Keep
From Freezing.
See also www.containerhandbuch.de (version in English).

BAGGED COFFEE IN CONTAINERS: RISKOF CONDENSATION
Condensation occurs because moisture is always present in
the air and hygroscopic (water-attracting) materials such as
coffee normally contain a certain amount of moisture as well.
Coffee with moisture content in excess of 12.5% (ISO 6673)
should never be shipped, whether in containers or bagged,
as beyond this point the risk of condensation and therefore
fungi growth occurring becomes unacceptably high. The only
exceptions could be specialty coffees that traditionally havehigh moisture content, such as Indian monsooned coffees.
This is not to suggest that a moisture content of 12.5% iscommercially acceptable for all coffee – for certain coffees,
certain origins and certain buyers it is definitely not. The

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figure of 12.5% simply represents a known technical point at
which the risk of damage from condensation and growth ofmould during storage and transport becomes unacceptably
high. Shippers who normally ship their coffee at moisture
percentages below 12.5% should definitely continue to do so.
NB: In certain areas there are shippers who habitually ship at
higher moisture contents. but this guide is not in a position toexpress an opinion on this.
An increasing number of buyers now include maximum
permissible arrival moisture content in purchasing contracts.
Increasing preoccupations with food health and hygiene in
consuming countries suggest strongly that exporters will
be well advised therefore to acquaint themselves with theirbuyers’ requirements in this regard.
Coffee is often loaded in tropical or otherwise warm areas
for discharge at places where the temperatures are verymuch lower. Warm air holds more water vapour than cold
air; when warm, moist air cools down to dew point, thencondensation occurs. Dew point is the temperature at whicha sample of saturated air will condense.
Put differently: coffee travelling from producing countries
during the Northern Hemisphere summer experiencesmuch less temperature change than when travelling during
the Northern Hemisphere winter. Vessels may then arrive
when snow and ice conditions are prevalent, particularly
in Northern Europe. Of course such conditions are entirely
beyond anyone’s control, including the shipping company.
On other routes cargo may experience multiple climate
zones during transit. For example from the Pacific Ocean
ports of Guayaquil (Ecuador) and Buenaventura (onColombia’s West Coast) to the East Coast (Atlantic Ocean)of the United States. When passing Cape Hatteras in theState of North Carolina on the East Coast vessels may inwinter sometimes experience a drop in outside temperatureof up to 20º C (36º F) in just four hours.
During transit the temperature outside the container graduallycools down and the steel container allows the chill to conductfrom the outside of the panels through to the inside. On arrival
the container has cool roof and side panels, and moist warm
air in the space above the cargo and within the stow. Mostof the moisture will have been given up by the coffee beans
themselves.

result in condensation taking place. In severe cases water
droplets, mostly consisting of dislocated moisture fromthe coffee itself, form on the interior roof and side panels,
and then drip on to the cargo causing water damage andmould. Correct stowage does mitigate against the air above
the cargo reaching dew point. This can be supported byadding a drying agent or desiccant always provided these
are approved for use with foodstuffs and are accepted by
the final receiver. For more on this see for example www.
stopak.com, www.dessicantsonline.com, or www.dry-bag.
nl.
In summary, differences in temperature plus the time factor
and the speed of events combine to release moisturefrom the coffee. Given enough time the coffee surface willreabsorb the moisture. If events unfold too fast or there
is too much moisture, then the coffee cannot reabsorb
what it gave up and condensation will continue as longas the temperature difference between the steel of thecontainer and the air inside it is greater than 8º C. A simple
demonstration: a glass of cold liquid ‘sweats’ because its
temperature is below the dew point of the surrounding air.
The moisture on the outside of the glass comes from thesurrounding air, not from the liquid or the glass itself. Whenthe glass warms up, its temperature eventually reaches thatdew point, which causes the moisture on the outside to dry
again: it evaporates back into the surrounding air.
In producing countries condensation occurs whencontainers are stuffed at high altitude locations with hightemperatures during the day that fall rapidly at night, leading
to the same scenario. The risk is increased if full containers
are left outside in the radiant heat of the sun, so containers
should not be stuffed too far ahead of the actual time of
shipment.
The only answer to all such weather-related events is to
exercise the utmost care when lining and stuffing containers,
and to ensure correct stowage on board ship. See also
www.tis-gdv.de of the Transport Information Service of theGerman Insurance Association. Alternatively, contact yourlocal shipping company representative for information on
container stuffing and related issues.

When the temperature of the panels falls below the dew
point of the air inside the container, condensation starts andwill continue until the dew point of the interior air falls to thatof the air outside.
Apart from making sure that the coffee’s own moisture content
is acceptable, condensation cannot really be avoided andall one can do is try to prevent the condensation falling onto
the coffee as droplets. If temperature changes are gradualand enough time passes then the coffee beans will absorb
the excess moisture from the air within the container and thecontainer will again be ‘dry’. But temperature differences of
8º C to 10º C over short periods of time almost inevitably will

Container vessel in Finland during winter, covered in snow.
Photograph courtesy Maersk Line Cargo Care.

CHAPTER 5 – LOGISTICS AND INSURANCE

Container approval form

Type

Condition

Watertightness

G 20’

G Steelbox

G Normal ventilated

G 40’

G Plywood

G Mini-vents

G New

Rust

G UsedG NoneG Normal wear and tear

G A little

G Severe wear and tear

G SomeG Unacceptable

G Unacceptable

Checked from inside/doors closed G Yes
G No (why) _______________

Doors
Closing devices

Left side
Top

G OK

G Defect

G OK

G Defect

MiddleG OK

G Defect

G OK

G Defect

BottomG OK

G Defect

G OK

G Defect

Door sealing

Left side

Humidity of floor
checkedOdour

Right side

Top

G OK

G Defect

G OK

G Defect

MiddleG OK

G Defect

G OK

G Defect

BottomG OK

G Defect

G OK

G Defect

G OpenG TapedG Other ____________________

Ventilation
Cleanliness

Right side

G Front wall panel

G Right side wall panel

G Roof panel

G Doors

G Left side wall panel

G Floor

G No

G Yes _________ %G Odour free

G Foreign smell likeContainer number: _______________________________________
Container approved by: _______________________________________________________________________________________
Date and venue

Name in capital letters

Signature

NB: Before entering a container check that there are no labels attached indicating it may previously have carried dangerous goods or, in thecase of fumigation, what kind of substance was used. Before entering such a container also check that it has been properly de-gassed.

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When ordering a container from the carrier, specify inwriting that the container must be suitable for the carriageof coffee beans, i.e. foodstuffs, that you reserve the rightto reject any container you detect to be unfit, and that you
will claim compensation for losses resulting from unsuitablecontainers. This is no guaranteed protection, but it will alert
the carrier. Even so, you remain fully liable for the selection ofa suitable container, so firmly reject any suspect container –irrespective of who supplies it. Note that where the shipping
line delivers the empty container to the shipper’s premises(carrier haulage) and it is validly rejected, then the line will
have to pay for replacing it. But if the shipper’s transportercollects it from the shipping line (merchant haulage) and it issubsequently rejected, then the shipper will be liable for thecost thereof.
Use a container approval form like the example on theprevious page. This will serve as a guideline for the personnel
in charge of loading and will also remind them to pay thenecessary attention. A copy could be left inside the container
to demonstrate that you did pay the necessary attention.
The basic premise is that condensation cannot always be
avoided but it is possible to avoid the condensed water
vapour coming back into the coffee. It is important to consider
the following: Containers must be technically impeccable: dry,clean, odourless and watertight; free of corrosion on theroof and sides; intact door locks, rubber packing andsealing devices.
 If possible check the moisture content of the floor. At
least insist on a dry container that has not been washedrecently. Note that it takes a long time for the floor to dry
out and that without an instrument (Penetro meter) you
have no reliable means of checking the floor’s moisture
content which, ideally, should not exceed 12% for bagged
cargo. Up to 14% place extra protection (cardboard/Kraft
paper) – if over 14% to 16% use plastic with cardboard/paper on it for this. Above this use dry pallets, but notethat containers with a floor moisture content above 18%
are basically not suitable for bagged coffee.
 When stuffing takes place at the shipper’s or at CFS
premises (in LCL status) the shipping line must
inspect the containers. An inspector, acting on behalfof the shipping line, should go inside the container andclose the doors. If any daylight is visible the container
must be rejected immediately.
 When stuffing takes place at the shipper’s premises (inFCL status) the shipper or its representative shouldinspect the containers as above and of course conduct
the goods tally.
 The inspector should also particularly check for
obnoxious smells by remaining inside the closed
container for at least two to three minutes. There areoccasional incidents of coffees arriving with a strong
phenolic smell which renders them unfit for use. A
phenolic smell or taste is reminiscent of disinfectant
or an industrial cleaning agent such as carbolic acid.
Inspectors should reject containers that show evidenceof a prior load of chemical cargo or that have an IMCO/IMO dangerous cargo sticker or label affixed. For more
information on the International Maritime Dangerous
Goods Code (IMDG) and dangerous cargo labels goto www.imo.org, the website of the International Maritime
Organization. Note that coffees tainted by chemical
contamination or smell will attract claims on arrival
ranging from 50% to 100%, to which must be added thecosts of destruction.
 Wooden container floors (where fitted) must havebeen treated against infestation – details of the treatment
method is found on the Container Safety Convention(CSC) plate on the container door. This is importantbecause of the already-mentioned rules on Wood
Packaging Material (WPM) that are used in international
shipments.
 The actual stuffing of the container should take place
under cover, just in case there is a rain shower. Bags
should be sound: no leaking, slack or torn bags; nowet bags; and no stained bags. The number of bags
loaded is to be tallied and signed for by both warehousestaff and loading supervisor (in case of LCL shipments
representing the shipping line).
 The container should never be filled to absolute
capacity in that there should always be some room
above the stow. (Applies equally to bulk cargo.)
 Best practice for bagged cargo is to line the container
with cardboard or two layers of Kraft paper, preferably
corrugated with the corrugation facing the steel structure,so that no bag comes in contact with the metal of thecontainer. When stuffing is complete a double layer ofKraft paper should be fitted on top of the bags all the way
to the floor in the doorway. This will ensure that the paper
will at least partly absorb any possible condensation fromthe roof. In a fully lined container there will be cardboard
or Kraft paper also between the bags and the corner
posts, in the junction between the upright walls andthe floor, at the back of the container and at the doors,and covering the top of the stow as well. Cardboard isstronger and preferable to Kraft paper Desiccants or dry bags are sometimes used. They
are meant to avoid the air in the container reaching dew
point (100% relative humidity) during the voyage. The
need depends on local circumstances but desiccantsshould only be used with the express prior permissionof the receiver. Many receivers do not permit their use
under any circumstances and it is up to the exporter todetermine their acceptability. Other materials that canhelp manage conditions inside a closed container also
exist, but fall outside the scope of this guide.
 Liners for bulk coffee should be 100% sound, whichmeans no pinholes etc. If condensation forms and drips
from the roof it may collect in puddles on the liner andsoak through if pinholes exist, which means a claim canbe made.
 Under International Maritime Dangerous Goods Code(IMDG) rules coffee still being under fumigation or not
yet properly ‘aired’ should be booked, documented,
labelled and handled for shipment as IMO Classified(Class 9 UN no. 3359 ‘fumigated unit’).

CHAPTER 5 – LOGISTICS AND INSURANCEBAGGED COFFEE IN CONTAINERS:STUFFING AND SHIPPING
Coffee is hygroscopic and contains water. When out in the
open the container roof heats up during the day and cools
down at night. If there is relatively free air circulation then
the warm, humid air released from the coffee rises to thecooler steel plates, where condensation can be severe. The
effect of this thermal flow is serious when coffee is stowed inbags because there are air channels within the stow, simply
because of the shape of the bags. Those air channels areeven larger when stowing is across as illustrated in the chart
below. Using the saddle stow blocks these air channels
between bags to quite an extent as also shown in the pictures
below.
Individual receivers may and do stipulate their own stowage
patterns and there is no standard method. However, thegolden rule is to try and minimize the air within the stow (i.e.
between the bags) as much as possible because cooling ofthat air during transit contributes to condensation.

Another way.

Stowage complete.

Transit time: Experience shows that most of thecondensation problems encountered during maritime
transport are caused at origin (containers are stuffed too
early ahead of actual shipment or not properly lined), or
immediately after offloading (particularly for containers
arriving in winter). It is therefore of the utmost importance tolimit transit times (by using dedicated sailing/routings) andthe dwell periods and land legs of the transit as much as
possible.
Note that without knowing the exact stowage positionof a container it is very difficult to prove that the cause ofdamage was wrong positioning of the container on board
the ship. The damage might already have happened on
shore, before loading. In any event, improper stuffing of acontainer (bags touching the roof or bulk coffee not levelled)
can never be compensated for by demanding special carefrom the carrier.
One way.

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licensed liners for coffee shipments. Shippers should checkwith their United States buyers what brands of liners arelicensed under present patents.

Recent years have seen a substantial increase in the
movement of coffee in bulk, using normal dry containers
fitted with a liner. Exact data are not readily available, but
informed shipping sources suggest that for a number oflarge producing countries most shipments, other than to theUnited States, are now ‘in bulk’.

Most shipping companies and freight forwarders will be able
to provide information on the availability and cost of liners,
but it may be advisable to obtain your buyer’s agreement
before choosing any particular type or make. Note also thatcoffee should only be shipped in bulk with the buyer’s priorconsent.

Shippers save on the cost of bags (and there is no need todispose of them at the receiving end), minus the cost of theliner. Also, a container can hold between 21-24 tons of coffee
in bulk which, depending on the type of coffee, can represent
a potential payload increase of almost 17% over bagged
coffee. At the receiving end the inland transport of say 50,000
tons green coffee in bulk a year for a large roaster is reduced
from 2,777 movements of 18 tons to 2,380 movements of 21
tons. In Brazil, for instance, 2 million bags shipped in bulk
means close to 1,000 fewer individual containers.
Other obvious advantages are time and labour savings
because bulk containers are emptied mechanically, using
a tilt chassis. (Jumbo bags or super sacks are much larger
than conventional bags, holding as much as 500 kg or
more. They are mostly used for intermediate transport cum
storage and must not be confused with liners that make useof the container’s entire load capacity which jumbo/supersacks cannot.) But there are also other advantages, which
are not always immediately apparent: Coffee in bulk arrives in a better condition than coffee
in bags when shipped under similar conditions. Air
in between the beans and in between the bags is calledinterstitial air. Interstitial air in a bulk load hardly moves
because the individual beans are obstructing the freeflow of air so the hot air cannot easily move to the top of
the container. As a result, the temperature of the inside air
at the top of the container is lower for bulk coffee than forcoffee in bags and the risk of condensation is reduced.
 There are far fewer claims on coffee shipped in bulk.
Shipping in bulk avoids most of the problems associatedwith bagged cargo: no baggy smells any more, no weightlosses due to handling, generally better preservation ofquality. When correct liners and procedures are used,
and the coffee is shipped at the correct moisture content,
there are far fewer claims on coffee shipped in bulk thanthere are on coffee shipped in bags – according to somesources claims are reduced by up to two-thirds. Good
quality liners also help to preserve coffee quality.
In recent years, a few of the originators of the bulk coffee
shipping process have patented in the United States someof the more ingenious parts of the bulk liner. The patents areon the strapping and bulkhead systems that hold the liner
in place when the container doors are opened. All major
importers and roasters in the United States have been
cautioned to use only licensed liners for coffee shipments.
As no one has contested the patent claims, the UnitedStates coffee industry has more or less agreed to use only

BULK CONTAINERS: LINING AND FILLING
The same inspection procedure must be carried out as forbagged coffee: a container is either suitable or it is not.
The liner itself is best described as an oblong sack orenvelope whose size is equivalent to the inner space of a
20 foot container (TEU). It is attached to hooks in the upper
corners after which loose coffee is blown in, graduallyfilling the entire container with coffee. Container liners areused in the containerized bulk shipment of dry free-flowingcargo such as coffee. They are quick and simple to installand enable bulk cargo to be shipped door to door with aminimum of handling, thereby minimizing cargo spillage
and waste.
Liners are usually made from virgin polyethylene (film or
woven polyolefins), allowing coffee to be transported safely
in an enclosed chamber, thus avoiding contamination from
pollutants and salt sea air. The liner protects the coffee
from external influences such as moisture and, in case ofcondensation occurring on the container’s inside walls, it
ensures that this does not affect the coffee.
Once full the liner is sealed and not opened again until
discharge at destination, either into the reception system ofa roasting plant, or into a silo storage system, for example
in a port. Bulk shipping means no export bags are required
anymore and more coffee fits into the container (variable but
generally about three tons more), thus saving on transport
costs. Bulk coffee is discharged mechanically at thereceiving end, thus avoiding the use of expensive manual
labour. In Western Europe the disposal of empty coffee bags
costs money as well. Today, large roasters may receive as
much as 90% in bulk but, medium-sized and especiallysmaller roasters are more likely to still use bagged coffee
for ease of blending. Nevertheless, being able to supply
coffee in bulk is a definite advantage with cost savings forboth shipper and receiver. To note that containers carrying
bulk coffee should display a warning sign ‘bulk cargo’ orsuch-like statement.

FIXING THE LINER
The inner polypropylene liner must fit snugly against thewalls, roof and floor when full – improper placing of theCHAPTER 5 – LOGISTICS AND INSURANCE

inlet could cause tearing – and the load must be as evenly
levelled as possible. The liner’s roof must not sag, butmust be tight so at no time will the inlet or roof rest on thecoffee after loading. Ideally, built-in reinforced straps in theliner’s front panel (bulkhead) will prevent bulging when thecontainer is full, thus allowing for easy closing of the doors.
(Strapping ropes can also be used.) There should not be
any pressure on the doors when closed after loading. The
liner must be properly fastened to the container’s interior,also at the far end: at the point of discharge the container istilted to enable the coffee to slide out of the liner, rather than
the filled liner sliding out of the container.
Containers can be filled in two ways. One method is to takethe coffee from the silo with the aid of a blower or to empty
individual bags into the blower’s reception hopper. Blowing
air into the liner makes it align itself with the walls, roof andfloor of the container. Once the liner fits correctly inside thecontainer, the blower then spews the coffee into the now
fully-lined container. During this process the displaced air
must be able to escape. Some types of piping may cause
static electricity build-up and should preferably be earthed.
Do not blow a heap into the centre, leaving space at therear and the doors, but fill the liner evenly. To ensure thecoffee stays away from the hot container roof, avoid asmuch as possible contact between the stow and the liner’s
roof panel, preferably by a margin of about 70 cm. Somereceivers stipulate that there must be space between theliner’s roof panel and the top of the coffee load.
Another way is to fill the container using a telescopic
conveyor belt that extends into the lined box. This eliminates
the need for air pressure and therefore the risk of damage
to the beans.

CONTAINERS AT THE
RECEIVING END
INLAND CONTAINER STATIONS
Unlike bagged coffee in containers, bulk coffee in lined
containers can be transported and stored outside for limited
periods fairly safely under ECC rules. Containers may beweighed and sampled at inland stations provided they wereon-carried within 14 calendar days of arrival at the seaportand were weighed and sampled within seven calendar daysof arriving at the inland station. (Whether or not carriers raise
any extra charges for such extra time is between them andthe receiver.) This permits large receivers to take delivery atinland terminals. They then call the containers forward just intime for direct discharge at the roasting plant.
The objective of the just-in-time (JIT) supply line principle
is to carry only the immediately necessary physical stocks,
with planned arrivals to make up for drawdown. Large trade
houses have the capacity to supply JIT direct from their own
stocks but cannot supply all a roaster’s requirements, also
because roasters do not want JIT to limit their purchasing
options. The alternative is to buy from smaller exporters andorigins ‘basis named vessel’ where the buyer dictates theshipping line and the vessel to be used.
Receivers are also expected to take all reasonablemeasures to avoid condensation occurring, especially in
winter. If the goods are not required for some time thenthey will be discharged in a port silo complex for call-up
when required. Many ports now offer dedicated silo storage
facilities or ‘silo parks’, which receive and store bulk.
Services include blending and cleaning/sorting on demand.
Deliveries to roasting plants are then made in bulk trucks
that discharge by tilting, or in bulk bags. Some bulk trucks
are compartmentalized and can hold different qualities,
which are discharged separately by a conveyor belt thatruns below the compartments.
Coffee in bags for larger end-users now increasingly goes toa silo installation for transformation into bulk, obviously at a
cost.

DISCHARGE
Technology and mechanization are constantly improving
supply chain management and an increasing number of bulk
containers go directly from the quay or container station to
the roasting plant. Here they are discharged, automaticallyand by a single person (sometimes the driver of the vehicle).

Bulk coffee in liners – an example. Photograph courtesy Maersk Line
Cargo Care.

At the roasting plant or silo storage facility the container
truck is backed onto a reception pit where the seals arechecked and cut. The doors are opened, the liner is cut
and the container is then gradually angled upwards by the

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lorry’s tilt-chassis, causing the coffee to pour out. The tilting
mechanism is plugged into the computerized reception
mechanism, which then controls the rate of tilt and hence
the rate of pour. Once the discharge is complete the liner isremoved and put away for dispatch to a recycling plant. Thisis much more efficient than when bags had to be unloaded,
cut open and tipped out manually

QUALITY AND SAMPLING
To receive the wrong quality of coffee creates huge problems
for any roaster. If anything this has been reinforced by modern
just-in-time supply chain practices.
Large roasting plants slot incoming containers into the
production line on the basis of the quality, i.e. to be used inblend or production run number X. The quality is known inthe sense that the purchasing department has previously
approved a sample of the coffee and it has been allocated apurchase or quality code. The plant has received the shipping
sample and has verified its conformity with the purchasecode.
It is extremely important to the roaster that the shipping
sample is fully representative of the actual shipment because
at the roasting plant the container is discharged directly
into a receiving silo. This leaves little room for manoeuvre –reversing the operation is both awkward and time-consuming.
Of course, someone watches the actual discharge to ensure
no excessive foreign matter or clumps of coffee are present.
Clumps suggest water or condensation damage and apotential risk of mould.
After dumping the coffee passes through a transfer duct
into the electronic weighing silo. During this passage a timeswitch opens a valve at regular intervals, permitting a small
amount of beans to fall into a sample receptacle. In this way
the entire load is automatically sampled, from beginningto end. The resulting sample is then thoroughly mixed andchecked to ensure it matches the purchase or quality code.
This system is much more accurate than the old way of usinga sampling iron on perhaps 10% of the bags. After approval
and weighing the coffee is then transferred to the final
storage silo pending supply to the roasting process. During
this transfer any foreign matter, dust and chips are removed,again automatically.

WEIGHTS AND SUPERVISION
Weighing technology in importing countries has progressedfrom the random check weighing of a certain percentageof the bags to the accurate computerized weighing of eachcomplete parcel, increasingly by using weighing silos.
The ECC states that the sellers shall refund any loss in weightin excess of 0.5% of the shipping weight. Unless weighingat origin is extremely accurate some argue that this implies‘delivered weights’ irrespective of what the contract states

because many containers travel long distances to the coastfrom inland filling stations. But the underlying reasoning isthat coffee in bulk does not dry out to any noticeable extent
and so should not incur any noticeable loss in weight either.
Experience suggests that 90% to 95% of bulk containers
discharge within the laid down weight tolerance of 0.5%
and that any loss exceeding 0.2% is likely to be due toincorrect filling. There is therefore no particular reason forshippers to add a little extra weight to avoid weight claims(as is sometimes done for bagged coffee). Note thoughthat large receivers seldom bother to claim for small weight
differences, preferring to simply strike a recurrent offender
off their list of approved suppliers.
Some receivers use the weighing mechanism in thecontainer gantry crane to establish whether the gross weightof a container appears to be within acceptable limits. Should
an individual container present cause for concern it will bedischarged and weighed under independent supervision.
This is not feasible in arrival ports but is possible by special
arrangement at inland container yards.
But, the container can only be discharged into the electronic
weighing system of the roasting plant or silo park operation.
This makes the term ‘supervision’ somewhat theoretical,
because all that will be produced is a computer print-out andverification of the container and seal numbers. Of course,
the supervisor could certify that the weighing system had
been correctly and formally calibrated in accordance withthe laws of the country where it is situated. The operatorsof such weighing installations should be able to produce a
valid calibration certificate on demand.

CONTAINER WEIGHTS AT SHIPMENT
There have been instances where coffee containers havearrived at destination severely underweight or even totally
empty, with all seals etc. intact. Strange as this may seem
it is nevertheless fact and seeing that theft while on board
ship seems rather unlikely, this raises the obvious question:
who, if anyone, checks container weights at the time ofloading on board vessel? What happens currently?
 Containers arrive at ship’s side for loading already locked
and sealed. Therefore, all that is visible during loading
are locked and sealed steel boxes.
 Port container or gantry cranes do have a weightindicator, but the operator, who is a third party, will notnecessarily always observe this nor is he/she in a position
to know what the weight of a particular container should
be. Container weights vary according to the contents
whereas sometimes even empty containers are carried
for repositioning.
 In theory it is possible to ask the port for a weighing slip,
but this means extra costs. It is also not really feasible tointerrupt loading in case variances were to be observed.
Modern container vessels carry large numbers ofCHAPTER 5 – LOGISTICS AND INSURANCE

containers and spend little time in port. Schedules arevery strict and interruptions are unacceptable.
 In some ports containers are loaded using the ship’s own
gear (lifting equipment), for example if port equipment
is in short supply. Such on-board equipment is notnecessarily fitted with weight indicators.
So far the conclusion has been that checking container
weights during loading is not a viable proposition unlesssomeone is prepared to incur, possibly substantial, costs.

As mentioned, most large modern roasting plants nolonger accept bagged coffee and producing countries orexporters that persist in using bags will see much of theircargo transiting through silo parks at destination. Here thebagged coffee is de-bagged and transferred into silos for
subsequent delivery in bulk, sometimes after blending. Thisis both costly and time consuming and will increasingly
render uncompetitive those mainstream suppliers who
cannot or will not ‘do bulk’.

However, in recent years evidence has come to light ofshippers overloading and under-declaring container weights(probably not coffee containers) to the point where vessel
security becomes compromised as evidenced by a numberof incidents at sea and in port. In December 2010, the World
Shipping Council – www.worldshipping.org – therefore
asked the International Maritime Organization – www.imo.
org – to establish an international legal requirement that allexport containers must be weighed before they are loaded.

COST AND CONVENIENCE

Weighing containers is by itself not difficult – the issue
is how to avoid interrupting the regular flow so as not tointerfere with yard, port and ship operations. This may meanchanges in the way containers are brought into the port orcontainer yard, or how they are handled there. One potential
way is to fit mobile container positioning equipment withweight indicators and to record the results with ‘exceptions’being directed away from the regular flow. Another would
be for accredited third party verifiers to provide accuratecontainer weights before entry into port or yard.

European Union countries hold importers directly
responsible for the disposal of waste materials such asjute and sisal bags, a task that roasters can do without.
The European Union is also increasingly pressuring roadtransport to travel outside peak traffic hours: coffee in bulk
fits this development because at the terminals it can behandled mechanically, outside normal working hours.

Whatever the case may be, as and when it materializes,
the weighing of loaded containers immediately ahead of
shipment should be an added security advantage to coffee
shippers and receivers alike.

OUTLOOK
Today (late 2011), the carriage of coffee in containers,
whether in bags or in bulk, has become universal and it isunlikely that much if any coffee is still shipped internationallyas break bulk or loose cargo. Furthermore, estimates
are that as much as 70% of all mainstream coffee is now
shipped in bulk. Because mainstream coffee makes up
over 90% of all coffee traded, this makes it likely that notless than 65% of all coffee traded internationally is shippedin bulk. But the real figure could be (much) higher. Exactdata on the amount of coffee carried in bulk versus thatin bags are not available and this information is based on
feedback from coffee shipping and trading sources. Largemainstream roasters are the major receivers of bulk coffee
and a number of them today accept nothing else into theirplants. But for importers and medium to small roasters,
especially specialty roasters, the proportion of bulk is muchless because medium to small roasters are more likely to
blend by bag count instead of container count.

Bulk shipments require less handling, cost less in terms of
packaging, and incur lower port and freight charges thanbagged cargo. At the receiving end they eliminate manual
labour and reduce transport costs, with the product basicallypresented ‘ready for use’ at the roasting plant. With exact
and reliable just-in-time scheduling, coffee increasingly
travels directly from origin to the roasting plants.

Containerization and cargo safety issues are underconstant research in areas as vacuum packing for green
coffee; improved desiccants and use of moisture absorbing
materials (MAMs); different fumigation and container
cleaning methods; electronic seals including door opening
registration alarms; satellite tracking; and securing inlandtransportation; etc.

CONTAINER SECURITY AT CUSTOMSPrevious sections have referred to security issues such as
quality, performance and finance. But there are also physicalrisks that may occur once the container leaves the loading
station. It may be tampered with for reasons of theft or
smuggling, both occurrences that are on the rise worldwide.
Favourite locations for this type of crime are ports andcontainer terminals, or during road or rail transport.

RECEIVING CONTAINERS – UNITED STATESThe aftermath of the terrible events of 11 September 2001
in New York brought much stricter inspection controls on
containers, and even coffee samples entering the UnitedStates and probably also other countries. There are many
millions of containers in use worldwide, carrying much of theworld’s cargo, and relatively few of them are ever physicallyinspected because to do so would cause bottlenecks thatwould not sit well with just-in-time logistics. To deal with such

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concerns, the U.S. Food and Drug Administration (FDA) has
introduced a Food Bioterrorism Regulation that requires all
those handling food products, including green coffee, to beregistered with it. See www.cfsan.fda.gov and www.ncausa.
org. See also the information on HACCP and the UnitedStates in chapter 12.

Security Initiative screening programme to all EU states. Since
then, the European Commission has adopted Commission
Regulation (EC) No. 1875/2006 of 18 December 2006 aimed
at increased security for shipments entering or leaving the EU
and providing greater facilitation for compliant operators. The
Regulation has implemented four measures as follows:In addition, US Customs have initiated C-TPAT (CustomsTrade Partnership against Terrorism), a government-businessprogramme to strengthen overall supply chain and bordersecurity. For more on this search for C-TPAT on www.cbp.
gov. C-TPAT is more extensive where US Customs review
company security and control systems. It is voluntary, but
once an importer has been registered costs will be lower as
there will be fewer customs inspections. Foreign companies
shipping to the United States that may not have links witha C-TPAT registered importer can make use of an Agency
Service offered by the National Coffee Association of USA.

 A risk management framework ensuring customs control
of goods crossing the EU.

The NCA C-TPAT programme is to help the industry partnerwith the United States Government to enhance homeland
security while easing potential burdens on commerce. The
NCA has partnered with the Global Security Verification(GSV) cross sector industry initiative (www.importsecurity.
com) and Intertek (www.intertek.com) to develop theindustry’s shared information platform designed to facilitate
importers’ and exporters’ participation and compliancewith C-TPAT requirements. The platform will be a registry of
foreign suppliers and their C-TPAT related security practices.
Industry importers that are current members and/or seeking
C-TPAT membership can utilize the NCA C-TPAT shared
information platform for efficient and cost-effective meansof collecting and maintaining necessary documentation. In
addition to the supplier registry, the platform is designed toprovide valuable information and tools to users to facilitate
application to the C-TPAT program. Visit www.ctpat.ncausa.
org which also describes the registration process itself.

A copy of the Regulation can be downloaded from thefollowing link: www.eur-lex.europa.eu/LexUriServ/site/en/
oj/2006/l_360/l_36020061219en00640125.pdf. The following
offers a brief explanation of what this means:

Under the Container Security Initiative (CSI) all high-risk
cargo is to be inspected before loading at origin and to
this end US Customs have established a presence in a
number of foreign ports. For food shipments US Customs
now require advance notice, no more than five days before
arrival and no later than noon the day prior to arrival fordischarge. In addition, the ’24 Hour Advance Manifest Rule’obliges shipping companies to transmit cargo manifest
details to US Customs 24 hours prior to a vessel’s ETA atthe port of loading. Cargo for which the required details
have not been transmitted as per this rule will not be loaded.
Should a certain shipment be considered suspect then US
Customs will issue a DNL message: Do Not Load. See moreon www.cbp.gov.

RECEIVING CONTAINERS – EUROPEAN
UNION
In early 2004, the United States and the European Union also
signed a shipping security deal that will extend the Container

 An Authorized Economic Operator (AEO) Certificate will be
granted to reliable economic operators.
 Traders will have to supply customs authorities withadvance information on goods brought into, or out of, theEU.
 Customs authorities will be required to exchange
information electronically on exports between the Customs
offices involved in the procedure (export control system).

Authorized Economic Operator. Reliable and compliant
traders will benefit from simplifications in the customs
procedures and/or from facilitation with regard to customs
controls relating to safety and security under the Authorized
Economic Operator (AEO) certification scheme. The AEO
concept should ensure a safer and more secure end-to-end
supply chain. Being recognized as an AEO will constitute an
added value for the operator as it demonstrates compliancewith solid security criteria and controls. This will provide acompetitive advantage to participating companies.
Information on goods prior leaving or entering the EU
territory. Traders will have to supply customs authorities withadvance information on goods brought into, or out of, theEU (entry and exit summary declarations). This will enable
customs authorities to carry out better risk analysis, e.g.
before goods arrive in the customs territory, and to focus onhigh risk cargo due to the availability of risk information at an
early stage. It will also allow quicker processing and release
upon arrival, resulting in a benefit for traders.
NB: This is of particular importance to coffee exporters inthat the advance information on shipments must be sent to
the EU Customs at the first point of arrival 24 hours before
the loading of a container on the vessel. See Annex 30A of
the Regulation for further details. Different time limits apply
to various modes of transport but the 24-hour requirement
covers virtually all coffee shipments.
What is now known as the European Union (EU) Advance
Cargo Declaration Regime entered into force on 1 January
2011.
For further information visit www.ecsa.eu/publications/101.pdf
or www.ecsa.eu (look under Publications). See also the FAQ
section at wwwec.europa.eu/ecip/help/faq/index_en.htm

CHAPTER 5 – LOGISTICS AND INSURANCE

Export control system. Customs authorities will be required
to exchange information electronically on exports between the
Customs offices involved in the procedure. This constitutes
the first step in the full computerization of the EU Customs;
the so-called electronic Customs project (IP/05/1501). Once
all Member States are connected to the export control systemthen EU exporters will receive the proof of export immediately
after the exit of goods, enabling all related processes (VAT
refunds, etc.) to be speeded up.
Further information on the security aspects of the Customs
Code can be found at: www.ec.europa.eu/taxation_customs/
customs/policy_issues/customs_security/index_en.htm
Most shipping lines are well aware of, and well versed in,
the application of the different directives in the United States
and the European Union and are mostly dealing with themby electronic means. They are more or less forced to do soon shippers’ behalf because potentially they are liable for
substantial fines where no or incorrect advance information isprovided. Because of this additional administrative workload
some shipping lines have introduced a new category offees to cover the cost – as explained at the beginning of thischapter.

CONTAINER SEALS
Apart from locks, the first defence against tampering are
the numbered seals the shipping company provides to seal
a container’s doors. If a seal is broken or damaged then it
may well be that the container has been tampered with. But
instances have been recorded where traditional seals havebeen broken and replaced without any visible sign of thishaving occurred. Because of this some exporters add locksof their own to physically secure container doors.
Containers and their seals must also be physically checked
each time a container changes hands, for example fromorigin terminal to ship, from ship to arrival terminal, fromarrival terminal to truck, and from truck to roasting plant.
Ideally, each time a Container Interchange Receipt shouldbe established that records the seal’s condition, the seal
number, and the exterior condition of the container itself.
Should there be something wrong with any of these thenthe receipt trail could show under whose responsibility thishappened, in turn enabling a claim to be lodged if necessary.
The last check takes place just before the container will be
opened. Shipping lines also use these receipts to claim
redress for any physical damage to the actual container
itself.
Security of containers is not just to protect the coffee.
In recent years, illegal drugs have also been found incoffee containers (as a result of port to port conspiracies,
unconnected with the coffee trade). The international coffee
trade and the shipping community are actively working withcustoms authorities worldwide to help stop the use of coffee
shipments as a vehicle for illegal drugs. Obviously, container
seals are the first line of defense in this battle.

Modern seals incorporate increasingly sophisticatedtechnology that makes undetected tampering much moredifficult. But physical verification is still required. Seals bythemselves cannot prevent containers being opened – they
are not a deterrent but rather a means of verification. Evenso, seals are no better than the person who places them. If
that person cannot be trusted then one cannot be sure theseal was really placed at all, i.e. that it was not faked. It is
not for this publication to explain different ways in which theplacing of seals has previously been faked. Instead, one
solution is to use clear seals that show the mechanism, with
the number printed on the inside under a clear elevation thatworks as a magnifying glass.
However, even intact seals prove only that the cargo seems
not to have been interfered with after the seals were affixed.
Bulk containers have been known to be attacked by forcing
a pipe through the rubber door seals and into the liner,
after which coffee is simply siphoned out. This is easily
prevented by placing a plank upright on the floor inside andin front of the doors before shutting them. However, there
have also been instances where containerized cargo has
disappeared during inland transit to port, yet doors andseals were perceived as intact. Where this occurs with any
regularity shippers really only have one option: invest in
security measures such as having trucks travel in escorted
convoys, only allowing night stops in authorized locations,etc.
If a container’s seal and seal number are sound and correct
on arrival of an FCL shipment, but the condition or weight ofthe coffee is not, then the receiver will claim from the shipper/
exporter, also if stuffing took place under supervision. When
goods are shipped FCL, the responsibility lies with theperson supplying them unless the bill of lading shows thecontainer was accepted as sound but at destination it isdelivered damaged. To repeat, the burden of proof always
lies with the shipper.
For goods shipped on an LCL basis, shipping lines can beheld responsible only for the number and the apparent goodorder and condition of the bags, Therefore, if on arrival theseal and seal number of a container shipped on an LCL basis
are sound and correct, but the condition or number of thebags is not, then the receiver will claim from the shipping line.

CONTAINER TRACKING AND SMARTCONTAINERS
Most reputable shipping lines provide container tracking
tools, track and trace, through their own websites.
Containers are not yet tracked electronically (implanting
microchip transmitters is still too expensive) but every moveis notified and recorded in the tracking system, making
up-to-date information available. As individual carriers
traditionally work with proprietary computer systems andprogrammes for such services, receivers have to contact
each carrier individually, which is cumbersome. However,shipping portals are increasingly standardizing the way

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shippers, receivers and clearing agents interact with carriers
by providing access through a single platform.
Other service tools will include sailing schedules, container
bookings, bill of lading information and event notifications.
Large shippers/receivers can have direct (authorized) accessto such portals and may for example operate entirely withelectronic information, including bills of lading. Eventually,such portals will also interact with both e-commerce andpaperless trading systems. For more on this go to www.
inttra.com Smaller or occasional shippers and receivers
mostly still rely on hard copy (printed) bills of lading, but
the portal can arrange to print the document at the mostappropriate location. This saves time and minimizes therisk of mail being lost. However, as mentioned in chapter
6, more widespread use by the coffee trade of electronic
documentation probably depends on major shipping lines
generally moving to electronic bills of lading.
Depending on their sophistication, modern container seals
can record and transmit all actions that might occur duringa voyage, particularly also the opening/closing of container
doors. Using technologies such as Radio Frequency
Identification (RFID) passive devices are read by scanningwhereas active devices (battery powered) can themselvestransmit information. These are useful tools for keeping trackof cargo and facilitating cross-border trade, for example
by reducing customs formalities in Europe. But security
concerns are also placing electronic seals in the forefront ofanti-terrorism activities. Until fairly recently, a container loadof simple food items like bottled water, flour or sugar did
not pose any major security risk, as theft was unlikely. But
today there is a real risk of terrorist action (contamination,poisoning, etc.) and also low-value food cargo requires highlevels of security.
The Smart Container pilot project by US Customs represents
another potential approach, but whichever direction istaken, electronic seals or smart containers, one or both will
become an integral part of coffee logistics. Although thecost of active (able to report) electronic seals is coming
down and re-usable ones are increasingly available, coststill remains an obstacle, not least because of the massive
number of container shipments that take place daily.

INSURANCEUTMOST GOOD FAITH
All insurance contracts are subject to the principle of utmost
good faith. The insured must truthfully inform the underwriterof every material fact that may influence the insurer in
accepting, rating or declining a risk. This duty of disclosure
continues throughout the life of the policy. Insurance is ineffect a partnership between the owner of the commodity
who wishes to avoid or minimize the risk of loss or damage
and the insurance company that will take on that risk against

payment of a fee. The owner of the commodity must practicerisk avoidance, just as the insurance company must makegood legitimate losses.
Insurance is the most obvious and the oldest form of risk
management, and has been practiced since long before
futures markets and other risk management instruments
came into being. It is beyond the scope of this guide to go
into the precise detail of what constitutes a good insurance
policy. There are almost endless variations on a very basic
theme: if the loss was unavoidable then the cover should
stand.
But insurance cover is only as good as what is stated in thepolicy document. One view is that only what is expressly
included is covered. Another and more attractive view is thatanything that is not specifically excluded is covered.

THE RISK TRAIL TO FOB
To judge the need for insurance cover, one first needs toanalyse the type of risk that exists, how prevalent it is andwhat potential loss it represents. Only then consider whether
or not cover should be purchased. Always look at themonetary value of coffee when considering risk. As coffee
prices fluctuate, so does the value of a truck or container
load. It is not always recognized that a container load ofcoffee can be more valuable than a load of television sets orother electronic goods.

THE RISK TRAIL TO FOB: FARM GATE TOPROCESSING
Money in transit. An obvious risk – buying agents carrycash. An insurance company may offer cash in transit coveras part of a general policy, but the extent of such a cover isalways limited so be sure to find out exactly what is covered
and what is not. When coffee values change the amount ofnecessary cash will change as well.
Ownership at inland buying stations. At this stage coffee
is often packed in unmarked bags and is very difficult to
identify. Keep stocks at such stations to a minimum andtransfer them to a central location as soon as possible.
Unless there is a good, formal record system at the buying
station it may be difficult to insure risk at this stage. Be certain
to advise the insurance company of all circumstances,including negative aspects, to prevent difficulties arising
after a loss occurs.
Inland transit. Often inland transit is by small trucks
under variable conditions of transport quality. Arrivals must
therefore be checked for quality, weight and moisture
content. To make fraudulent manipulation more difficult
samples should be taken by a member of the quality control
department rather than by warehouse staff.

CHAPTER 5 – LOGISTICS AND INSURANCETHE RISK TRAIL TO FOB: WAREHOUSING
AND PROCESSING

THE RISK TRAIL TO FOB: TRANSPORT TO
PORT

Warehousing. The better organized this function is, theeasier it is to obtain cover and negotiate the best terms andconditions. Like banks, insurance companies wish to know
and understand how a business operates. Ensure coffee isstored in an easily identifiable manner, using a numbered
bay system in the warehouse with the bay numbers andboundaries painted on the floor. Coffee must always be
stored on dry, clean wooden baulks or pallets, off the floor,
away from walls.

There are no uniform patterns for inland transportation to theport. Each producing country has different arrangements, but
all have some risk principles in common.

Keep back-up warehouse records in a secure and separate
location. Otherwise the loss of both stocks and records canbecome very convenient for some, while creating a nightmare
for the owner. Make weekly stock checks, preferably using
people who do not know what is expected and therefore
can only report what they find. All stacks should bear aclearly visible stack card, showing the detail and history of
the coffee stored. There should never be unidentified coffee
in any warehouse. Unidentified can become unknown andmay progress to non-existent – mystery disappearance or‘going over the wall’.
Make regular random weight checks to verify that bags are of
the correct weight and that scales have not been tamperedwith. Occasionally tear down a stack, again at random, toverify there is no hole or empty drum in the middle.
Other obvious general risk factors include flooding, fire,lightning, explosion, plane crash, theft, burglary andembezzlement. Others are deterioration due to excessive
moisture content, prolonged storage or infestation (but not
all of these latter types of risk are insurable).
The buildings themselves can pose risk if roofs are not tight,
drainage pipes are blocked, ventilation is inadequate or
the walls and floor are of poor quality. The area in which
the warehouse is located may pose risks if neighbouringbuildings are used to store or produce hazardous or smelly
goods.
Processing. Usually the risk of faulty or improper
processing cannot be insured. Processors must dependon the qualifications of their staff and good quality control
at the purchasing end to achieve the expected results.
Nevertheless, accurate storage and processing records
with daily out-turn reports will go a long way to alerting one
to any unexpected and unwelcome variations.
Processing is always a weak point in that out-turns cannot
be forecast exactly. Ensure scales are correctly set, bags
are weighed to the proper weight and, above all, do notallow any unmarked coffee to lie around. Unmarked bags orbags without tags could be the first stage of an unscheduled
voyage out of the warehouse.

 The truck that collects the coffee at your facility musthave been properly cleaned, as you do not know what
it carried before. Closely inspect all trucks for smells andother contamination. Look for holes in the roof or flooring
through which water could penetrate or through whichcoffee might be stolen by the use of probes.
 The same applies when containers are used for inlandtransportation. In addition, take a very close look at thelocking devices of the doors and at the door hinges.
 It is also recommended to check the moisture of any
wooden flooring of any such truck or container with amoisture-measuring instrument. Even a moisture content
of well in excess of 20%, a situation in which coffee would
definitely become damaged, cannot be verified by simply
touching or feeling the floor.
 If the inland container is also to be used to ship the coffee,then be sure that the container is properly lined, with thecoffee fully enveloped by strong Kraft paper or cardboard(depending on the season and your type of trade) or anadequate container liner in the case of a bulk shipment.
 Depending on climatic conditions, heat radiation may be
a potential hazard. Even if that is not the case, coffee ina container should never be stored in the open for any
prolonged period.
 Ensure that only known and trusted parties or persons
handle the coffee. It is advisable to operate with as few
truckers or trucking companies as possible in order tobuild a mutual relationship. It may also be wise to clearly
define which trucks and which drivers may be used.
 Keep in contact with the driver(s) by mobile phone and/or use a Global Positioning System (GPS) to monitor atruck’s progress.
 Do not permit overnight trucking or prolonged stops at
unknown places. If the distance to the port is too far to
make it in a single day trip, then make sure the driver
reports with the truck at places that can be trusted, andstays overnight only in a safe and secured compound.
Under certain circumstances convoy systems can also
be of help.
 In some countries it is advisable to consider using security
services. Before adopting such safety measures and so
incurring cost, always ask how quickly you will be notifiedof something being wrong, and who will do what within
what period of time after such information is received.
Have an established accident or crisis management
procedure.
 Ensure the coffee is delivered to a safe and suitablelocation, and that the operator is familiar with thehandling of coffee. On arrival the goods should beproperly checked and a certificate of receipt issued. This
is to ensure there is a credible paper trail that the insurer
can verify.

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CHAPTER 5 – LOGISTICS AND INSURANCE Remember, the climate in most shipping ports is far from
ideal for coffee. In high temperatures and high humidity
coffee absorbs moisture, possibly to a level wherepermissible limits for safe transportation are exceeded
and where severe condensation and mould may become
unavoidable.
Exporters should bear in mind that at all times the coffee
travels and is stored at their risk. There is also the obligation
to deliver a particular quality and quantity at a given timeand place. Poor management of the risks to FOB may ruin
any chance of claiming a mishap on force majeure (i.e.
as unforeseeable events beyond anyone’s control – seechapter 4, Contracts).

DELIVERY TO FOB: FCL (OR CY) TERMS
Up to this point there is no difference between shipping FCL(full container load) (CY) or LCL (less than container load)(CFS), because it is always the shipper’s responsibility andrisk that the coffee arrives at the point and time contracted
for, usually FOB a particular vessel. (For a more detailed
explanation of the terms LCL and FCL, see the beginning of
this chapter) The following are the additional responsibilities
and risks an exporter assumes when shipping FCL.
 The shipper is responsible for selecting a suitablecontainer. This is not limited to deciding whether a typeof container is suitable in principle; each individual
container must be suitable for the carriage of foodstuffs.
As per the bill of lading only the shipper is responsible forselecting a suitable container, for controlling its condition
and for preparing it in every respect for the voyage.
 The shipper is responsible for proper lining of thecontainer, or for enveloping the coffee in a suitable form.
 The shipper is responsible for loading the correct quantity.
Only evidence that the container has been tamperedwith will absolve the exporter from having to make good
any short weights. The shipper is responsible for what is
loaded into the container, right until the doors are closed.
 It is solely the task of the shipper to prepare the container
for the carriage of goods. Any damage that cannot be
proved to have occurred from external causes is forthe account of the shipper. In this context, changes inweather or temperature are not an external cause.
 The shipper is responsible for proper stowage and must
request the carrier to ‘stow away from heat, cool stow
and sun/weather protected’ or ‘stow in protected places
only/away from heat and radiation’ (i.e. no outer or top
position). The ECC also stipulates that shippers shallpass on all relevant shipping instructions received frombuyers to the carrier.
Remember, the burden of proof is always on the shipper,that has to show that everything was in good order when thecontainer left their premises or was loaded. If there is any
doubt, the shipper will be held responsible, regardless of any
supervision certificates issued by any party at origin.

Such weight or supervision certificates do not provide an
ultimate safeguard because only the verifiable facts at
destination count. This does not prevent shippers from
employing trustworthy persons with good knowledge tocontrol and verify what is being done – their simple presence
may already be enough to avoid manipulations. But, unlessexpressly agreed, such inspectors or inspection companies
seldom assume any financial liability arising from their work.

DELIVERY TO FOB: FCL (OR CY) TERMS IN
BULK
Bulk shipments are made almost exclusively on FCL (fullcontainer load) terms. In only very few ports do shipping
companies offer the service of bulk loading coffee that isdelivered to them in bags. For bulk shipments, be aware of
all risks already mentioned above for FCL shipments, andalso of the following additional factors.
 While the need to select a suitable container for bagged
coffee is essential and obvious, this is even more so forcoffee in bulk because separating out any damaged
beans is far more difficult and expensive. In particular,
the container must be clean, free of taint, watertight, andwith locking and sealing devices intact. Only responsible,
experienced and reliable persons should be entrustedwith the checking of containers before stuffing.
 Using the appropriate liner is essential. These are madefrom woven polypropylene or similar material that allows
the coffee to breathe. The liner must be fixed to thecontainer in such a way that:– It does not slide out during tilting and emptying of thecontainer;– The liner’s roof does not lie on the coffee; and– The bulge does not touch the doors, but is well awayfrom them (this because the bulging effect increases
during transit).
 The liner must be filled properly with the correct quantityand quality of coffee. The surface of the coffee must be
as level as possible to provide maximum distance to thecontainer roof, and to prevent the liner from resting on
top of the coffee.
 Sealing the container is a good option to secure evidenceof what has been done. The carrier will probably also
affix a seal. If so, check carefully that the seal is correctly
applied, and the seal number is noted and mentioned
in the shipping documents. (The ECC requires shippers
to provide seal and container numbers in their shipping
advices.)

DELIVERY TO FOB: LCL (OR CFS)
LCL (less than container load) means the carrier is
responsible for the suitability and condition of the container,
and the stuffing thereof for which they charge an LCL
service charge. The bill of lading will then state ‘received
in apparent good order and condition X number of bags

CHAPTER 5 – LOGISTICS AND INSURANCE

said to weigh Y kg’. The carrier accepts responsibility forthe number of bags but not the contents or the weight. The
exporter’s liability is reduced, but not eliminated, because
again, the carrier can only be blamed if the cause of any
arrival discrepancies can be proved to be external.

TERMINATION OF RISK
Depending on the terms of the contract of sale contract, risk
may terminate at different stages of the shipping process.
FCA (can be either CY or CFS). The buyer or their agent
takes delivery at an inland place, probably at the seller’s
mill or warehouse, the receiving station or on the carrier’s
truck. No risk of physical damage or destruction attaches
to the exporter after this point, but the exporter remains
responsible for errors or omissions that occurred while thegoods were under their care and responsibility.
In other words, if you deliver an FCL container that is
unsuitable (e.g. tainted) then you remain responsible for all
the consequences. The same goes for short weights beyond
the permitted tolerance. But if the container is stolen after it
leaves the premises, then the loss is not the responsibilityof the exporter.
FOB (and CFR). As discussed in chapter 4, Contracts, there
are differences between FOB according to Incoterms®
and FOB as per the ECC and GCA contracts for coffee. In
insurance terms, the following applies: Incoterms®. FOB means that you must bring the goods
safely and in sound condition on board ship at your risk
and expense. See www.iccwbo.org/incoterms.
 ECC. FOB means that the risk, or rather the obligation tokeep the goods insured, passes to the buyer when thecoffee leaves ‘the ultimate warehouse or place of storage
at the port of shipment’. This certainly does not meanthat the entire inland haulage or storage is at the buyer’srisk – all it means is the very short time span from thelast place of storage immediately before shipment. (Thisstipulation removes any uncertainty regarding insurance
cover being in place for FOB shipments. The seller’s
contractual responsibility ends ‘when the goods crossthe ship’s rail’, but for insurance purposes it is difficult
to establish when exactly this happens.) In the case ofcontainer shipments it means the removal of the containerfrom the stack in the port of shipment for direct placing
under ship’s tackle – not the removal of the coffee fromthe warehouse for stowing it into containers. ECC thengoes on to state that ‘the sellers shall have the right tothe benefit of the policy until the documents are paid for’.
This ensures that the exporter has recourse to the buyers’
insurance policy in case the goods or the container itself
are damaged, destroyed or stolen between the time thecontainer is placed in the export stack in the port and its
receipt on board.

 GCA: Under GCA contracts, however, title to the goods
is transferred when they cross the ship’s rail and theshipper is therefore obliged to insure up to this point. The
structure of the American coffee trade is different fromthat in Europe. The vast majority of American roasters
buy coffee ‘ex dock’ so it is the trade house or importerthat deals with marine insurance matters whereas inEurope many roasters buy basis FOB.
CIF. In addition to paying the ocean freight the shipper
must also arrange and pay for an insurance that must be
in conformity with the stipulation of the ECC: warehouseto warehouse, all risks including SRCC (strikes, riots, civilcommotions commodity trade) risk, and war risks at a valueof CIF + 5%. Very few CIF sales take place nowadays – as isseen earlier in this chapter.

STANDARD FORMS OF CONTRACT
Changes to standard forms of contract used in the coffee
trade are relatively rare but do occur and by the end of 2011
the ECC was under review. To see the latest version visit www.
ecf-coffee.org and look for Contracts under Publications. For
GCA contracts visit www.greencoffeeassociation.org andlook for Contracts under Resources.

INSURANCE: THE COVER
INSURING RISK
The preceding texts are intended to assist in assessing therisks and obligations, other than purely commercial ones,
that accompany particular types of contracts. The need for
insurance will be obvious to everyone – the scope of coverthat is needed depends on the total exposure to risk and isbest assessed by seeking professional guidance from aninsurance broker, an underwriter or one’s bankers. This guidecannot provide a comprehensive overview of all potential
options and solutions.
Just as it is essential to fully appreciate and quantify one’s
exposure to certain risks, so one must understand theobligation to inform the underwriters fully of all the factorsof the risk to be insured against. If this is not done it may beconsidered that the risk was misrepresented, rendering theinsurance null and void. The relationship between client andunderwriters is in many ways very similar to that between
borrower and banker – full disclosure is the best approach.
Insurance is a business with firm rules and regulations. The
costs of insurance coverage are not based on firm tariffs,
however, but are the result of the underwriters’ experience
with the particular type of risk. Underwriters keep check of
the amount of premium collected and the losses paid out.
This loss experience will determine whether premiums are
reduced, remain the same or are increased.

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Alternatively the scope of cover may be reduced or evencancelled entirely. It is therefore in the exporter’s own interestto avoid losses and claims, that is, to practice loss avoidance.
Finally, parties taking out insurance should always determine
whether or not the cover they purchase includes loss as aresult of terrorist action. If this is not specifically mentioned
in a policy document then it may not be covered.

TYPES OF COVER
Open coverIf you have regular needs for insurance, it is advisable to enter
into a contract that is valid for a period of time – usually one
year. Within the principal contract all necessary stipulations
are discussed and agreed once, and they apply for the entire
period. This means that within its period of validity the coveris always available when needed. Compared to insuring ona case-by-case basis this provides additional safety, better
rates and a better relationship with underwriters.

Maximum exposure or limit of liability
With an open cover the insurance contract will stipulate thelimit of the underwriters’ liability to compensate the insured
for a single occurrence. The amount of liability may varydepending on each stage of transport or storage. On a caseby-case basis (insurance per certificate) the amount stated in
the insurance certificate is the limit of liability. The considerable
increase in green coffee prices, especially arabica, in 2010/11
once again highlights the need to regularly review all insured
limits to make certain the value covered remains adequate.

minimize losses recoverable under the insurance, and (ii) toensure that all rights against third parties (warehousemen,transporters, port authorities, etc.) are properly preserved
and exercised.

Loss in weight
One matter clearly not covered under ‘all risks’ is loss inweight that does not result from obvious theft or torn bags.
Exporters wishing to cover potential weight losses, forexample when shipping coffee in bulk, must expressly apply
for such cover. Carefully check first whether it would not bebetter instead to ensure that the correct quantity is always
shipped, possibly even with a small excess or ‘tolerance’.

Duration of cover
There will be a clear stipulation from which moment until
which moment cover is granted. Read that part of the policy
or certificate very carefully; if you experience a loss outsidethat given timeframe, you are not covered. Note too that‘warehouse to warehouse’ does not mean any warehousethat may be suitable – it is always a warehouse at the statedplace of destination. This may well be different from the finaldestination the goods may travel to.

Exclusions
The policy or certificate may contain exclusion of particularrisks, for example the nuclear energy exclusion clause.
Another likely exclusion is for war on land, not to be confusedwith coverage against SRCC risks (strikes, riots, and civilcommotion). There will also be other exclusions, sometimes
based on the location of a particular risk.

Extent of insurance – all risks

Deductibles or franchises

In reality the phrase ‘all risks’ certainly does not mean thatall possible risks are covered. Normal storage and transport
insurance principally covers only losses due to physicaldamage to goods that occurs suddenly and originates fromexternal sources or events. For example, underwriters will
never cover the risk of goods becoming unfit for use as aconsequence of excessive moisture content or improper
preparation. They will firmly reject all such claims.

It may well be that the underwriter does not cover all of therisk and only agrees to insure 80%. Alternatively, the firstthousands of dollars of any claim will not be paid. Indirectly,
this is the same thing. The objective of such stipulations isto ensure that the client, the insured, makes every effort toavoid claims occurring, that is, they practice risk avoidance.

‘All risks’ normally covers all the physical risks mentioned
earlier. The contract may however also include a list of perils,
particularly for storage insurance. Be very careful with such
lists. Only the items (perils) they mention are covered by the
insurance – nothing else. If the list states only fire, lightning
and flooding, then risks such as contamination, infestation,
wetting or theft are not covered.

Risk avoidance
It is the duty of the insured and whoever is acting on theirbehalf (i) to take all reasonable measures to avoid or

Agreeing to deductibles – also called franchises – will also
save some premium, but avoid a situation where in case ofa major disaster the total amount of such deductibles could
put the company’s financial health at risk.

Premiums
The policy will stipulate the amount of premium to be
paid, how the monthly declarations shall be made to theunderwriters, and the way and time limit within which
invoices need to be paid. Remember that unpaid premiums
can result in cover lapsing. Underwriters usually view single
risks as more speculative and more expensive to administerthan declarations under an open cover or declaration policy.

CHAPTER 5 – LOGISTICS AND INSURANCE

Rates under open covers are generally much lower thanthose for single risks.

may not be expert in transport matters) would be a useful
exercise in collaboration between coffee trade associationsin producing and consuming countries.

CLAIMS FROM RECEIVERS AT
DESTINATIONIn any case, when a notification of a potential claim is
received, it is best to react with all due haste and in particular
the following:

It is known that the vast majority of shipments are contracted
FOB, and that receivers cover the marine insurance. As aresult, their relationship and arrangements with the providersof that cover are not of direct interest, but exporters need tounderstand why the receiver claims from them, rather thanfrom the carrier or the carrier’s insurance company.

 Inform your own insurance company, and the carrier, asa matter of course.
 Obtain the fullest information about the extent of the loss
or damage.
 If necessary request someone (your agent for example)
to visit the site.
 If things appear to be serious, appoint a qualified
surveyor to attend on your behalf, always keeping yourown underwriters informed.

The burden of proof rests on the shipper unless and until
there is concrete evidence that the loss or damage was due
to an external event that took place after the container was
closed and sealed. At the same time, it must be appreciatedthat serious partners of good standing are not interested
in claiming loss or damage where it does not exist. Somereceivers take the trouble to immediately inform shippers
when they believe there could be a claim on an arrival,
perhaps adding a digital photograph showing the problem(e.g. wetness, mould or clotting of the beans).
Depending on the type of problem the shipper is thengiven a time limit within which to respond, for example byarranging for an appointed representative to witness thedischarging. Because the shipper has only insured till FOB
it is unlikely that their own insurance company will become
involved, unless of course the evidence suggests that thedamage or loss could have occurred before loading. As aprecaution, shippers are always advised to transmit suchclaims to their underwriters.
Even so, damage due to the improper selection of a container,
improper lining or stowing etc., is never part of the insurance
cover to FOB unless it has been expressly agreed (liability
insurance for faulty workmanship). Unexplained differencesin weight or number of bags will also not be covered unlessthe cover was against loss in weight ‘irrespective of cause’,something few underwriters will consider.

Appointment of surveyors‘Appointment of surveyors’ is an often-heard term. ‘Lloyd’s
agents’ is another. But the trade in coffee is increasingly
specialized, and the burden of proof is increasingly placedon the exporter, including for health-related issues. It is
unlikely that the average insurance surveyor will have therequired expertise in condensation issues, for example. In
some countries this kind of specialized expertise is moreeasily obtained than in others; if shippers consider theymight be at risk they could be well advised to determine
in advance whom they could call on to represent them incase of claims. Compiling information for different importing
countries on qualified, professional surveyors and otheravailable coffee experts (surveyors may not understandquality issues for example and a coffee quality expert

WAR RISK INSURANCEIN SHIPPING
There are instances where underwriters declare certain
areas to be ‘war risk zones’. Not because of actual war,
but because of piracy attacks. For example, the Malacca
Straits in June 2005 and much more recently the Arabian
Gulf area, as well as large stretches of the Indian Ocean,due to a spiralling number of attacks emanating from theSomali coast. Piracy problems are also encountered along
the coast of West Africa. When a ‘war risk zone’ declaration
is made shipping companies may decide to recoup any
additional insurance premium they may have to pay bycharging ‘war risk’ as a separate, additional freight cost to
shippers. This is of interest to coffee producers because
inevitably in today’s coffee economy, such costs will bepassed back to the producer in the form of lower prices.
The decision on the Malacca Straits Declaration was takenby the Joint War Committee or JWC, part of the Lloyd’s
Insurance Market Association, following a report on shipping
security it had commissioned because of piracy attacks;
the appalling situation along the Somali coast is generalpublic knowledge. Strictly speaking, ‘war’ means a dispute
between nations, conducted by military and/or naval attack.
But this was not the case in the Malacca Straits, nor is it soalong the Somali coast.
The insurance industry uses a number of acknowledged
definitions of what covers certain types of risk. Among them
are the Institute War Clauses (Commodity Trades) thatspeak of ‘loss or damage to the coffee caused by war, civil
war, revolution, rebellion, insurrection or resulting civil strife
or any hostile act by or against a belligerent power’. War
clauses also deal with capture, seizure, damage due toderelict mines, etc. as well as general average or salvage
charges. But ‘war’ does not equal piracy. Yet, where suchacts occur frequently, underwriters have to consider thisadditional risk and do so by declaring the area in question

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to be a ‘war risk zone’. Individual insurance companies thendetermine what level of additional premium to apply – thiscalculation will depend on their assessment of the situation
as well as the reinsurance arrangements they have in place.
The implementation of such a move, i.e. the levying of
higher insurance premiums for ‘war risk’, was previously
arranged jointly by the underwriters concerned that thenadvised the relevant shipping conferences. Usually, thisresulted in a standard, across-the-board charge applicable
to all shipping lines. Today, this is no longer the case, mostly
as a result of the introduction of strict anti-cartel legislationthat forbids ‘joint price setting’ by underwriters and shipping
companies alike.
See the beginning of this chapter for an explanation of‘shipping Conferences’.
Other clauses relevant to the trade in coffee are (i) the
Institute Commodity Trades Clauses (A), dealing withloss/damage to goods, general average and salvage
charges, and liability under the ‘both to blame collision’
clause which appears in some bills of lading; and (ii) the
Institute Strikes Clauses (Commodity Trades) dealing
with loss/damage caused by strikers, locked-out workers
or people taking part in labour disturbances, riots or civilcommotions, and any terrorist or person acting from a
political motive in addition to general average or salvage
charges connected with the foregoing.
Individual shipping companies, faced with demands for
additional premium on vessels sailing through or passing
the declared danger zone, basically have three options: Purchase the additional insurance cover; Cover it themselves through their in-house insurance
pool; or
 Do nothing and take the risk.
Within all three options a commercial decision then has
to be made on whether or not to charge ‘war risk’ as aseparate, additional freight cost to shippers or receivers.
This is done with bunker (fuel) surcharges, for example. By
quoting freight and surcharge together the ‘war risk’ issue
in question automatically becomes part of the contract ofcarriage, the bill of lading.
However, insuring cargo against ‘war risk’ is not the
responsibility of the shipping company: the conditions of thecontract of carriage firmly place the onus on the owners of
the goods. Thus, the additional premium mentioned here isthat payable for the insurance of the vessel. A premium paidby the shipping company that may result in a surcharge on
the ocean freight it in turn charges to shippers.
Of course the owners (receivers) of the cargo most likely
also have to pay additional ‘war risk’ insurance to cover
the goods they ship. If all these additional costs become
substantial it is inevitable that prices will suffer: new costs
or cost increases that are introduced between ‘production’and ‘landing of the goods abroad’ in the end usually fall on
producers in the form of lower prices.
Finally, the foregoing only provides a brief overview of what
usually takes place between declaring that ‘war risk’ exists,and shippers or receivers being asked to pay a surcharge
for this. The legal definitions and interpretations of what
constitutes ‘war risk’ are extremely complicated and cannot
be explained here, nor can the level of surcharges individualcompanies might apply be easily estimated.
The unprecedented increase in piracy attacks emanatingfrom the Somali coast affects East and Central African coffee
producers in that war risk surcharges on their main export
routes have been driven to very high levels indeed, with asmuch as US$ 200 per TEU reportedly being charged bysome shipping lines in 2011. Fortunately, coffee prices hadrisen substantially by then, but over the longer term there
can be little doubt that such surcharge levels, together with
the increased premiums receivers have to pay for insuring
their goods, in the end directly impact on the economiesof the countries concerned. These additional charges ofcourse apply to all their maritime import and export cargo,
not just coffee.
For more information on piracy threats and counter measuresvisit www.imo.org and go to their Knowledge Centre.

CHAPTER 6

E-COMMERCE AND SUPPLYCHAIN MANAGEMENT

E-COMMERCE AND COFFEE .............................................................................................................................110
INTERNET AUCTIONS .........................................................................................................................................112
PAPERLESS TRADE .............................................................................................................................................112
SPECIFIC ASPECTS ............................................................................................................................................115
TECHNICAL QUESTIONS ...................................................................................................................................118

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E-COMMERCE AND SUPPLY CHAIN
MANAGEMENT
E-COMMERCE AND COFFEE
Modern communication technology, Internet, e-mail, mobile
phones, etc. has enabled many to access information oncoffee markets and pricing almost effortlessly, often almost
irrespective of where one might be located. Use of the Internet
is widespread also in the dissemination of statistics, shipping
information and other useful information, while networking
services as Facebook and Twitter enable the instantaneous
exchange of news and views on coffee matters and issues
globally. It is surprising that despite initial enthusiasm andan almost global acceptance of electronic operations inmany spheres of economic activity, green coffee trading via
electronic market places has not taken off.
Price information is widely available on the Internet andcoffee futures are all traded electronically on both LIFFE(www.euronext.com) and ICE (www.theice.com). However,no electronic marketplaces actively trading in green coffee
have emerged as yet. A number of serious attempts havebeen made, but failed to attract the required interest andwe were not aware of any electronic market place that was
actively trading physical or green coffee (as opposed tocoffee futures) by end 2011.
When it comes to actual trading then traditional methods
continue to be the order of the day, i.e. direct contact
between seller and buyer using e-mail, telephone, telex andfax. Why is this? Apart from the fact that the internationalcoffee trade remains very fragmented with numerous actors,
there are probably two major reasons:
1. Buyers need to know what quality they may bepurchasing because coffee is not homogeneous.
The reason futures markets work is that they trade a fully
standardized 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 is what makes trading possible.
Coffee quality varies enormously and development ofinternationally accepted green coffee standards thatroasters could trust enough to receive coffee ‘unseen’
has to date proved impossible. Roasters need advancesamples of the physical coffee they receive and they need
to be able to reject substandard deliveries. But at the sametime, 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 thatuse electronic documentation throughout but unless anduntil a number of them give solid backing to the idea of anopen electronic marketplace for green coffee, there is little
chance of one emerging any time soon.
In fact it is questionable whether the mainstream coffeeindustry (85%-90% of all coffee roasted) presently has any
interest in advancing beyond the electronic trading andexecution 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 forthe pricing of most physical or green coffee, leaving only thesourcing and implementation of the actual purchases to be
carried out through direct contacts.
This is not the same as an ‘electronic market place forgreen coffee’, but seems to be all the market requires atthis stage. This is why otherwise great ideas as Eximware,www.eximware.com, and Intercontinental Exchange’s (ICE)eCOPS system, www.theice.com have failed to advance intogreen coffee trading. Futures markets operate combined
electronic trading and documentation systems successfully,
but this is a very different environment from the trade inphysical, in green coffee.
Many specialty coffee sellers would like to see an electronic
marketplace 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 factthat no serious importer or roaster will purchase specialty
coffee unseen, i.e. without being able to assess the quality
and knowing the supplier before committing to a purchase.
Therefore, until such issues are resolved, instead of thisbusiness-to-business (B2B) model, the most obvious
e-commerce activity in the coffee world will likely remainthat of business-to-consumers (B2C), in which roasters,
importers and some specialized producers with therequisite logistical capability sell small amounts, often inretail packs, directly to individual consumers or wholesale tosmall retailers. See chapters 8 and 9 for more on futures anddifferentials. See also chapter 3 on the difference between
mainstream and specialty roasters.
Undoubtedly, the technology exists to make Internet-based,
e-commerce coffee trading feasible. It will not take off,
however, until enough market participants are comfortable

CHAPTER 6 – E-COMMERCE AND SUPPLY CHAIN MANAGEMENT

with using it to provide the critical mass necessary to makeit viable. Electronic market platforms, we suggest, 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 theInternational Trade Centre (ITC). Electronic market placeson the other hand would allow them to also enter into andexecute legally binding transactions, requiring much more
complex and demanding systems to deal with electronic
B2B trades. Examples of platforms offering coffee linkages
include www.eFresh.com and www.koffeelink.com.
2. Efficient commerce comes first. Supply chain
management is not e-commerce – instead of ‘electronic
marketplaces’, what is required first of all is standardizationof the way in which industry or a group of companies operate.
Before we can have successful e-commerce in coffee, weneed efficient commerce, and this is where the Internet offers
huge potential that is increasingly being exploited. Prime
examples already operating in the coffee industry include
the London LIFFE CONNECT™ futures trading system, the
GCA’s XML contract, the eCOPS system, shipping portals
and logistics tracking systems. These are widely used bymany participants in the coffee trade.
However, one of the original expectations of electronic
documentation was that such systems could eventually link
all or at least most actors along the entire coffee chain. And
that the logical outcome of such a process would, over time,
facilitate the emergence of electronic market places wherebuyers and sellers of green coffee would meet.
Electronic documentation has developed into somethingquite different from the original vision. In today’s coffee
trade most such systems with automatic database updates
generate internal documents only. They then e-mail or send
confirmations to third parties. These third party documents
must then be entered manually into the database of theparty receiving them.
The problem for fully automated documentation systems
is twofold. Experience has shown that (i) few in the coffee
trade are (yet?) willing to pay a third party for document
generation, and (ii) individual companies want to maintaintheir 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. They are seldom linked toother parties in the coffee trade and certainly play no role
when it comes to trading green coffee. This then relegatesthe concept of electronic market places for green coffee still
further into the future.
However, electronic documentation systems are here andthey are being used extensively although not as fully as one
would have expected. To date one of the main stumbling
blocks also appears to be a reluctance to move to negotiable

electronic bills of lading, resulting in the continued physicaltransfer of shipping documents against payment. As
mentioned in chapter 5, some receivers use sea way bills,
whereby cargo is deliverable only to the party specified at thetime of loading. Such bills are not negotiable and eliminate
the need to transmit paper documentation to obtain delivery
at destination. But this can only work between closely linked
parties and other documents might still be in paper form.
However, should major shipping lines decide to make ageneral move to electronic bills of lading then it is logicalthe coffee trade would adapt and fully fledged electronic
documentation systems for physical coffee transactions
would come into their own.
It is important to understand how such systems can orshould work.

EFFICIENT COMMERCE – THE ICE eCOPS
SYSTEM
eCOPS, the ICE's Electronic Commodity Operations
Processing System, in 2004 replaced the ever-growing
stream of paper documentation necessary for the delivery ofcoffee to the New York futures market. This became possible
when negotiable electronic warehouse receipts (EWRs)
replaced the old paper ones. EWRs had already been usedin the United States cotton trade since the early 1990s.
Other electronic documents are the warehouse bill of
lading (local shipping advice), contract summary, shipping
advice, FDA and Customs entry, sampling order, delivery
order, commercial invoice, notice of assignment, trust
receipt, weighing request, exchange invoice, notice oftransfer, bank release, weight note, sampling confirmation,
quality certificate and grade certificate. Most of these are
not of direct interest to exporters as such, but this rangeof previously paper documents demonstrates a seamlessexchange of data, title and, therefore, goods and money.
eCOPS does include an electronic maritime bill of lading
option that in theory enables exporters to link into this entire
system once electronic bills of lading become accepted in
the coffee trade.
The integrity of the eCOPS EWRs and other documentationis ensured by restricting issuance authority to licensed
operators only, and eCOPS generated EWRs are accepted ascollateral by the commercial banking system. All companies
that deal with Exchange coffee are connected to eCOPS,
but as yet the system is not widely used for non-Exchange
goods. However, since 2003 every change of ownershipof Exchange Certified Coffee has been successfully
tracked by eCOPS, not only in the United States but also
in the European ports of Antwerp, Hamburg/Bremen andBarcelona. Some United States coffee warehouses have
moved to issuing eCOPS EWRs for all coffee they handle,
Exchange certified or otherwise.

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However, as mentioned previously, the eCOPS system
too has not been able to transform itself into a true B2B
electronic market place. For more on eCOPS and updates
on further developments go to www.theice.com and look for
eCOPS.

EFFICIENT COMMERCE – SUPPLY CHAIN
SECURITY AND EFFICIENCY
Supply chain security has become extremely important asevidenced by the Importer Security Filing (ISF) requirements
for the United States and the Import Control System (ICS)
now in force for the European Union (see also chapter 5).
Globally import and export cargo security measures now
require the sharing of information around the world, thus
allowing government systems to screen against what may
be considered risky cargo.
These security systems are electronically managed andinvolve large amounts of information to be collected,
processed and shared speedily to ensure no undocumented
or risky shipments are allowed to travel. Failure to comply
fully may result in serious fines being levied against carriers
and importers alike. And, as security concerns grow so will
the complexity of the legislation to address these, all ofwhich will add to the responsibilities of operators along themodern supply chain.
Shipping lines have so far been at the vanguard ofdeveloping the necessary infrastructure because cargo thatis inadequately documented in terms of these regulations
may not be loaded at origin. This increasing reliance onelectronic documentation and the consequent streamliningof data collection processes is now exposing smaller
exporters and importers to the advantages that electronic
documentation brings. This includes reduced risk of errors
and possibly fraud, as well as faster and more accurate
information flows.
Alos, electronic linkages within the coffee trade will continue
to grow, because more and more of the required software
can now be leased on a pay-as-you-go basis, which avoids
the previous problem of having to invest in software that
becomes outdated within a relatively short time. The end
result is likely to be a more efficient and more secure supply
chain, even if the actual electronic trading of green coffee
remains excluded.

INTERNET AUCTIONSThere is growing interest in Internet auctions for selling
specialty coffee. The concept and many of the legal, technicaland practical aspects were developed under the auspicesof the ICO/ITC/CFC Gourmet Coffee Project and involved
the Brazilian Specialty Coffee Association (BSCA) working
in association with the Specialty Coffee Association ofAmerica (SCAA). The first auction was held in Brazil in 1999.
The idea has subsequently been developed into the Cup of
Excellence programme, owned by the non-profit Alliance for
Coffee Excellence. Since 1999, more than 60 COE auctions
have taken place in Bolivia (Plurinational State of), Brazil,
Colombia, Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua and Rwanda. Similar Internet auctions have also
been held in other countries, outside the COE programme.
Although the individual lots sold may mostly be very small,the auctions generate enormous publicity and interest. The
coffees and their stories do put a country and an area ‘on thequality map’, and there is an increasing number of successstories where individual coffee growers have subsequently
been able to create sustained follow-up business at very
good prices with some of the auction buyers.
The logistics of hosting an Internet auction are complex
and involve developing a suitable portal that can handle
real time defined bids from different sources. The processof signing up international buyers and importers is alsoa difficult and time-consuming task, as is establishing atasting panel of recognized cuppers who select the best
coffees in a competition among hundreds of candidates.
Origins interested in hosting a Cup of Excellence Internet
auction may contact the organizers at www.cupofexcellence.
org. Note that such auctions focus on the small exemplary
segment of the specialty market and do not lend themselves
to broader-based selling of coffee.

PAPERLESS TRADE
TAKING THE PAPER OUT OF THE COFFEE
TRADE: AN EXAMPLE
Today, larger companies in particular have automatedback office systems that link in with shipping portals and,sometimes, selected suppliers and/or buyers. Nevertheless,as also explained in chapter 5, nearly the entire coffee
trade still uses paper documentation in its dealings. Actual
negotiations are conducted by phone, fax, and e-mail, but
final agreements such as contracts, delivery orders, bills of
lading, letters of credit and other vital documents require
an original signature and mostly continue to be presented
physically to the respective parties.
Furthermore, the quality and type of shipping documentationthat circulates can be quite variable and delays may beconsiderable when faulty documents have to be returned
and resubmitted, or cargo release is delayed because
the documents are not available, causing significant andunnecessary cost.
Banks and others in the trade chain are very interested
both in electronic security and the standardization of trade
documentation. Taken together, if clear and enforceable

CHAPTER 6 – E-COMMERCE AND SUPPLY CHAIN MANAGEMENT

standards apply, these would provide the certainty that the
shipping documentation submitted is valid and negotiable,
which is not always the case today.

adopted by the international green coffee trade, but it is andremains an option which is why this overview is provided.

For many exporters the time lapse between actual shipment
and receipt of payment, executed through physicaltransmission of paper documents, can take as much as 15
to 25 days. In a truly paperless electronic system, the transferof documents, transfer of title and financial settlement canbe reduced to four days or even less, depending on thecomplexity of the business process.

BIRD’S EYE VIEW

Typical traditional document flow
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 7
Day 8
Day 9
Day 10Day 11
Day 12
Day 13
Day 14Day 15
Day 16
Day 17

Coffee loads
Carrier prepares bill of lading
Shipper receives bill of lading (can be much laterin some coffee producing countries)
Shipper processes bill of lading to bank
Bank receives bill of lading
Non-working day
Non-working day
Bank processes documents
Documents in transit to selected European bankDocuments in transit to selected European bank
The European bank receives documents
The European bank sends documents to buyers
Non-working day
Non-working day
Buyer receives and processes documents
Payment effected
Shipper receives payment

Typical electronic documentation flow
Day 1

Day 2
Day 3
Day 4

Coffee loads, bill of lading raised by carrier
Bill of lading instantly transmitted to shipper
Shipper uses bill of lading to generate otherdocuments
Shipper transmits to selected European bankDocuments received and processed by bank
Bank transmits to buyer
Buyer processes documents and effects payment
Shipper is credited with the payment

Clearly the benefits will vary from country to country, but thatthey are potentially substantial is obvious, especially whencredit is tight and expensive, and when exporters depend
on fast turn-around of their capital. However, as explained,
the coffee trade has as yet not fully accepted to use truly
paperless systems and appears to be satisfied with partial
solutions. Nevertheless, it is good to understand how
truly paperless systems really function – also because theincreasing demand for rapid and accurate advance security
information on coffee shipments is bringing ever morecoffee trade players into the field of electronic information
sharing. This is not to say that the electronic documentation
process described in the sections that follow will be rapidly

Imagine the electronic progress of a coffee shipment fromsale to delivery as a highway along which there are a numberof stops where different actions take place: the coffee iscontracted, bagged, weighed, transported, stuffed into
containers, cleared, shipped, invoiced, paid, discharged,
cleared, trucked inland and delivered to the roaster. At eachstop documents and advices are initiated and are slotted
into the electronic master envelope that represents thephysical shipment. When the envelope reaches the buyer it
contains all the required documentation and the buyer pays
for the goods.
This is no different from the traditional way of physicallycollecting all the paper and signatures at every stage
and couriering them to the buyer or their bank. Except theelectronic method is entirely secure, it is neutral and it takes
much less time. It also provides a precise and instantaneousrecord of each step or action that is taken along the way, andof who takes it. At all times each party will know who said
what to who, thus avoiding misunderstandings and mistakes.

THE ELECTRONIC ENVIRONMENT
Major international companies have seen that the electronic
sharing of non-confidential data and information can shortendelivery, marketing and financing cycles, while maintaining
acceptable inventory levels, thereby reducing cost andliberating working capital throughout the trade chains.
Optimizing the supply chain results in efficiency gains for allparties, and minimizes the complications and risks involved
in international trade and shipping.
Electronic information flows also make it much easier to act
proactively when a potential control issue looms; the situation
at each stage of the execution of an international shipment isvisible, instantly and constantly. Finally, increases in efficiency
and security may also add to cash market liquidity.
Such major change does not happen overnight. We haveseen the telex and fax gradually being replaced by e-mail. But
what to do with electronic data which is not standardized?
How to make optimal use of Internet technology? How tobring the community of coffee exporters, traders, importers,
roasters, carriers, warehousemen, government authorities,
financial institutions and other service suppliers closer
together in sharing data, thereby avoiding duplication anderrors? How to create efficiencies for each member of thecommunity in their function within the supply chain and forthe coffee community as a whole? What about the securityof the data transmission? Will such comprehensive data be
used effectively and without compromising the competitive

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advantage individual companies may have developed over
the years?

messaging of the data, between participants or via thee-marketplace.

Various global shippers have focused their efforts onproviding browser-based information services on contracts,
delivery orders, shipments and quality. These initiatives
have played a meaningful role in the process of automationand creation of supply chain visibility. But in the long run
they are probably not a sustainable solution because they
do not allow for efficient, industry-wide data integration.

If the electronic data are in a standard format, which canbe recognized by participating systems, information can betransferred directly from computer to computer. This is also
known as straight through processing. This means thedata do not have to be intercepted by users for verificationand subsequent re-entry in the system – often the origin oferrors. They can be integrated directly into the individualuser’s application or database.

Two mainstream solutions have now evolved: e-marketplaces
for commodity trading and secure messaging platforms toallow for data integration within the supply chain.

FROM B2B-EXCHANGE TO
E-MARKETPLACES
When e-commerce over the Internet was introduced, theoperations were rightfully considered as B2B exchanges.
Bringing buyers and sellers together, price discovery,
and matching supply and demand were the main criteria
bringing coffee traders and roasters to the Internet. Throughspecialization these B2B exchanges then developed into
private exchanges or evolved into e-marketplaces, enlarging
their scope to cover several commodities.
These e-marketplaces facilitate the electronic execution ofcoffee contracts, but this covers only the ‘front office’ segmentof trading coffee. The ‘back office’ component (executionof contracts, shipments, payments) continues to be largely
paper based. Logically, e-marketplaces need to be able tolink the members of the coffee industry and service suppliers,
so as to offer the best levels of service and data distribution to
the back offices and planning systems of exporters, traders,
importers, roasters, warehouses and other service providers.

CENTRALLY AVAILABLE DATA VERSUSSTRAIGHT THROUGH PROCESSING
While e-marketplaces provide electronic functions and may
replace back-office functions within each of the individual
trading partners, the data remain on the servers at thee-marketplace. For certain functions it is ideal if the various
parties in the supply chain have access to these centralized
data. However, certain types of data need to be held in the
databases of the participants themselves, for reasons ofcorporate security or enterprise resource planning (ERP):
production scheduling, accounting, contract and position
management systems and so on that are outside the scopeof an e-marketplace. Such data need to be transferredamong the different players.
In paperless trade this is done not through physical transfersof documents or rekeying the data, but through electronic

When combined with the central functions provided by thee-marketplaces, straight through processing allows for
efficiencies and cost savings at all functional levels of the
supply chain. Administrative tasks are reduced and supply
chain visibility and efficiency between trade chain partners
is increased.

LEGAL FRAMEWORK REQUIREDManaging and limiting risk is essential in the internationalcoffee trade and shipping environment. Knowing andtrusting one’s counterparts is not always easy. Managing
the risks inherent in negotiable documents requires security,
non-repudiation and certainty of delivery.
Some companies have been using e-commerce for sometime despite the lack of specific international or national
legislation, however, the lack of legal clarity has slowed
acceptance. The electronic exchange of data does notin itself pose a problem, but when the data represent
contracts, negotiable instruments or payments, a clear legal
and neutral framework is required. In the absence of uniform
national legislation, this framework can take the form of amultilateral contract that binds all participants to rules ofconduct that are necessary for these transactions to work.

CONTRACT AND TITLE REGISTRY
The contract will clearly define which electronic messages
replicate the provisions of the classic paper documents,
such as contracts and bills of lading. It also provides data
security and integrity, and establishes that these messages
cannot be repudiated. These are all essential elements
in electronic messaging. It would also establish a central
registry of titles, so that legitimate transfer of title can bemade, basically for any type of negotiable documents,
whether bills of lading, contracts, warehouse warrants or
letters of credit. Of course, the legality of such a system
would have to be tested in a number of jurisdictions,
between them covering many countries.

CHAPTER 6 – E-COMMERCE AND SUPPLY CHAIN MANAGEMENTCOMPLIANCE, VERIFICATION AND
SETTLEMENT IdenTrust. This is a certification authority and schemethat enables digital signatures to be deployed byapplications. SWIFT provides network and interface
services to IdenTrust. See www.identrust.com.

Any system will have to be able to handle and verify thecompliance of all types of international trade documentation.
From commercial documents to government-issued
certificates and financial settlement tools such as documentcompliance checking and exchange of business documents
against payment, so eliminating expensive and timeconsuming manual activities. Also, in a properly establishedsystem electronic documents of title should provide abasis for trade goods to be used as collateral for financing.
Finally, the overall aim should be to connect the entire tradecommunity: exporters, importers, carriers, banks and otherintermediaries, thereby making the movement of goods andfinancial settlement cycles entirely paperless.

 GS1 US. Previously Transora, GS1 US is a supply chain
standard development and information sharing platform,
linking multiple sectors and businesses. See www.gs1us.
org.

Different options include web-based browser solutions
that focus on particular functions, industries or geographic
sectors. Other solutions such as TradeCard, PayPal and
IdenTrust focus more on financial settlement. Some existing
service providers restrict themselves to specific markets,
some overlap with others, and in some cases they arecomplementary.

The international banking community has been using
protocols and systems for many years: SWIFT (Society for
Worldwide Interbank Financial Telecommunication) andCHIPS standards (Clearing House Interbank Payments
System). Today these systems handle approximately 95%
of all international United States dollar payments. Bolero
and IdenTrust are based on similar principles and are logicalextensions of the original considerations that led to SWIFT’s
formation.

SECURE TRANSFER OF DATA AND
DOCUMENTS

SWIFT is one of the founders of Bolero and IdenTrustand manages the technical operations of the Bolero
system under contract, thus linking Bolero directly into theinternational banking system. According to its 2010 report
there are 9,700 live users in 209 countries transmitting over
4 billion messages a year with peak traffic at over 18 million
in a single day. Details at www.swift.com.

Neutrality is an important aspect when choosing a service
provider. Exporters, traders and roasters will generally feel
more comfortable with a visibly neutral platform. They alsoprefer a legal framework in which supply chain participants
can communicate data and documents within a closed
community, yet within an open technology environment
providing more effective business processes throughout
the supply chain.
Individual participants will continue needing to keep data on
their own servers and will strive to establish ‘straight throughprocesses’ to their particular customers. But over timecommunities served by different providers will require crossprovider links between those networks. Service suppliers to
the trade who are active across multiple industries, suchas carriers, warehouses and banks, require access andtransferability.
Both the open technology used and the transparencyof cross-provider transfer of data will eventually allow
companies to interact across borders and industries. Alreadyseveral systems collaborate and promote collaboration
between supply chain members, so they will seek similar
connections between different networks. Three examples: Bolero, developers of an electronic trade facilitation
system originally known as Bill of Lading Europe. See
www.bolero.net.

Transactions must be handled through a provider or trusteethat furnishes depository services. That is to say, all thosewishing to use electronic transfer of original documents will
have to be linked to a provider of depository services, atleast until individual providers can themselves be linked toeach other and carry out each other’s deliveries, adheringto the strictest standards of integrity and verification of the
documentation.

SPECIFIC ASPECTS
SECURITY, COMMON GROUND ANDDISPUTE RESOLUTION
The trade in coffee would not be possible without security,some form of common ground and the effective, neutral
resolution of disputes. The existing trade execution system
has been developed and fine-tuned over many decades.
Electronic systems will have to satisfy the same concerns
and meet if not surpass the same standards to address the
new issues arising from the use of electronic documents.
In the paperless chain, security will be provided primarily
by the legal framework, exactly as is the case with SWIFT,CHIPS, IdenTrust and others.
Common ground will be provided by the multilateralcontract with the main operator acting as trustee for theentire operation. As in the traditional coffee trade, rules

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and regulations will have to be clearly defined and would
preferably be overseen by the system users themselves,
coming together rather as the coffee trade comes together
in the GCA and the ECF.

GUARANTEED ORIGINALS AND
NO MISTAKES
An electronic chain has its own in-built security insofar as it
guarantees that what is transmitted is the original. Changes,
additions, deletions and any mismatches, including theidentity of who submitted them and when, are noted,
recorded and advised. This removes a major cause for loss
and argument in the coffee trade: incorrect documentation
and who is to blame for it. An electronic system guarantees
that the documents are correct as received, but cannot
by itself say anything about the coffee these cover, so theimportance of collateral management remains unchanged.
The system would record exactly what was done, by whom
and when, for each individual contract by means of a unique
identifier which also tracks the progress of each individual
document. An identifier is generated whenever a newtransaction is initiated. This can be done by the buyer or theseller, depending on what was agreed between them.
In its simplest form all this means, for example, that a buyer
who erred in the description of the goods in a letter of credit,or that instructed the wrong shipping marks, cannot later
claim it was the shipper’s fault and withhold payment.

WHAT ARE THE BENEFITS OF
E-COMMERCE?
 Banks and their collateral managers can exercise better
control over the execution of the transactions they fund,an important factor when financing trade in commodities.
Depending on industry demand, electronic warehousereceipts could also be linked into the system, for example
to start the funding chain of the coffee that is to be
procured, processed for export and shipped. Or coffee
could be tendered to commodity exchanges such as
New York and London, linking into systems as eCOPS.
 All concerned, including the bankers, can see theprogress of the goods and, therefore, the progress of thetransaction.
 Shipping documents are prepared, issued andtransmitted more quickly, resulting in earlier payment.
 Turnover is faster, meaning more business within thesame amount of working capital, or a reduction of theworking capital required.
 Costs are lower: less interest, no errors, no lost or latedocuments, no arguments and no waiting for shipping
documents.

 Sellers have better control. So do importers and roasters,
who can trace both coffee and documents.
 In some consuming countries special arrangements
permit coffee to be cleared through customs aheadof arrival, resulting in direct dispatch from ship to finaldestination. This could bring many exporters closer toparticipation in the just-in-time supply systems of larger
roasters.

ELECTRONIC TRADE EXECUTIONIN PRACTICE
Contract. Once a deal is established the contract details
are automatically transmitted to the principal parties to thetrade, using the secure messaging platform and the contract
XML standard. (XML means extensible mark-up language.)
Back office link. This is automatic, as both parties havereceived the contract confirmation and the information has
been integrated into their back-office systems through theiruser interface. The contract data are now ready for further
execution.
Price fixing. The price is fixed either by using an
e-marketplace or directly between the parties by trading
futures via their futures broker, using the network to confirm
the transactions.
Letter of credit. If called for, the network is used to establish
the letter of credit through a message from the openingbank to the exporter’s bank.
Shipping instructions. For a FOB contract the importer will
provide shipping and document instructions to the exporterand the opening bank via the network. The opening bank inturn sends an undertaking to the exporter’s bank, detailingthe commercial documents to be presented under the letterof credit.
Pre-shipment finance. On the basis of the letter of credit (orother undertaking) the exporter can apply for pre-shipment
finance, using the protocols provided by the system (andtheir relationship to the banking system). Upon approval thebank’s collateral manager will be automatically linked into
the transaction.
Freight. The importer can negotiate freight througha carrier’s electronic service provider (e.g. INTTRA or
GTNexus), confirmed through the network’s electronic
messaging system.
Shipment. The exporter advises the coffee’s availability andmakes a container booking using electronic messaging.
(This incidentally also facilitates the establishment of the
ship’s stowage plan.) The importer books for voyage andspace with the carrier as per this advice. These messages
are simultaneously copied to other involved parties, forexample, the handlers of the cargo to the export terminal,

CHAPTER 6 – E-COMMERCE AND SUPPLY CHAIN MANAGEMENT

the warehouse and the agency supervising weighing
and stuffing. The foregoing presupposes that all of those
involved, including customs, have updated their electronic
back-office systems using data obtained from a web
interface or using their own document management
software.
Bill of lading. Using details from the booking anddocument instructions received earlier, the carrier issues anelectronic bill of lading and registers it under the network title
registry for release to the exporter. The exporter is notified
through the system and will endorse the bill of lading to theappropriate party, usually the bank that financed the goods,
which is then registered as pledgee on the bill of lading.
Alternatively, the bill of lading can also be issued directly ina bank’s favour.
Shipment advice. This is sent via the network using the
XML standard for electronic shipping advices.
Dispatch. The exporter combines the commercial invoicewith the other export documents received from the different
service providers and authorities and packages these intoa network message that the network forwards to either thebuyer or the bank.
Verification. The documents are verified electronically with
the instructions registered under the L/C undertaking. If
there is any discrepancy the system notifies all parties andasks for refusal or acceptance of the documents.
Presentation of documents. If the documents arecorrect they are transmitted for inspection and/or approval(as per the L/C protocol) to the importer’s bank or, in thecase of CAD (payment cash against documents on firstpresentation) directly in trust to the importer. When theimporter’s bank makes payment, the electronic documents
are released automatically to the importer. Alternatively, theL/C opening bank, which was acting as pledgee on the billof lading, will endorse the bill of lading to the importer oncethe electronic funds transfer has been confirmed throughthe SWIFT clearing system.
At the receiving end. Before or upon arrival of the vessel,
the carrier notifies all concerned (importer, clearing agent,
Customs, inland roasting plant, etc.) of the vessel’s ETA,
followed by a notice of arrival, using XML. The importer
settles the freight, releases the bill of lading to the carrieror shipping agency at the port of destination, and copies
the bill of lading together with the commercial invoice
to the clearing agent, all through the electronic network
system and all at the same time. Again, each party knows
instantaneously who said what to whom.
Final delivery. If the coffee is going to an inland roasting
plant, notifications of cargo arrival, sample orders anddelivery orders will pass electronically between the importerand the roaster. If the roaster operates on a vendor managed
inventory basis then the importer will place the coffee either
at the roasting plant, or at an intermediate container station,or in a warehouse or silo park pending final delivery. All thisis done through network instructions to the clearing agents,
trucking company and warehousemen. Again, everyone
knows what is happening, and the roaster can see where
the coffee is.
Finally, the importer issues an XML invoice and delivery
order to the roaster, copied to the clearing agents, truckers
and warehousemen. Upon payment this delivery order acts
as transfer of title as per the conditions determined in the
ECF or GCA standard form contract.

END RESULT AND OUTLOOK FOR‘PAPERLESS TRADE’
The foregoing is a realistic scenario of the execution of acoffee contract from origin to delivery at the destination
market to a roaster. The example makes optimal use ofelectronic means of transferring data without the need forrekeying, as is also the case for example with ICE’s eCOPS.
All electronically issued data are reused through back-officeintegration, or through making the data available throughonline service providers or e-marketplaces, facilitating
the trade or the services performed by different service
suppliers.
It appears to be a complicated process, but thanks toelectronic messaging, use of XML standards and secure
electronic transfer of title and financial settlement, theadministrative handling is far less cumbersome than in thepaper environment. The efficiencies realized will translate
into direct cost reductions and savings across the supply
chain. Equally important are the reduction in finance cycles
and the possible reduction in inventory cycles, easier
management, and improved cash flow.
For many exporters the business process described above
can take 15 to 25 days from shipment to receipt of payment
when executed through physical transmission of paper
documents. Using an electronic system, the transfer of
documents, transfer of title and financial settlement can be
reduced to four days or less, depending on the complexityof the business process and the state of preparedness inthe exporting country.
The use of back-office systems, often linking multiple
locations within large companies, is increasingly widespreadand can be expected to continue growing as these makethe trade in coffee more efficient, more secure and lesscostly. However, electronic supply chain management is not
yet widely used in the coffee trade although it is expected
to grow. So far though, other than linkage with the futures
markets of New York and London, most systems are notused for actual green coffee trading activities. More at, interalia, www.bolero.net, www.theice.com, www.coffeenetwork.
com, www.eximware.com, www.commoditiesOne.com,
www.iRely.com, www.ekaplus.com and www.essdocs.com.

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CHAPTER 6 – E-COMMERCE AND SUPPLY CHAIN MANAGEMENTTECHNICAL QUESTIONSWHO COULD USE AN ELECTRONICSYSTEM?
A local IT infrastructure and legal framework must be in placefirst. If they are, anyone with Internet access, or whose bank,coffee authority or IT provider is linked into the system, canaccess it, either as a full member or by buying the service
on a retail basis.
In practice only those countries whose customs and possibly
coffee industry authorities have accepted the system andhave installed the necessary capability will benefit. It seems
likely that larger producing countries will be more interested
because for them the potential economies of scale aretremendous. The roasting sector will also participate more
and more because of the control and information the
network provides, which will permit some to move from justin-time systems to vendor managed inventory systems.
Even if a roaster is not linked into the system, the importercan surrender the electronic documents and have them
replicated as paper originals by the original issuing authority,
for instance the carrier or warehouse.
For the buyer it is essential, however, that the exporter islinked into the system. Given the cost savings and reduced
working capital requirements the system provides, thislinkage can become an important issue when considering
the viability of any particular transaction or business
relationship with an origin country or an individual exporter.

STANDARDS
Easy communication of data and documents within thecoffee supply chain requires certain standards for contracts
and contract amendments, pricing, optional conditions,declarations and so on. Standards are also needed forthe electronic documents for contract execution, such as
sample and delivery orders, bills of lading, warehousereceipts and warrants.
Electronic standards have been developed for the UnitedStates coffee industry in collaboration with the membershipof the GCA, the National Coffee Association of USA and
ICE. These use XML (extensible mark-up language) format
so both humans and computers can read them and they
allow electronic transfer and integration into back-officesystems (straight through processing). The GCA electronic
contract includes additional options: price fix letter, price fix
rolling letter and a destination declaration letter.
The technology provides both simplification and an optimal
number of choices when creating a contract, transmitting
a delivery order or shipment advice, or presenting acommercial set of documents.

ACCESS
The system as described is not an actual IT applicationor browser, but rather provides an ‘electronic highway’
between the different parties in the electronic community.
In short, it is open platform technology. Like CHIPS or
SWIFT, such a system can keep track of all documents
transmitted on its system (platform). It can provide proofof who said what to whom and when, and it can confirm
that messages, contracts, shipping instructions, samplingorders, documents, delivery orders and so on were received
in a timely manner and in good order.
To access such an electronic highway participants would
probably use accredited application providers andpossibly middleware companies, using software that canbe implemented as stand-alone document packages, or
integrated with back-office systems or enterprise resource
planning systems.
Different parties have different needs, so different
applications will have to be available for banks, carriers,
traders, processors and others in the trade chain. Different
solutions also apply to different sizes of companies. Bigger
operations will need packages to be integrated with their
existing software, while smaller companies may not have theneed, the knowledge or the means to acquire sophisticatedsoftware.
In future, even the smallest exporter will probably beable to link into the electronic highway, either through an
e-commerce site or by simply buying into an appropriate
service through a bank or other service provider. This willcertainly be the case in countries with well-developedand easy Internet access, provided Customs and othergovernment authorities are in agreement and the necessary
legal steps have been completed. Banks in coffee producing
countries are likely candidates to take a direct interest as
they then could retail the service to individual clients on auser fee basis.
Note that any electronic document handling system will
have to be able to link up with the electronic bill of lading
solutions that major shipping companies may eventually
come up with.

CHAPTER 7

ARBITRATION

THE PRINCIPLE OF ARBITRATION.................................................................................................................... 120
ARBITRATION IN THE UNITED KINGDOM....................................................................................................... 122
ARBITRATION IN GERMANY ............................................................................................................................. 124
ARBITRATION IN FRANCE ................................................................................................................................. 126
ARBITRATION IN THE UNITED STATES ........................................................................................................... 127

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ARBITRATION
THE PRINCIPLE OF
ARBITRATION
A contract becomes final and binding when buyer andseller agree on a transaction: verbally, by e-mail, by fax orotherwise. For this to be possible all standard terms andconditions must have been agreed to previously, including
how possible disputes will be resolved. Arbitration provides
a neutral, specialized platform to resolve a dispute when
amicable settlement proves impossible.
The international trade in coffee is complex by nature and so
dispute resolution can be quite complicated as well: it requires
experience and insights not easily found outside the coffee
trade itself. Disputes also need to be resolved quickly andfairly, preferably amicably, with buyer and seller agreeing toa mutually acceptable solution. But if this proves impossible
then arbitration provides the means to resolve the matter in
an impartial manner without involving a court of law where
proceedings could be subject to delays (possibly holding up
disposal of the goods) and where expert knowledge may not
be easily accessible. Also, the exercise could be very costly.
This is the main reason why the European Coffee Federation(ECF) and the Green Coffee Association (GCA) standard
contracts expressly exclude recourse to the law for thesettlement of disputes, stating instead that this shall always
be through arbitration. Go to www.ecf-coffee.org and www.
greencoffeeassociation.org for the full contract texts.
Arbitration rules have been set by the professional coffee
associations in importing countries. The most important
arbitration centres in Europe are London, Hamburg and Le
Havre. Other arbitration centres are Amsterdam, Antwerp,
Genoa, Rome and Trieste. In the United States arbitrations
have always been held in New York but since 2006 they canalso be held in other locations as approved by the GCA.
Interested parties should contact their US connection or the
GCA for an up to date list of GCA-approved locations.

interpretation, custom and national law governing arbitrationin different localities, for example between London andTrieste. It is therefore important that the place where any
arbitration will be held is agreed ahead of concluding atransaction, and is so stipulated in the contract. This will also
avoid having to be a party to proceedings in an unfamiliar
environment and, possibly, language.
United Kingdom
The British Coffee Association, London
Website: www.britishcoffeeassociation.org
Germany
Deutscher Kaffeeverband e.V., Hamburg
Website: www.kaffeeverband.de
FranceChambre arbitrale des cafés et poivres du Havre
115, rue Desramé, 76600 Le Havre
Telephone: +33 2 35216161
Fax:+33 2 35218060
United States of America
Green Coffee Association, New York
Website: www.greencoffeeassociation.org
Netherlands
Royal Netherlands Coffee and Tea Association, Rijswijk
Website: www.knvkt.nl
Belgium
Union professionelle du commerce anversois d’importationde café (UPCAIC), Antwerp
E-mail: bvdaki-upcaic@skynet.be
Italy
Associazione Caffè Trieste, Trieste
Website: www.assocaffe.it

TYPES OF DISPUTE AND CLAIMS
There are two types of disputes:

ARBITRATION CENTRES
Under GCA rules arbitrations are held in New York unless a
different GCA-approved location has been specified in thecontract. Appeals are always heard in New York.

 Quality disputes – resolved through quality arbitration;
 Technical disputes – (any other dispute) resolved
through technical arbitration.

Under ECF contracts arbitrations can be held in different
countries, something that could make a difference.

Because quality disputes affect the fate of a parcel ofcoffee (delays are costly and at the same time the quality
deteriorates) the rules and time limits for lodging a claim are
different from those for technical disputes:

Even though there is one single European Contract for
Coffee (ECC), there will always be subtle differences in ECF contracts. Quality claims must be lodged within
21 calendar days from date of final discharge at port ofCHAPTER 7 – ARBITRATION

destination. All other claims (technical): not later than 45
calendar days from discharge provided the documents
were available to the buyer, or from the last date of thecontractual shipping period if the coffee has not been
shipped.
 GCA contracts. Quality claims must be lodged within 15
calendar days after discharge or within 15 calendar days
after all government clearances have been received.
All other claims (technical): no time limit for lodging theclaim, but a demand for technical arbitration must be
lodged within one year from the date the issue first arose.
Either party to a contract can lodge a claim, preferably in
writing, by notifying the other party within the stipulated
time limits that a dispute has arisen. Should amicablesettlement prove impossible then the claimant can proceed
to arbitration. Suppliers must carefully consider theirhandling of claims. It is almost inevitable that forcing a claim
to be settled through arbitration will signal the end of therelationship with the buyer in question.
Buyers are most likely to claim on matters of quality,
weight, delayed or non-shipment, incorrect or missing
documentation, etc. Suppliers’ claims are more likely tocenter on late, incomplete or even non-payment or, forexample, frustration of a contract by a buyer that fails toprovide shipping instructions.

Remember also that those who see the coffee trade fromonly one side, such as exporters, do not always appreciate
why and how certain actions or lack of action can cause theircounterpart to suffer loss or damage, and it is not uncommon
for some to feel subsequently that they have been treatedunfairly in the arbitration proceedings. Look for local assistancebecause local representatives usually have more experience
with the arbitration system and can guide an exporter throughsome of the details. A local representative might not know
exactly how an arbitration award was decided, but he or sheshould clearly understand the proceedings and be able toexplain more or less how the outcome was determined. Thisis very helpful for an exporter in deciding whether or not toappeal against an award.

APPOINTING ARBITRATORS
Appointing an arbitrator does not mean acquiring a defender
who will advance one side of a dispute no matter what.
Arbitration means that the arbitrators impartially consider
and pronounce on the merits of a case, irrespective of bywhom they were appointed.

Fewer and fewer quality claims make it to arbitration
because the supplier/shipper does not want to risk therelationship, whereas especially larger buyers do not botherto pursue relatively minor claims, preferring to simply strikethe offending supplier off their register, sometimes even
without notification.

Only well known, experienced and respected members of
the coffee trade can become arbitrators. They are selectedby their peers to serve on their association’s panel ofarbitrators. As per his or her particular sphere of expertise,an arbitrator may serve on the quality panel, the technicalpanel or both. Depending on the rules of the association
concerned arbitrators can be appointed by the parties to thedispute, or by the association itself. Where the parties to a
dispute appoint their own arbitrators, usual practice is thatthese arbitrators themselves then select a third, the umpire.

COMMON ERRORS

AWARDS

The buyer is not the enemy. Keeping buyers informed
usually means that most if not all of a problem can be
resolved amicably. Hiding ‘bad news’ on the other handguarantees trouble. Knowingly shipping sub-standard
quality demonstrates disregard for contract integrity, ora lack of quality knowledge, or both. Not reporting that ashipment may be delayed can cause much greater damage
than may immediately be obvious.

An award is the verdict of the arbitrators, arrived at inaccordance with the arbitration rules of their local arbitralbody and national law. Under GCA contracts arbitrations
always take place in the United States. However, under ECF
contracts they can be held in different countries, somethingthat could make a difference.

Buyer and seller are partners in a transaction. Both are
obliged to play their role to ensure the successful completionand to minimize the impact of potentially harmful situations.
Keeping the buyer informed of any problems enables
timely corrective action to be taken, thereby saving costs
and damages. Arbitrators will take this into account whenit comes to making an award. And if a claim is received,
deal with it. Promptly and efficiently. Do not ignore a claimin the belief that it will ‘go away’. And if a claim does resultin arbitration proceedings being initiated, cooperate fully
because otherwise the exercise will proceed without yourinput.

Most awards are subject to appeal, within the time limits
set by the arbitral body at the place where the arbitration
was held. The limits and procedures are different for each
arbitral body whose rules should therefore be consulted.

FAILURE TO COMPLY WITH AN AWARD
Under ECF rules, if one of the parties fails to comply with anarbitration award which has become final, the other party
may request the coffee association under whose rules thearbitration was held to post (publicise) the name of thedefaulting party and/or bring it to the notice of the members
and, through the ECF, to any person or organization with

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or having an interest in coffee. Each of the recipients ofsuch notification may in turn bring it to the notice of its own
members or otherwise publicise it. In addition, in order toenforce an arbitration award, a party may also have direct
recourse to the courts of the place where the defaulting party
is established. GCA rules allow 30 days for an award to besatisfied, after which a comparable procedure kicks in if theparty in whose favour the award was given so requests.

VARIATIONS TO STANDARDS CONTRACTS
Of course contracts can be, and very many are, concluded
with conditions differing from those of the standard formsof contract (GCA and ECC – see chapter 4, Contracts), as
long as these are well understood and are clearly set out
in unambiguous language, leaving no room for differinginterpretations. For example, one might agree to change theweight tolerance in Article 2 of the ECC from 3% to 5%, inwhich case the contract should include a paragraph to theeffect that ‘Article 2 of ECC is amended for this contract by
mutual agreement to read a tolerance of 5%’.
If a modification to an existing contract is agreed it should be
confirmed in writing, preferably countersigned by both parties.
Adding the words ‘without prejudice to the original terms andconditions of the contract’ ensures that the modification does
not result in unintended or unforeseen change to the originalcontract. A modification that is not confirmed in writing could
subsequently be repudiated or disputed by one of the parties,
for example during arbitration proceedings. Human memory
is fallible and there is nothing offensive in ensuring that all
matters of record are on record.

ARBITRATION IN THE UNITED
KINGDOM
THE BRITISH COFFEE ASSOCIATIONThe British Coffee Association (BCA) provides a two-tierarbitration service: arbitration at the first stage by a tribunalof three arbitrators and, where required, an appeal procedurethrough a board of appeal of five arbitrators. Arbitrators areappointed by the BCA from members of the BCA Panel of
Arbitrators. All disputes referred to the BCA on or after 1
February 2012 are determined subject to the provisions of
the Arbitration Act 1996 and of any statutory re-enactment,
modification or amendment for the time being in force (‘TheAct’), and the British Coffee Association Arbitration Rules
2012.

THE ARBITRAL PROCEEDINGS
Proceedings before a tribunal are referred to as ‘first-tierproceedings’ and proceedings before a board of appeal as‘appeal proceedings’. The seat of all arbitral proceedings is
London, England.
Parties to proceedings have the right to apply to the courts
to determine questions as to the substantive jurisdictionof the arbitral tribunal or board of appeal but in the lattercase only if the original objection had already been madein the first-tier proceedings. Tribunals and boards of appeal
may seek legal advice from or allow an independent legal
adviser to attend at the hearing of any oral evidence or oral
submissions. Tribunals and boards of appeal may also seek
expert opinion from and/or allow an independent expert orassessor to attend at the hearing of any oral evidence or oral
submissions for the purpose of providing expert opinion.
All written statements must be in English and supporting
evidence in other languages must be accompanied byan independent translation. All written correspondence,submissions and notices are communicated in legible form
by a prompt method of communication, including e-mail or
fax unless otherwise directed by either tribunal or board of
appeal.
Each party to proceedings (both tribunal and board of
appeal) have the right upon application in writing to the BCA
to require the BCA to remove one arbitrator only in which
event a substitute arbitrator shall be appointed by the BCA.
A party seeking to exercise this right is not required to givereasons for doing so. This right must be exercised within
three London working days of the date of the appointment of
the arbitrator which that party seeks to have removed.
In accordance with its general duty a tribunal or board of
appeal has the power to order on its own initiative or on
the application of a party: that the arbitral proceedings shallbe consolidated with other arbitral proceedings; or that
concurrent hearings shall be held;
A party may be represented in the arbitral proceedings
by a representative (which expression shall include legal
practitioners) except that: (i) at a hearing of oral evidence
and/or oral submissions a party may not be represented
by one or more legal practitioners unless permitted by thetribunal or board of appeal; and (ii) at a hearing of oral
evidence a natural person ordered or permitted to giveoral evidence may not give that oral evidence by way of arepresentative and must give that oral evidence in person.
It is the general duty of a tribunal or board of appeal to: (a) act
fairly and impartially as between the parties, giving each partya reasonable opportunity of putting its case and dealing withthat of its opponent; and (b) adopt procedures suitable to thecircumstances of the particular case, avoiding unnecessary
delay or expense, so as to provide a fair means for the
resolution of the matters falling to be determined.
NB. If without showing sufficient cause a party after due
notice fails to attend or be represented at hearings or fails to
submit written evidence or make written submissions, then atribunal or board of appeal may continue the proceedings inCHAPTER 7 – ARBITRATION

the absence of that party or, as the case may be, without any
written evidence or submissions on that party’s behalf, andmay make an award on the basis of the evidence before it.

TIME LIMITS FOR INTRODUCING
ARBITRATION CLAIMSIt is essential that claimants adhere to the rules of thestandard form of contract on which the sale was based.
ECC rules require quality claims to be submitted not later
than 21 calendar days from the final date of discharge at theport of destination. All other claims must be submitted notlater than 45 calendar days from: The final date of discharge at the port of destination,
provided all documents are available to the buyers; The last day of the contractual shipping period if thecoffee has not been shipped.
If amicable settlement (always the preferred solution) proves
impossible then the formal decision to initiate arbitration
proceedings must be notified within the following time limits:
 Quality disputes: not later than 28 calendar days from thedate the claim was formulated; Other disputes: not later than 90 calendar days from thedate one party formally notifies the other that the disputeapparently cannot be resolved amicably and arbitration
proceedings will be initiated.
These time limits must be respected, or the outcome of
the arbitration can be jeopardized. If unavoidable delays
do arise then, in the interests of justice or avoiding undue
hardship, ECC rules authorize the arbitral body at the placeof arbitration to extend the time as it may think appropriate.

CLARITY IS ESSENTIAL
Claimants should provide a clear statement of the problem,
how it arose and the remedy sought. It is not sufficientfor example to simply state ‘We claim an allowance’. If an
allowance is sought then it must be quantified, e.g. ‘US$ 4
per 50 kg is claimed on quality grounds’. The statement must
be in writing and must be supported by copies of all relevant
documentation, including copies of exchanges between theparties. All should be catalogued, numbered and presented
in chronological order. If the dispute concerns quality thearbitrators will give directions on the production of thenecessary samples. Respondents should provide all relevant
documentation to all concerned and should specificallyaddress the points raised by the claimant.

STANDARD TIMETABLE FOR FIRST-TIER
PROCEEDINGS
Claimants and respondents ensure receipt by the BCA offive copies of their submissions, which include supporting

evidence, within the following deadlines: (a) the claimant’s
claim submissions: within 21 days from the date the first-tierproceedings were commenced; (b) the respondent’s defence
submissions and counterclaim submissions (if any): within 21
days from the date the respondent received the claimant’s
claim submissions from the BCA; (c) the claimant’s reply
submissions and defence to counterclaim submissions (ifany): within 21 days from the date the claimant received
the respondent’s defence submissions and counterclaim
submissions (if any) from the BCA; (d) the respondent’s
reply to defence to counterclaim submissions: within 21 days
from the date the respondent received the claimant’s reply
submissions and defence to counterclaim submissions fromthe BCA.

PROVISION OF SAMPLES
If a claimant wishes a tribunal to examine any sample, theclaimant ensures receipt by the BCA of the sample, together
with a concise statement of the purpose for which the sample
is being provided, at the same time as receipt by the BCAof the claimant’s application for arbitration. If a respondentwishes a tribunal to examine a sample the respondent
ensures receipt by the BCA of the sample, together with aconcise statement of the purpose for which the sample isbeing provided, no later than at the same time as receipt
by the BCA of the respondent’s defence submissions. If aparty wishes to submit a sample at a later stage in first-tierproceedings for examination by a tribunal that party does soonly with the permission of the tribunal.

AWARDS MADE BY A TRIBUNAL
A tribunal may make one final award on all matters to be
determined. Alternatively a tribunal may make more than
one final award on different aspects of the matters to be
determined, pursuant to Section 47 of the Act, including
but not limited to separate awards on interest, costs andjurisdiction. In addition, a tribunal has power to order on aprovisional basis any relief which it would have power to grantin a final award.

COMMENCING APPEAL PROCEEDINGSA party wishing to commence appeal proceedings (the‘appellant’) ensures receipt by the BCA within 28 days fromthe date of the tribunal’s award against which the appellant
wishes to appeal of: (a) a non-returnable fee payable to
the BCA in the amount published by the BCA from time totime; and (b) a written application for appeal proceedings
to be commenced (the ‘application for appeal’); (c) failingwhich the right to commence appeal proceedings shall betime barred unless the party wishing to commence appeal
proceedings applies for an extension of time, in which casethe BCA shall appoint a board of appeal to pronounce on
the application.

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The application for appeal should: (a) name the other partyor parties (each a ‘respondent’) to the intended appeal
proceedings; and (b) identify the tribunal’s award against
which the appellant wishes to appeal; and (c) request the
BCA to appoint a board of appeal. It shall be accompanied
by: evidence that the appellant has transmitted a copy of
the application for appeal to each respondent; and a copyof the tribunal’s award against which the appellant wishes
to appeal.
Upon receipt by the BCA of both the non-returnable fee
and the application for appeal, the appeal proceedings
are deemed to have been commenced and the BCA shall:(a) forward a copy of the application for appeal to each
respondent; and (b) appoint five arbitrators to form a boardof appeal (unless already appointed as per above); and (c)forward to the board of appeal: a copy of the application forappeal; and a copy of the tribunal’s award against which theappellant wishes to appeal.

STANDARD TIMETABLE FOR APPEALPROCEEDINGS
Appellants and respondents ensure receipt by the BCA ofseven copies of their submissions, which include supporting
evidence, within the following deadlines: (a) the appellant’s
claim submissions: within 21 days from the date the appeal
proceedings were commenced; (b) the respondent’s defence
submissions and counterclaim submissions (if any): within 21
days from the date the respondent received the appellant’s
claim submissions from the BCA; (c) the appellant’s reply
submissions and defence to counterclaim submissions (ifany): within 21 days from the date the appellant received
the respondent’s defence submissions and counterclaim
submissions (if any) from the BCA; (d) the respondent’s
reply to defence to counterclaim submissions: within 21 days
from the date the respondent received the appellant’s reply
submissions and defence to counterclaim submissions fromthe BCA. A board of appeal may vary the above timetable inaccordance with its general duty to act fairly and impartially.
Note that under BCA rules appeal proceedings are
new proceedings in which the parties may submit new
submissions and new supporting evidence to the board of
appeal. But a board of appeal may consider submissions
or supporting evidence submitted to the tribunal in the firsttier proceedings and/or correspondence or documents
generated during the first-tier proceedings only if copiesof the same are provided to it by a party in the appeal
proceedings in accordance with the above timetable.

PROVISION OF SAMPLES
If a party wishes the board of appeal to examine a sample notsubmitted for examination during the first-tier proceedingsthat party can do so only with the permission of the boardof appeal.

AWARDS OF INTEREST
A tribunal or board of appeal may award simple or compoundinterest from such dates, at such rates and with such rests
as it considers meets the justice of the case.

COSTS OF THE ARBITRATION
A tribunal or board of appeal may make an award allocating
the costs of the arbitration as between the parties, subject
to any agreement of the parties. The expression ‘costsof the arbitration’ means: (a) the fees and expenses oftribunals and boards of appeal; (b) the fees and expensesof the BCA; and (c) the legal or other costs of the parties.
Unless the parties otherwise agree, a tribunal or board of
appeal shall award costs on the general principle that costs
should follow the event except where it appears that in thecircumstances this is not appropriate in relation to the wholeor part of the costs.
The fees and expenses of the tribunal or board of appeal
and the fees and expenses of the BCA shall be calculated:(a) at the time any final award is made; or (b) upon thetribunal or board of appeal becoming aware that the arbitralproceedings are subject to settlement between any of theparties or have been abandoned by one or more parties; (c)and the sum calculated shall be notified to the parties.
For detailed information on costs contact the BCA at www.
britishcoffeeassociation.org.

ARBITRATION IN GERMANY
THE DEUTSCHER KAFFEEVERBAND E.V.
The Deutscher Kaffeeverband e.V. (DKV) in Hamburg is
the umbrella organization for the German coffee tradeand industry. The court of arbitration of the Deutsche
Kaffeeverband e.V. at the Hamburg Chamber of Commerce(HCC) deals with principal arbitration cases on technicaldisputes. Proceedings are administrated by the HCC.
Quality disputes are dealt with by the Association of
Hamburg Coffee Import Agents.

TECHNICAL ARBITRATION BY THE DKV
Arbitration panel. The panel usually consists of threemembers. Each party to the dispute appoints an arbitrator,
who has to be owner, member of the board of directors,
managing director, personally liable partner, fully authorized
signatory or duly authorized employee of a firm whichis registered in the German Commercial Register or
Cooperative Societies Register. Both arbitrators appoint

CHAPTER 7 – ARBITRATIONan umpire. If they cannot agree on the umpire, then theumpire will be appointed by the Hamburg Chamber ofCommerce. The Chamber will also appoint an arbitrator forthe defendant, if the defendant fails to do so himself. The
panel can be enlarged by two additional arbitrators on the
demand of any party. Remember that arbitrators in a disputeare not partial to any side – they are neutral members of theofficial arbitration board.

Value added tax (VAT), where applicable, comes on top of all
said fees, as well as necessary expenses of the arbitratorsand the HCC. On submitting the statement of claim, theplaintiff has to make a security payment amounting to theanticipated costs of the proceedings.

Requests for arbitration must be made in writing to thearbitration board of the DKV at the Hamburg Chamber ofCoffee and shall state the grounds for the dispute, a precise
claim and proof of agreement regarding the competenceof the arbitration board. The plaintiff also has to provide
the name and address of the plaintiff’s arbitrator and his
declaration of assent.

The contract must clearly state where arbitration will be held
and under which rules.

HCC informs the other party of the claim, requesting awritten response that must include the name of the arbitrator
who will act for the defendant and his declaration of assent.
Unlike some other markets, there is no fixed time limit within
which the defendant must respond. Instead it is left to thediscretion of HCC to set the limit for the first response,but once the arbitration panel is constituted then it sets all
subsequent time limits. All submissions must be in writing
in five copies.
Hearing and award. The date and the organization of thehearing are arranged by the umpire and HCC notifies theparties in writing. Arbitrators examine the written submissions
and may invite further voluntary evidence from outside
witnesses and experts. Both parties to the dispute are also
summoned for oral pleading of their case. A legal adviser
from the HCC has to attend all meetings and participates inthe deliberations but has no vote. Decisions are reached bysimple majority vote and the award, setting out the grounds
for the verdict, is delivered in writing through the HCC.
Appeal. There is no appeal as such against a DKV award.
An award can be submitted to the Hamburg HanseaticHigh Court which is competent for all judicial rulings andfunctions required in accordance with German civil processlaw (ZPO). If the court disaffirms the award on formal legal
grounds then the arbitration must be repeated, with thesame arbitrators and umpire officiating unless the court
specifically ruled otherwise.
Costs and fees are linked to the value of the dispute: up to
EUR 10,000 the fee is EUR 1,000. Then an additional 10%
for the next EUR 5,000; 9% for the next EUR 10,000; 8% for
the next EUR 15,000; 7% for the next EUR 25,000; 6% for
the next EUR 35,000; 5% for the next EUR 200,000; 4% for
the next EUR 700,000; and 2% for the next EUR 1,000,000.
For disputed sums over EUR 2,000,000 the additional fee is0.5% of the amount in excess of EUR 2,000,000.
In addition to the above the HCC shall charge a flat-rate
sum in the amount of 15% of these fees with a maximum of
EUR 20,000.

QUALITY ARBITRATION IN HAMBURG

Arbitration panel. Hamburg Private Arbitration in the Coffee
Import Trade. Each party appoints their own arbitrator;
together the arbitrators appoint the umpire. If a contract was
concluded through an agent that agent is assumed to be theseller’s arbitrator unless the agent appoints someone elseto act for them. If the arbitrators fail to appoint an umpirethen the chairperson of the Association of Hamburg Coffee
Import Agents and Brokers will do so.
Requests for arbitration must be made in writing to theassociation. If asked to do so the association will also
appoint arbitrators or umpires. No time limits are laid down
for these appointments, but they must be made without
undue delay.
Hearing and award. The hearing is based on the originalcontract submitted by the claimant. Unless otherwise
agreed, for bagged coffee arbitration samples must be
drawn from 10% of the lot and must be sealed, either byboth parties jointly or by an independent sworn sampler. For
coffee shipped in bulk a 2 kg sealed sample is required,usually of each individual container. If the arbitrators fail toreach agreement then the decision of the umpire will befinal. In the interest of neutrality the parties’ identities arewithheld from the umpire until after a verdict has beenreached. Should the umpire inadvertently become aware of
the buyer’s identity then the umpire must withdraw, thereby
necessitating a new hearing. Awards are issued on theofficial Association certificate and signed by both arbitratorsand the umpire.
Appeals. The Hamburg rules do not allow for appeals
against awards in quality arbitrations. The awards are
final and the arbitrators and umpire need not provide thegrounds for their verdict.
Unsound coffee or radical quality differences, includingexcessive moisture content. ECC Article 7 states that
where arbitrators establish that the coffee is unsound or ofradically different quality, and award invoicing back, thenthey shall also establish the price having in mind all thecircumstances. As an example, the quality difference might
be so enormous that it is obvious the shipper made noserious attempt to supply what was sold. The more seldom
Bremen arbitrations deal with this somewhat differently, butboth sets of rules make special provision for such cases,
and describe them as ‘fraud and negligence’.

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CHAPTER 7 – ARBITRATIONThe question of fraud or negligence can be pursued only if
the claimant requests this. In this type of case the arbitratorsand three umpires are limited to pronouncing a ‘suspicionof fraud and gross negligence’ and to fixing an adequate
allowance. The claimant may contest this and demand atechnical arbitration to order annulment of the contract
rather than payment of an allowance. The panel’s reasoning
must therefore be provided in writing by the umpires forpossible use in such an arbitration.
Costs and fees. 1–1,000 bags: EUR 100 per arbitrator/
umpire. For each additional 1,000 bags or portion thereof:an additional 100 EUR per arbitrator/umpire.

ARBITRATION IN FRANCETHE CHAMBRE ARBITRALE DES CAFÉS ET
POIVRES DU HAVREThe Chambre arbitrale des cafés et poivres du Havre(CACPH) is the main arbitral body for coffee and brings
together arbitrators from both the French and the Swisscoffee trade. CACPH conducts both quality (arbitrage dequalité et expertise) and technical arbitrations (arbitrage
de principe). Linked quality and technical issues within thesame dispute can be dealt with simultaneously in a ‘joint
arbitration’ (arbitrage mixte). Requests for arbitration must
be made in French or in English on the official form provided.
If legal counsel is to be involved this must be indicated on
the request form. The rules provide for a two-tier system ofadjudication: arbitration at the first instance and an appeals
procedure. All time limits are calendar days and run fromthe date material is forwarded, including 72 hours deemednecessary for transmission. Late delivery automaticallyextends the time limit according to the delay involved.

DOCUMENTS TO BE SUBMITTED AND TIME
LIMITS
Quality disputes
 Contract or sales confirmation;
 Invoice; Out-turn sample, sealed under independent supervision
or by the parties jointly;
 Where relevant, a jointly sealed original sample of thecoffee that was sold.
The request to CACPH must be submitted no later than 30days from the formal notification by one of the parties thatthey are to proceed to arbitration. The defendant has 15days from the date CACPH dispatches the notification tocountersign and return it. Failure to respond will result in thearbitration proceeding without any input from the defendant.

Technical disputes
 Statement of the matters in disputes and claims made; All relevant documents (contracts, invoices, bills of
lading, certificates, etc.).
The request for arbitration must be lodged within 30 days
as above, to be followed by the complete dispute file in fivecopies, including statements of facts and claims, within afurther 10 days. The other party must lodge their defence
within 30 days from the date CACPH transmits the disputefile to them.
The plaintiff then has 15 days to respond after which thedefendant has a further 15 days to make a final response.
Failure to respond will result in the arbitration proceeding
without any input from the defendant.

ARBITRATION PANELS
All arbitrators are designated by CACPH and their names
are made known to the parties. Arbitrators may not have any
connection with the matter in dispute. If they find that they
do then they must withdraw unless the parties agree thatthey can continue.
For quality arbitrations and appeals: three arbitrators,
appointed by the board of directors.
For technical arbitrations: in the first instance threearbitrators and on appeal five, again appointed by the
CACPH board.
Parties to a dispute may challenge arbitrators only on
grounds which arose, or became apparent, after they
were appointed and must do so within three days of theevent, failing which the panel shall stand as nominated. All
arbitration hearings are private but in technical arbitrations
the parties may be present or may be represented by legal
counsel. They can also be represented by a member of thecoffee trade but only with the prior approval of the panel.

Awards and appeals
Quality awards are issued within eight weeks fromregistration of the original request. Any appeal must
be lodged within 15 days from the date the award wasdispatched, copied to the other party. Appeal procedures
and time limits are the same as for arbitration in the first
instance.
Technical awards are made within three months fromthe date of hearing although this can be extended with theagreement of the CACPH board. Any appeal must be lodged
within 20 days from the date the award was dispatched,copied to the other party, with the complete dispute file inseven copies being lodged with CACPH not more than 10days later. Procedures and time limits are the same as forarbitration in the first instance.

CHAPTER 7 – ARBITRATIONNB: Awards are pronounced in French to enable the parties
to obtain execution by the ‘Tribunal de Grande Instance
du Havre’. Awards can however be translated by sworn
translators.
Costs and fees are set by the arbitrators, who also stipulate
who shall be liable for them. No arbitration procedure will
be initiated unless the required deposit for costs and fees
(determined by CACPH for each individual case) has firstbeen made.

ARBITRATION IN THE UNITEDSTATESTHE GREEN COFFEE ASSOCIATIONThe rules of the Green Coffee Association (GCA) set out
comprehensive arbitration and appeal procedures. Over
95% of the coffee imported into the United States andCanada is sold under GCA contracts so these rules apply toa large part of world imports and are of some considerable
importance.
The rules differ in some important aspects from those inEurope. For example, for technical disputes GCA sets notime limit for lodging the claim and instead sets a limit of
one year from the date the issue first arose for the filing of
the demand for technical arbitration hearings. ECF on theother hand sets a time limit for lodging the claim of 45 days
from the date of discharge at port of destination (provided
all documents were available to the buyers), or from the last
day of the shipping period in the case of non-shipment. Thisis followed by a further 90 days for the filing of the demand
for arbitration, counted from the date one party formallynotifies the other that arbitration will be initiated.
GCA permits the use of legal counsel whereas ECF requires
prior approval for this. The GCA freely permits the use of
witnesses and legal counsel, but it does not allow new
evidence to be presented at an appeal, whereas the British
Coffee Association’s rules allow new evidence at any time.
In the United Kingdom arbitrators are appointed by the BCA
whereas in Germany claimant and defendant each appoint
one arbitrator who together select a third, the umpire. For
GCA arbitrations held outside of New York buyer and seller
shall each nominate an arbitrator who jointly appoint a third.
The same procedure applies for GCA arbitrations held in
New York, but the parties may also agree to have all threeselected by the GCA secretary, by lot, from the appropriate
GCA arbitration panel. In addition to the technical panel
the GCA has separate quality panels for washed arabica,
natural arabica, robusta, specialty coffee and decaffeinatedcoffee.
GCA members annually submit names of coffee
professionals who they feel are qualified to settle quality and/or technical disputes. The arbitration committee reviews theexperience of each individual, and determines for which list
he or she is qualified. These lists form the pool of names
from which the GCA secretary then chooses arbitrators
by lot. The secretary must also be vigilant not to selectarbitrators who may have a conflict of interest because of
relationships with either party to a dispute.
Once the arbitrators are selected, the arbitration is entirely
under their control as stated in the GCA Rules of Arbitration:
The Association does administer and interpret thearbitration procedure and these Rules and it designates
the arbitrators. It is, however, the arbitrators who conduct
the hearings, determine and decide the issue, and theyalone have the power and authority to make an award.
Arbitrators shall be in complete charge of the arbitration.
They shall conduct the same with the purpose of
establishing equity and fair dealings in matters of tradeand commerce.
All GCA arbitrations are monitored by the legal staff ofthe IntercontinentalExchange (ICE) to ensure they are runefficiently and that the results are both impartial and infull compliance with the laws of the land. Since 1999 theadministration of the GCA has fallen under the auspices of
the Exchange (now ICE but previously known as the New
York Board of Trade or NYBOT).

QUALITY ARBITRATIONSThe GCA contract stipulates that:
Coffee shall be considered accepted as to quality unlesswithin 15 calendar days after discharge of the coffee, orwithin 15 calendar days after all government clearances
have been received, whichever is later, either: Claims are settled by the parties to the contract; or Arbitration procedures have been filed by one of theparties in accordance with the provisions of the contract.
If neither of the above has been done within the statedperiod, or if any portion of the coffee has been removed
from the point of discharge before representative sealed
samples have been drawn by the GCA, in accordance with
its rules, seller’s responsibility for quality claims ceases forthat portion so removed.
To initiate a quality arbitration, the claimant must submit asigned and notarized demand for arbitration in triplicate
explicitly setting forth the precise complaint(s) in detail on
GCA form A-2. This must be accompanied by the originalcontract, a sampling order to the order of the GCA, and therequisite arbitration fee. When GCA receives the defendant’s
answer it copies it to the claimant, who may either file a reply
with GCA or allow the arbitration to proceed in accordancewith the original submission. All arbitration forms areavailable from www.greencoffeeassociation.org.

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CHAPTER 7 – ARBITRATIONOn receipt of the arbitration demand, the defendant
responds by filing their signed and notarized answer intriplicate on GCA form B-2, together with the requisite fee.
This answer must be filed with GCA within five business days
from receipt of the arbitration demand if the defendant’s
office is located in New York City. If the defendant’s office
is not in New York City, the GCA secretary can, at his or
her discretion, extend any time requirement beyond thatprescribed to give the defendant an equivalent period tothat allowed to a resident.
If the claimant files an answer to the defendant’s reply,
the defendant can file an additional response or they canallow the arbitration to proceed on the basis of their original
answer.

Procedure
When the final answer or reply has been filed, or the time
when the same is due has expired, the GCA secretary
determines the panel of arbitrators to be used. Any arbitrator
known to be connected with either party shall be removed
from the list.
If the arbitration is outside of New York, the secretary shallthen supply the list of potential arbitrators to the petitioner
and the respondent and ask them each to select one
arbitrator. The secretary shall then ask the two arbitrators
selected, to choose a third arbitrator from the same list. Thisis referred to as the Alternate Panel Selection method.
If the arbitration location is in New York, and the Alternate
Panel Selection method is not specified at time of contract,
the GCA secretary will select the panel by lot. If the arbitration
location is not specified at time of contract, the arbitration
will be in New York with the GCA secretary selecting thepanel by lot.
Arbitrations involving grade or quality must be held at one
physical location acceptable to the arbitrators and theassociation. GCA prepares an extract of the arbitration
papers that have been filed, deleting all names andreferences to the parties, including all marks on the samples
to be tested and ensures that all pertinent data and samples
are submitted to the arbitrators. This secrecy applies toarbitrations where the GCA chooses the arbitrators. If thealternative selection of arbitrators is invoked, the parties
waive their right to anonymity with the arbitrators. The
arbitrators shall then make an award within five business
days.
The arbitrators independently cup and grade six cups
for each chop submitted for arbitration, according to theclaimant’s demand, and make their own conclusions. The
arbitrators review their findings and issue either a unanimousdecision, or a majority and a minority decision. GCA notifies
the parties to the dispute as quickly as possible, but notlater than five business days after the decision on the award
is reached.

The arbitrators are also required to assess the costs of thearbitration against the unsuccessful party; they can also
instruct the parties to share the costs.

Award and appeal
An award must be made and the parties notified by GCA
within five business days after a quality arbitration is held. If
the award is to be contested, an appeal must be filed with
GCA within two business days after receipt of the award,
on GCA form D in triplicate, duly signed and notarized
and accompanied by the requisite fee. No new claims or
counterclaims may be submitted on appeal.
All appeals are held in New York and the appeal arbitration
panel consisting of five new arbitrators, so excluding theoriginal three, is selected by GCA. The arbitrators grade andcup the original sample in the same way as the first panel
to reach a decision. Their decision to uphold or change theoriginal award is final.
The appeal award must be made within five business daysof the sitting and the unsuccessful party must settle theaward within seven calendar days of the date of receipt of
the notice of the award.

GROSS NEGLIGENCE AND FRAUD
Under GCA rules all quality issues under FCA, FOB, CFR,CIF and DAF contracts are settled by allowance. GCA
considers that it is a technical issue whether or not quality
is inferior to such an extent that the normal remedy of anallowance is insufficient. Therefore the claimant must file ademand for a technical arbitration. The technical arbitration
panel might in its turn convene a quality panel to verify
whether negligence or fraud took place but this would not
be made known to the claimant who would only receive thedecision of the technical panel.

TECHNICAL ARBITRATIONS
Actions the claimant and the defendant must take. These
are the same as for quality arbitrations, but the demand andresponse must be submitted on GCA forms A-1 and B-1.
All relevant papers (shipping documents, correspondence,certificates, statements, etc.) must accompany these forms,
which are available from www.greencoffeeassociation.org.
Technical arbitration hearings can be held in person at any
facility deemed acceptable by the GCA and the arbitrators,
or by conference phone call, or Internet meeting site. It
is not necessary that arbitrators, parties and their legal
representatives, and the GCA secretary be physicallypresent at the same location. The secretary will arrange for a
stenographic record of testimony if this is requested by either
party.

CHAPTER 7 – ARBITRATION

Each party has the right to request an oral hearing. If they
exercise this right, they may appear with an attorney andwitnesses provided the arbitrators and the other party werebeen given prior notice of this and the arbitrators have notobjected. The other party may then also appear with anattorney. The arbitrators always have the option of asking
GCA legal counsel to be present.
All oral testimony must be made under oath; the entire
procedure is recorded. All communications must be
addressed to the chairperson of the arbitration panel; noone is permitted to communicate directly with the arbitrators
or witnesses, except with the chairperson’s approval.

Procedure
After the final replies have been received from all parties, the
GCA secretary selects a panel of three arbitrators from theassociation’s register of technical arbitrators and ensuresthat they have no connection with any of the disputants. A
mutually satisfactory time and a date are set. The arbitrators
may approve a delay of five days if acceptable reasons are
submitted in writing.
The arbitrators receive copies of all the documents that havebeen filed and review them independently before the date of
the arbitration. They elect their own chairperson to conduct
the arbitration and hearings. The arbitrators may request
the GCA counsel to attend and act as a legal adviser, but
GCA counsel has no voice or vote in any decisions. The
arbitrators assess costs on either or both of the parties.

Award and appeal
The award must be made within five business days of
the arbitrators receiving copies of the transcript of theproceedings.
If the award is to be contested, an appeal must be filed
within two business days of receipt of the award on form
D in triplicate, duly signed, notarized and accompanied by
the requisite fee. Five new arbitrators are selected to hear
the appeal. They can review only the original documents
and transcripts; no new evidence may be submitted. Theirdecision is final. The appeal award must be made within fivebusiness days of the arbitrators receiving the transcript of thehearings.
Settlement of the award must be within seven calendar
days of the date of receipt of the notice of the award by theunsuccessful party.

PRACTICAL CONSIDERATIONS
Although the GCA arbitration system is designed so thatexporters can use the system directly from source countries,
it is advisable to have local representation at the arbitration.
The GCA administration will provide all reasonableassistance to assure a fair hearing regardless of how far
away a respondent may be, but there are certain facts andprocedures of which the system assumes all participants
have a good understanding.
To protect oneself from oversight, it is a simple matterfor an exporter to nominate a local importer to appear on
their behalf in arbitration. Most importers will perform thisservice free of charge and the practice is quite common.
Local representation helps in a number of ways. First ofall, documents and sampling usually move along more
efficiently. When a piece of paper or a sampling order ismisplaced, local people can trace the problem more
quickly. Second, local representatives usually have moreexperience with the arbitration system and can guide theexporter through some of the details.
For example, it is clearly stated that blanket contentions
are not admissible in quality arbitrations. That is to say,one cannot simply ask for a quality allowance because ‘thecoffee is bad’. An experienced person would point out thata quality complaint should not only be detailed, but also
be all encompassing. There have been quality arbitrations
where a claimant has complained only about the gradeof the coffee. When reviewing the samples the arbitrators
also found cup deficiencies, but felt unable to include thecupping problem in their award because the claimant did
not claim on the cup. An experienced claimant would makea claim for certain grade defects (e.g. black beans, sourbeans or husks) ‘that sometimes reflect in the cup quality’.
The need for local representation in technical arbitrations
is more obvious. The details of why and how contractual
obligations are determined can be complex. An exporter’s
experience is usually mostly sales oriented, whereas
importers (and most technical arbitrators for that matter)
have the broader experience of being both buyer and sellerin the international coffee market.
The final advantage to having local representation is
gaining a better understanding of the award. Most awards
are very simple statements like: ‘Based upon the evidence
submitted, we award X to the seller [or buyer], and the costof the arbitration to the buyer [or seller].’ It is rare that anaward includes any explanation as to why the arbitrators
decided the way they did.
Because most arbitrators are experienced coffee people,
with equal experience as international buyers and sellersof coffee, they understand both sides of the transaction.
Those who see the coffee trade from only one side, suchas exporters, do not always appreciate why and how certain
actions or lack of actions can cause their counterpart tosuffer loss or damage, and it is not uncommon for someto feel they have been treated unfairly in the arbitration
proceedings. Someone who has not experienced thebusiness from both sides cannot always see how theother party was legitimately hurt by their actions and may
sometimes think that the other party won the award becauseof a bias in the arbitration system.

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CHAPTER 7 – ARBITRATIONIn quality arbitrations the arbitrators do not know who theparties are. They see only the complaint and the defendant’s
reply, without names. After this the coffee does the talking.
Therefore, bias in quality arbitrations is virtually impossible.
In technical arbitrations, the arbitrators do see the names ofthe parties, but they are both buyers and sellers of coffeeand so understand both sides of the business. Before
being appointed they are pre-screened about any personal
contacts they may have with the parties to the dispute,and GCA legal counsel monitors the proceedings. A local
representative might not know exactly how the arbitration
award was decided, but they should have a clear view ofthe proceedings and be able to explain more or less how an
outcome was determined. This is very helpful for an exporterin deciding whether or not to appeal.

COSTS AND FEES
The arbitration fee for GCA-members shall be as follows: US$ 450 minimum up to 250 bags on any question solelyof grade or quality of coffee. For each additional bag over
250 bags there shall be a fee of 50 cts per bag.
 US$ 650 minimum up to 250 bags from appellants only
on an appeal from the award rendered on any question
solely of grade or quality of coffee. For each additionalbag over 250 bags there shall be a fee of 75 cts per bag.
 US$ 650 minimum up to 250 bags on any question otherthan one solely involving grade or quality of coffee. For
each additional bag over 250 bags there shall be a fee of
50 cts per bag.
 US$ 850 minimum up to 250 bags from appellants only
on an appeal from the award rendered on any question
other than one solely involving grade or quality of coffee.
For each additional bag over 250 bags there shall be afee of 75 cts per bag.
From the fees received the association shall pay a fee to thearbitrators as follows: Arbitrations on any question solely of grade or quality ofcoffee, US$ 100 per arbitrator;
 Arbitrations on any question other than solely of grade or
quality of coffee, US$ 100 per arbitrator.
In the event that arbitration is withdrawn or cancelled before
an answer is filed, the sum of US$ 200 shall be retainedby the Association as a filing fee out of the arbitrationfee deposited providing a hearing has not yet begun.
The balance of the arbitration fee shall be returned to thedepositor except as provided below. When a hearing has
been scheduled and held on a technical arbitration orappeal and any settlement is reached between the partiesor they mutually agree to withdraw the arbitration or appeal,such settlement or agreement shall provide for forfeiture of
the arbitration fee to the association by the depositor as thepanel sees fit.

When a decision has been rendered by the panel, thearbitrators shall assess the arbitration fee on one or bothof the parties as they see fit. All other expenses incurred,
shall be borne in such manner as fixed in the award. Other
deposits received are refunded to the parties entitled tothem, except for non-member fees or any cancellation fees.
All non-members party to an arbitration shall be charged
an additional fee for each arbitration or appeal, over andabove the scheduled fees charged to members as provided
above:
 US$ 300 on any question solely of grade or quality ofcoffee; US$ 300 on any other question.
The non-member fee when arbitrating against another nonmember is: US$ 500 on any question solely of grade or quality ofcoffee; US$ 2,000 on any other question.
This additional fee is retained by the association regardlessof the result. It must be paid, together with the regular
arbitration fee charged to members, to the GCA at the time
the submission to arbitration, and/or answer thereto is filedwith the GCA secretary.

CHAPTER 8

FUTURES MARKETSABOUT FUTURES MARKETS ............................................................................................................................. 132
ORGANIZATION OF A FUTURES MARKET...................................................................................................... 135
THE PRINCIPAL FUTURES MARKETS FOR COFFEE ...................................................................................... 136
THE NEW YORK ARABICA CONTRACT ........................................................................................................... 136
THE LONDON ROBUSTA CONTRACT .............................................................................................................. 138
BOLSA DE MERCADORIAS & FUTUROS – BRAZIL ........................................................................................ 140
SINGAPORE EXCHANGE LTD – THE SGX ROBUSTA COFFEE CONTRACT .............................................. 141
VIET NAM – TWO EXCHANGES FOR ROBUSTA ............................................................................................ 141
THE MECHANICS OF TRADING IN FUTURES ................................................................................................ 141

132

CHAPTER 8 – FUTURES MARKETSFUTURES MARKETSABOUT FUTURES MARKETSThe extreme volatility of the price of coffee brings drastic
price changes over months, weeks or days, or even within
the same trading day. Crop prospects vary widely due tounforeseen events, for example drought, frost or disease. Highcoffee prices encourage production growth, while low prices
result in falling output. The balance of supply and demandis subject to many uncertainties that affect price trends andtherefore represent price risk. All levels of the coffee industry
are exposed to risk from sudden price changes.
Coffee futures represent coffee that will become available
at some point in the future, based on standard contracts todeliver or accept a pre-determined quantity and quality ofcoffee at one of a known range of delivery ports. The only
points to be agreed when concluding a futures contract
are the delivery period and the price. The delivery period ischosen from a pre-set range of calendar months, called the
trading positions. Market forces determine the price at thetime of dealing.
There are two main futures market centres, New York andLondon, serving the global coffee industry: In New York, the Intercontinental Exchange (NYSE: ICE),
for arabica (the New York C Contract – market symbolKC) – see www.theice.com.
 In London, the London International Financial Futures
and Options Exchange (NYSE Liffe), for robusta (market
symbol RC) – see www.euronext.com.
For ease of reference these markets will from now on mostly
be referred to in this guide as New York arabica or New YorkC Contract and as London robusta, Liffe or LIFFE.
Other futures markets trading in coffee are found in
Brazil and Singapore, whereas Viet Nam inaugurated two
domestic exchanges in 2011.

To locate market information on the Internet, it is helpful tounderstand the market coding systems. Using the symbols
mentioned above, LKDX12 would refer to a quote on the
London robusta market for the November 2012 delivery
period. In the same way, KCZ12 would symbolize a quoteon the New York arabica contract for the December 2012delivery period. Some Internet sites are easier to navigate
and read using these official market symbols; other sites
spell everything out in plain English.
Free access price quotations are subject to a 20 to 30 minutedelay. Anyone requiring up-to-the-minute quotations mustregister with a subscription service, which means paying
monthly fees for real-time quotes. There are numerous
such subscription services with fees ranging anywhere from
US$ 200 to US$ 1,000 per month, depending on what othernews and trading services the subscription package includes.

THE FUNCTION OF FUTURES MARKETS
Coffee futures exchanges were originally created to bringorder to the process of pricing and trading coffee and todiminish the risk associated with chaotic cash market
conditions. The futures prices that serve as benchmarks
for the coffee industry are openly negotiated in the marketsof the coffee futures exchanges (primarily New York andLondon).
To support a futures market, a cash market must have certain
characteristics: sufficient price volatility and continuous
price risk exposure to affect all levels of the marketing chain;enough market participants with competing price goals;
and, a quantifiable underlying basic commodity with grade
or common characteristics that can be standardized. The
futures exchange is an organized marketplace that: Provides and operates the facilities for trading; Establishes, monitors and enforces the rules for trading; Keeps and disseminates trading data.

INTERNET ACCESSThe growth of the Internet has made access to priceinformation on the main markets easier than ever before.
The exchanges have their own websites, and all the majorcommodity news services (Reuters, CRB, etc.) supply pricequotes for the major coffee futures markets. There are alsoInternet sites relating specifically to the coffee business thatprovide market quotes. Most sites are easy to navigate andusually include a page with the latest futures price quotations.

The exchange does not set the price. It does not evenparticipate in coffee price determination. The exchange
market supports five basic pricing functions: Price discovery;
 Price risk transfer; Price dissemination;
 Price quality;
 Arbitration.

CHAPTER 8 – FUTURES MARKETSThe exchange establishes a visible, free market setting forthe trading of futures and options which helps the underlying
industry find a market price (price discovery) for the productand allows the transfer of risk associated with cash pricevolatility. As price discovery takes place, the exchange
provides price dissemination worldwide.
Continuous availability of pricing information contributes towider market participation and to the quality of price. (Morebuyers and sellers in the marketplace mean better liquidity
and therefore, better pricing opportunities.). To ensure theaccuracy and efficiency of the trading process, the exchange
also resolves trading disputes through arbitration.

THE TWO MARKETS – CASH AND FUTURES
To clearly understand the coffee futures market, a distinction
must be drawn between physical (cash) coffee and coffee
futures.
In the coffee cash market, participants buy and sell physical,
green coffee of different qualities that will be delivered either
immediately or promptly. The cash transaction therefore
involves the transfer of the ownership of a specific lot of aparticular quality of physical coffee. The cash price for thephysical coffee is the current local price for the specificproduct to be transferred. (Note that sales of physical, green
coffee for later (forward) delivery, called forward contracts,
are not to be confused with futures contracts.)
In the coffee futures market, participants buy and sell aprice for a standard quality of coffee. The futures transaction
centres around trading a futures contract based on physicalcoffee (or its cash equivalent) at a price determined in an
open auction – the futures market. The futures price is theprice one expects to pay, or receive, for coffee at somefuture date.
 Cash price. The price now for coffee (by trading thephysical product for immediate or prompt delivery).
 Futures price. The expected price for coffee (by trading
the different positions of the futures contract).
The futures contract is a standardized legal commitment
to deliver or receive a specific quantity and grade of acommodity or its cash equivalent on a specified date andat a specified delivery point. Its standardization allows themarket participants to focus on the price and the choice ofcontract month.
Traders in the futures markets are primarily interested inrisk management (hedging), investment opportunities, or
speculation, rather than the physical exchange of actual
coffee. Although delivery of physical coffee can take place
under the terms of the futures contract, few contracts
actually lead to delivery. Instead, purchases are usuallymatched by offsetting sales and vice versa, and no physicaldelivery takes place.

In addition to its pricing functions, the coffee futures market
also serves to establish standards of quality and grade thatcan be applied throughout the industry.

PRICE RISK AND DIFFERENTIAL
Because the futures contract is standardized in terms of
the quantity and quality of the commodity, the futures pricerepresents an average range of qualities and is therefore
an average price. The price for each individual origin andeven quality of physical coffee is not necessarily the same:
it may be higher or it may be lower. Historically the futures
price and the cash price tend to move closer together as the
futures delivery date draws near. While such convergence
does occur in an efficient market, prices for physicalcoffee often fluctuate quite independently from the futures
market. The physical premium or discount, the differential,
represents the value (plus or minus) the market attaches tosuch a coffee compared to the futures market. This pricedifferential can reflect local physical market conditions, aswell as coffee quality and grade.
Price risk therefore has two components:
 The underlying price risk. The prices for arabica or
robusta futures as a whole rise or fall; The differential risk or basis risk. The difference
between the price on the physical coffee market fora particular quality or origin, and the price on the future
market (known as the basis or differential) increases ordecreases.
Futures markets can be used to moderate exposure to theprice risk because they represent the state of supply anddemand for an average grade of widely available deliverable
coffee. They cannot be used to moderate the differential orbasis risk, which attaches entirely to a particular origin, typeor quality of coffee.
Price risk is almost always greater than differential risk,so the risk reduction capability of the futures market is an
important management tool. Differential or basis risk can,admittedly, be very high at times and should never beignored. It is helpful to examine historical differential pricing
to identify periods of increased differential risk. There might
be seasonal patterns, for example.

LIQUIDITY AND TURNOVER
Liquidity is a crucial factor in determining the success ofa futures market. A futures market must have enoughparticipants with competing price goals (buyers and sellers)to ensure a turnover high enough to permit the buying andselling of contracts at a moment’s notice without direct
price distortion. Large transaction volumes provide flexibility(liquidity) and enable traders to pick the most appropriate
contract month, corresponding to their physical delivery

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CHAPTER 8 – FUTURES MARKETS

commitments, to hedge the price risks inherent in thosephysical transactions. More bids to buy and offers to sell inthe market at any given time create greater pricing efficiency
for the participants seeking a price for the commodity.
Currently only the New York and London markets provide
this flexibility on an international scale, while the Brazilian
market, although extremely active, is mostly relevant to local
interests.

Table 8.1

Speculators and hedgers competing for price generallymeans that futures and cash prices move in the same
direction over time and as a futures contract approachesdelivery, the futures price and the cash price will often
converge. Futures prices do not always reflect cash market
reality though, especially over the very short term when large
volumes may be traded for purely speculative reasons. The
volume of futures trading and the underlying quantity ofphysical coffee it represents easily exceed total productionof green coffee, or indeed the volume of the physical tradeas a whole.
The large volumes on the futures markets not only influence
futures prices, but inevitably have an influence on the priceof physical coffee as well. It is important for those involvedin the physical coffee business to be aware of the activityof speculators and derivative traders. For that reason, thefutures industry regularly examines and publishes the ratioof speculative and hedging activity in the market.

Annual turnover in futures compared with grossworld imports, 1980–2010 (millions of tons)
New York

LondonTotal
futuresWorld
imports*

1980

15.2

5.5

20.7

4.1

1985

11.1

5.1

16.2

4.5

1985–1989

17.7

5.4

23.1

4.7

1990–1994

37.3

5.5

42.8

5.3

1995–1999

37.6

6.6

44.2

5.6

2000

33.7

7.4

41.1

6.1

2001

37.4

7.7

45.1

6.2

2002

46.2

9.5

55.7

6.3

2003

54.6

11.6

66.2

6.5

2004

71.3

15.3

86.6

7.0

2005

67.8

16.3

84.1

7.0

2006

75.0

17.8

92.8

7.3

2007

84.6

22.2

106.8

7.6

2008

92.6

21.9

114.5

7.8

2009

72.4

25.2

97.6

7.6

2010

93.9

27.9

121.8

7.9

Year

* Gross imports from all sources.

Speculators are absolutely necessary to the efficient
functioning of a futures market. Speculative activity directly
improves liquidity and therefore serves the hedgers’ longterm interests. During the last 10 years or so, the activityof hedge funds and the development of options on
futures markets have both led to an increase in short-term
speculative activity.

Table 8.2

Annual turnover in options and futures, 1990–
2010 (millions of tons)
New York

LondonTotal
options

Options +futures

1990

4.8

0.2

5.0

41.0

1990–1994

12.9

0.7

13.6

56.3

While options on futures provide another speculative
opportunity in the futures market, options also represent
an important risk management tool that has become very
useful in recent years. See also chapter 9, Hedging andother operations.

1995–1998

16.9

0.8

17.7

42.1

1999

23.3

0.9

24.2

76.9

2000

15.5

0.6

16.1

57.2

2001

13.6

0.4

14.0

59.1

Not all options result in actual futures contracts. However,they do represent potential quantities to be traded on the
strike dates should the holders decide to exercise theiroptions rather than simply letting them expire. In any event,the large turnover in actual futures demonstrates the impactof the futures markets on the daily trade in physical coffee. In
recent years, physical prices have largely been determinedby applying a differential to prices in the futures market; thatis, the combination of the differential (plus or minus) and theprice of the selected futures position gives the price for thephysical coffee.

2002

18.1

0.7

18.8

74.5

2003

22.6

0.7

23.3

89.5

2004

33.5

1.2

34.7

121.3

2005

40.3

0.8

41.1

125.2

2006

47.2

2.3

49.5

142.3

2007

49.5

3.3

52.8

159.6

2008

48.0

2.8

50.8

165.3

2009

24.4

1.9

26.3

123.9

2010

39.2

4.8

44.0

165.8

The tables 8.1 and 8.2 demonstrate the huge growth involume of the trade in options and futures.

YearCHAPTER 8 – FUTURES MARKETSVOLATILITY
The extreme volatility of coffee prices can be seen
historically in both the size and suddenness of price moves.
In April 1994, for example, New York arabica ‘C’ futures werearound 85 cts/lb – after frost damage in Brazil they reached
248 cts/lb: a rise of close to 300% in less than three months.
Eventually values fell back to around 90 cts/lb, but by May
1997 prices had reached over 300 cts/lb. And by mid 2001
the nearest position on the New York arabica ‘C’ contract
had fallen to below 50 cts/lb: a 30-year low just four years
after the 1997 highs. By end 2005 the near position once
again stood above 100 cts/lb, reaching the 300 cts/lb level
again in the first half of 2011. www.futures.tradingcharts.
com/chart/CF/M offers charts showing the price movements
over the last eight to nine years.
Modern communications can move markets quickly,
ensuring that all events affecting price become known to allmarket players more or less simultaneously. And when as aresult everyone wants to buy or sell, but there are no sellers
or buyers, then without any trading the price may jump or fallby as much as 10 cts/lb or more, depending on the starting
price level. In times of extreme volatility this gap means a
trader can be left with a position they cannot liquidate when
they wish to because there is no trade.

ORGANIZATION OF A FUTURES
MARKET
CLEARING HOUSE
The clearing house conducts all futures business, including
the tendering (delivery) of physicals under the terms of the
futures contract. Usually set up as a corporation, separate
and independent from the exchange, the clearing houseguarantees and settles all exchange trades. Through its
system of financial safeguards and transaction guarantees,
the clearing house protects the interests of the trading public,
members of the exchanges and the clearing members of
the clearing corporation.
ICE Clear U.S. or ‘Clearing Corporation’ is the designatedclearing house for ICE Futures U.S. – i.e. for the New Yorkarabica contract. Although an ICE Futures U.S. subsidiary,
ICE Clear U.S. has its own separate membership, board of
directors, elected officers and operating staff.
In London the clearing house is owned by leading banks.

TRADING OF FUTURES
LEVERAGE
Leverage is a significant characteristic of the futures market.
In light of coffee price volatility, it is important to be awarethat futures contracts are leveraged instruments, meaningthat a trader does not pay the full market price for eachcontract.
Instead, futures traders pay a small portion of the contract’s
total value (usually less than 10%) in the form of margin, agood faith deposit to ensure contract performance. A New
York arabica ‘C’ contract trading at 200 cts/lb would be
worth US$ 75,000 (each contract is for 37,500 lb of coffee).
If the margin requirement is about US$ 5,400 per contract,buying 10 contracts at 200 cts/lb means posting a marginof US$ 54,000, representing a long (unsold) position worth
US$ 750,000. Leverage offers advantages, but it carries anequal amount of risk. If the market moves down 10 cts before
a selling trade can be achieved then the loss of US$ 37,500
in this case represents about 70% of the original investment
of US$ 54,000 and will require payment of a variation margin(see later in this chapter). Of course, the hedger would be
realizing a comparable gain in the cash market of the valueof the planned physical transaction.
Large margin calls (additional payments necessary tomaintain the original margin level) sometimes further
increase volatility when inability or unwillingness to raise
the additional deposits causes traders or speculators toliquidate their positions, thus fuelling the price movement
up or down still further.

Traditionally the trading of futures contracts on the exchange
floor was permitted only between exchange members.
However, with the advent of electronic trading, anyone withthe appropriate trading rights agreement with a clearing
firm, direct or through brokers, can now trade futureselectronically but will have to offer substantial guarantees
before a trading account can be opened. In origin countries
licensed commercial banks may offer such facilities.
Purchases and sales positions for the same contract
month offset each other and are built up on a daily basis.
Rather than carry such trades until maturity, the clearing
house matches offsetting positions and clears them fromthe records of the brokers who handled them. The clearing
house takes the place of the buyer or seller; it performs therole of seller to all buyers, and that of buyer to all sellers.
In this way a maximum number of direct settlements is
automatically possible at the close of each trading day.

FINANCIAL SECURITY AND CLEARING
HOUSES
Financial security for the market is assured by the clearing
house, which establishes and enforces rules and guidelines
on the financial aspects of all exchange transactions. The
clearing house checks, settles and reports each day’s
business and guarantees the fulfilment of each contract.
This is assured through the payment of margins and thecollection of all outstanding obligations from members

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CHAPTER 8 – FUTURES MARKETS

within 24 hours. In addition, members pay into a permanentguarantee fund, enabling the clearing house to assume
financial responsibility if a member defaults.
The clearing house also assigns tenders and re-tenders ofdeliverable coffee after ensuring each lot meets certain set
standards of quality, storage, packing, and so on.

THE PRINCIPAL FUTURES
MARKETS FOR COFFEE
Establishing a futures market requires extensive researchand preparation, whereas success will depend largelyon the financial backing that can be attracted. A further
prerequisite is that the new futures operation can attain theliquidity necessary to create a true market place that attracts
not only local interest, but also foreign operators. The UnitedStates and the United Kingdom markets are world market
makers, whereas the Brazilian market is of special interest
because it operates in a producing country.

THE NEW YORK ARABICACONTRACTThe original Coffee Exchange of the City of New York wasfounded in 1882 to deal in futures contracts for Brazilian
arabica. The New York Board of Trade or NYBOT was
established in 1998 as the parent company of the Coffee,
Sugar and Cocoa Exchange (CSCE) and the New York
Cotton Exchange (NYCE).
Today’s ‘C’ contract or NYKC covers mild arabica coffee
and currently allows delivery of coffee from 19 producing
countries. Some of these coffees are traded at basis price,
while others are traded at differentials above or below thebasis price.
In January 2007 the New York Board of Trade mergedwith ICE – www.theice.com, resulting in the introduction
on 2 February 2007 of the electronic trading of six NYBOT
soft commodity futures contracts, including arabica coffee,
alongside the existing open outcry trading.
Open outcry trading was halted early 2008. Since then all
Futures and Against Actuals or AA transactions are carriedout electronically. Options, however, trade side by side, i.e.
both electronically and through open outcry. The electronic
trading hours for options are the same as for futures but
open outcry trading of options only operates from 0800
hours to 1330 hours New York time. See later in this chapter
for an explanation of AA transactions.

TRADING HOURS, QUOTATIONS, PRICE
FLUCTUATION LIMITSElectronic trading hours. Hours are as follows (London
equivalent time in brackets): Open 3.30 a.m. (8.30 a.m.),
Settlement window 1.28–1.30 p.m. (6.28–6.30 p.m.), Close
2 p.m. (7 p.m.). However, the ICE platform also offers apre-open facility where traders can enter bids and offers onoutright positions. Pre-open orders will not be available for
execution until the electronic market session opens. They
are shown in the electronic order book and are executed ona first-in-first-out (FIFO) basis when the electronic market
opens. Pre-open sessions operate from 8 p.m. to 1.30 a.m.
New York time on working days, and on Sunday evenings
prior to a Monday trading session. Readers are advised tocheck on www.theice.com for any changes.
Quotations. For all bids and offers quotations are in UnitedStates cents and decimal fractions of a cent. No transactions,
except against actuals (AA) transactions, are permitted at a
price that is not a multiple of five one-hundredths of one
cent per pound, or five points per pound.
Price fluctuation limits. There are no general limits fordaily price fluctuations on the ‘C’ contract. The Board ofManagers, however, may prescribe, modify, or suspend
maximum permissible price fluctuations, without priornotice. In times of maximum volatility it is common to have
limits imposed; historically, these limits have been between
4 and 8 cts per pound maximum daily fluctuation. Basedon the New York ‘C’ contract size of 37,500 lb, a 4-centvariation is equivalent to US$ 1,500 per contract. Jobbers
and floor brokers calculate this by taking US$ 3.75 for every
point of movement, so each 1 cent move equals 100 points
times 3.75, or US$ 375.
The daily settlement price. For all open positions this isbased on the trades occurring between 12.28 and 12.30
p.m. New York time.

DELIVERIES, DELIVERY MONTHS,TENDERABLE GROWTHS AND
DIFFERENTIALS
Deliveries: can be made at the ports of New York (at par) as
well as Houston, New Orleans and Miami; deliveries to thelast three ports incur a discount or penalty of 125 points, or
US$ 468.75 per 37,500 lb contract (100 points = US$ 0.01,
i.e. 1 point = 1/100 cent). In Europe deliveries can be madeat Antwerp, Bremen/Hamburg and Barcelona, subject again
to a 125 point discount from the New York delivery price.
Delivery months: (or trading positions) are March, May,
July, September and December. Ten trading positions arealways quoted, giving a two-year period. For example:
July 2012 (N12), September 2012 (U12), December 2012
(Z12), March 2013 (H13), May 2013 (K13), July 2013 (N13),

CHAPTER 8 – FUTURES MARKETS

September 2013 (U13), December 2013 (Z13), March 2014
(H14) and May 2014 (K14). The first or nearest month is
known as the current or spot month. When months repeat,
the further out positions are sometimes referred to as red: inthis example the March 2014 and May 2014 positions would
be known as red March and red May.
Table 8.3

Tenderable growths and differentials at ICE

Tenderable growths

Deliverable atBasis or contract priceCosta Rica, El Salvador,
Guatemala, Honduras, Kenya,
Mexico, Nicaragua, Panama,
Papua New Guinea, Peru,
Uganda, United Republic of
Tanzania
Colombia

Plus 200 points per pound

Burundi, India, Venezuela(Bolivarian Republic of)

Minus 100 points per pound

Rwanda*Minus 300 points per pound

Dominican Republic, Ecuador

Minus 400 points per pound

Brazil**Minus 900 points per pound* Effective with the March 2013 expiration, the differential for Rwanda
will be minus 100 points.
** Deliverable effective with the March 2013 delivery expiration.

CERTIFICATION OF DELIVERIESNo coffee can be submitted for tendering without having
first obtained a certificate of grade and quality from theexchange. All coffee submitted for certification is examinedby a panel of three licensed graders. The examination isblind, or neutral, as the graders know the country of origin
but not who submitted the sample. The quality is determinedon the basis of six evaluations and measurements:
 Green coffee odour (no foreign odours);
 Screen size (50% over screen 15, no more than 5% below
screen 14);
 Colour (greenish); Grade (defect count); Roast uniformity; Cup (six cups per sample).
Brazilian arabica will be deliverable effective with the March2013 expiration. This means that in future both washed andsemi-washed Brazilian arabicas may be tendered, but theexchange has not addressed this directly. Instead it has
added a new standard to the rules as follows:‘Coffee “C” shall consist of one (1) growth, in soundcondition, free from all unwashed and aged flavours in
the cup, of good roasting quality and of bean size andcolour in accordance with criteria established by the
Exchange.’

The reference to ‘aged flavours’ is not linked to Brazilian
arabica, but refers to all growths and is accompanied bysimultaneous changes in the age penalties that exchange
graded tenderable lots incur after a certain period ofstorage, also effective with the March 2013 expiration.
If a lot is passed, the exchange will issue the certificate, which
includes a complete rating on any grade imperfections.
One appeal against rejection is possible on each lot withthe whole process repeated by five graders instead of theoriginal three. The appellant has the option to submit a new
sample or to run the appeal on the original sample. It is quite
normal for coffee that grades well, but has failed on cup to
be appealed automatically in the hope that the unsound cup
in the first test was an anomaly.
The certificate establishes the basis, or standard, deliverable
for these growths. Each growth is allowed a maximum of
23 imperfections (out of 350 grams), with a deduction of
10 points for each full imperfection by which it exceeds
the number permitted in the basis. Sample size is 5 lb forparcels up to 300 bags, 8 lb for 301–500 bags and 10 lb formore than 500 bags.
Exchanges continuously monitor cash market conditions
and adjust contracts or create new ones to reflect thosechanges. This reflects the fundamental relationship between
cash and futures. If the futures market does not accurately
represent the cash market, then it cannot perform its primary
pricing functions.
As an example, in recent years the ‘C’ contract added
Panamanian coffee to its tenderable growths, reduced thediscount for a number of other growths and added Europeandelivery points. In addition, new grading procedures as well
as changes in bagging standards have been implemented.

INTEGRATING FUTURES AND CASH
MARKETS: THE eCOPS SYSTEM
ICE’s direct involvement with the grading, certification andwarehousing of physical coffee is an indication of how
interconnected the futures and cash markets have become.
The New York Exchange is also directly involved in theestablishment of electronic transfer of ownership of lots ofcoffee through standardized electronic contracts and otherpaperwork that must accompany the movement of coffee
through the marketing chain.
In 1992, the then NYBOT introduced COPS or Commodity
Operations and Processing System, a computerizedcommodity delivery system that addressed sampling,
quality, weighing, and title transfer as well as confirming
title status of deliveries. This transformed the entire delivery
process for the coffee industry by reducing the complex,
time consuming, costly and inefficient paper trail for eachdelivery against a futures contract.

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CHAPTER 8 – FUTURES MARKETSeCOPS has now replaced the paper delivery trail with electronic
versions of warehouse receipts, delivery orders, samplingorders, weight notes, invoices, insurance declarations anda number of other accompanying documents. Other areas
such as bills of lading and customs entry documentation will
be added as the system grows. For more on eCOPS see also
chapter 6 or go to www.theice.com and look for eCOPS.

SUPERVISION BY CFTC
The U.S. Commodity Futures Trading Commission (CFTC) is
charged with the supervision of trading in commodity futures.
The CFTC reports directly to the United States Congress
and its aim is to protect the trading public from possible
abuses by the futures industry, such as manipulation of themarket and other deceptive practices that might prevent themarket from correctly reflecting supply and demand factors.
It also seeks to ensure that the members of the exchange
are financially viable.
Exchange bylaws, rules and regulations are statutory andtherefore have the force of law. The provisions of the CFTC
Act require every intermediary that deals with membersof the public investing in futures to be registered with the
National Futures Association, a self-regulatory body createdby the Act. The ICE Exchanges, through the use of electronic
surveillance and professional personnel, actively monitor
trading activity and enforce trading rules and regulations.

COMMITMENT OF TRADERS REPORTThe CFTC actively promotes market transparency andto this end publishes the Commitment of Traders (COT)
reports, which clearly show the position of large commercial
and non-commercial traders. Positions of 50 contracts ormore must be reported to the CFTC. This is of great value
to small players in that it allows them to see information that
otherwise would be available only to very large operators.

THE LONDON ROBUSTACONTRACT
Following the removal in 1982 of exchange controls in
the United Kingdom, the London International Financial
Futures and Options Exchange (LIFFE) was set up to offer
market participants better means to manage exposure toboth foreign exchange and interest rate volatility. In 1992 itmerged with the London Traded Options Market, and in 1996
it merged with the London Commodity Exchange (LCE).
This is when soft and agricultural commodity contracts wereadded to the financial portfolio.
Contracts currently traded are cocoa, robusta coffee, whitesugar, wheat, barley and potatoes. There is also a weather
contract. Following the purchase of LIFFE by NYSE theexchange was renamed NYSE Liffe – although in the trade
it is still referred to as LIFFE. Commodity futures have been
traded in London for many years – robusta coffee futures
first started trading in 1958. Quotations then were in poundsterling but from 1992 onwards both futures and options
have been trading in United States dollars.
Market symbol RC – website www.euronext.com

ELECTRONIC TRADING AT LIFFE
Trading takes place electronically by submitting an order,
via a trading application (front-end software) into the LIFFE
CONNECT™ central order book. Having received theorders the system’s Trading Host stores all orders in thecentral order book. It also performs order matching withcorresponding orders (this is an electronic representationof the marketplace), where the criteria for determining tradepriority depend on the contract being traded. Traders can
submit orders; revise price, volume or a ‘good till cancelled’
order’s date; pull orders; and make wholesale trades. After a
trade has been executed, trade details are sent into the Trade
Registration System in real-time throughout the day for posttrade processing.

In the coffee market it is not uncommon for large speculative
hedge funds to hold 20%–25% of the open (uncovered)interest, long or short, and it is important for producers andexporters to know in which delivery months these funds
hold their positions. Because of the speculative nature ofsuch fund positions, it is equally important to know their size
because if the tonnage of either their long or short position
moves to extremes, very fast action could become imminent(liquidation of the longs or buying against the shorts as thecase might be).

Traders do not know who their trading counterpart is, either
before or after the trade. Dramatic as this move seemed at
the time, the end-result has been increased liquidity andconsiderably easier access through linkages with global
communications networks that provide electronic accesson an equal footing, virtually regardless of location. LIFFE
has broken new ground in that rather than obliging market
participants to use LIFFE access software, a series of
independent software vendors were contracted to design‘tailor-made’ front-end solutions.

The CFTC produces a weekly COT on futures, and afortnightly COT on futures and options combined – available
on the CFTC’s home page at www.cftc.gov. The reports
provide information on four categories of market players:
Commercial, SWAP Dealers, Managed Money and Other
Reportables.

Participants may change or withdraw unfulfilled orders at any
time and are able to ‘see’ all available offer and bid prices,
including the number of lots on offer or bid for at those prices,and many other market details at any one time. To find out
how to link into the LIFFE CONNECT™ trading system go
to www.euronext.com, or ask for their brochure ‘How theCHAPTER 8 – FUTURES MARKETS

market works’. Price information is also available free ofcharge at www.euronext.com/trader/priceslistsderivatives/
derivativespriceslists-46171-EN.html, but with a 15 minutetime delay.

ROBUSTA CONTRACT FEATURES AT LIFFE
Market symbol: RC
Trading hours are from 9 a.m. to 5.30 p.m. United Kingdom
time. The exchange is open Monday through Friday except
for listed public holidays.
The price basis is US$/ton ex warehouse.
The contract unit is 10 tons with a minimum price fluctuationof US$ 1/ton.
Delivery months are January (F), March (H), May (K), July(N), September (U), and November (X). As in New York, ten
trading positions are always quoted.
The last trading day is the last business day of the delivery
month (till 12.30 p.m.); tenders may be made any day during
the delivery month.
Delivery points. Exchange-nominated warehouses in
London and the United Kingdom home counties, or in anominated warehouse in, or in the Board’s opinion sufficiently
close to Amsterdam, Antwerp, Barcelona, Bremen,
Felixstowe, Genoa-Savona, Hamburg, Le Havre, MarseillesFos, New Orleans, New York, Rotterdam and Trieste.

TENDERABLE GROWTHS, PACKING,DIFFERENTIALS AND CERTIFICATION

minimum of 90% over screen 14 round and a minimum of
96% over screen 12 round per 300 g at contract price.
Class 2: up to a maximum of 5.0% defects by weight and
up to a maximum of 1.0% foreign matter by weight and aminimum of 90% over screen 13 round and a minimum of
96% over screen 12 round per 300 g; at an allowance of
US$ 30 discount per ton.
Class 3: up to a maximum of 7.5% defects by weight and
up to a maximum of 1.0% foreign matter by weight and aminimum of 90% over screen 13 round and a minimum of
96% over screen 12 round per 300 g; at an allowance of
US$ 60 discount per ton.
Class 4: up to a maximum of 8.0 % defects by weight and
up to a maximum of 1.0% foreign matter by weight and aminimum of 90% over screen 12 round per 300 g; at anallowance of US$ 90 discount per ton.
Coffee shall not be tenderable if in the opinion of the graders
one or more of the following applies: The lot is not robusta coffee;
 The lot is unsound for any reason other than having thedefects listed above; The lot contains more than 8.0% defects by weight per
300 g;
 The lot contains less than 90% over screen 12 round; The lot contains more than 1.0% by weight of foreign
matter per 300 g;
 The lot has a detectable foreign odour including, but notlimited to, mould, fermentation or smoke.

Age allowance
Tenderable growths and packing
Robusta coffee from any country of origin that meets theminimum quality requirements is tenderable, provided it isfreely available for exportation.
Coffee may be delivered in sound normal bags of maximum
80 kg gross each (bulk shipments must be bagged into
tenderable lots), or in sound food grade flexible intermediatebulk containers (FIBC or big bags) weighing not less than
900 kg gross and not more than 1,100 kg gross.

Differentials
Premium Class: up to a maximum of 0.5% defects by weight
and up to a maximum of 0.2% foreign matter by weight anda minimum of 90% over screen 15 round and a minimumof 96% over screen 13 round per 300 g; at an allowance of
US$ 30 premium per ton.
Class 1: up to a maximum of 3.0% defects by weight and
up to a maximum of 0.5% foreign matter by weight and a US$ 5 discount per ton per calendar month for the periodof 13 to 48 months following the date of grading.
 US$ 10 discount per ton per calendar month for theperiod of 49 calendar months and onwards following thedate of grading.

Certification
Grading samples are examined by three members of the
Exchange grading panel, who award a grading certificate
based on the screen test, the measuring of both defects
and foreign matter by weight, and an olfactory (smell) test –the coffee is not liquored (tasted).

SUPERVISION BY LCH
The London Clearing House (LCH) acts as the central
counter party for all trades executed on the LIFFE exchange,
and is contractually obliged to ensure the performance of all
trades registered by its members.

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CHAPTER 8 – FUTURES MARKETSApart from LIFFE’s internal regulations on members’ financial
resources, staff competency and systems suitability, aconsiderable body of United Kingdom legislation governs
the general trade on futures markets. The Financial Services
Act 1986 requires, among other things, every person dealing
with the futures-trading public to register with the Securities
and Futures Association. This is a self-regulatory body
created by the Act (enhanced by the Financial Services andMarkets Act 2000) that seeks to assure the financial viabilityof all Exchange members. LIFFE now also issues a weekly
Commitments of Traders Report.

OUTLOOK FOR AN ELECTRONICEXCHANGE
LIFFE is the largest electronic exchange in the world in termsof value, and has the potential to cope with substantiallyhigher trading volumes. Depending on market demand
it could also be expanded to incorporate acceptance ofelectronic warehouse warrants for tendering purposes.
Clearing of physical coffee against futures (against actuals)
is already available.
Through electronic documentation systems (see chapter
6, E-commerce and supply chain management) it istheoretically also possible to link coffee purchases in origin
countries and the subsequent export shipments with therelevant hedging positions on the exchange. Such additions
are of interest especially to the banking system that financessuch operations, but would require considerable further
development. See chapter 10, Risk and the relation to tradecredit.

BOLSA DE MERCADORIAS &FUTUROS – BRAZIL
The first commodity exchange in Brazil was founded in São
Paulo in 1917. The present Bolsa de Mercadorias & Futuros(BM&F) was established in 1985; in 1991 it and the originalexchange merged and in 1997 a further merger with theBrazilian Futures Exchange of Rio de Janeiro consolidated
BM&F’s position as the leading derivatives trading centre in
the MERCOSUR free trade area. The exchange conducts
business in many fields of which coffee is just one. Details at
www.bmfbovespa.com.br.
Through the GLOBEX system BM&F is linked to exchanges
in the United States and elsewhere and its coffee contracts
are accessible to non-residents of Brazil. This enables foreign
traders and roasters to hedge purchases of Brazilian physicals
against Brazilian futures, thus avoiding the differential riskthat comes with hedging on other exchanges.

SEPARATE CONTRACTS FOR SPOT AND
FUTURESThe contract size (100 bags of 60 kg each, meaning it isaccessible also to smaller growers), clearly demonstrates
that BM&F operates in a producing country.
The spot contract trades physical coffee. Type 6 or better,
hard cup or better, is graded by BM&F and stored in licensed
warehouses in the city of São Paulo. Prices are quoted
in Brazilian reals per 60 kg bag and all contracts must be
closed out at the end of each trading day. This contract isaimed at operators in the local market. Brazil is not just theworld’s largest producer – it is also the world’s second largest
consumer of coffee.
The arabica futures contract trades seven positions.
These are March, May, July, September and December plus
the next two positions of the following year. Basis: type 4–25
(4/5) or better, good cup or better, classified by BM&F, withprices quoted in US$ per 60 kg bag. Delivery may be madein BM&F licensed warehouses in 29 locations in the statesof São Paulo, Paraná, Minais Gerais and Bahia (deliveriesoutside the city of São Paulo incur a deduction for freightcosts). Using United States dollars facilitates linkage with theexport market.

OPTIONSPut and call option contracts. These contracts are also
traded, based on the BM&F arabica futures contract expiringin the month after the delivery month of the option, also priced
in United States dollars. There are seven trading positions:February, April, June, August and November, plus the next
two positions in the following year. Buyers may decide to
exercise options from the first business day following the day
a position has been initiated up to the last trading day before
expiry as follows:
Put option. The buyer (holder) of the option may decide
to sell, and the seller (issuer) of the option must buy thecorresponding position on the arabica futures contract.
Call option. The buyer (holder) of the option may decideto buy, and the seller (issuer) must sell the corresponding
position on the arabica futures contract.
All transactions are at the strike price for which the option was
taken and settlement is effected according to all the usualexchange regulations. Options are exercised only if theyshow a profit – otherwise they are simply allowed to expire.

CLEARING SERVICES, TURNOVER AND
LIQUIDITY
Clearing services are provided by the exchange’s clearing
members, who are liable for the settlement of all transactions.
Clearing members must maintain the minimum net working

CHAPTER 8 – FUTURES MARKETS

capital set by the exchange’s clearing division and must post
collateral to finance the clearing fund. They are also subject
to limits in respect of the trading positions for which they
accept liability.
Commodity brokers and local traders are in turn bonded tothe clearing members for all transactions they execute, fromregistration to final settlement. There is no clearing house to
take the role of counterpart in all transactions as is the case in
New York and London.

TURNOVER – FUTURES AND OPTIONSOver the years turnover has grown steadily: 2008: trading reached 838,090 arabica futures contracts
or almost 84 million bags. But the open interest at yearend was just 15,066 contracts, whereas trade in options
was just 54,853 contracts with the year-end open interest
standing at 5,831 contracts.
 2009: 596,435 futures contracts were traded, but again
the year-end open interest was low at 18,538 contracts.
Trade in options was just 5,155 contracts.
 2010: 640,754 futures contracts were traded and theyear-end open interest was 14,108 contracts. Trade inoptions was 17,453 contracts.

SINGAPORE EXCHANGE LTD– THE SGX ROBUSTA COFFEECONTRACT
Launched in April 2010, the SGX Robusta Coffee Contract
moved to the Singapore Exchange Ltd in January 2011.
The interesting aspect is the option to effect delivery in
different locations, but to date activity has been modest.
SGX Coffee is a physical delivery futures contract, traded infive metric tons per lot of robusta coffee with specific quality
standards defined by the exchange. There are two trading
windows for the contract capturing both Asian and European
trading hours: T session: 1000 hours to 1900 hours and theT+1 session: 2000 hours to 0200 hours (next day).
Delivery will be made via Warehouse Receipts representing
coffee stored in bonded warehouses in Ho Chi Minh City,
Viet Nam or Singapore. This is an interesting aspect, butnevertheless it remains to be seen whether this venture will be
more successful than others that have ceased trading, like forexample the arabica and robusta contracts that were tradedin the past at Indian exchanges and the failed attempts in
New York to establish a viable robusta contract.
For contract details visit www.sgx.com and go to products
then commodities then robusta coffee futures.

VIET NAM – TWO EXCHANGESFOR ROBUSTA
In early 2011, both the Vietnam Commodity Exchange (VNX)
in Ho Chi Minh City and the Buon Ma Thuot Coffee Exchange
Center (BCEC) in Dak Lak commenced offering robusta
coffee futures trading. See www.vnx.com.vn and http://bcec.
vn respectively.
Located in Ho Chi Minh City, VNX was established as Viet
Nam’s first fully fledged commodities exchange in September
2010. The VNX Robusta Contract (five metric tons) is linked toboth the London NYSE Liffe and Singapore SICOM exchanges
and offers the choice of either quality specification at the timeof initiating a trade. In terms of liquidity this link will assist inthat VNX can offset contracts on either exchange should local
liquidity not be sufficient. Exchange licensed warehouses willstore coffee to be tendered and the intention is to try andarrange that in future samples may be sent to London forgrading at the NYSE Liffe exchange. If this becomes reality
then over time such an arrangement could lead to NYSE Liffe
certified coffee being available ex warehouse Ho Chi Minh
City. Potentially this could assist the holders to raise financeagainst such stocks and increase liquidity on VNX.
BCEC on the other hand commenced operations in 2005 asa spot market for physical coffee that before sale would bewarehoused and inspected by the exchange. The intention
was to provide an open market system that allowed farmers
to access all available information and so negotiate better
prices, whereas buyers would be assured of both contract
integrity and quality. However, by early 2011 only small
amounts of green coffee had been transacted in this way with
farmers seemingly objecting to having to deliver coffee to the
BCEC complex in the city of Buon Ma Thuot, preferring to sell
to more easily accessible collectors instead. Nevertheless,the new futures contract is intended to offer individual farmers,
traders, collectors and exporters the possibility of selling andbuying coffee forward. To enable individual farmers to takepart, the contract is for just two metric tons.
These are potentially interesting initiatives, but it should be
noted that to date no serious alternatives to the London and
New York exchanges have evolved. Turnover at SICOM in
Singapore remains very small and coffee futures trading inIndia stopped some years ago because of a lack of liquidity.

THE MECHANICS OF TRADINGIN FUTURES
The following paragraphs describe the actual workings ofa futures market, based on the procedures and customs
applicable to the New York and London Exchanges.
It is necessary to gain a good understanding of themechanics of the market before attempting to grasp thecommercial principles that govern traders’ actions. These
are discussed in chapter 9.

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CHAPTER 8 – FUTURES MARKETSFLOOR PROCEDURE
In traditional open outcry or floor-based trading, the initiationof a transaction takes place on the floor of the exchange. Exactfloor procedures vary from market to market. Exchanges as
LIFFE for London robusta (screen only) and ICE for New Yorkarabica (screen only except for options) have moved trading
to a screen-based environment and automated the entire
process.
In both floor and screen-based trading, there is usually someform of open auction during which buyers and sellers maketheir trades in public. Unlike the physical market, no privately
arranged deals are allowed.
The transaction is negotiated across the floor, providing all
participants an opportunity to respond to the current bids
and offers. The negotiation is concluded the moment a buyer
and a seller agree with each other and the seller registers thecontract as a sale to the clearing house. Thereafter, the two
traders are responsible only to the clearing house. In this way,
the clearing house is a party to every transaction made byboth buyers and sellers.
Automated or electronic trading is different, but maintains
the transparency of open outcry trading in that all bids andoffers can be viewed by all participants. The computer
system matches equivalent bids and offers without humanintervention. Once the orders are matched, the clearing
procedure is exactly the same as the old open outcry system.
Futures contracts are standardized in that all terms are given,
except the exact date of delivery, the names of the seller andbuyer, and the price. The market rules are legally enforceable
contract terms and therefore cannot be substantially alteredduring the period of the contract. Every futures contract
specifies the quantity, quality, and condition of the commodity
upon delivery; the steps to be taken in the event of default indelivery; and the terms of final payment.

DELIVERY
Most futures transactions do not result in physicaldelivery of the commodity. Depending on their strategy,
futures traders usually make conscious decisions either toavoid delivery or to accomplish it. That is, they either make anoffsetting transaction ahead of the delivery, thereby avoiding
physical coffee being tendered to them; or they consciously
force the exchange to deliver (tender) physical coffee by
allowing the contract to fall due. Delivery must be completed
between the first and the last trading days of the delivery
month, although the exact terms vary from one market to theother.
While the futures contract can be used for delivery, its terms
are not convenient for all parties. For example, the termsof delivery of futures contract provide the seller with theexclusive right to select the point of delivery. This situation
can obviously create difficulties for the buyer. In addition, theactual coffee delivered, while acceptable under the futurescontract, may not match the buyer’s specific quality needs.

OFFSETTING TRANSACTIONS
A trader who buys a futures contract and has no other positionon the exchange is long. If this purchase is not eventually
offset by an equivalent sale of futures then the buyer will haveto take delivery of the actual commodity. Alternatively, a trader
who sells a futures contract without an offsetting purchase of
futures is said to be short.
Traders who have taken either position in the market have
two ways of liquidating it. The first involves the actual deliveryor receipt of goods. Most traders choose the second option,
which is to cancel an obligation to buy or sell by carrying out areverse operation, called an offsetting transaction. By buying
a matching contract a futures trader in a short position will be
released from the obligation to deliver. Similarly, a trader who
is long can offset outstanding purchases by selling.
Against actuals (AA). It is possible to liquidate futures
positions in the spot market privately under a pre-arranged
trade. This type of transaction, called an against actuals trade,avoids the complexities of making a physical delivery undera futures contract. However, such AA transactions must takeplace under the rules of the exchange that supervises the
futures contract.
Open interest. The total of the clearing house’s long or
short positions (which are always equal) outstanding at agiven moment is called the open interest. At the end of eachtrading day, the clearing house assumes one side of all open
contracts. If a trader has taken a long position, the clearing
house takes the short position, and vice versa.
The clearing house guarantees the performance of bothsides of all open contracts to its members and each trader
deals only with the clearing house after initiating a position.
In effect, therefore, all obligations to receive or delivercommodities are undertaken with the clearing house and notwith other traders.

FUTURES PRICES
Futures prices and spot prices. Futures markets provide
a public forum to enable producers, consumers, dealersand speculators to exchange offers and bids until a priceis reached which balances the day’s supply and demand.
Remember that only a negligible proportion of the physicalcoffee trade actually moves through exchange markets.
The futures price is intended to reflect current and prospective
supply and demand conditions whereas the spot price in thephysical market refers to the price of a coffee for immediatedelivery. In the futures market the spot price normally reflects
the nearest futures trading position.

CHAPTER 8 – FUTURES MARKETSCarries and inversions. When the quotation for the forward
positions stands at a premium to the spot price, the market issaid to display a carry (also called forwardation or contango).
The price of each successive forward position rises thefurther away it is from the spot position. In order to provide
adequate incentives for traders to carry stocks, the premiums
for forward positions must cover at least part of the carrying
costs of those who accept ownership. Therefore, when stocks
become excessive, the futures market enables operators toenter the market to buy the commodity on a cash basis andto sell futures, thereby carrying it. The carry will eventually rise
to a level where the premium covers the full cost of financing,
warehousing and insuring unused coffee stocks. This level ofthe forward premium is known as the full carry. The holdersof surplus coffee are now covered for the full costs of holding
these stocks.
The size of the forward premium or discount between thevarious forward trading months quoted at any time reflects
the fundamentals of the coffee market. When coffee is in
short supply, the market nearly always displays an inversion(backwardation), with the forward quotation standing at a
discount to the cash price.
This inversion encourages the holder of surplus stocks to
supply them to the spot market and to earn the inversion bysimultaneously purchasing comparable tonnages of forward
futures at a discount to the spot price.

Differences between forward and futures
market prices
Forward markets are used to contract for the physical delivery
of a commodity. By contrast, futures markets are ‘paper’markets used for hedging price risks or for speculation rather
than for negotiating the actual delivery of goods. On the whole,prices in the physical and the futures markets move parallel
to each other. However, whereas the futures price represents
world supply and demand conditions, the physical price forany particular coffee in the forward market reflects the supply
and demand for that specific type and grade of coffee, andthe nearest comparable growths.
Prices in both physical and futures markets tend to move
together because traders in futures contracts are entitledto demand or make delivery of physical coffee against their
futures contracts. The important point is not that delivery
actually takes place, but that delivery is possible, whether thiscourse of action is chosen or not. Any marked discrepancy
between the prices for physicals and futures would attract
simultaneous offsetting transactions in the two markets, thus
bringing prices together again.
However, buying futures in the hope of using the coffee against
physical delivery obligations is extremely risky because thebuyer of futures contracts does not know the exact storage
location or the origin or quality of the coffee until delivery ismade. The coffee that is finally delivered may be unsuitable
for the buyer’s physical contractual obligations, leaving themwith more rather than less risk exposure. On the other hand,
physical coffee on a forward shipment or delivery contract thatis of an acceptable quality can usually be delivered against a
short position on the futures market as the buyer can choose
the origin and where to make the physical delivery (or tender).
This feature makes futures contracts particularly suitable as ahedge against physicals.

TYPES OF ORDERS
Fixed price order for the same day. This means that an
Exchange member is asked to buy or sell a given numberof lots (contracts) for a particular month at a set price, forinstance, two lots of coffee for December at US$ 1.70/lb. The
contract must be completed during the day on which theorder is given. If possible, the broker will buy (sell) at a lower(higher) price but never at a higher (lower) price. This ensuresthat the client will get the desired price if a contract is made,but they run the risk of not having a contract made at all if thefloor trader cannot execute the order on that day.
Fixed price, open order is a similar order, except that the
instructions stand for an indefinite period of time until theorder is satisfied or cancelled by the client. This type of orderis popularly known as good till cancelled.
Market order. This is an order that gives the broker more
flexibility, and allows him to make a contract for the best
possible price available at the time.
Different orders are often made, subject to certain conditions.
For example, a broker may be instructed to make a contract if
the price reaches a certain level. Orders that are conditional on
specific terms set by the client can also be made. Examples
of such orders are those to be carried out only at the opening
or closing of the market or those to be carried out within acertain period of time. (Orders have to queue at the opening
and closing of the market and are therefore not all filled at
the same price, particularly when trading volume is high inan active market. If one stipulates a price then an order may
not be executed if that price is not touched, or is exceeded.)Market orders and fixed price orders for the same day
are the most common, but orders are also made to suit
the requirements of clients. Clients who follow exchange
movements closely frequently revise their orders in responseto changing market conditions. Those less involved in hourlymarket movements usually place open orders, or orders
subject to certain conditions. For example, a stop-loss order– which is triggered into action as soon as a predetermined
price level is reached – limits the client’s losses relative to thelevel at which the order is executed. Placing more generalconditions on the order gives the broker greater flexibility toreact to changes in the market and leaves the final decision
to them.

Positions
Open position. This is the number of contracts registeredby the clearing house which are not offset by other contracts
or tenders when the contracts become spot (the nearby
contract month). For example, a coffee trader may have a

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position with the clearing house of 30 purchase contracts and40 sales contracts. Some of the purchases and sales may be
for the same delivery month, but the trader may have labelledthem as ‘wait for instructions’ if those contracts represent
separate hedging transactions for that trader. This means thetrader will enter into additional futures deals to offset themonce they unwind the physicals against which the original
hedge was taken. In other words, the open position of thatparticular operator remains 70 lots until some of the contracts
are offset or ‘washed out’.
The clearing house reports only the total of all operator
positions, rather than that of any one member, which is left
to the broker to report. The CFTC’s commitment of traders(COT) report breaks down the total open interest on the New
York ‘C’ contract by category of traders. Large traders arecalled reportable, while small traders are non-reportable.
The COT report then further breaks down the open interestby commercial and non-commercial reportable traders. It isa very handy tool for exporters to get an idea of the long or
short positions of the large speculative hedge funds.

Margins
Trading deposits (margins). These are required upon
initiation of a futures trade. Further deposits may be required
daily to reflect the changes in the price of the contracts,
when the market moves against a trader’s position. If
additional funds are required to restore the original margin(ranging from 5%-10% of the contract’s nominal value) thenvariation margins must be paid in unless adequate security,for example treasury bills, had already been deposited when
the account was established. Conversely, if the futures pricemove is favourable to the trader, the gains transferred into
the account above the margin requirement level become
immediately available to the trader.
Clearing house members must maintain specific margins
depending upon their net open position with the clearing
house. Margins are also needed for members of the
trading public who lodge their contracts with membersof the exchange. Original margins are normally set atapproximately 10% of the market value of a contract andvariation margins must be paid in full upon demand. Margin
money collected by the exchange member from the publicmust be deposited in segregated customers’ accounts.
Note that the original margin requirements in this category
are minimum figures and that exchange members may
require additional security from their clients if they feel theminimum margin is not enough.
Original and variation margins are adjusted from time
to time for the following reasons: to reflect increased or
decreased market levels; to add security to volatile positions,particularly in months carrying no limit; and to discourage
excessive concentration of trading positions in any one
month. Investors should note that margin requirements canbe changed without prior notice.

Financing margins
Financing margin calls on open contracts can make theuse of futures markets very expensive for producers andexporters, partly because variation margins are always paidin cash. This does not apply to trading deposits, which canbe covered by securities such as bank guarantees andtreasury bills.
Any user of futures markets should be aware that unanticipatedcalls for variation margins can be costly in terms of demandson their cash flow and the interest forgone on cash deposited
with the clearing house. Therefore, a user should carefully
consider how margin calls will be financed before entering
into any commitments. See also chapter10.
An (extreme) example: on 24 June 1994 the ‘C’ contract closed
at 125.50 cts/lb. Just two weeks later the market closed at245.25 cts/lb owing to frost damage in Brazil. This translated
into a variation margin of US$ 45,000 per lot so an exporter
with a short of 10 lots against physical stocks would have had
to pay US$ 450,000 to meet the margin call – and within 24
hours at that. As a result of margin financing problems theopen interest at that time was halved within weeks. Of course,
exporters would benefit from the increased value of their
physical stocks in a situation like this, but might not always findit easy to convince any but the most experienced commodity
finance banks of the validity of this argument.
Merchants and brokers are often willing to help producers
and exporters to overcome the problems that margin calls
can create. In some cases, the broker will finance all the
margin costs but in return the broker will expect a higher rateof commission or a discount on physical contracts. Brokers
can be particularly useful in solving the additional problems
connected with distant futures transactions. Often a highpremium can be picked up for forward physicals, but there isno liquidity for such far dates in the futures markets.
However, most if not all of today’s forward business inphysicals is conducted on a price to be fixed basis, which
has reduced the need to enter into far forward futures deals.
For information on price to be fixed, or PTBF, see chapter 9.
Traders and others who pay their own margins are entitled
to receive cash payments of all credit variation margins.
Additionally, if they pay the trading deposit in cash, they areentitled to receive interest on that money.
Trade houses play an important role in aiding producers,
exporters and industry to overcome margin requirements.
When a trade house enters into a transaction for physicalcoffee, either on a price to be fixed basis or on an outrightprice basis, it is usually also the trade house that takes
up the obligation and risk of margin financing. This is ofsignificant benefit to the coffee trade and plays an integral
part in establishing long-term delivery contracts. Of course,
the trade house itself must have strict financial and third-party(counter-party) risk controls in place in order to avoid any
excess margin calls in times of increased market volatility.

CHAPTER 9HEDGING AND OTHER
OPERATIONSHEDGING – THE CONTEXT................................................................................................................................146
TRADING AT PRICE TO BE FIXED .....................................................................................................................149
OPTIONS...............................................................................................................................................................152
HEDGING..............................................................................................................................................................153
HOW TRADE HOUSES USE FUTURES..............................................................................................................154
COMMODITY SPECULATION ............................................................................................................................155
TECHNICAL ANALYSIS OF FUTURES MARKETS ............................................................................................158

146

CHAPTER 9 – HEDGING AND OTHER OPERATIONSHEDGING AND OTHER
OPERATIONSHEDGING – THE CONTEXT
Coffee prices are inherently unstable. Irrespective ofwhether one is a producer, exporter, importer or roasterone must have a strategy to manage price volatility. For
operators using borrowed funds most banks will insist upona solid risk management strategy. Most of these strategies
are designed using coffee futures and options to offset
the price risk inherent with holding coffee inventories, orcommitments to deliver coffee. Hedging can sometimes
also be done by offsetting a sale of one type of physicalcoffee with the purchase of another type of coffee. This typeof hedging is very difficult as the physical coffee market is
not as liquid as coffee futures and it may be difficult to find abuyer at short notice for that particular coffee.
The text in this chapter presupposes that the reader has readchapter 8, Futures markets. Similarly, before proceeding tochapter 10, Risk and the relation to credit, readers should
first acquaint themselves with the information provided onhedging and related operations.

PRINCIPLE, RISKS, PROTECTION
Hedging is a trading operation that enables managementof the risks posed by unforeseen price movements. There
are many strategies for hedging. Most of these strategies
call for the use of coffee futures or options to offset normal
price risk incurred with either (i) holding unsold stocks orinventories of coffee = being long or through (ii) forward
sales of coffee not yet bought = being short.
Hedging does not eliminate risk, it is only a way to manage
risk. Professional risk managers, sometimes referred to as‘traders’, know many different hedging strategies and whatkind of price protection each strategy will generate.
Hedging allows one to offset price risk through opposing
but matching transactions in both physicals and futures. But
only the price risk, not the basis or differential risk, can behedged. Over the years hedging activity has risen strongly,
mainly because few banks will finance transactions where
price risk is not managed. But hedging in severely volatile
markets requires increasingly large capital outlays, at times
rising to unaffordable levels for all but the strongest hands.
Successful hedging strategies therefore require backing

from experienced banks, well-versed in the financing of thecommodity trade.

RISKS
Coffee producers are a natural ‘long’ in the coffee
market. They always have coffee that is subject to pricechanges. The coffee producers’ own might be stocks ofalready harvested coffee, or coffee still on their trees. They
also have future coffee production that will be subject toprice swings in the market. They might not know the exact
quantities of their production in the next or the following year,
but experienced coffee producers have a good idea howmuch a farm will produce in any given crop year. Hence, thenext or the following year’s production must be seen as partof the producer’s long position.
Coffee roasters are a natural ‘short’ in the market.
As long as a roaster stays in business, he or she needs
to buy coffee, hence they are short. Inventory and forward
purchases might reduce the need to buy coffee nearby, but
as business continues, they will roast what they have andwill need to buy more at the market price. Price swings cangreatly affect their business and while they have a goodidea of their futures sales volume, they have no idea of theprice they will pay for coffee, unless they hedge.
Exporters and importers are true middlemen. They must
buy coffee when the producer wants to sell and they mustsell coffee when the roaster wants to buy. Exporters andimporters can be naturally long or short, depending onwhether they have more purchases or sales in their physical(green coffee) position.

TYPES OF PRICE RISK
Before active futures markets came into being coffee wasbought and sold at fixed prices, meaning purchase and sale
contracts would show a simple amount per pound or per
ton. This type of pricing is also called ‘outright’ pricing. If
one bought coffee at US$ 1.60/lb that had not already beensold (bought long), one could only hope and pray that theprice would stay the same or go higher. If one sold coffee at
US$ 1.60/lb that had not already been bought (sold short),
the hope would be that the price would stay the same or
go down in value. Anytime you closed such a contract, youCHAPTER 9 – HEDGING AND OTHER OPERATIONS

were totally exposed to any price movements in the coffee
market.
Another type of pricing is coffee bought or sold on adifferential basis. When buying or selling coffee on adifferential basis, one is committing to deliver or takedelivery of coffee, not at a fixed price but at a difference
to the futures market. Theoretically one can buy or sell at adifference to any published price in the coffee business (i.e.
ICO Indicators), but almost all differential business is done
against futures markets. More specifically, it is normal thatrobusta coffee is bought or sold against the London LIFFE
Contract and arabica coffee is bought or sold against the
New York ICE ‘C’ Contract. The reason differential contracts
are mostly priced against future markets is that the future
markets are liquid and prices can be fixed anytime thesemarkets are open for trading.
Differentials link prices for widely differing types and qualities
of green coffee with prices on the futures markets where
standard qualities and quantities of coffee are traded. In
recent years, increasing activity on the futures markets has
translated into more and more severe price volatility, notalways linked to changing fundamentals in the coffee market
such as supply and demand. As a result, differentials formany individual origins now fluctuate not only in response
to domestic changes in, for example, quality or availability,
but increasingly also because of (sometimes unexpected)
movements on the futures markets that are caused byspeculative influences.
Historically, it has been quite normal to buy Brazil mid
grade arabica at ICE ‘C’ with a differential of around minus
15 cts per pound FOB whereas Colombian UGQ (usual
good quality) might for example trade at ICE ‘C’ plus 15
cts per pound FOB. While some of the other Milds coffees
from Central America and East Africa have tended to tradenear equal to or ’basis’ with ICE ‘C’. It is also normal thatthe trading or delivery month used for the differential would
be the month immediately following the shipment period.
For example, June shipment arabicas would be sold as adifferential to July ICE ‘C’.
It is important to note that buying or selling on a differential
basis does not eliminate price volatility risk. For example,
in 2010 some Colombian coffees which had been trading
at around ICE ‘C’ plus 15 cts/lb, went up to ICE ‘C’ plus
80 cts/lb. If one had sold Colombian coffee at ICE ‘C’ plus
15 and were forced to cover the coffee at ICE ‘C’ plus 80,
there would have been a loss of 65 cts/lb on the differential,
before the contract itself was even fixed. This example isextreme, but it did happen and it will happen again withsome quality of coffee.
Despite the extreme example just shown, it is safe to saythat price differentials are generally less volatile thanfutures prices. With differential or Price To Be Fixed (PTBF)
Contracts, one can reduce the price risk by taking positions,either long or short and avail those positions to all the risk
management tools available in the futures and options

markets. But remember, it is impossible to entirely eliminate
all of the risk. Nevertheless, most large end-users tend topurchase on PTBF basis and anyone wishing to partake of
their business will have to be conversant with trading in thisway. More will be discussed about PTBF contracts later inthis chapter.

THE SELLING HEDGEA party holding unsold stocks of a commodity, e.g. a
producer, exporter, processor or importer/dealer, etc. isinterested in safeguarding against the risk that the price may
fall. This risk is offset by a forward sale of a corresponding
tonnage on the futures market: the short or selling hedge.
If prices decline, long holders would lose on the physicalcoffee they own. However, they would be compensated byprofits made at the exchange because the futures contract
would have been bought back at a lower price as well. Thisrelies on the assumption, usually accurate, that futures
prices also decline when physical prices fall.
A straightforward example (see below) would be that of anexporter in Guatemala who on 15 September buys 1,000
bags of prime washed arabica coffee ready for shipment
in October. As there may be no buyers on that day willingto pay their asking price (FOB), the exporter sells four lotsof the New York ‘C’ December position instead. They dothis because the price obtainable will be very close to theirasking price, plus or minus the differential, for the physicalcoffee. If the market for the physical coffee goes down,
they will protect themselves from the lower price they may
eventually have to sell at, by simultaneously buying in theirshort sale of New York ‘C’ December. Should the market goup, they will make up their loss on the December futures by
the higher price they will receive when they sell the 1,000
bags of physical coffee – assuming that the prices for
futures and the physical coffee move in tandem.
Differentials usually (but not always) tend to be lower when
futures prices are high, and higher when futures are low. It
is important however to be aware that at times differentials
can be extremely volatile and although these variations cansometimes work in favour of an exporter, they can also attimes leave all operators with a nasty surprise. Differentials
vary as a result of a number of factors including production
or supply problems at origin or outside influences on
futures markets. Of course, not all hedging operations arenecessarily profitable.

THE BUYING HEDGERoasters may have customers who want to purchase acertain percentage of their requirements at a fixed price formonthly deliveries up to a year ahead. But it would be both
economically and physically impractical to purchase spot
green coffee and finance and warehouse it for that period oftime, so the roaster’s alternative is to buy futures positions

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CHAPTER 9 – HEDGING AND OTHER OPERATIONS

Box 9.1

The selling hedge – an example

 The market goes down
Physical transaction:
15 September:
30 October:

Exporter buys 1,000 bags of 152 lb each from grower
Exporter sells 1,000 bags

@ US$ 1.62/lb@ US$ 1.61/lb

Loss of $0.01/lb on 152,000 lb= (US$ 1,520)

Exporter sells 4 lots December ‘C’ (150,000 lb)
Exporter buys 4 lots December ‘C’ (150,000 lb)@ US$ 1.72/lb@ US$ 1.70/lb

Futures transaction:
15 September:
30 October:Profit of 200 points x 4 lots or $0.02/lb= US$ 3,000

Gross profit before commissions= US$ 1,480

 The market goes up
Physical transaction:
15 September:
30 October:

Exporter buys 1,000 bags of 152 lb each from grower
Exporter sells 1,000 bags
Profit of $0.03/lb on 152,000 lb@ US$ 1.62/lb@ US$ 1.65/lb= US$ 4,560

Futures transaction:
15 September:
30 October:

Exporter sells 4 lots December ‘C’ (150,000 lb)
Exporter buys 4 lots December ‘C’ (150,000 lb)@ US$ 1.72/lb@ US$ 1.74/lb

Loss of 200 points x 4 lots or $0.02/lb= (US$ 3,000)

Gross profit before commissions= US$ 1,560

Note for the example above: Most countries in Latin America use bags of 69 kg (152 lb) although bags of 46 kg and 75 kg are also seen.
Brazil and most countries in Asia and Africa use 60 kg bags. All ICO statistics are expressed in 60 kg bags equivalent though.

for as far forward as necessary to cover the sale of theroasted coffee.
Thus, in covering their needs for green coffee in a general
way by purchasing the various forward months on theexchange, the roaster is in a position to buy a specificgrowth and quantity of physical coffee as and when needed
for roasting, to fulfil their spread sale of roasted coffee. Uponpurchasing the actual coffee they require, they then either
sell out their position on the exchange or tender it as an ‘AA’
(against actuals) through the exchange with the agreementof the dealer from whom they are purchasing the physicals.
The dealer or importer who has entered into a forward saleof up to 12 monthly deliveries to a roaster can purchasethe various trading months of the futures contract to protect
their sale until they are able to buy the physical coffee tobe delivered against the forward sale. Once physical coffee

is purchased, they sell back that part of their long positionin futures on the exchange. As in the selling hedge, bothparties have protected their price risk, regardless of market
fluctuations up or down.

THE BUYING HEDGE – AN EXAMPLE
ExampleOn 2 January, a roaster sells roasted coffee equivalent to500 bags arabica coffee per month, February through toJanuary the next year at the (fixed) price of US$ 1.73/lb (GBE
– green bean equivalent, net GBE sales price, i.e. roasting
costs and margins have been deducted). They now protectthat price by simultaneously buying the monthly positions ofthe ‘C’ contract as follows:

CHAPTER 9 – HEDGING AND OTHER OPERATIONS

5 lots (1,250 bags) of March@ US$ 1.68/lb

5 lots (1,250 bags) of May@ US$ 1.70/lb

5 lots (1,250 bags) of July

@ US$ 1.72/lb

5 lots (1,250 bags) of September@ US$ 1.74/lb

4 lots (1,000 bags) of December@ US$ 1.76/lb

i.e. 24 lots (6,000 bags) at an average of 171.83 cts/lb or
1.17 cts/lb below the GBE selling price.
With this activity the roaster has immediately hedged most of
the price risk involved. They can now deal with the purchaseof the physical coffee at their convenience by periodicallybuying physicals to roast and ship to their customer, while
simultaneously selling the corresponding amount of futures.
For example, on 1 February, they buy 1,250 bags of spot
milds at US$ 1.70/lb, and simultaneously sell the five lotsof March ‘C’ at US$ 1.70/lb. They apply their profit of 2 cts
from the sale of the ‘C’ to lower the cost of their physicalpurchase to US$ 1.68/lb. On 1 April, they buy 1,250 bagsof spot milds at US$ 1.69/lb and sell the five lots of May ‘C’at US$ 1.69/lb. They apply the 1-cent loss from the ‘C’ saleto the cost of their physical purchase, resulting in a price of
US$ 1.70/lb. And so on.
The roaster continues to buy in the approved physicals of theirchoice as needed, whether 250 bags at a time or 1,250 bags
at once, and sells out the equivalent futures. Their hedging
objective is to maintain their average differential of 1.17 cts/lb
or better on the purchase of their physical coffee compared totheir position on the futures market. The example above also
shows that large roasters often price green coffee down to
two decimal prices which demonstrates the competitivenessof the mainstream coffee business.

TRADING AT PRICE TO BE FIXEDTHE PRINCIPLE OF TRADING PTBF
The trading described above assumed that buyers andsellers worked with fixed or outright prices. It also focusedon the primary market or price risk, not on the basis risk ordifferential risk that cannot be offset by hedging. In recent
years more and more physicals have been traded at pricesthat are to be fixed against the futures markets: the PTBF
contract.
The PTBF contract is a great tool for price risk management
as it combines the act of hedging with the act of buying or
selling physical coffee. Immediately after a PTBF contract issigned, price risk changes from outright price to differential
price. As mentioned earlier, differential price risk is inherently
lower in volatility than outright price risk. Secondly, once a
PTBF contract is signed, the buyer and seller can fix theirrespective prices anytime a futures market is open without
having to wait for a bid or offer in a physical market which
may lack liquidity. Yes, the buyer’s price can be different

than the seller’s price for the same contract and the text that
follows will show how this can happen.
It is necessary to caution that the PTBF contract is arisk management tool. Like any tool, if it is used improperly,
it can cause more damage than good. There are numerous
examples of how parties enter into PTBF contracts without
proper knowledge of how they work. Instead of managing
risk, the parties can unknowingly increase their risk beyond
their means. There are known examples of exporters fixing
PTBF contracts without actually having bought the physicalgreen coffee – pure speculation. Or, delaying fixing untillong after the physical green coffee was bought is just moreof the same.
Yet the fact remains, a well executed PTBF contract will limit
price risk to changes in the price differential and does givethe ability to fix purchase or sale prices whenever future
markets are open. However, to take advantage of this last
attribute, buyers and sellers of PTBF contracts must haveaccess to trading of coffee futures.
Initiating a PTBF contract. A relevant delivery month of
the futures market is chosen. Because the quality of thephysicals (the green coffee) is worth more or less than thequality on which the futures contract is based, the pricestipulation will read (for example) ‘New York ’C’ December
plus (or minus) 3 cts/lb’, or ‘London Robusta November
plus (or minus) US$ 30/ton’: the plus 3 or plus 30 is thedifferential.
Differentials for Colombians are normally a premium tothe ‘C’ contract while natural Brazil arabica is normallya discount. Viet Nam grade 2 robustas are usually a
discount to LIFFE while a good Uganda robusta is normallyat a premium. The relevant month of the future market isusually the month traded nearest to the delivery month ofthe physical coffee. December delivery Colombians would
normally trade against December ‘C’ contract. The numberof futures contracts used to fix the price of the physicaldelivery is determined by taking the total quantity of thephysical contract and dividing it by the size of each futurescontract. If there is fraction of a futures contract involved, thetotal number of contracts will be rounded up or down.
It is important that all these contract terms – differential,
futures month(s), number of futures contracts – are specified
at the time of the contract initiation.
The contract constitutes a firm agreement to deliver andaccept a quantity of physical coffee of a known quality andunder established conditions. These conditions are basedon the quotation for the specified delivery month of the
futures market at the time of fixing, plus or minus the agreed
differential. The advantage to the buyer and seller is thateach has secured a contract for physical coffee, but theprice remains open.
In other words, the buyer has now separated the operational
decision to secure physical coffee (thereby avoiding

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problems of shortages) from the financial decision to fix
the cost of that coffee, which they prefer to postpone. This
arrangement provides flexibility for both buyer and seller.
The obligation to deliver and accept physicals now exists,
but as the price remains open.

FIXING PTBF CONTRACTS
Beside the differential that is determined at the initiation of
the contract, there are three other prices: (i) the price thatthe seller fixed at, (ii) the price that the buyer fixed at, and(iii) the invoice price.
As mentioned earlier, it is preferable if not imperative thatsellers and buyers of PTBF contracts have access, directlyor via an intermediary, to futures trading accounts so they
can fix at their command. The seller can fix the price he sells
in a PTBF contract simply by selling the number of futures
specified in the contract, in his, i.e. the seller’s, futures
account. The buyer can also fix his buying price by doing
the opposite, i.e. buying the number of futures specified
in his own futures account. The invoice price for the PTBF
contract is set when either buyer or seller transfers theselots to the counterparty. In the case of ‘PTBF buyer’s call’ itis the buyer who transfers futures to the seller. In the case of‘PTBF seller’s call’ it is the seller who transfers shorts fromhis or her futures account to offset the longs in the buyer’s
account, fixing the invoice price. In all PTBF contracts, theselling price for the coffee is the invoice price plus the profit
or loss in the seller’s futures account. The buying price forthe coffee is the invoice price plus the profit or loss in thebuyer’s futures account.

USING PTBF – AN EXAMPLE
 On 20 August the exporter sells short 2,000 bags ofPrime Mexican October shipment of the same year PTBF
against NYKC December, again of the same year, less 6
cts/lb, FOB Laredo.
 On 20 September the exporter is able to buy the physicals
at 160 cts/lb FOB equivalent and decides to buy or lockin at this price. NYKC December is trading at 169 cts/
lb. The exporter calls their FCM (Futures Commission
Merchant) and asks him to sell eight contracts December‘C’ contract at 169 cts/lb.
 There is a market uptick and the FCM is able to sell at
169.50. Thus the sale price for the physicals is fixed at169.50 less 6 = 163.50 cts/lb FOB Laredo. The seller has
locked in a profit of 3.5 cts/lb. His PTBF price is locked at
163.50 cts/lb but this is not the invoice price.
 On 20 October, the buyer wants to lock in his price. NYKC
is now trading at 189.50 and the buyer asks his FCM to
execute at this level. The FCM buys 8 lots at 189.50 for
account of the buyer. Thus the buy price for the physicalcoffee is fixed at 189.50 less 6 = 183.50cts/lb. Still this is
not the invoice price.

 The next step in the PTBF contract is the establishmentof the invoice price. This is commonly called Contract
Price Fixation but as we have shown it is a misnomer as
it merely establishes the invoice price for delivery of thephysical goods. If the contract is ‘seller’s call’, it is theseller’s right to transfer the lots to the buyer, thereby fixing
the invoice price. If it is ‘buyer’s call’, it is the buyer’s rightto transfer the futures to the seller to establish the invoice
price. For purposes of this example, the PTBF contract is‘seller’s call’.
 On 18 November, which happens to be First Notice Day
for NYKC December, the seller decides to fix the invoice
price. December futures are trading that day between
180.00 and 182.00. He asks his FCM to post an AA(Against Actuals) transfer of eight lots short December’C’ to the buyer’s account at 181.50. By posting an AA
within the range of the day, he is assured he will get thatprice and this is common practice for all Exchanges.
Once the transfer is complete the lots move out of theseller’s account at 181.50 and move into buyer’s accountat 181.50, fixing the invoice price of the PTBF contract at
181.50 less 6.00 cts/lb= 175.50 cts per pound.
 The seller will receive 175.50 cts/lb when he delivers
the coffee but he must subtract the loss in his futures
account of 181.50 less 169.50 = 12 cts/lbs. So his saleprice is 175.50 less 12.00 = 163.50 cts/lb, the same as
his fixation of 20 September.
 The buyer must pay 175.50 cts/ lb when the coffee isdelivered but he also lost in his future account. He bought
at 189.50 and sold at 181.50 for a loss of 8.00 cts/lb. So
he pays 175.50 cts/lb invoice price plus his futures lossof 8.00 cts/lb for total price of 183.50 cts/lb, the same as
his fixation of 20 October.
The example above shows how the PTBF contract shouldwork. The net sales price and the net buying price aredifferent from the invoice price. There are variations to this.
If, for example, the seller fixes his sales price and makes the
futures transfer to the buyer on the same day, the net sales
price and the invoice price are the same. This also works forbuyer’s call. If the buyer does his fixation at the same timeand same price he transfers lots to the seller, his net buying
price is the same as the invoice price.
However, the example demonstrates the ideal situation, thatis to say it assumes that both parties (i) are well-versed inthese kinds of transactions, and (ii) have unfettered andeasy access to futures trading accounts, either directly or
through intermediaries as banks, brokers and others. But
this is not necessarily the case in all origin countries or for
all exporters.

WHY SELL PTBF
Why then sell PTBF in the first place? The fact is thatmany exporters (who often double up as processors aswell) have to be constantly present in the market, i.e. theymust buy when ‘their’ growers or collectors want to sell. But

CHAPTER 9 – HEDGING AND OTHER OPERATIONS

buying coffee without a home for it can be dangerous andmany exporters (and their bankers) therefore like to see thatsuch purchases have a potential home. After all, trading
coffee requires substantial funds of which most exporters
need to borrow at least the major part which requires bankapproval of the trading operation (as discussed in chapter
10). But selling forward at a fixed price, i.e. without alreadyhaving the coffee, is equally dangerous. PTBF contracts on
the other hand allow one to ‘fix’ the price at a later date, whileat the same time providing an assured home for the coffee
that will be bought. As explained earlier, the differential risk
remains and it is up to each individual operator to determine
how much of that risk is acceptable.
In its most basic form, PTBF sales contracts should be
fixed when the physical coffee is purchased, possibly eachtime a container load has been reached. In this case larger
contracts must allow for multiple fixations. How much coffee
to accumulate before ‘fixing’ is an individual decision, butselling PTBF is a risk management tool and not intended
for speculation. Having both the coffee and a ‘fixed’ sales
contract means all market risk (price and basis) is eliminated.
How to fix? The seller has to rely on the buyer to do so on
his behalf. When the seller calls for the fixation the buyer
sells the appropriate amount of futures in the mannerthat should have been agreed earlier in the contract. For
example, at the market opening, midpoint or close. Again,
an individual arrangement. The seller has to believe that thebuyer will not take advantage of what is after all a conflictof interest situation, meaning the parties must know eachother and trust each other. This role is played by most trade
houses and leading importers who do such trades ‘within
the differential’. Their objective is, for example, to buy
PTBF at ‘plus 5’ and sell PTBF at ‘plus 15’ and it is they,
as intermediaries, who now undertake the entire process
outlined in the previous section.
Trading PTBF is also risky for the intermediary buyer.
What if the exporter/shipper asks for fixation without actuallyowning the coffee? By so doing that exporter becomes fully
exposed to market volatility. Should things go badly wrong
and the exporter defaults then the importer who arranged
the fixation will be in serious difficulty. He or she would haveto cover the entire loss on the futures he or she sold andwould still have to fulfil his or her own sales contract for theunderlying physical coffee. Some buyers today therefore
only allow fixing from a certain date, particularly for extended
forward contracts.

SELLERS NEED DISCIPLINE!
A PTBF sale does not mean the seller has made their pricedecision – that will only be the case once they fix. But manya seller has been unable to bring themselves to fix at anunattractive level, and in falling markets a good number
even of sellers roll open fixations from one futures position
to the next, preferring to pay the cost of the switch. Usually
this is the difference in price between the two positions plus

the buyer’s costs of arranging the operation. In other words,
a PTBF sale is like being a passenger in an elevator without
knowing whether it is going up or down, with ‘fixing’ being
the floor buttons. If you do not push the button you may end
up somewhere unexpected.
To avoid falling into the ‘fixation trap’ (an inability to
decide), set internal stops to ensure that fixing takes place
automatically when a certain time has elapsed or a price, up
or down, is reached. Fixing orders can be given basis GTC(good till cancelled). But, as explained previously, in a very
volatile and fast moving market situation the ‘gap trading’phenomenon may make the timely execution of such GTC
orders difficult if not impossible.
The producer or exporter who has both the coffee and a
PTBF sale (i.e. they have the differential but no base price),must appreciate that although they have eliminated thedifferential risk, a decision not to fix leaves them totally
exposed to the market or price risk. As already said, thisis not very different from straightforward speculation. It is awell known fact that some shipment contracts allow fixation
to be delayed, at exporter’s request, sometimes even until
after the goods have already been shipped. As has beenstressed repeatedly already, PTBF is a trading mechanismthat of course can also be used speculatively and it is up toeach individual operator to determine what level of risk is
acceptable.
NB: When fixed price sales are not feasible, one simple
alternative is to sell PTBF and to fix immediately, thereby
fixing both the futures price and the differential that, together,make up the final sales price. Concerns such as ‘are we
fixing too early?’ or ‘what if the market goes up?’ can be
dealt with by also buying a call option, accepting that thecost of this comes out of the sales price for the physicals.

MARGINSFor sellers to lock in their sale price on a PTBF contract theyneed to sell futures for their account. For the buyer to lock in
his buy price they need to buy futures for his account. The
futures account for both parties stays open until the transfer
of lots is made offsetting the futures transaction (longs lessshorts = 0).
While the futures accounts stay open, there are daily margin
calls that must be paid. If the market goes up the shorts
pay margin. If the market goes down, the longs pay margin.
On a PTBF contract, the margins will be recovered when
the futures transactions are squared, i.e. when the actual
coffee is delivered and invoiced. Remember, however, there
can be a long time between fixation of price and the actual
delivery of the coffee. The parties must have enough cash
to finance these margin calls until coffee delivery. Most
commodity bankers will follow a margin call and grant
additional financing but only if they are confident that the
PTBF contract is properly executed and backed up with realcoffee and a real commitment to sell.

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CHAPTER 9 – HEDGING AND OTHER OPERATIONSOPTIONSPUT AND CALL OPTIONS
Another approach to risk management has also
demonstrated a growing usefulness: the purchase or saleof options on futures as price insurance. Obviously this‘insurance’ is purchased at some cost, but the strategy
enables one to limit potential losses in the futures market
without having to pay margin calls whilst still being able tobenefit from upside price potential. The purchase of options
is particularly attractive to small producers who may wish toestablish a price floor (above the cost of production) withoutcommitting capital to a margin account.
Options alone or in combination with futures offer greater
flexibility for risk managers in the design of their hedging
strategies. There are two options around which all option
strategies are based: the call and the put. There are also
two actions: you can buy or sell options.
Buying a call option confers the right, but not the obligation,
to buy a futures contract at an agreed price between thedate of concluding the contract and the time the option
contract expires. If the buyer decides to exercise the option
then the seller of the option is obliged to deliver the futures.
Buying a put option confers the right, but not the obligation,
to sell a futures contract at an agreed price: the seller ofthe option is obliged to accept the futures if the option is
exercised.
Of course the option holder will only exercise the option if itmakes financial sense, that is, if the option shows a profit.
When one buys an option, the risk is limited to theprice premium one pays for the option. If one sells
or writes an option, i.e. one that was not previouslybought, the risk is potentially unlimited.
The main thing to remember about options is that when you
purchase an option, you pay a premium and your potential
for loss is limited to the amount of that premium. The
option can be exercised at any time, no matter how far themarket moves, so there is potential for unlimited return lessthe amount of the premium. Also, you are not required todeposit any margin when purchasing options. Options work
rather like insurance; the payment of a premium provides alevel of protection against loss.
When you sell (or write) options, the reverse is true. The
option writer is paid a premium (limited return) and must
perform no matter how far the market moves (unlimited risk).
Option writers must maintain margin accounts. Because of
the potentially unlimited risk, only experienced hedgers andtraders should consider selling or writing options.

PRICING OPTIONSThere are two prices quoted for options, the strike priceand the premium. The strike price is the price quoted in an
option; the price at which the option can be exercised. The
premium, or cost of the option, is determined by the option
Greeks – these are letters from the Greek alphabet used to
identify different risks: Option Greek Delta. The amount by which the price ofan option changes if the price of the underlying coffee
future changes by one.
 Option Greek Gamma. The sensitivity of an option’sdelta to a change in the price of the underlying entity.
In other words, gamma measures the rate of change
of delta in relation to the change in the price of theunderlying entity.
 Option Greek Theta. The amount by which the price ofan option changes when the time remaining for the expiry
date of the option falls by one day. As the time remaining
for the expiry date of the option reduces, the price of theoption falls. Thus option Greek Theta is always negative.
 Option Greek Vega. The implied volatility of anunderlying stock is one of the most influential factors indetermining the price of an option. Option Greek Vega
measures the amount by which the price of the optionchanges when the implied volatility of the underlying
future changes by one.
Basically the price for an option is based on three factors:
the intrinsic value, the time to expiration (or time value), andthe implied volatility. The cost of an option is related to how
close the strike price is to the market price ruling at the time
the option contract is concluded. As with futures there is anactive trade in option contracts. To summarize: The strike price is the price quoted in an option; the priceat which the option can be exercised.
 The intrinsic value of an option is the strike price as adifferential to where the market is trading. If this intrinsic
value is negative then it is considered to be zero.
 The time value of the option is also a factor in determining
the premium. A longer time until expiration of the option
increases the likelihood that the option will be exercised.

INTRINSIC VALUE – AN EXAMPLE
If December futures are trading at 154 cts/lb then a
December call with a 150 cts/lb strike price might be quoted
at a 6.50 cts/lb premium. The intrinsic value then is 4 cts/lb
because the option is in the money. But a December call witha strike price of 160 cts/lb might trade at a 3 cts/lb premium,
meaning the intrinsic value is nil because the option is ‘outof the money’. Of course the buyer of an option has the
choice of paying a higher premium to establish a greaterlevel of price protection.

CHAPTER 9 – HEDGING AND OTHER OPERATIONS‘Out of the money’ options will not usually be exercised.
Out of the money ‘puts’ are often sold by roasters, as they
are always short. Out of the money ‘calls’ can be sold by
producers as they are always long but it should be done
cautiously risking a small percentage of an annual crop.
Some large producers, for example in Brazil, are comfortableselling call options in spite of the infinite risk. This is because
producers are always long coffee. They have coffee stocks
and future production on the trees. If a future market isabove their cost of production, they often sell a small
percentage of their production by selling call options. If thecall options are struck, they can put their coffee against thestruck options pocketing the strike price and the premium.
It is the same as selling forward futures but at a premium tothe futures market. The downside for the producer is that hemust leave the call option percentage of his crop unsold,unhedged and not fixed in price until the call options expire.
If a producer were to sell everything and the call options
outstanding were struck, the producer would be net short,
at least until the next crop arrives.
Implied volatility, which is based on a mathematical formula,evaluates the premium on the expected price volatility of theunderlying futures contract. It is important to realize that theprice of an option can change because of time and volatility
factors even when the underlying futures price does not
move.
Option strategies are extremely diverse, and almost any
strategy can be developed using options (obviously at a
cost and a risk). A variety of names have been attributed
to various strategies – strangles, condor, calendar spread,butterfly, and many others.
The scope of option trading is vast and an explanation of all
the strategies would take a book in itself. Call options areof little direct interest to producers and exporters. Sellingor writing options is only for experienced hedgers andinvolves potentially unlimited risk. Both therefore fall outside
the scope of this publication but more information can beobtained from both IntercontinentalExchange (ICE) in New
York and NYSE Liffe in London.

BUYING PUT OPTIONS – AN EXAMPLE
Instead of selling futures, producers and exporters canestablish a minimum price, or price floor, by buying a put
option. With a put option in a falling market one can still
have a short hedge at a reasonable level. For calculating
value, the price floor will be the strike price less the premium
paid for the option. The advantage of the option is that if themarket goes up the option can simply be allowed to expire,
while the physicals can be sold at the higher level (fromwhich the premium paid for the option should be deductedto arrive at the net sales realization).
If December futures are trading at 154 cts/lb an exporter or
producer might perhaps be able to buy a December 150

cts/lb put for a premium of 2.5 cts/lb. A put is an option to
be short, so there is no intrinsic value in being short at 150
cts/lb in a 154 cts/lb market. Furthermore, the right to be
short at 150 cts/lb costs 2.5 cts/lb, so the value of the option
is really 147.50 cts/lb. In this scenario, the option holder isguaranteed a price floor at 147.50 cts/lb if the market goes
down, but they will still be able to take advantage of any
upswing in prices if the market rises.

HEDGINGHEDGING – THE ADVANTAGES
Hedging offers definite advantages to commodity producers
and costs comparatively little. Hedging with futures allows
a producer to lock in a price that reflects the producer’s
business goals (a profit). The producer should therefore
determine the actual price available in the futures market
that will support the cost of production plus a profit. If prices
fall, the producer still achieves something near the originallyintended pricing goals. If prices rise, the producer foregoes
a larger profit margin.
The loss of this potential (speculative) extra profit is balancedby the protection afforded against dramatic and damaging
declines in the market. There are also other advantages in
addition to this price-insurance aspect of hedging.
First, hedging offers a flexible pricing mechanism. Anyone
who feels they have made the wrong decision on theexchange can have an alternative order executed easily
and immediately. Second, hedging operations involve only
small initial outlays of money. If the price of futures goesup, the producer who has sold futures may be asked to
pay additional margins; but the price of their physicals will
also have risen. Third, because a futures contract provides
considerable price protection, banks and other financial
institutions are more likely to finance producers, exporters
and traders who hedge their crops and positions than those
who do not.
Finally, commodity trade banks and risk solution providers
put together different risk mitigation instruments that are
tailored to a client’s requirements. For example, a put option
can be graduated to extend over the usual marketing season
by spreading equal portions over two or three futures trading
positions, at different strike prices if so wished. Each individual
portion can then be exercised individually. Alternatively, asolution provider may simply guarantee a minimum price.
For payment of a premium, they undertake to make good
any shortfall between the insured price (the minimum pricethe producer wishes to secure) and the price ruling for thestated futures trading positions (New York or London), either
at a given date or based on the average price over a numberof trading days. In doing this the producer buys a ‘floor’, aguaranteed price minus the cost of the premium.

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CHAPTER 9 – HEDGING AND OTHER OPERATIONSSWAP AGREEMENTS
The straight meaning of the term ‘swap’ is to barter or
exchange and this is very much to the point. For example,
producers can ‘swap’ price risk by giving up the benefits
from future price rises in exchange for a guaranteed
minimum price. Such a swap agreement could even cover
more than one crop year, with tonnages and settlement
dates set for each quarter. In other words, they are written
or tailored to address different, individual requirements.
Swaps are often mentioned in commodity market reports
but, generally speaking, are of limited interest to exporters.
In the case of coffee swaps, the price fixing necessary
to finalize them would rely on the relevant futures market
without actually having to trade futures. This avoids the
problems that using futures can cause like having to raise
margin calls, particularly when distant positions are to be
dealt with. In addition, futures trading or hedging does notalways address individual price insurance requirements.
Swap agreements are negotiated directly between thosewishing to acquire them and solution providers who areprepared to offer or write them. Because such agreements
are concluded separately from formal futures trading they areusually known as over-the-counter (OTC) products. Swap
agreements are extensively used in financial and energy
markets, but less so in agricultural commodity markets. Yet,demand for them could be on the increase, also because
financial institutions are increasingly risk averse.
This is pertinent because one difficulty faced by bothparties to a swap agreement is performance risk, especiallyfor longer-dated agreements. Different from futures, there
is no central clearing mechanism for agricultural swap
agreements and, as a result, default is possible. This thenlimits their attraction as a price insurance vehicle.
To address this, in February 2009 ICE in New York introduced
a clearing facility for agricultural swap agreements – initiallyfor sugar, coffee and cocoa. To quote ICE literature in thisrespect:
1. Cleared swaps are OTC agreements that are eligible
to be cleared by ICE Clear U.S. (the Clearing House),
but which are not executed on ICE Futures U.S. (theExchange), either electronically or on the trading floor.
A cleared swap contract is created when the parties toan off-Exchange, OTC transaction agree to extinguishtheir OTC contracts and replace it with a cleared swap
contract. This will provide the same efficiencies andbenefits that centralized clearing offers traders ofcontracts listed for trading on the Exchange – including
credit risk intermediation and the ability to offset different
positions initiated with different counter parties.
2. This process is accomplished by the submission ofeach side of an OTC transaction to the Exchange andthe acceptance of each side by the Clearing Membersof each party to the swap. Cleared swap contracts willoffer eligible OTC market participants in these products
the ability to clear transactions through ICE Clear U.S.
In addition, Clearing Members will be able to hold thecleared swaps and the margin deposited with respect
to them in the same account as they hold position andmargin deposited with respect to futures traded on the
Exchange.
In brief therefore, execution of an OTC product that is turned
into a ‘cleared swap contract’ becomes guaranteed by
ICE Clear U.S., just as is the case with Exchange tradedfutures contracts. It seems logical this should enhance theirsuitability to be considered as price and credit risk limitation
mechanisms.
In 2009, NYSE Liffe in London introduced cash-settled
futures and options on its Bclear service for cocoa, robusta
coffee and white sugar.

HOW TRADE HOUSES USE
FUTURESARBITRAGE
The most common form of arbitrage for coffee is the robusta/
arabica quality spread because the two major futures
markets clearly show the arbitrage value, New York beingarabica based and London robusta. If the price difference
between two comparable arabica and robusta delivery
positions is considered overstated or understated then thearbitrageur will buy the one and sell the other according totheir convictions, speculating that the difference will movein their favour.
Trade houses for the most part go far beyond simple robusta/
arabica arbitraging. Remember, there are over 60 countries
that produce hundreds of different qualities and types ofcoffee. A good trader will look to all the quality options.
Perhaps they will buy Brazil coffee trading at 8 cts/lb under
New York ‘C’, while selling short Colombians at plus 12 cts/lb New York ‘C’, arguing that, comparatively speaking, Brazil
is cheap and Colombians expensive. This sounds good, but
in recent years it has been entirely possible to lose on bothsides of such an arbitrage.
There are other forms of arbitrage. One that is very common
in an oversupplied market is the ‘cash and carry’. When the
spot position is at a discount, high enough to cover the costsof carrying inventory to the next delivery period, this is called a‘cash and carry’. A ‘cash and carry’ in itself is not an arbitrage,
but when the costs to carry are different for different markets,
one can arbitrage the variation in carry costs.

CHAPTER 9 – HEDGING AND OTHER OPERATIONSARBITRAGE – AN EXAMPLE
The carry cost for the NYKC September to December isbased upon the following costs:
 Financing (cost of money); Insurance;

positions, that is, make them look better than they really are.
Another sign of a good trader is the ability to take a loss.
Traders cannot be right all the time. They only need to beright 60% of the time to be profitable.
The ability to take losses and move on is an essential
element in trading, applicable to exporters as well.

 Storage;
 Weight discounts (0.5% after the first two months ofstorage, 0.125% for each month stored after that); Age discounts (0.5 cts or 50 points for the first 150 days,
after that 25 points per month for the first year, 50 points
per month for the second year, 75 points per month forthe third year, and 100 points per month for coffee overthree years).
The costs for a simple August shipment of cash market coffee
on ‘cash and carry’ basis, September through December, are
all of the above, except for any quality discounts. Depending
upon the type of coffee and its actual arrival date, there
might be no weight discount. One can take delivery of fresh
coffee in September and deliver it on in December without adiscount. It is thus possible to arbitrage the cash market ‘cash
and carry’, which is approximately 2.5 cts/lb, with the futures
market ‘cash and carry’ of approximately 4 cts/lb based upon
the average age of the certificates. In this example, a trader
can pick up 1.5 cts for every pound of coffee carried from
September to December.
 In August buy fresh coffee at September less 1 ct/lb;
 Simultaneously sell the same coffee at December less
1 ct/lb; September/December is trading at 4 cts: the ‘cash andcarry’ for the futures market;
 Effectively the trader bought fresh coffee September
delivery at a 4 cts discount to the price they sold
December; It costs 2.5 cts/lb to carry the coffee from September
to December in the cash market (storage, interest, andinsurance only) leaving the remaining 1.5 cts/lb as profit.

TRADER SPECULATION
When traders say they are ‘fully hedged’, it is usually asign that they have a bad position. In order to cover costs
as an importer or trader, one simply must speculate. This
speculation is not always outright long or short, but mostof the time it is. Traders do, however, play quality and timedifferentials, and these are a different type of speculation.
A good trader is disciplined. Operations are always
accounted for as what they are. A good trader will never use
a hedge lot to offset a bad speculative trade. Nor will a goodtrader mix quality arbitrage with spread trading.
Keeping ‘the book’ well defined sounds easy but it is thedownfall of many traders that they try to dress up their

COMMODITY SPECULATION
Commodity speculation is the purchase and sale of acommodity in the expectation that the reversal of thepurchase or sale will yield a profit as a result of a change
in the market value of the commodity. There is a certain
amount of pure speculation in commodity futures, although
its magnitude is difficult to gauge.
Throughout the 1970s, high levels of inflation and exchange
rate uncertainty were associated with a greater degreeof nominal price volatility for primary commodities. Thisin turn gave a tremendous boost to futures speculation,
sometimes referred to as the other side of the exchange. The
participation of speculators in the futures market contributes
to that market’s liquidity, essential for avoiding undue pricedistortions that can be caused by laying on or lifting hedges.
However, excessive speculation can lead to wider pricefluctuations – markets become ‘overdone on the upsideand on the downside’ (prices move to greater extremes
than expected) – until the excess of either the long or shortpositions is finally unwound. By virtue of an individual or firm’s
expectations and willingness to take risks, speculators aim to
make an uncertain profit from their operations in the market.
Speculators may form their price expectations on the basisof the futures prices, the spot price, both spot and futures
prices, or perhaps on the basis of the price spread alone, andtake positions reflecting their expectations in the markets.
Certain features of futures exchanges attract speculation.
These include the standardization of the futures contract,
the relatively low costs of transactions and the comparatively
low initial funding required (leverage).

DIFFERENCES BETWEEN HEDGING AND
SPECULATION
Hedging is often confused with speculation. In both cases
operators are concerned with unforeseen price changes.
They make buying and selling decisions based on their
expectations of how the market will move in the future.
However, where hedging is essentially a means to avoid or
reduce price risk, speculation relies on the risk element. For
instance, it would be irrational to carry out a selling hedge if
the market were absolutely certain to rise. In the absence ofabsolute certainty about future market movements, hedging
offers an element of protection against price risk, whereas

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speculation involves deliberately taking a risk on pricemovements, up or down, in the hope of obtaining a profit.
One of the principles of speculation involves the opportunity
for gain that the investor achieves by agreeing to accept
some of the risk passed off by the hedger. In other words, thehedger gives up some opportunity in exchange for reduced
risk. The speculator acquires opportunity in exchange fortaking on risk.
Buyers and sellers of coffee who aim to minimize their pricerisks in the physical market assume opposite positions,or risks, in the futures market. At any moment there will
be a number of buying and a number of selling hedge
operations. However, it is unlikely that demand for hedges
against buying risks will exactly balance demand for hedges
against selling risks. The resulting surplus of buying andselling risks that has not been covered by the usual hedgers
is taken up by speculators.
To absorb the vast amounts of futures entering the coffee
exchanges, numerous speculators willing to buy one or
two lots are required. Likewise, considerable purchasingpressure occurs when traders or roasters hedge to cover
their future needs. Prices would increase unless speculators
were willing to step in as sellers.
If producers who wish to hedge could always findcounterparts who also wished to do so, there would be
no need for speculators. However, this situation is unlikely
to occur regularly, partly because the periods in which
producers carry out hedging operations normally do notcoincide with the periods in which consumers try to hedge.
The speculator provides the link between these two different
periods and interests. Nevertheless, large speculative
positions can ‘push’ the market either way and producers/
exporters should monitor developments closely since theirobjective is to lock in profitable prices rather than partake ofspeculative activities.

TYPES OF SPECULATORSIn any futures market the extent of speculative involvement
can be high. The coffee markets are no exception. The New
York market attracts the most attention, and longer-term
speculative involvement can reach as much as 30% of theopen interest. Day traders can account for an extremely
large percentage of the daily volume.
Day traders are so-called because they always square
their position at the end of each trading day – they nevercarry any long or short position overnight. The day traders
in coffee are referred to as ‘locals’ as many operate forthemselves. They take short-term positions (for minutes orhours) based on the order flow they see in the market andare well positioned to take advantage of price aberrations
caused by other market participants. They will be prepared,for example, to deal at a few points under the market level
if they judge that the distortion will be short-lived and thatprices will return to their previous levels. Thus, locals canliquidate their contracts at a profit, although the profit may
be quite small. Because the locals receive a beneficial
commission rate they can repeat this operation several
times a day.
Commodity and hedge funds provide the greatest sourceof speculative activity and their financial power can greatly
influence price movements. Funds operate on a variety
of mathematical trigger mechanisms such as moving
averages, trends and momentum indicators.
Over the years they have become more sophisticatedin the complexity of the systems they use and some now
incorporate an element of in-depth market research within
their strategies. The fund managers generally have a large
portfolio of markets to trade and will therefore view coffee as
only one facet in their total risk management. A hedge fundcould lose in coffee and make profit in other non-related
markets (such as bonds or currencies) to return an overallprofit.
Professional coffee traders do not have the luxury of thisdiversification or the financial backing that the funds control,
and thus must be aware of the fund positions in the market
in order to manage their own coffee books accordingly.
Hedge funds normally take longer-term market positions.
Speculative funds that trade in coffee have been around foryears but in recent years, their volume has grown. Also in
the last few years there has been the entry of index funds
into the coffee and other markets. These funds are large andhave affected the dynamics of the market. While speculative
funds move in and out of the market and can create shortterm changes in supply and demand, index funds enter amarket as part of a long-term investment strategy for coffee
within a basket of other commodities. They never liquidate
their positions and usually only rebalance their positions
once a year. This means that once a year, the fund’s
managers may decide to add or subtract a certain quantityof coffee futures in order to balance the fund and adjust
the percentage of coffee contracts relative to the othercommodities in the index fund. Hence, these funds maintaincertain long positions by rolling forward futures contracts.
In essence these funds create an additional demand forcoffee and this investment demand does influence prices.
In the United States the Commitments of Traders Report
documents activities of both speculative funds and index
funds. Exporters as well as all industry hedgers should
monitor the activity of these funds and accept that real
supply and demand for coffee can be affected in both theshort and long term. When these funds buy or sell in unison,
they create much larger volumes in future trading than thecoffee industry can offset and in so doing can move prices.
Websites of interest include www.cftc.gov of the
U.S. Commodity Futures Trading Commission, www.
commitmentoftraders.com, and www.newedge, which offer

CHAPTER 9 – HEDGING AND OTHER OPERATIONS

charts and spreadsheets showing the weekly commitmentsof traders of index funds.
High velocity traders have been around for a while in theequity markets but are relatively new to the commodity
industry. It has been suggested that 60 % of volume today(end 2011) on the New York Stock Exchange is created byhigh velocity traders. These funds use proprietary algorithms
to electronically buy and sell large quantities of futures, inmicroseconds, sometimes nanoseconds, in order to makea return on investment.
The problem for the coffee industry is that these high velocity
traders can also move prices but, unlike speculative funds
and index funds, they do not maintain large positions forany length of time. This makes it virtually impossible to see
what they are doing to the market. Normally high volume
is good for liquidity, but these funds trade so fast andaggressively that the only feature they add to the market ishigher volatility. Industry hedgers need to be aware of this....
Professional coffee traders do not have the luxury of thisdiversification or the financial backing that the funds control,
and thus must be aware of the fund positions in the market
in order to manage their own coffee books accordingly.
Hedge funds normally take longer-term market positions.
Coffee trade houses as well as large non-coffee related
speculators take strategic positions in the futures market.
Such positions could be to anticipate a directional moveor to take advantage of price differences between different
market positions – for instance a discounted switch structurein the same market or an arbitrage between the New Yorkarabica and London robusta markets.
Non-professional speculators operate in commodity
markets that are likely to experience sudden changes inprice and hence offer a greater profit potential. They tend
to be guided by information and comments from secondhand sources such as bulletins published by brokers, daily
newspapers and, more recently, information on the Internet.
This category of speculators normally involves small
investors, many of who rely on the advice of commission
houses.

SPECULATIVE STRATEGIES
Stop-loss order. Just as margin calls protect the clearing
house from overexposure to the risk of financial losses, stoploss orders offer protection to the speculator. Although they
are willing to bear some losses from an adverse movementof prices, speculators cannot risk seeing a large proportionof the value of their assets wiped out. Speculators give astop-loss order in order to moderate their losses. Thisorder is triggered once the price of the ‘stop’ is reached,at which time the broker seeks to trade at the price given in
the order or as close as possible if the market permits theorder to be executed. Because the objective of the stoploss order is to get out of a position, such orders have to

be carried out ruthlessly. Stop-loss instructions are given
the moment a trading position is taken, or sometimes even
before, so the taking of any position automatically puts
them in place. It is also quite customary to employ a ‘trailingstop’. For example, if the initial position taken is good andthe market trend continues as expected, the stop can be
moved accordingly and so ‘trail’ the trend, thereby locking
in increasing amounts of profit.
There are several aspects worth considering: first, theposition to be adopted (long or short) as suggested by themarket analysis, and the size of the transaction; second,
the financial resources available for the operation; third,
the target profit expressed in points; fourth, the loss, also
expressed in points, that the speculator is prepared toabsorb if the market moves in an unexpected direction; andfinally, the changes in the level of the stop-loss orders thatwill ensure a paper profit.
It is important for speculators to decide the maximum loss
they are willing to bear before taking a position. Once a
position begins to lose points, there is a strong temptation
to justify the losses and continue to invest, rather than toaccept that the original decision was a mistake.
Likewise, speculators should define the expected profit (inpoints) and only liquidate their position when the target has
been reached. It is just as common to attempt to take theprofits before the positions have reached the maximum
level as it is to continue to sustain losses even after prices
have sunk below reasonable levels.
Straddling. This is another method of trading on thecommodity markets. It involves simultaneously purchasing
one delivery period and selling another delivery period. Thiscan be undertaken in a variety of ways:
 The transactions can be carried out with two futures
positions on the same exchange. This is sometimes
referred to as a spread or switch.
 The two futures positions can be taken on two different
exchanges.
 Positions can be taken on two separate exchanges ofrelated merchandises, for example, arabica in New Yorkand robusta in London. This is also generally called
arbitrage.
Straddle operations have the advantage of offering lower
risks to operators although, not surprisingly, at lower profits.
In a sense, a straddle is a form of hedge. Exchanges
usually encourage straddling by requiring less deposit thanfor a single purchase or sale. When operators undertake
straddles they are long and short of futures contracts
for different months or maturities, usually in the samecommodity market. Operators buy one month’s contract ina product and sell another month’s contract in the same
product or, in some cases, a related product.
The purpose of taking two futures positions is to takeadvantage of a change in price relationships, also called

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the ‘spread’. The intention is to earn a profit from expectedfluctuations in the differential between the prices of the twomonths. If during the interval prices rise, the profit madefrom the long position will be compensated by the loss on
the short position, and vice versa if prices decline. Whatreally matters in a straddle operation, therefore, is the pricespread between periods. It is of no consequence in which
direction the market moves. If, for example, the price spread
between the July and December position seems greaterthan usual, with the forward position at a premium, it makes
sense to buy the near position and sell the forward position.
This assumes that the differential will be reduced at a later
date, in which case the trader will gain.
The spread will narrow if one of the following situations
arises: The near position rises while the forward position remains
unchanged;
 The near position rises higher than the forward position; The near position remains unchanged while the forward
position falls;
 The near position falls less than the forward position.

STRADDLING – AN EXAMPLE
A speculator sells New York ‘C’ December 2012 (KCZ12) andbuys March 2013 (KCH13) at 360 points premium March. In
abbreviated fashion, they are buying March/December at
360. As December gets closer to the first notice day and thelevel of certified stocks is rather high, the market will moveout to a full ‘carry’ estimated by the trade to be 425 points.
Our speculator now buys December/March (buys KCZ12
and sells KCH13) at 425, locking in a 65-point profit per lot.
At US$ 3.75 per point, the profit is US$ 243.75 per lot. See
chapter 8 for more on ‘carries and inversions’.

TECHNICAL ANALYSIS OF
FUTURES MARKETSTechnical analysis is the study of the market itself rather
than an evaluation of the factors affecting the supply of,and demand for, a commodity (which is called fundamental
analysis). The important components of technical analysis
are prices, market volume and open interest. As thistechnical approach only considers the market, it must take
into account fluctuations that reflect traders’ actions and thatare not necessarily associated with supply-and-demandcycles. The basic assumption of all technical analyses
is that the market in the future can be forecast merely byanalyzing the past behaviour of the market (although manyin the coffee trade find this hard to accept).
Detailed technical analysis is not possible for all or even mosttraders. The most important elements for accurate decisionmaking are close contacts with the markets and withknowledgeable individuals in the trade. However, if charting
specialists supply the analysis within a usable period of time,
technical analysis can provide useful additional information,
particularly for medium-term forecasts.
The main tools of technical analysis are past price patterns
that are shown in various forms of charts or graphs. Thechanges in the volume of open positions (i.e. the numberof futures or option contracts outstanding on a given
commodity) and the total volume of operations in themarket are also examined. Charts often use a moving
average to record and interpret price trends. In mostcharts, an average moves with time as the newest priceinformation is incorporated into the average and the oldest
price is discarded. For example, a simple three-day moving
average of the daily closing price of a commodity changes
as follows: on Wednesday, the sum of closing prices on
Monday, Tuesday and Wednesday is divided by three; onThursday, the sum of closing prices for Tuesday, Wednesday
and Thursday is divided by three; and so on. Analysts canaverage prices over a period of hours, days, months or evenyears, depending on their needs.
The value of the moving average always lags behind thecurrent market price. When prices are rising in bull markets,the moving average will fall below the current price.
However, the moving average in a bear market will be higher
than the current price. When the trend in prices is reversed,
the moving average and the current price cross each other.
While advocates of charting accept that fundamental factors
are the prime determinants of commodity prices, they pointout that these factors cannot predict prices. They argue thatthe graphs incorporate all the fundamental factors that shapeprices and also reflect the subjective market reaction tothese factors. The alternative argument holds that although
the price curve and other elements of the graph are real andobjective, the interpretation is necessarily subjective. Thus,
the same graph can give contradictory signals to different
readers.
In reality there is likely to be substantial overlap between
the fundamental approach and the charting approach. It
is common for operators to determine the market trend by
studying fundamental factors and to then select the righttime to enter the market by referring to the charts. Similarly,
chart advocates also study other factors beyond the limitof technical analysis. They may consider the number ofmarketing days left before a position expires, the amounts
notified for delivery on the exchange, the situation of thelongs, and the possibility of accepting deliveries on theexchange without adverse results.
Many companies specialize in producing charts for various
commodities and most have their own websites where it ispossible to access charting information such as price history,
volumes, open interest and technical studies. In addition,
all of the Internet coffee information sites, such as www.
theice.com, www.euronext.com, www.coffeenetwork.com,

CHAPTER 9 – HEDGING AND OTHER OPERATIONS

www.tradingcharts.com and www.futures.tradingcharts.com
have charting ability and analysis. Most of these websites
carry not only price, but also volume and open interest, all ofwhich are discussed in other parts of this chapter.

OPEN INTEREST
The total of a clearing house’s outstanding long or shortpositions is called the open interest. If a broker who is longin a futures contract sells their position to another trader
who wants to be long on futures, the open interest does
not change. However, if they sell their position to a trader
who is short and is therefore closing out their position, theopen interest is reduced. The total size of the open interest
indicates the degree of current liquidity on a given market.
When considering the open interest, it is important todistinguish between the types of operators entering theexchange. The term ‘strong hands’ describes those who areable to make margin payments over an extended period oftime whereas ‘weak hands’ are operators who cannot easily
meet the substantial variation margins demanded wheneverprices move significantly.
In general, strong hands are comparatively resilient toprice changes. One type of strong hand is an operator who
uses the exchange for hedging purposes. They may wantto liquidate a position, not as a result of price movements
but because of an opportunity to carry out an operationin physicals. Once the hedging operation has begun they
will not be affected by price changes. Another type ofstrong hand is the speculator who holds large amountsof capital. Such operators can withstand a setback on themarket without being forced to sell their positions because
they have the financial resources to cover the margins.
Small non-professional speculators who generally operate
through a broker are considered weak hands because they
are more vulnerable to changes in price.
Looking at prices in isolation can give some indication ofwhether buyers or sellers are dominating the market, but it
will not distinguish new purchases from hedging operations.
If new purchases are the predominant activity, it is possible
to forecast the continuance of the market’s upward trend
as these purchases signify that new operators are entering
the market in the hope that the market will rise. However, if
these purchases are largely for hedging purposes to covershort positions, the market is considered weak because
once these short positions are covered the buying pressure
will subside.

VOLUME OF OPERATIONS
The volume of operations, or turnover, is equivalent to thenumber of trades in all futures contracts for a particularcommodity on a given day. Technical analysts regard volume
and open interest as indicators of the number of people orweight of interest in the market and thus of the likelihoodof a price rise. A gradual increase in volume during a price
upturn could suggest a continuation of the trend.
The rise in volume could also result from an anticipation ofhigher prices in the future, but in fact it may indicate thatlong or short positions are leaving the market because ofa fall in prices. In general, the volume of trade is a good
guide to the breadth of the outside support given to a pricemovement on the market.

RELATIONSHIP BETWEEN OPEN INTEREST,VOLUME AND PRICE
The elements of charting must be interpreted together as
they are meaningless on their own. When changes in open
interest and volume are analysed in conjunction with theprice charts, they may indicate several trends, described in
the paragraphs that follow.
When both volume and open interest are expanding against
a background of rising prices, a so-called bullish trend
on the market is indicated. A rise in open positions is aconsequence of the ongoing entry of new long positions
and new short positions into the market. However, withevery subsequent upward movement in prices, the shortsthat previously entered the market will incur worsening
losses that will be increasingly difficult to sustain. Eventually,
traders with short positions will be forced to buy, which will
add more buying pressure to the market.
A persistent rise in both volume and open interest with prices
rising is a good indicator of a bull market. In this scenario
more new participants are willing to enter the market on thelong side, looking for higher levels. When the volume andopen interest start to decline this could be a signal of a trend
reversal. As mentioned earlier, for the New York market, thecommitment of traders (COT) report, published by the U.S.
Commodity Futures Trading Commission, www.cftc.gov,
yields a great analysis of the opened interest, not only bytrader category, but also by weekly change.
If daily volume and open interest are falling and prices are
declining, a so-called bearish trend is confirmed. When there
are more sellers than buyers in the market, long positions
suffer increasing losses until they are forced into a selling
position. Declining volumes together with declining prices inturn mean that it will be some time before the lowest price of
this bearish trend is reached.
An explosion of volume can also signal a turning point in
the market if a day’s trading at very high price levels isrecorded against a very large volume and if subsequent
price movements, either up or down, are accompanied bylower levels of volume. This is a good sign that a reversal
is imminent. Similarly, a collapse in prices after a severe
downtrend, recorded against a high volume, can signal an
end to the bearish trend.

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CHAPTER 9 – HEDGING AND OTHER OPERATIONSCHARTING
The two most commonly used charts in technical analysis
are the bar chart, and the point and figure chart. There aremany technical studies that can be added to these chartssuch as trend lines, moving averages and stochastics(probabilities).
Bar charts use a vertical bar to record the high and low
range of a price for each market day. The length of thebar indicates the range between the highest and lowest
quotations. The vertical line is crossed by a small horizontal
line at the closing price level. Therefore, in just one line per
day it is possible to show the closing price as well as theminimum and maximum quotations registered for that day.
A record is made daily, forming a pattern that may cover
several weeks, months or even years. Some chartists insist
that a new bar chart should be started as soon as a new
futures position is opened.
However, it is common to continue the original chart with
the new position following the position that has just expired.
As the new position may have discounts or premiums in
relation to the old position, the chart should be clearlymarked to indicate where the new position starts and where
the old position ends.
Continuous plotting can be done in various ways. One
way is to show the first position until it expires and then tocontinue with the new first position. Another way is to show
only one position until it expires and then to continue withthe same month of the following year. The drawback of
the second method is that once a position expires, e.g. in
December 2004, and the next position taken is December
2005, prices may have changed significantly and the chart
may therefore show either a large increase or decrease.
Trend lines on charts reveal significant trend changes but
obscure subtle changes in supply and demand factors. The
trend line is best suited for recording long-term changes inindices or other financial and economic data. The market
registers three types of trends: a bullish trend when prices
are rising, a bearish trend when prices are falling, and asteady or lateral trend when prices are neither rising nor
falling. A steady trend sustained for a comparatively long
period is known as a ‘congestion area’. The larger this area,
the greater the possibility that the market will begin a definite
trend, either bullish or bearish.
The simplest patterns to recognize are those formed by thethree types of trend lines. These are: the support line, which
is drawn to connect the bottom points of a price move; theresistance line, which is drawn across the peaks of a trend;
and the channel, which is the area between the support andresistance lines that contains a sustained price move.
Point and figure charts differ from the bar charts in two
important respects. First, they ignore the passage of time.
Unlike a bar chart, where lines are equidistant to markdistinct time periods, each column of the point and figure
chart can represent any length of time. Second, the volumeof trade is unimportant as it is thought merely to reflect
price action and to contain no predictive importance. The
measurement of change in price direction alone determines
the pattern of the chart. The assumptions underlying thepoint and figure chart primarily concern the price of acommodity. It is assumed that the price, at any given time,is the commodity’s correct valuation up to the instant thecontract is closed. This price is the consensus of all buyers
and sellers in the world and is the result of all the forces
governing the laws of supply and demand.
Moreover, no other information needs to be included inthis chart because the price is assumed to reflect all theessential information on the commodity.
Real time and delayed charts can be obtained from various
sources, e.g. www.theice.com, www.tradingcharts.com andwww.coffeenetwork.com – just to mention a few.
Daily and monthly coffee price futures charts are offered
free of charge by www.futures.tradingcharts.com and areeasy to access. See examples on the following page.

CHAPTER 9 – HEDGING AND OTHER OPERATIONS

Figure 9.1 Example of a daily coffee futures price chart (December 2011); Coffee – ICE, 4 November 2011

Chart courtesy of TradingCharts.com, Inc., www.futures.tradingcharts.com.
MACD: Moving average convergence/divergence.
RSI: Relative strength index.

Figure 9.2 Example of a monthly coffee futures price chart; Coffee – ICE, 31 October 2011

Chart courtesy of TradingCharts.com, Inc., www.futures.tradingcharts.com

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RISK AND THE RELATIONTO TRADE CREDIT

TYPES OF RISK ...................................................................................................................................................164
IN-HOUSE DISCIPLINE ......................................................................................................................................165
RISK AND CREDIT ..............................................................................................................................................167
TRANSACTION SPECIFIC RISKS......................................................................................................................171
CONDITIONALITIES FOR CREDITS .................................................................................................................171
RISK MANAGEMENT AND CREDIT ..................................................................................................................174
TRADE CREDITS IN PRODUCING COUNTRIES .............................................................................................176
TRADE CREDIT AND ASSOCIATED RISKS .....................................................................................................177
LETTERS OF CREDIT..........................................................................................................................................179
ALL-IN COLLATERAL MANAGEMENT ..............................................................................................................181
TRADE CREDIT AND RISK – SMALLHOLDERS ...............................................................................................182

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CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDITRISK AND THE RELATIONTO TRADE CREDIT
TYPES OF RISK
Risk in the coffee and general commodity trade can bedivided into five main categories:
 Physical and security risk. Physical loss or damage
as well as theft and fraud, will be covered by insurance
against payment of a premium. See also chapter 5,
Logistics and insurance.
 Quality risk. The goods are not what they are supposed
to be – at worst they are not fit to be sold.
 Price risk or market risk. The price of goods may riseor fall to the detriment of the owner, depending on thetype of transaction they have engaged in. The value of
unsold stocks falls when demand declines or there isover supply. Conversely the cost of covering (buying in
against) a short or forward sale increases when demandrises or there is a supply shortage.
 Macroeconomic risk. As recently as at the turn ofthe century the value of coffee generally was basicallytranslated into price per United States dollar. Today, withwealth moving from older developed countries to newer,
more powerful economies, the local value of coffee canand does easily move differently from its United States
dollar price. A farmer in Brazil can see his price decline
while at the same time a buyer in euros is experiencing a
price increase. Macroeconomic moves in wealth createchanges in currencies on a daily basis, resulting in asituation where for many exporters currency fluctuations
now have a much greater impact on domestic coffee
prices than ever before.
 Performance risk. One of the parties to a transaction
does not fulfil its obligations, for example because of
short supply or unexpected price movements, resulting
in loss for the other party. A seller does not deliver,delivers late, or delivers the wrong quality. A buyer does
not take up the documents, becomes insolvent or simply
refuses to pay. In some countries this particular type of
non-performance risk is also known as del credere risk.

IMPORTANT TRADE ASPECTS ANDTERMINOLOGYLong and short positions. ‘Long’ means unsold stocks,
or bought positions against which there is no matchingsale. The total unmatched quantity is the ‘long position’.
Short is the opposite, that is, sales exceed stocks and one
has outstanding sales without matching purchases – the‘short position’. When large holders sell off their ‘longs’ themarket speaks of ‘liquidating’. Conversely, when traders buy
in against ‘shorts’ then the reports speak of ‘short covering’.
Physical and paper trade. There are two very different
types of coffee trade. Exporters, importers and roasters
handle green coffee: they trade ‘physicals’. Other players
trade purely on the futures markets and are known as ‘paper’
traders or technical traders because they do not habitually
deliver or receive physical coffee. Paper traders include
brokers acting on behalf of physical traders wishing to offset
risk (hedging), market makers, individual speculators (daytraders) and institutional speculators (funds).
Physical traders perform a supply function. Trading physicals
requires in-depth product knowledge and regular accessto producing countries. Futures traders, on the other
hand, trade the risks players in the physical market wish
to safeguard against. Most futures contracts are offset bymatching counter transactions through the clearing houses
that manage the contract settlements of the futures markets
and debit or credit traders with losses or profits. Very rarely
therefore do futures traders handle physical coffee. Instead,they specialize in market analysis and trendspotting. Coupledwith considerable financial strength, this enables them to takeon the risks the physical trade wishes to offset by providing
market liquidity.
Exporters combine analytical ability with product knowledge.
Like their clients they can put a value on physical coffee(quality), and they know which quality suits what buyer.
Many paper or technical traders are not very conversant with‘quality’, and do not need to be.
When physical traders wish to guard against future price falls
on unsold stocks they sell futures, and the paper trade buys
those futures contracts. When the delivery time draws near,
the physical trade will want to buy those contracts back andthe paper trade will then sell them.
Because the clearing house is always between buyer andseller (and deals only with approved parties) the identityof either is irrelevant. The system works because a futurescontract represents a standard quantity of standard quality
coffee, deliverable during a specified month (the trading
position) and so matching trading positions long and shortCHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

automatically cancel each other out, leaving just the pricesettlement.
First and second hand. Coffee sold directly from origin(from producing countries) is first hand – there were nointermediate holders. If the foreign buyer then re-offers thatsame coffee for sale, the market will know it as second hand.
But international traders also offer certain coffees for sale
independently from origin: in so doing they are going ‘short’in the expectation of buying in later at a profit. To achieve
such sales they may actually compete with origin by quoting
lower prices. Market reports then refer to second handoffers or simply the second hand. Traders can buy and sellmatching contracts many times, causing a single shipment
to pass through a number of hands before reaching the enduser: a roaster. Such interlinked contracts are known as string
contracts.
Volume of physicals versus futures and second hand.
The volume of physicals is limited by how much coffee
is available, but there is no such constraint on the trade in
futures or second hand coffee. The huge volume of tradeon the futures markets contributes strongly to the volatility ofphysicals. Futures can cause prices for physicals to move
abruptly, sometimes for no immediately obvious reasons.
In addition, the volume of trade in some individual coffees
regularly exceeds actual production because many second
hand or string contracts are either offset (washed out), or are
executed through the repeated receiving and passing on ofa single set of shipping documents. Producing countries are
but a single factor in the daily trade and price movements.
The differential. This is the difference, plus or minus,
between the price for a given trading position on the futures
markets of New York (ICE, trading arabicas) or London(LIFFE, trading robustas), and a particular physical (green)coffee.
Briefly, the differential takes into account (i) differences
between that coffee and the standard quality on which the
futures market is based, (ii) the physical availability of thatcoffee (plentiful or tight), and (iii) the terms and conditions
on which it is offered for sale. By combining the ex dock
New York or London futures price and the differential, one
usually obtains the FOB (free on board) price for the green
coffee in question. This enables the market to simply quote,for example, ‘Quality X from Origin Y for October shipment at
New York December plus 5’ (cts/lb). Traders and importers
know the cost of shipping coffee from each origin to Europe,
the United States, Japan or wherever, and so can easily
recalculate ‘plus 5’ into a price landed final destination.
Price to be fixed – PTBF. Parties may agree to sell physicalcoffee at a differential (plus or minus) to the price, at an as yet
undetermined point in the future, of a specific delivery monthon the futures market, for example, ‘New York December plus
5’ (cts/lb) or ‘LIFFE July minus 25’ (US$/ton). The contract willstate when and by whom the final price will be ‘fixed’: if by theseller then it is ‘seller’s call’, if by the buyer then it is ‘buyer’s
call’. See chapter 9, Hedging and other operations.

IN-HOUSE DISCIPLINEAVOID OVER-TRADING
People often associate risk management with priceprotection, but there are many different types of risk andrisk management. Exporters and traders can buy protection
against many forms of risk, obviously at a cost. But there areother risks inherent to the trade in coffee that only they can‘manage’.
The serious exporter’s long-term strategic objective isto trade steadily and profitably, and to seek regularity ofbusiness; not to chase potential windfall situations involving
speculative moves with the potential to put the day-to-day
business at risk. Solid seller-client relationships are foundedon confidence and regularity of trade. Regular purchases
maintain producer links; regular offers and sales help toconvince clients to place at least part of their business ‘withour company’.
Purely speculative trading has no place in such a strategy,
but many an exporter has unwittingly fallen foul of speculative
markets. When prices are low, the potential risk of a sudden
rise is often high. Conversely, when prices are very high thenthe potential risk of a sudden fall increases accordingly. This
conventional wisdom is reinforced by an old but accurate
saying in the coffee trade: ‘When prices are down coffee isnever cheap enough, yet when prices are on the up thencoffee is never too expensive.’ In other words, when highprices fall the ‘herd’ does not buy, yet when low prices rise
people buy all the way up and beyond. This often causes
price movements to be exaggerated.
A speculative long position or stock of physicals, held in
expectation of a price rise, needs to be financed. If one
allows such speculation to take up most available working
capital and the market turns – it falls – the competition will
be able to buy and offer at the lower levels. The choice isthen sell at a loss, or lose business and perhaps lose buyers
as well by letting the competition in. The only consolation,
perhaps, is that in theory the loss potential of long position
holders is limited to their investment. Those with shortpositions potentially face an open-ended risk as no one
knows how high a market may go.
Selling physicals short in anticipation of price falls usually
does not require any direct investment (as opposed toselling on the futures markets where margin payments haveto be put up), but the risk is entirely open ended. Should
an unusual event occur, the market may rise beyond all
reasonable expectation. In extreme cases it may become
impossible to cover the shorts at any price. In a situation
where uncovered sales are showing a serious loss one
becomes reluctant to make further sales, even thoughbuyers are now prepared to pay more. This again opens thedoor to the competition to grab both business and clients.
Worse, with higher sales prices more can be bid in the local
market, thus squeezing the short seller from both sides.

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Quick turnaround? A trader who decides early enough thatthe market is definitely turning against them can quickly cover
their shorts and go long. Or, in the reverse instance, sell
stocks and in addition go short. But only if they can finance allthese transactions. If they cannot, if they have overextended
themselves by over-trading, then the party is over, at least forthat season.
Price protection, hedging, options and other risk management
tools may be available in theory. But such instruments will notnecessarily save those who overextend themselves and do
not manage their physical or position risk.

LONG AND SHORT AT THE SAME TIME
Strictly speaking, long or short represents the net difference
between purchases and sales. But this assumes trading isin one type or quality of coffee only. What happens if stocks
consist of one quality and sales are of another? For example,
an exporter might believe that having at least some coffee instock will act as a hedge against the shorts and limit exposure
to price risk, even if stocks and shorts are of different qualities.
Or the expectation might be that the ‘spread’ (price difference)
between the two types of coffee will change in the exporter’sfavour. In both cases the simple statement ‘we are X tons
long or short’ hides the fact that there are not one but two
positions. The qualities are not substitutional: the trader islong in quality A and short in quality B. If the market for B rises
then the shorts must be covered. If funds must be liberated
to do this then the longs must be sold.
But if others are short of B as well then covering may produce
substantial losses and at the same time A may have to be soldat a loss simply to release the funds necessary to pay for thepurchases of B. Incidentally, this does not change if the shortsales were made on the basis of PTBF. Shortage or surplus
in a particular type of physical coffee immediately forces thedifferential for that coffee up or down, often independently ofthe market as a whole.
Spread trading is the forecasting or anticipating of changes
in price differences between two qualities or markets, forexample between New York arabicas and London robustas.
Arbitrage, on the other hand, is making use of (small)differences or distortions between different markets orpositions, for the same commodity.

VOLUME LIMIT
Exporters deal with physical coffee. Unless they have easy
access to a suitable futures market, they will always bedirectly exposed to physical or position risk. And that risk
has to be managed by limiting or mitigating it. Any operation,
large or small, should establish its exact position at least at
the close of business every day.
The daily position report will show total stocks, forward
purchases, and sales awaiting execution, concluding with an

overall long or short position. At first glance it seems safe
to assume that by imposing a volume limit, a maximum
permitted volume or tonnage long or short, one avoids
traders going ‘overboard’ and possibly putting the firm at risk.
In reality this is not the case. As mentioned above, long or
short is the net difference between stocks and sales, but
only if both are of the same quality. Therefore, a number ofdifferent position reports are required for the full picture to
be seen: Tonnage and cost of stocks (including forward purchases)that cannot be offset against existing sales; Tonnage and estimated cost/value of uncovered (open)
sales, i.e. sales for which coffee still has to be purchased; Tonnage and cost of stocks (including forward purchases)
awaiting allocation against existing contracts, costof shipments under execution, and total outstanding
invoices (receivables).

FINANCIAL LIMIT
A volume limit is meant to avoid excessive risk. However,at a price of US$ 2,000/ton a 500-ton limit long or short
represents US$ 1 million, but at US$ 4,000/ton the same 500
tons represents US$ 2 million. So, at US$ 2,000/ton, US$ 1
million is needed to pay for covering a short position of 500
tons; double that amount if the price goes to US$ 4,000/ton.
Conversely, at US$ 2,000/ton a long position of 500 tons
costs US$ 1 million to finance but US$ 2 million at US$ 4,000/
ton. Clearly, because exporters deal in physical coffee thatmust be financed, the volume limit by itself is not enough.
A financial limit is needed as well to ensure the operation, thebook, can be financed. However, the volume limit is equallyimportant. A price change of US$ 200/ton against the exportermeans a loss of US$ 100,000 for 500 tons; double that if lower
prices had caused their financial limit to permit a position of
1,000 tons. To take a real-life example, in December 1999 the
ICO ‘other milds’ indicator stood at 124 cts/lb ex dock: by theend of December 2001 the same indicator had fallen below
60 cts/lb and by the end of February 2011 it stood at no lessthan 296 cts/lb.
Both types of limit are needed therefore to protect against
drastic price changes. The financial limit kicks in when prices
rise, and the tonnage limit kicks in when prices fall. The
objective is to avoid exceeding one’s financing capacity or
incurring unsustainable trading losses.
By adding the third position category (pending shipments
and outstanding invoices) the daily position report will show
both the funds applied by category, and the firm’s total trading
exposure. Unfulfilled contracts, shipments in progress andoutstanding invoices should be subdivided to show the total
exposure per individual client.
The combination of financial and volume limits is also
important for those trading on the futures markets where
financial leverage or gearing may enable traders to turn, forCHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

example, a margin investment of US$ 100,000 into a US$
500,000 coffee position (if they are permitted to trade at theratio of 5 to 1). In this situation a 1% position profit means a
5% profit on the actual investment; conversely, a 1% position
loss means dropping 5% on the investment. (In futures thevolume limit would be expressed as a number of contracts.)

MARGIN CALLS – A POTENTIAL HEDGELIQUIDITY TRAP
Producers, traders and exporters are increasingly seeking
ways and means to hedge price risks. When such hedging
is done on a futures exchange, directly or through brokers,
then deposits and margin calls are part of the deal. Usually
producers and exporters sell futures short to hedge unsold
crops and stocks. If futures prices then rise, additionaland often substantial margin calls can pose real liquidity
problems. There may be insufficient liquid funds available tocover the margin calls, even though the underlying trading
position is sound and profitable. If there are heavily gearedor leveraged speculative positions in the market, then margin
calls by themselves can move the price of futures.
Hedge positions, and their associated potential margindemands, should also be included in the daily position report,
as should any gearing or leverage involved in the futurestransaction. The difficulty is that margin calls can be neither
predicted nor quantified in advance, and in extreme cases a
company’s liquidity may not be adequate to finance them.
Commodity banks understand this and their credit packages
will make provision for margin calls to avoid otherwise soundoperations being derailed.
Smaller banks in producing countries cannot always offer
similar facilities, unless they act as agents for such commodity
banks or other providers of risk management solutions.

CURRENCY RISK
The vast bulk of the world trade in coffee is expressed in UnitedStates dollars and coffee is known as a ‘dollar commodity’.
In many producing countries the local currency is not linked
to the United States dollar. Exporters therefore face the riskthat the dollar exchange rate will move adversely in relation totheir own local currency, affecting both export revenues andinternal coffee prices.
Usually, the currency risk can be limited by borrowing in
the currency of sale, provided local regulations permit suchforeign currency advances to be offset against the export
proceeds. If advances are immediately converted into local
currency that in turn is immediately used to pay for spot
goods whose shipment will be invoiced in United States
dollars, then the cost of goods is expressed in dollars andnot local currency. If the cost of goods represents 80% of thesales value then one could say that exposure to currency risk
is limited. But in many countries local banks are not always
able to make substantial advances in United States dollars.

Historically, in many coffee producing countries the local
currency was more likely to depreciate (exporters ought toprofit on stocks bought in local currency) than appreciate(exporters are likely to lose because they will receive lesslocal currency on export). But there have also been numerous
examples, especially since the monetary crisis of 2008 and in
subsequent years, where local currency movements in coffee
producing countries have gone against exporters with theirlocal currency appreciating against the United States dollar.
Today, macro shifts in the wealth of nations are changing oldcurrency and interest rate trends and international flows ofcapital are affecting relative currency rates and therefore theprice of coffee. As a result, the supply and demand value ofcoffee does not always translate into the actual price that is
paid.
Individual companies and bankers approach currency risk
in different ways, but the guiding principle should always bethat commodity export and currency speculation do not go
together.
Exposure to potential currency risk needs to be reported andmonitored in exactly the same way as purely coffee traderelated risk. In many coffee producing countries currency risk
can be hedged, but the complexity of currency markets andtrading is beyond the scope of this guide.

RISK AND CREDIT
Risk is often assumed to concern only sellers and buyers,
but there are other parties to a transaction. Usually financefor the deal is directly or indirectly provided by banks orother financial institutions whose risk is that after they haveadvanced funds to enable a transaction things somehow fallapart and part or all of the funds cannot be recovered. There
are three principals to almost all transactions: sellers, buyers
and financiers, each of whom have different but interlinked
risk concerns. In other words, credit and risk mitigation are
irrevocably linked. (Insurers or underwriters are obviously
also party to risk but as service providers, not as principals.)
Few producers, traders, processors, exporters, importers,
trade houses or roasters are able to finance turnover from‘own funds’. If they were able to do so then the financiers’
preoccupations with risk would not concern them, except tosay that in a well run business many of those concerns aretaken into account as a matter of course. But if one aspires toborrow working capital then all the lender’s preoccupations
have to be addressed satisfactorily. Otherwise there is little
chance of obtaining any finance.
Simply put, there are two perspectives to risk and risk
management: The commercial or trade perspective is mainly
preoccupied with managing physical and price risks,
although performance risk also plays a role.
 The financial or lending perspective on the other hand ismainly concerned with performance risk.

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All the other risks associated with commerce also feature,
but a lender can insist on many types of risk ‘insurance’
against these, ranging from insurance against loss or theft
to the hedging of unsold stocks or open positions. But
what of the risk that a borrower does not perform – that is,someone becomes unable to refund a loan, misrepresents
the company’s financial or trading position, misstates thequality of goods financed, or engages in pure speculation
without the knowledge of their financial backers?
What if the suppliers or buyers a borrower depends on default
against that borrower? For example, unfavourable pricemovements cause a supplier to renege on sales contracts,
thereby rendering the borrower unable to fulfil their own
contractual obligations, through no fault of their own.
Each type of trade has its peculiarities and coffee is no
exception. An added factor is that a coffee’s value depends
not only on supply and demand, but also on quality. Noone without at least some ability to assess and value quality
would be expected to make a success of the physical or
green coffee business as a trader, processor, exporter,
importer or roaster. But assessing that quality, and therefore
a coffee’s commercial value, is not an exact science. Market
analysis is not exact either, with many price movements
difficult to anticipate or explain. These uncertainties
complicate the business of raising loan finance because
banks dislike uncertainty in any shape or form.
The risks that attach to monies lent for investment in visible
physical assets (i.e. land and buildings) are very different
from the risks on monies lent to finance trade in coffee.
Commodity trade finance is a highly specialized activity,
usually undertaken not by the average retail bank but rather
by corporate lending or commodity trade finance banks.
The term ‘trade finance’ is self-explanatory: these banks
finance trade, not speculation. Prospective borrowers
should understand this from the very beginning. Therefore,
before any credit limit or credit line can be agreed, the typesof transactions that are to be financed have to be agreed,
to avoid each and every deal having to be individually
approved. Usually, but not always, the borrower can thentrade freely within the limits that have been agreed andneeds to apply for additional approval only if, for example,
they wish to increase their credit line.
Different risks are attached to financing the trade in coffee.
Some of these could be termed trend risks, in that changing
trends in the coffee world can have negative effects on
those who borrow trade finance. Other more transaction
specific risks attach to the type of coffee trade engaged in.
This discussion is limited to the financing of coffee that has
been harvested, i.e. ‘off the tree’. ‘On tree’ or production
financing criteria would also be based on many of theconsiderations described below, but on many others as
well. To discuss those is beyond the scope of this guide.

TREND RISKS
Market risk. World demand for coffee is relatively stable withlimited growth potential only. Increasing price transparency
means there is not that much scope for expansion of tradeprofitability other than through competition, consolidation,
or expansion or diversification of activities. Diversification
usually means getting involved with different or with a larger
number of commercial counterparts, which can increase
performance risk.
Margin (profitability) risk. The concentration of roasterbuying power coupled with the large roasters’ need forincreased transparency in green coffee pricing puts
pressure on margins, again potentially affecting tradeprofitability. Meanwhile costs rise because of changing
buying patterns and a greater need for risk management(hedging). Having fewer and larger partners also means
having larger performance risks. Margins are also likely tobe affected as price transparency increases, certainly forthe more standardized qualities of coffee.
Volatility risk. For many it is becoming more and moredifficult to trade back-to-back (make matching purchases
and sales simultaneously), and more and more position
taking is required. While the general price risk canbe hedged (the market as a whole rises or falls), it is
impossible to hedge the differential risk or basis risk (thevalue of the coffee bought or sold rises or falls comparedto the underlying futures market). Modern communications
provide instant price news worldwide, bringing increased
price volatility.
Country risk. This is a risk rating applied to all international
lending, based on the lender’s assessment of the political,
social and economic climate in the individual country where
the funds are to be employed. Country risk often weighsquite heavily in the total risk assessment attaching to thefinancing of trade with coffee producing countries. The
more unstable a country or its economy, the poorer thecountry risk rating will be. Such ratings will also include anassessment of the probability that a country may suddenly
introduce or reintroduce exchange controls or otherlimitations on financial transactions. Poor country ratings
increase the cost of borrowing and may result in banks
demanding loan guarantees from sources independentof the country concerned. If banks feel the country risk is
unacceptably high they will buy country or credit insurance,
the cost of which adds to the lending rate to be charged.
What is not always appreciated is that country risk also
applies to the buyer’s country of residence. If an exporter
trades with bank-supplied finance then the bank will usuallyreserve the right to pre-approve the exporter’s buyers andsometimes even the individual transactions. If a sale is to bemade to an unusual destination, country risk will play a rolein that approval process. It is easier for an international bankthan for an individual exporter to make such judgement calls.

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDITRISK IS NOT STATIC
General change or evolution has an effect on the positioning
and exposure of exporters and traders or trade houses.
Examples are the ever-increasing concentration of buying
power in the hands of a small number of very large roasters,also now in the specialty trade, and the ongoing switch tothe just-in-time supply chain. Large roasters concentrate
more and more on their core business: the roasting
and marketing of coffee. Procurement at origin, delivery
and financing the supply chain is therefore increasingly
entrusted to specialized trade houses and in-house trading
firms, usually in the form of long-term supply contracts for arange of coffees. Such contracts may even stipulate delivery
dates at roasting plants.
Another example of change or evolution in the marketplaceis growing transparency in the coffee pricing chain. This
limits trading margins, certainly for the more standardized
qualities that very large end-users require. At the same time,near instantaneous global access to information means ‘themarket’ as a whole learns more or less at the same timeof important developments, which undoubtedly serves toincrease price volatility.
All this evolutionary change impacts on the way the coffee
trade does business and, by implication, changes therisks it incurs as well. Having fewer but very large business
partners, for example, also means having fewer but larger
performance risks, whereas the trader or trade house may
be more or less forced to dance to their partner’s tune.
The concentration of buying power is not limited to roasters.
The same development is evident in the coffee trade, where
today a small number of really large trade houses dominate.
The just-in-time supply system can be said to increase
trade risks. But it also enables trade houses, especiallylarger ones, to add value because their turnover and their
total range of activities both increase, often when they
establish operations in producing countries in competition
with local operators. The large trade houses’ relatively easy
access to cheaper international credit than is available tolocal operators has obviously facilitated their entry as direct
players into origin markets.

CHANGING RISK AND SMALLER
OPERATORS
Smaller exporters, traders and importers are having tobecome more professional and specialized if they are to
maintain or add to their traditional functions. If they cannot
satisfy the demands of the larger roasters then they must
concentrate on niche markets and smaller counterparts, forexample in the specialty market.

Their functions and margins may also be under threat frome-commerce or Internet trading at the retail end. This may
not necessarily compete with them, but may limit theirability to maintain adequate margins. If trading margins are
inadequate then turnover has to rise or other activities haveto be added – again factors that can have an impact on risk.
If this involves them in more position taking, then their hedging
requirements will increase accordingly, accompanied byexposure to margin calls. Smaller operators mostly lackthe margin cushion that large houses with direct or indirect
exchange membership enjoy. Large operators with directaccess to the exchanges usually pay margin calls only overtheir net open futures position (long minus short). But for
many in the industry, margin calls can present particularly
unwelcome and difficult swings in liquidity. Perhaps this is
one more reason why so much trading has been on a PTBF
(price to be fixed) basis in recent years. Until such contracts
have to be ‘fixed’, hedging is not necessarily required
because the price remains open. See chapter 9 for moreon trading PTBF.
Unless a transaction is back-to-back, banks usually require
outright purchases at fixed prices to be hedged immediately,
but of course such open hedges (sales or purchases) on
the futures exchanges bring exposure to margin calls thatneed to be financed.
Importers dealing with the strongly growing specialty market
need to ‘carry’ their customers: they must hold green coffee
in stock for them, they must stock a range of different green
coffees, and more often than not they must provide theirclients with credit terms ranging from 30 to perhaps as
much as 120 days after the actual delivery takes place. Risk
attaches to all of these activities. See below for more on this.
Exporters wishing to sell to the specialty market often also
have to guarantee a certain minimum availability over acertain period of time. This automatically translates into
price risk on the unsold stock holdings that need to be
maintained as a result.
Exporters wishing to secure a permanent foothold in thespecialty market may have to make crop finance advances
to certain producers in order to safeguard supplies
from future crops, i.e. more risk again. Admittedly longestablished and well-known exporters may be able to offset
such transactions against forward sales to importers orroasters who also want to secure longer term supplies ofthat particular coffee, but not always.
Clearly, long-term industry trends require careful monitoring.
Most change has an effect one way or another on a risk
situation somewhere, sometime.
To these points one must add the risks attaching to theactual type of trade to be financed. These are the operationalrisks associated with the coffee operations that are to be
conducted, and the transaction risks that attach to each andevery individual transaction.

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CREDIT INSURANCE AS A (CREDIT) RISKMANAGEMENT TOOL
Credit insurance is provided by specialized companies thatassess the credit risk posed by an importer’s (or roaster’s)
individual clients, particularly those requiring extended
payment terms. Especially, smaller companies cannot
afford the risk that a client fails to pay for goods delivered
whereas their own banking (overdraft) facilities may also be
dependent on having adequate credit insurance in place.
Credit insurers in turn place limits on the amount of credit
that can be insured for each individual buyer, but particularly
in times of economic uncertainty, such limits can suddenly
be sharply reduced or even withdrawn altogether. In such asituation, smaller importers/wholesalers, which rely on the
security of the insurance, may have to either stop supplying
certain clients altogether or demand cash up front.
NB: It is important not to confuse credit insurance with credit
lines. The first refers to insuring the risk a buyer does not
pay for goods received; the second refers to the amount ofcredit (or overdraft facility) a commercial bank is prepared toprovide to an importer or trader.
Usually, credit insurers require importers to take out cover for
all their clients – in other words, all or none. Whether to insure
or not will depend on the type of business that is conducted
and the premium required. If the great majority of clients are
top roasting companies then the cost may not be warranted,
or may simply be too high. Cost would appear to be one
reason why the use of credit insurance is not widespread in
the United States coffee market, although it is used in thespecialty segment. In Europe it is fairly widely used, but mostly
amongst smaller companies which do not normally sell(regularly) to the majors. Usually, the cost is relatively modest
whereas for many importers/traders the willingness of a credit
insurer to cover a (potential) client is a good indication of thatclient’s financial standing. This is particularly important giventhat many smaller roasters demand extended credit terms.
For a review of commonly used payment terms in the coffee
trade see chapter 4.

WHY IS THE AVAILABILITY (OR ABSENCE)
OF CREDIT INSURANCE IMPORTANT?
Here one has to differentiate between the two value chains.
Coffee is mostly retailed through two separate market
segments: supermarket chains and individual outlets as
coffee shops, etc. Furthermore, especially for smaller
operators, bank finance and credit risk are irrevocably linked
with most bank funding conditional on having adequate
credit risk insurance in place.
Supermarket chains are mostly serviced by the major
roasting companies who in turn rely largely on trade houses
for their green coffee supplies. Over time the tendency on
the part of supermarket chains to demand ever more credit
from suppliers has notably intensified. This in turn means
similar demands from major roasters. For example, insteadof buying on the basis of ‘cash against documents on firstpresentation’, some of the majors buy green coffee on thebasis of ‘payment on arrival’, thus shifting a substantial
financing burden on to their suppliers. Whilst accepting thatmajor roasters present little or no credit risk, this shift still
obliges potential suppliers to find the additional funding thisnecessitates. Major operators will find this easier than will
their smaller counterparts, some of who may be unable tocompete because they cannot raise the extended finance.
Smaller roasters and coffee shops (particularly specialty)
are largely serviced by importers/traders and wholesalers.
The provision of credit has always been an accepted wayof doing business in this segment. This is particularly so inthe specialty business where most small roasters expect toreceive 30 or more days of credit from the date of delivery.
However, when the economic climate worsens, as in 2008,
so does the availability of finance. Even medium sizedroasters started looking to their suppliers for additional
credit by way of later payment, also because their own
clients were seeking extended credit terms. Again, larger
trade houses may deal with this more easily with this kindof situation, for example by channeling their specialty andsmaller client business through separate companies that
can afford to take out cover for all their clients.
For smaller operators, selling on (extended) credit is notreally advisable without credit insurance, whereby the
insurance company insures the risk that a buyer will not pay
for goods received. This is central to the functioning of almost
every retail supply chain, including coffee. Without accessto adequate credit insurance many smaller importers/
wholesalers may be unable to trade freely. If credit insurers
experience underwriting losses then the likely reaction is to
reduce exposure – at times by cancelling individual buyer
coverage altogether. If that happens an importer may haveto retreat from certain types of business and/or clients,
irrespective of the availability of bank finance. It is important
to note here that credit insurers do not reduce or cancel
individual client limits without reason. General reductions
may be linked to a deteriorating economic climate in the
sector concerned whereas individual reductions may be
because of information received or obtained, for example
from annual accounts lodged by privately held companies
with chambers of commerce or similar institutions.

FACTORING
Providing extended credit of course constrains one’s
liquidity, i.e. funds that are tied up in credit to buyers cannot
be used for new trading. It is important to note here thatcredit insurance does not improve one’s liquidity – theinsurance only comes into play if a buyer defaults.
Factoring is one way around the liquidity problems associatedwith extending credit. It is the selling at a discount of acompany’s receivables (outstanding invoices) to a third party,
the factor, who advances most (but not all) of the expected
proceeds immediately, and pays the balance once the buyer

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDITin question has settled the amount due. This is at a cost, but
the availability of the released funds for new business, i.e. theimproved liquidity that is generated, probably offsets most if
not all.

TRANSACTION SPECIFIC RISKSOPERATIONAL RISKS
Different categories of traders have different strengths andweaknesses. Weaknesses can be equated with potential
risks. See table 10.1.
There are also the in-house buying or trading companies ofthe very large roasters and some retail chains (which havecoffee roasted for them by third parties), whose strengthlies in buying power and strong financial resources that
permit them to negotiate favourable terms of trade, eitherwith trade houses or directly with origin. The fact that suchin-house buying companies have a guaranteed outlet for
their purchases obviously appeals to the banking system. In
partnership with collateral management providers (discussed
later in this chapter), this combination of interested bankand strong buyer is able to get closer to origin through allencompassing credit packages that extend backwards fromthe roaster-buyer to the exporter and indirectly enable theexporter to purchase the necessary coffee at the farm gate.
Last but not least, there are speculative operations, technicalor paper traders, and investment or commodity funds. The
latter in particular have access to huge capital resources.
They can 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. See table 10.2.

TRANSACTION RISKS
It is not always appreciated that lenders and borrowers havethe same interest: that the transactions for which the funds
are used come to a fruitful and profitable conclusion. Manyof the average lender’s preconditions are no more onerous
than those any sensible owner or manager of an operation
would apply in-house.

CONDITIONALITIES FOR
CREDITSGENERAL CONDITIONALITIES FOR
CREDITS
When banks and other institutions finance trade in coffee they
indirectly but automatically share in all these risks. Clearly

their assessment of the degree of risk presented by eachborrower or type of operation plays a role in determining thecredit line (the amount of finance to be provided), and what
conditions and costs will apply.
As well as setting a limit on the amount of finance to beprovided, banks will also stipulate under what circumstancesand for which purposes funds may be drawn. For example,
funds meant for trading coffee may not be used to financeother operations.
As a rule, international banks will only finance the trade incoffee in foreign currency (in most cases in United States
dollars), and under an agreed set of pre-conditions,
including limits on a borrower’s total exposure to open
and other risks, and a predetermined programme of actual
transactions. The exact credit structure will depend to alarge extent on an individual borrower’s solvency, balance
sheet and general standing. As a general rule smaller
operators are likely to be subject to more stringent controls
than substantial and well-known companies. Banks will also
clearly distinguish between, and assess separately, theprice (value) risks and the physical (goods) risks inherent ineach lending operation.
Trade or commodity banks provide short-term credit tofinance transactions from the purchase of stocks through tothe collection of export or sales proceeds. Usually this means
the credit is self-liquidating – funds lent for the purchase ofa particular tonnage of coffee must be reimbursed when theproceeds are collected.
Put differently, credit buys stocks that turn into receivables(invoices on buyers, usually accompanied by documents of
title such as shipping documents) that generate incoming
funds, which automatically offset the original credit.

SECURITY STRUCTURE
To safeguard its funds and the underlying transaction flow thelender will establish a security structure. The elements can besummarized as follows.
Exporter. Assignment of accounts, mortgages on fixed
assets, pledges of goods. Assignment of contracts,
receivables, insurances. Business experience, track record.
Fixed price contracts, risk management or hedging.
Monitoring of trading ‘book’, independent audit of accounts.
Price risk during and after transaction. Agreed transaction
structure, hedging tools, in-built margin call financing.
Contract reliability. Pre-approved buyers only; agreed
transaction structure; fixed price or agreed hedging
arrangement. (Who decides when and how price fixing
takes place? For example, is it the trader or someone else?
Are there specific time limits? For example, fix no later thanso many days after date of contract, or so many days aheadof shipment.)

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Table 10.1 Operational risks
Category

Strengths

Weaknesses

International multi-country
traders or trade houses

Long-term supply contracts provide buying
power and opportunities to add value byoffering 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.

Exporters

Local expertise.
Can invest ‘upstream’ in processing andeven production.
Can add value by tailoring quality for nichemarkets.

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.

Importers

Local expertise.
Can add value by adding services andservicing niche markets.
Specialized products can mean higher
margins.

Can face reducing client base because ofconcentrations of buying power.
Services often include holding stocks andproviding credit.
Supply, quality and price risks on specialized
products higher.

Category of risk

Transaction risks

Potential remedies

Speculative risk andvolatility

The deal is not fully hedged or not hedged at all.
Prices for physicals affected by speculation on
futures markets.
Differentials move ‘against us’.
Increasing visibility of prices brings more volatility.

Strict hedging rules and controls over ‘open’
positions.
Strong management.
Knowledgeable staff/brokers/agents.
Pre-approved credit line for margin calls.

Performance risk(technical)

Supplier or buyer reneges on contract, forexample because prices have moved sharply up
or down.
Inferior quality or weight is supplied. Coffee isrejected.
Non-adherence to contract terms.

Deal only with well-established reputableparties on approved list.
Possibly provide pre-finance.
Establish independent quality and weightcontrols.
Strong monitoring and administrative skills.

Performance risk
(documentary)

Exporter presents inaccurate or invalid shipping
documents.
Documents are delayed or lost.

Standardize documentation anddocumentary processes.
Facilitate access to electronic
documentation systems.

Performance risk
(financial)

One of the parties is declared insolvent.

Limit total exposure to any one client or
supplier.
Monitor changes in behaviour that may point
to difficulties ahead, for example gradualslowing down of payments.

Currency risk

Currencies of purchase and sale are different.
Currency rates move ‘against us’.

Match currency of purchase, borrowing andsale.
Strictly control ‘open’ positions.
Use pre-finance expressed in United States
dollars.
Use forward cover.

Table 10.2 Transaction risks

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

Physical stocks. Stored in eligible (approved) warehouses.
Properly marked, stored separately and identifiably.
Commingling with other goods not permitted.
Stocks as security. Pledge agreement with title to the goods,
i.e. warehouse warrants. (Note that depending on local law,warehouse receipts are not always documents of title in thelegal sense and may need a court order to enforce rights.)
Take ownership of the goods. Note that this does not protect
the lender where export licenses are required, or where local
law may require attached collateral to be auctioned locally –sometimes within just 14 days after the default is confirmed.
How to ensure no other lender, creditor or authority may haveprior assignment over the goods? For example, if the national
revenue authority’s claims take precedence the goods may
remain blocked for long periods.
Stock values. Daily verification of market value versus credit
outstanding, based on futures exchange values where goods
are quoted, or valuation basis to be agreed. Top-up clausein lending agreement in case collateral value becomesinadequate. Monitoring of processing cycles and turnover
speed.
Collateral management agreement (CMA). External legal
opinion on the CMA itself, the fiduciary transfer of goods andthe power of attorney to sell the goods. Due diligence ontransport, shipping, warehousing, inspection and collateralmanagement companies. (Due diligence is the thoroughanalysis of operations, standing, strengths and weaknesses,
profitability and credit worthiness.) Performance insurance
including cover against negligence and fraud by collateralmanager. What pre-emptive rights, if any, do warehousemen
and collateral managers have over goods under their control?
Do their storage and management charges take precedence?
Export. Goods must comply with industry, governmentand contract specifications. In case of default, does a bankrequire any special licence to trade or export the goods? What
will be the cost of export taxes, shipment and insurance?
When does risk move from performance risk to payment
risk? (Meaning at what stage does the lender get possessionof actual negotiable shipping documents?) Are funds
freely transferable in and out of the country? It is no goodcollecting local currency against an outstanding amount inforeign currency if that local currency is not convertible ortransferable.
Buyer. Exposure to price risk and volatility (affects both
exporter and importer). Due diligence; pre-approved buyers
only. Limit total exposure to any one buyer. Buyer must accept
that lender may execute contract in case of exporter default.

SPECIFIC CONDITIONALITIESAll or some of the following preconditions, the conditions
precedent, must be met before any lending agreement will
be considered.
 The borrower has obtained all necessary authorizations
to export.

 All levies, fees and taxes are paid up to date.
 Legal opinion confirms the rights of the lender and theright to execute these without needing a court order.
 The borrower’s entitlement to enter into the lending
agreement is evidenced by, for example, a directors’ orshareholders’ resolution.
 Statements are available showing there are no
outstanding or pending claims from tax or other authorities
or institutions that could impinge upon the free andunconditional execution by the lender of its rights, or thefree and unencumbered movement of the goods.
 Grading, bagging, inspection and quality certificates areavailable.
 The goods are and will be stored separately under thefull control and responsibility of an approved collateralmanager.
 Suitable commercial all risks insurance cover is in place,covering storage, in-country transit and loading onboardship.
 Suitable political risk insurance cover is in place, covering
seizure, confiscation, appropriation, exporter default due
to export restrictions, riots, looting, war, contract frustration,and so on.
 Cash deposit or collateral deposit of X%.
Usually, the lending agreement will take effect only if:
 The goods are covered by fixed sales contract(s),pledged to the lender.
 All rights under the sales contract(s) are assigned to
the lender with the acknowledgement of the buyer,
authorizing the lender to execute the contract in case ofdefault by the borrower.
 The export proceeds (receivables) under the contract(s)are pledged to the lender.
 The borrower’s export account (escrow account) andother assets with the bank are also pledged to the lender.
(An escrow account is an account under a third party’s
custody or control.) All insurance policies are assigned to the lender withacknowledgement that the lender is the loss payee orbeneficiary.
 A collateral management agreement with an eligible andapproved collateral manager is in place.
 The coffee (stock in trade) is pledged to the lender. Weekly
stock statements are issued by eligible (approved)
warehousing companies under collateral managementagreements, or countersigned by an independent
collateral manager confirming that the quantity andquality are equivalent to or higher than required for tenderagainst the pledged sales contract(s).
 All relevant forwarding and shipping documents, issued
by eligible (approved) transport, warehousing andshipping companies, are assigned to the lender.
 The transaction structure and control over the goods issuch that there are no obvious ‘gaps’ in the transfer of
title documents.

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THE BORROWER’S BALANCE SHEETThe borrower’s balance sheet is important – if it is not soundthen not much else is likely to be sound either. But in any caseinternational trade finance for coffee producers and exporters
is nearly always, if not exclusively, based on realizable
collateral security. Only very large ‘blue chip’ companies canobtain substantial credit lines on the strength of their balance
sheets. At the other end of the borrowing scale are those who
can obtain only fully collateralized credit (sometimes only
against offsetting sales) because there is less balance sheet
security.
Less substantial and smaller firms will usually be subject todetailed day-to-day scrutiny by both banks and collateralmanagers – more substantial or highly secured borrowers
will fall somewhere in-between.

AVAILABILITY AND COST OF CREDIT
The availability of credit depends on a bank’s overall exposure
to a given country (each bank applies a ‘country limit’) or
commodity, and the net collateral value (assets, stocks) an
individual borrower may be able to provide (pledge). The
ratio to pledgeable assets at which banks provide overdraft
facilities varies, but will never be 100%.
Non-pledgeable assets are not considered, and banks alwayscap (set a limit to) their exposure to each individual borrower.
Borrowers must appreciate that while gaining market shareand making margins is important to banks, these are not the
primary considerations when evaluating credit applications.
The cost of credit to a borrower is built up from the regularlending rate to include all the considerations discussed under
trend and trade specific risks. Each consideration adds tothe base lending rate until one arrives at an interest rate at
which both the risk factors and the bank’s profitability areadequately covered. This is why lending rates differ fromcountry to country, and from borrower to borrower.

MONITORING
Monitoring of a borrower’s entire operation is vital to avoid thechance that certain transactions are kept hidden – an ‘audit
trail’ needs to be established. Even so, it can still be difficult
for a bank to determine whether a client is entirely truthful withthem, for example when it comes to forward transactions.
Other than the exchange of contracts, a forward PTBF saleor purchase for completion six months ahead need not
immediately generate visible action or disclosure, and could
therefore be kept secret. Differential volatility has also proved
to be a risk factor in itself. Unless a deal is back-to-back (thedifferential on both the purchase and the sale has been fixed),
the company’s position contains an unknown price risk. Thisis another reason why banks dislike financing unsold stocks.
Similarly, it is not always easy for banks to determine whether
someone is speculating. The world has seen spectacularcollapses of loss-making speculative operations in a numberof commodities and markets, usually because at least someof ‘the book’ was hidden from both top management and thebanks. Loss-making deals were kept secret and were rolled
over until the loss became too high to manage. But there havealso been instances where rogue traders declared insolvency
while keeping profitable transactions hidden. Most banks
will therefore regularly audit the borrower’s procedures andadministration, including retrospectively checking adherence
to position limits and contract disclosure. This may be done
as often as once a month.
Banks also watch for gradual changes in client behaviour.
They will also control as much as possible the use of loan
finance, for example by making payment direct to authorized
suppliers and by using collateral managers. See later in thischapter for a review of collateral management.
In some producing countries local commercial banks
have had bad experiences with lending to agriculture andcommodity trading. Admittedly this has sometimes been due
to government interference. Nevertheless, it has caused somelocal banks to cease such lending altogether, and others
are now extra careful because soft commodity financing isdangerous and requires intimate knowledge of the trade.
The degree to which a bank follows the borrower’s operation
will vary from case to case. It is not unusual for a bank toprice or ‘quantify’ its risk on a particular borrower on a daily
basis. It is important to understand that unsold stocks will bevalued at the purchase price or at market value, whicheveris the lower. Stocks held against forward contracts that are
to be shipped at some later stage, may also be valued on
the same basis because they do not constitute receivables.
This is because if shipment is subsequently frustrated thenit is likely that neither the exporter nor the bank will be able torealize the sales value of the original contract and the goods
may have to be disposed of at the then-ruling market price.
Cumbersome as all this may seem, the bank is a direct
partner in the risk the business entails and as such is entitledto all relevant information. As with buyers, so too with banks:
the early and frank disclosure of unexpected events usuallyleads to solutions being found. Good relationships andoptimal support in banking are based on openness. For
example, if a bank rules out a particular buyer perhaps theexporter should be grateful rather than annoyed, as the real
message being conveyed is ‘watch out.’

RISK MANAGEMENT AND
CREDITRISK MANAGEMENT AS A CREDITCOMPONENT
Banks increasingly insist on risk management as acredit component but, as every trader or exporter knows,
depending on just the futures markets for this can be

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

quite restrictive (specifications, timing and financial
requirements). Using futures does not always fit the bill for
traders or their banks, or simply might not be possible. As
a result, more and more ‘off market’ risk solutions are being
created by the banks themselves, tailored to the individual
client’s requirements. Such individual packages can include
facilities for the automatic financing of margin calls, forexample, when an exporter sells PTBF ‘buyer’s call’ to an
importer or roaster on the bank’s ‘approved list’ and wants
to hedge (sell futures) to protect their base price.
For larger deals and more important clients the maincommodity banks often create risk solution packages inhouse. They do not necessarily offset these against the
futures markets, but rather do so independently ‘over thecounter’, sometimes even in-house. This may also be doneat the request of the importer or roaster rather than theexporter. This can be important for exporters who otherwise
may be unable to trade directly with large roasters who
insist on buying PTBF ‘buyer’s call’. The golden rule is thatthe more the bank is involved in a transaction, for example if
it is financing both the exporter and the receiver, the easier itwill be to have access to tailored credit or risk management
packages. But banks will never provide such facilities fortransactions with unapproved buyers. Should there be adefault the bank’s loss could be double.
Obviously all of this comes at a cost, but at the same timeit enables exporters at origin to compete on a more equal
footing with the international trade. Once they can hedge
their price risk, they will also be able to sell directly toroasters who habitually purchase ‘buyer’s call’.
The audit trail must always be clear and dependable. Much
depends therefore on the quality of the control systems thatare in place, their ability to prevent fraud and whether or not
the fraud risk is insurable.

AVAILABILITY OF CREDIT IS NOT STATICIn recent decades the international banking system has
witnessed a number of serious disruptions and defaults,
the net result of which have been much more stringent risk
assessments for lending, and new rules on the ratio ‘own
capital to lending’ banks must maintain. The higher the risk
factor, the higher the ratio of own capital to such lending will
have to be. Such rules ‘block’ capital, reduce the amount ofavailable credit and increase costs. Despite globalizationand talk of the world as a single marketplace, banks havein general become more selective as to how much, for what
purpose and to whom they will lend in which countries.
Liberalization and deregulation in the 1980s and 1990s
brought huge change in the export marketing of coffee
worldwide: new rules, open markets and different players.
But not all of the new players were creditworthy from aninternational banking perspective, whereas price volatility
has become huge. As a result, from a banker’s perspective

the financing of coffee trading became more risky and lessattractive, i.e. less ‘bankable’.
Add to this some fairly spectacular defaults caused bysudden price changes, over-trading, over-pricing and quality
problems, and it is no surprise that many banks consider
such business to be long on risks and short on margins. As
a result the number of banks willing to lend to commodity
producers and traders has been decreasing rather thanincreasing. But those that remain are more commodityfocused, they see new opportunities and have the expertise
to gather the necessary information. Therefore, they havebetter insight into the actual business. Often such banks
finance the entire chain, from roaster or importer back to theexporter, especially where the buyer actively supports theborrower’s application.
Other initiatives aim to make risk management tools
available to individual growers and smallholder groups as
an integral part of producer credit. Electronic warehousereceipts will likely play a significant role in all this eventually.
In general, though, modern coffee trade financing solutions
are increasingly coming from specialized foreign banksrather than from banks in coffee producing countries.

RISK REMAINS RISKSpecialized commodity trade banks place trade credits
where risk is manageable; that is, where collateral canbe realized and genuine debts can relatively easily berecovered through a reasonably modern and properly
functioning judicial system, and the funds so obtained canbe remitted out of the country.
International trade houses co-exist well enough with all this,but local exporters may be faced with weak internal banking
systems that are unable or unwilling to become substantiallyinvolved. They have to pay higher rates of interest, andthey cannot easily or not at all directly access international
finance. But the large commodity banks cannot easily or
not at all work ‘in the field’ in producing countries either, so
in-country financing requires local solutions. Sometimes
this is achieved by a foreign bank taking a shareholding
in a local bank. Even then, local banks remain first andforemost commercial institutions with specific limits andregulations. They cannot always accommodate modern
risk management solutions, no matter which shareholder orinternational development agency backs them or provides
the funding for specific packages.
It has to be recognized that risk remains risk for the seller andtheir bank until such time as the bank obtains receivables(invoices, with shipping documents) on a pre-approved
foreign buyer. Even if the foreign bank is only involved ‘atdistance’, perhaps by providing credit through a local bankand not directly to the borrower, it will nevertheless evaluate
both the credit risk and the value in the entire transaction.
That is also the case if the deal is ‘fully collateralized’, forexample by warehouse receipts or warrants.

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WAREHOUSE RECEIPTS AS COLLATERALIn most countries a warehouse warrant automaticallyprovides title to the goods, but with warehouse receipts this is
not necessarily the case. National legislation may be unclear
or silent on the enforceability (execution) of rights over theunderlying goods. Although warehouse receipts have been in
existence for centuries, not all country legislation recognizes
them as negotiable documents of title. Even if the common
law framework and trade legislation provide sufficient basis
for using warehouse receipts as negotiable documentsof title, banks and other creditors may still encounterunexpected obstacles when trying to execute a warehousereceipt and take title to the goods. In some countries there willbe ‘reasons’ why a creditor may have title, but cannot enforce
the rights this supposedly confers.
Where rights under a title are obtained, the execution stillneeds to be supported by legislation that will permit thecreditor to trade or export the underlying goods. Does thecreditor need a trade license? An export license? Can thesales proceeds be transferred out of the country? What are
the chances of the execution process being interfered with ordelayed? In some countries the execution of debt presentsbanks with huge problems. No credit risk assessment cantherefore avoid examining the legal and sometimes physicaldifficulties surrounding the execution of the lender’s rights.
The usefulness of warehouse receipts in general is wellestablished, for example as a source of credit for producers
of seasonal crops who may thus avoid having to sell duringseasonal periods of oversupply and therefore low prices.
But for the coffee export industry, warehouse receipts may
represent only part of the answer to the banks’ concerns
about debt security and debt or collateral execution.
Freely negotiable warehouse receipts present a different
potential for fraud, in that the documents themselves may
be stolen or falsely endorsed. Some international collateralmanagers therefore prefer to issue their own, non-negotiable
receipts as part of ‘guaranteed total performance’ packages,
which they back with liability and indemnity insurance.
It could be argued that the real value of such insurance
will emerge only when a real claim (a really huge claim)arises, because insurance cover is only as good as whatis stated in the policy document. One view is that only what
is included is covered; the more attractive alternative viewis that anything that is not specifically excluded is therefore
covered by implication.

WAREHOUSE RECEIPTS – SUMMARY OF
PRE-CONDITIONS
To recapitulate, in the context of coffee export trade finance,
warehouse receipts may generally be considered as valid
collateral if:

 The receipt is issued by an approved entity (public
warehouseman, collateral manager).
 The goods are identifiable, records are maintained, andno commingling is permitted.
 No superior rights (liens) are held over the goods by theissuer (the warehouseman).
 The receipt can be transferred by endorsement or
assignment (it is negotiable), or it is issued in favour ofthe lender.
 The receipt can be used to pledge or sell the underlying
goods.
 Insurance cover against loss or unauthorized release of
the underlying goods is adequate.
 No third party can have superior rights over the underlying
goods.
 Local legislation enables the beneficial holder to enforce
their rights over the underlying goods, that is, the debt
the goods represent can be executed ahead of any
claims that others (for example revenue authorities or
warehousemen) may have.

TRADE CREDITS IN PRODUCINGCOUNTRIESTRADE CREDIT TERMINOLOGY AND
DEFINITIONS Physical coffee – green coffee.
 First hand – coffee sold from/by origin.
 Second hand – coffee subsequently sold on by overseas
traders.
 Long – coffee bought in expectation of later sale.
 Short – coffee sold against expected future purchases
or arrivals.
 Spot – immediately available coffee.
 Forward sales – coffee sold for later shipment, sometimes
months ahead.
 Futures market – trades standard qualities and quantities
of coffee for future delivery at pre-determined ports
during specific months or trading positions.
 Paper trade or paper coffee – trade in futures and othercontracts that are offset against each other, i.e. do not
result in physical delivery of coffee.
 Differential – premium or discount of ‘our coffee’ withrespect to the futures market.
 Outright sale or fixed price sale – the full selling price is
set at the time of sale.
 PTBF – price to be fixed: selling now at a known differential
against the futures market with the futures price being
determined later.

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT Fixing – the action to determine the futures price that,combined with the differential, will become the contract
price for the physical coffee.
 PTBF seller’s call – futures price to be called or fixed by
the seller.
 PTBF buyer’s call – futures price to be called or fixed by
the buyer.
 Price risk or market risk – the risk that the coffee pricegenerally moves against us.
 Basis risk or differential risk – the risk that the differential
moves against us.
 Collateral – underlying security for advances, for example
stocks.

TYPES OF COFFEE TRADE FINANCE
The most common types of coffee trade finance are thepre-financing of coffee to be purchased, advances against
actual stock holdings and the financing of the goods during
processing for export and shipment.

Pre-financing
Processors and exporters engage in pre-financing to secure
future supplies of particular coffees. Bank support for suchdeals depends very much on the track record of the parties
concerned, and whether the buyer has a guaranteed salefor that coffee. It is difficult enough to obtain finance forunsold stocks, let alone for ‘promised’ stocks.
This is one of the strengths of the trade houses thatengage in long-term supply contracts with large roasters.
They usually have a guaranteed outlet for their coffee withlittle performance risk and they are able to raise funds
internationally, often at lower rates than those available in
the producing country itself. But the individual exporter who
deals with importers and smaller roasters will usually findthat this type of buyer is not interested in providing any kindof finance; they may even be looking for credit themselves.

Collection credits and stock advances
The main issues with collection credits and stock advances
are what proportion of the value can be borrowed, what typeand quality of coffee will be collected or bought, at what
prices, and how will the coffee be physically handled. It is
often assumed that borrowing against stocks, or against
coffees for which there is already a sales contract, isrelatively risk free. But although the lender will have a formal
lien over the goods, what if the weight or the quality is
misstated? What if warehouse receipts are issued for nonexistent goods? All exporters should ask themselves andtheir staff these same questions.

Pre-shipment financePre-shipment finance is usually obtained when the readygoods are lodged for shipment (as pre-shipment finance)or when shipment has been made and the documents
become available (as negotiation of documents). The term‘negotiation of documents’ is often misunderstood – thebank merely makes an advance of all or part of the invoicevalue against receipt of the shipping documents, which itthen presents to the buyer for payment. If the buyer does
not pay, the bank has automatic recourse to the exporter
because although it ‘negotiated’ the documents, it did
not take over the non-performance risk, that is, the riskthat the buyer would not pay. Letters of credit (see later inthis chapter) are an option, but not all buyers are willing toestablish them.

TRADE CREDIT AND
ASSOCIATED RISKS
All the risks mentioned in other parts of this chapter arepresent. How do we know that the goods are what they aresaid to be? When a bill of lading simply reads ‘received one
container said to contain (STC) 20 tons of green coffee,
shipper’s stow and count’, where does that leave everyone?
All forms of credit expose the lender to five types of risk:
 Physical risk: the goods are simply not there, or are
somehow lost.
 Price risk or market risk: the market price falls and the loss
cannot be recovered, or the quality is not up to standard
and so the value of the goods is less than expected, also
called value risk.
 Differential risk or basis risk: The domestic price of coffee
does not move in tandem with international prices
 Currency risk: Fluctuating domestic currency rates may
cause losses, for example when the domestic currency
strengthens against the currency of sale.
 Performance risk: the foreign buyer does not buy thegoods, reneges on the contract or is declared insolvent.

PHYSICAL RISKWhen funds are advanced against stock in trade, the goods
so financed are usually pledged to the lender as guaranteeof repayment: they become the security or collateral.
Banks do this by taking out a general lien over stocks andcollectables (outstanding invoices) through which beneficial
ownership rests with the bank until all outstanding advances
have been refunded in full.
In long-established relationships banks may be satisfied
with this. They may leave the management and physicalcontrol of the goods to the borrower, especially if general

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international guarantees are in place, for example from a
trade house’s parent company.
But for smaller operators, and certainly those in new or
relatively recent relationships, the banks will want to besatisfied that checks and balances are in place. Thesechecks could include having the goods stored by public
warehousing companies that issue warrants or warehousereceipts in the bank’s name or hand warrants to the bank‘endorsed in blank’ which permits the bank to freely transfer
or assume title. The bank’s lien will extend to the proceedsof any insurance claim that may arise, since all the goods
must be insured with an agreed insurer, on conditions
acceptable to the bank. Even so, banks may still demand
additional security guarantees

PRICE RISK OR MARKET RISKIn this context, price risk is the risk that the market as awhole (the price risk), or the differential (the differential orbasis risk), will change to the borrower’s disadvantage.
Remember that banks do not normally encourage or financespeculation. Whether a bank will permit a client to holdstocks without hedging them depends on the relationshipand the guarantees that the borrower may have provided.
Unless the goods have been bought to fulfil a fixed pricecontract, it is likely that the bank will insist on the regularhedging of the price risk on all stocks. In a general sense,
smaller exporters especially should understand that banks
are risk averse and do not like to finance speculativetransactions. That is, they do not really approve of ‘open’
positions. Only the price risk can be hedged. The differential
risk cannot be hedged.

NB: Usually (but not always) differentials tend to be lower
when futures prices are high, and higher when futures arelow.
A differential of ‘plus 10’ on arabica when the ‘C’ contract is
at 100 cts/lb may change to ‘even money’ in the producing
country when the ‘C’ for example goes to 150 cts/lb. Thisis favourable for exporters who need to buy physicals
against a PTBF sale because when they fix the purchasethe physicals will only cost ‘even money’.
A differential of ‘minus 30’ on robusta when LIFFE is at
US$ 1,700/ton may perhaps change to ‘even money’ in the
producing country when London goes to US$ 1,500/ton.
This is unfavourable for exporters who need to buy physicals
against a PTBF sale because when they fix the purchasethe physicals will cost ‘even money’ against an open saleof ‘minus 30’. Differentials in producing countries may also
buck the general market trend, for example because ofdrought or other production problems.

CURRENCY RISKWhen advances in United States dollars are immediately
turned into coffee stocks that will later also be sold in UnitedStates dollars, then the currency risk can be consideredlimited and to be mostly of local concern. However, in thepast decade changing international capital flows have led
to increased volatility between currencies. Coffee is still a‘dollar commodity’, but nowadays coffee prices worldwide
are determined not only by supply and demand, but also by
the relative value of the United Sates dollar to other world
currencies. Major movements in exchange rates, especiallyfor the Brazilian real or the Colombian peso, but also in othercoffee producing countries, will affect the price of coffee. In
some instances such price or currency changes could put
original United States dollar advances at risk.

DIFFERENTIAL RISK OR BASIS RISK
Banks are well aware that the differential risk can besubstantial, especially for those trading single origin coffee,
but also that it is difficult for banks to have insight into the way
differentials move is and that as yet there is no immediately
obvious solution for this. They therefore mostly depend on
the borrower’s track record and judgement, especially whencoffee is bought against offsetting fixed price sales.
But where purchases are made against an open pricesales contract (a PTBF contract that specifies only aselling differential) then the buying differential will only
be determined when the physical coffee is bought and‘fixed’. If the market differential for that type of coffee has
substantially changed since the sale was made, then the
difference between the hedge price and the buying price ofthe physicals may be substantially different as well, which
could cause the transaction to be unprofitable.

PERFORMANCE RISK
The first line of defence against performance risk is acorrectly structured transaction. Further safeguards can thenbe put in place through the use of collateral management,
beginning at the point of purchase and ending with thehanding over of shipping documents. On the selling side
this is more difficult, as it is impossible to know the financial
status and health of all potential importers or roasters.
This is why banks will insist that trade is only with ‘authorizedbuyers’ – companies that are known and in which they haveconfidence. In addition the bank may require that a sales
contract is in place before any monies are advanced to buy
stocks. In that case selling PTBF facilitates matters. The
contractual obligation to supply and accept the goods canbe established without the buyer being committed to an
actual price long in advance of the actual shipment: only

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

the differential has to be agreed. (Many, if not most, roasters
insist on buying ‘PTBF buyer’s call’.)This resolves the performance issue, but still leaves open
the questions of price and differential risk. As a general rule,most banks dislike advancing the entire cost of a purchase,often preferring to stick to a percentage of the value, say
80%. This provides reasonable cover against a worst casescenario. The percentage will vary according to the risk
rating of the country where the borrower conducts theirbusiness, and the bank’s assessment of the borrower.

COMMON ERRORS ANDMISCONCEPTIONS The internal control and reporting systems are inadequate.
 Transactions work when everyone wishes it – suddenchange (weather, prices, buyer turns ‘nasty’ and politics)
can alter this and result in ‘blameless’ default.
 It does not really help a bank to become the owner ofthe borrower’s stocks. If these have to be sold off at aloss (10%–20% is not unusual) it may take years of newlending to recoup the money lost.
 The local legal system may make the realization ofcollateral or debt recovery difficult. If so, local collateralin whatever form, including warehouse receipts, may be(almost) without value.

LETTERS OF CREDIT Borrowers are not frank enough. If the bank feels it is
not receiving all information, it will wonder why. In any
case, banks do not want uncertainty – they want control.
Shared knowledge is also beneficial to both parties andenables the bank to be proactive.
 Applications that are not based on adequate ‘homework’,
result in a poor first impression or outright rejection.
 Borrowers do not realize how important it is to have quality
independently audited financial statements (‘financials’),delivered by reputable auditors.

Letters of credit can serve a dual purpose: A guarantee of payment once shipment has been made,to reduce the exporter’s credit risk; A means of advancing credit to an exporter, enabling
goods to be bought and shipped.
In the first instance the exporter is paid against submissionof the complete and correct set of shipping documents
as stipulated in the letter of credit (L/C): the documentary

Table 10.3 What a borrower must show
Advances at
each stage

Borrower must show

Ratio and cost ofadvance

Conditions

Financing of margin
calls

1. Document
negotiation

Real function, i.e. adds value.
Track record. (Defaults aremost likely to occur in thefirst three to five years of new
operations.)
Quality management.
Understanding of the coffeebusiness.
Deals are correctly structured.

Ratio orpercentage ofadvance: highest.
Interest rate:
lowest.

Sold to approved
buyer.
Documents and/or
payment via bank.

Exposure has been
hedged, or PTBF
sale has been ‘fixed’.

2. Pre-shipment

Appropriate business plan andreporting systems.
In-house financial and volume
limits.
Clear document flows, proper
stock rotation.

Ratio: lower.
Cost: higher.

Pre-sold toapproved buyer orhedged.
Collateral manager.

Depending on
package andborrower’s ‘book’.

3. Export
processing

Own capital.
Visible, permanent andpledgeable assets.

Ratio: lower again.
Cost: higher
again.

Pre-sold toapproved buyer orhedged.
Collateral manager.

Depending on
package andborrower’s ‘book’.

4. Interior buying

Adequate warehousing andinsurance.
Access to collateralmanagement.

Ratio: lowest or
even nil.
Cost: highest.

Pre-sold toapproved buyer orhedged.
Collateral manager.

Depending on
package andborrower’s ‘book’.

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credit. This is a guarantee of payment once shipment has
been made. It is not a specifically designed instrument toenable one to raise credit, although occasionally banks may
accept documentary credits as a form of collateral.
Documentary credits include: Sight letter of credit: payable on first sight (presentation)of the documents to the bank.
 Usance or time letter of credit: payable after a certain
period has elapsed.
 In addition there is the performance credit or bid letter ofcredit, whose value is forfeited if the party concerned fails
to perform (i.e. does not deliver, or does not establish
the requisite documentary letter of credit). These aresometimes used for large, long-term supply contracts
or in conjunction with tenders (a form of bid bond). For
more on using documentary letters of credit see also
chapter 4, Contracts.

ADVANCE CREDIT – THREE TYPES
Here the letter of credit becomes a means of raising credit.
The buyer or (more likely) a bank agrees to release funds
whenever an agreed set of circumstances arises and certain
pre-conditions are met. In this category there are three maintypes of letters of credit.

Red clause letter of credit
This type of L/C is a combination of documentary and open
credit in that it provides unsecured credit to an exporter
against an agreed transaction. The issuing bank agrees toadvance part of the estimated sales proceeds of the coffee
to be shipped, without tender of the shipping documents.
The balance is then paid once the shipping documents
are presented. If a ‘green clause’ (see below) is included
as well then the exporter can obtain additional advances
upon submission of warehouse receipts as collateral. The
issuing bank will issue strict directions to the correspondentbank in the exporter’s country as to how, when, by whomand under what circumstances funds may be drawn. (Thecorrespondent bank is a bank with which the issuing bankhas an established relationship.)A red clause letter of credit allows an exporter to obtain preshipment finance, although the amount of available credit
is usually only part of the estimated value or even the sales
value. This is one way for buyers to expand their sourcesof supply. Most buyers are reluctant to become involved
in financing goods that have not yet been shipped, but
exporter and buyer may be linked together through a normal
contract with the trade bank establishing the red clause L/Cagainst a registered contract with an approved buyer.

Advance letter of credit
This is similar to the red clause L/C, but it limits the amountthat can be drawn without presentation of documents to apercentage of the invoice value and requires the exporterto present an original set of bills of lading before a specificdate. Again, inclusion of a ‘green clause’ can extend theavailability of credit through presentation of warehousereceipts as collateral.
Both red clause and advance letters of credit are used
when local financing is not available or is available only at
excessively high rates of interest. From the point of view of
the trade bank or the buyer, the credit provided is unsecured.

Green clause letter of credit
This is a normal documentary letter of credit, which provides
a secured form of credit in that exporters can draw anagreed percentage of the value of the goods to be shippedagainst presentation of warehouse receipts as collateral.
Such receipts will be issued by an authorized party (public
warehousing company, bonded warehouse, collateralmanager), and issued or endorsed in favour of the bank inquestion. Proof of adequate insurance cover, with the bankas beneficiary, may also have to be submitted.
This type of credit can provide an exporter with working
capital during the buying season and while export
processing takes place. The credit will be revolving, in thesense that it must be self-liquidating with export proceeds
offsetting the relevant outstanding advances in the orderthese were incurred. At the end of the season or otheragreed period all outstanding advances are liquidated
when the last shipment takes place. The advantage is thatthe lender (bank or buyer) has some control over the goods.
Depending on their assessment of the exporter’s reliability,
the lender may decide to appoint someone to supervise
the stocks on their behalf. This supervision is usually called
collateral management. This is discussed in detail under‘Warehouse receipts as collateral’ earlier in this chapter, andbelow.

UNIFORM CUSTOM AND PRACTICE FOR
DOCUMENTARY CREDITS – UCP 600
Terms and conditions governing the issuance and execution
by banks of letters of credit are laid down in what is known as
the Uniform Custom and Practice for Documentary Credits,issued by the International Chamber of Commerce. Mattersof particular interest to the commodity trade include thebasic responsibilities of banks when examining documents
tendered for payment under letters of credit governed by
the Uniform Customs and Practice – UCP 600, and therequirements pertaining to different types of documents that
may be tendered under letters of credit. However, UCP 600
only applies when the text of the credit expressly indicatesthat it is subject to these rules.

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

For a buyer to be under an obligation to open a letter ofcredit governed by the UCP 600, the sales contract needs toinclude an express condition imposing such an obligation on
the buyer. Only with such a condition in place can the seller
object if the buyer were to open a letter of credit that is notgoverned by the UCP, e.g. ‘Payment by irrevocable letter ofcredit, incorporating UCP 600’. However, buyers may still
stipulate in the credit that certain aspects of the UCP rules are
excluded, provided this was laid down in the sales contract.

 Lending bank is named as loss payee (beneficiary).

The major advantage of incorporating UCP 600 in thesales contract for a seller is that where the UCP 600 rules
are incorporated, he or she will know in advance the criteria
against which the banks will examine the shipping documents
in deciding whether or not to pay under the credit. The majoradvantage for a buyer is that he or she will know in advancethe criteria against which the price for the goods will be paid
against tender of documents.

 Bags received are counted.

For a more detailed overview of UCP 600, see chapter 4,
Contracts.

ALL-IN COLLATERALMANAGEMENT

 Premiums are paid up to date.
 Premises and goods are adequately described.
Verification of premises: The premises are secure, safe and fit for storage.
Tally-in and weighing: Bags are weighed and stacked.
Verification of quality: The goods are what they are supposed to be.
 Goods can be monitored from farm gate to ship’s hold.
Issue or certification of warehouse receipts:
 Certifying receipt of the goods.
 Providing proof of existence, which is collateral for
funding.
Stock administration and control: Goods are properly accounted for.
 Goods cannot be dispatched independently.

FUNCTIONS OF THE COLLATERALMANAGERThe collateral manager (CM) is an independent operator who‘manages’ the collateral (the stocks) for a fee on the bank’s
behalf. The action that triggers the release of bank funds
usually determines the stage at which the collateral manager
enters the process. Depending on circumstances this may
entail CM personnel supervising or managing the borrower’s
premises, or the storage of goods at public warehouses
owned and managed by the CM. Usually the CM is engaged
by the borrower and the bank jointly, with the fees paid by theborrower.
To have true value for the banks the CM’s obligations haveto be guaranteed as well. This is usually done throughappropriate liability and indemnity insurance, acceptable tothe bank.
Today’s collateral managers offer a host of services,
described below:
Verification of funding: The funds are applied to the agreed purpose.
 The timing and level of advances applied for is as agreed
or is realistic.
 The purchase price is as agreed or is realistic.
Verification of borrower’s and warehouseman’s insurance
arrangements:
 Quality and scope of cover are acceptable.

 Goods are stored separately, they can be readily
identified and no commingling is permitted at any time.
Export process: Supervision of export processing; quality control; goods
match the sales contract.
 Goods are handed over against approved waybills,
receipts or bills of lading.
 Waybills, receipts and bills of lading stipulate the bankas beneficial owner and are handled and dispatchedcorrectly.
The stage at which the CM leaves the process depends on
the bank. The bank’s back office will have monitored theentire process and the CM’s role often ends when the goods
are handed over for shipment with the bank assuming title
through the issue of bills of lading in the bank’s name rather
than the exporter’s.

MODERN COLLATERAL MANAGEMENT
FACILITATES CREDIT
Collateral management in coffee producing countries is alogical extension of the traditional ‘supervision’ businessof independent verifiers and sworn weighers. Where
previously such companies certified that goods loaded on
ships were of the prescribed quality and weight, they now
begin the verification process at the very first point in thecollection marketing chain. Modern collateral management
increasingly means that a single company coordinates all thelogistics, guarantees the integrity of the physical circuit, and

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provides security over the export documentation process,thus eliminating all unsecured gaps. In other words, they
are in the business of ‘moving collateral’. As such they canplay an essential role in the financing of coffee traders andprocessors or exporters, especially where the same bank isfinancing both the end-user and the exporter.
Some international CMs provide complete packages, linking
customers with lending institutions on the strength of the CM’s
performance guarantee, based on standard packages andprocedures which they apply worldwide. Should the coffee
trade in future move into paperless trade with electronic
documents of title and so on, then the role of the CM will takeon more importance.

GUARANTEES
Banks need the guarantee that warehouse receipts will
become receivables, that is, commercial invoices backed bynegotiable bills of lading or other relevant documents of title
to the goods. All the gaps and risks in the process from thefirst purchase to this point need to be quantified and covered.
For CMs the risk is enormous. Cases of quality fraud, physicaltheft and document falsification do occur.
Therefore, if their guarantees are to be truly solid thenthey need to be backed by fidelity (indemnity) and liability
insurance of a quality and level that is acceptable to banks. To
be readily enforceable, the insurance policy, and if possible
the underlying collateral management contract, must be
based on an acceptable jurisdiction, for example English law.
If a CM’s overseas parent company provides the guarantees,
then it could be said that the collateral manager takes at least
part of the country risk on board. This makes it easier forbanks to approve certain lending operations, especially when
the total credit and risk management package encompasses
both the end-user and the producer or exporter.
Coupled with the ‘total’ credit and risk management
packages offered by commodity banks, modern ‘all in’collateral management has become an essential componentof credit. The increased collateral and transaction security
it offers facilitates access to credit, and can help to bringsmaller producers and exporters closer to buyers and endusers in consuming countries.

The risk principles are the same, although the detail may bedifferent.
 Performance: Will the crop be delivered as agreed?
 Price: Will the value cover the outstanding credit?
 Value: Will the quality be acceptable and fit for sale?
 Collateral: Can any collateral be provided, and if it is, canit be realized?
Obviously it is difficult, if not entirely impossible, for the
average commercial bank to evaluate performance risk, letalone potential quality and value, on an individual basis forthousands of smallholders.

PROVIDING COLLATERAL CAN PROVE
DIFFICULT FOR SMALLHOLDERS
Land is nearly always unsuitable as collateral. Even though
for most smallholders it may be their only form of visible
asset, in many countries such land is often held throughtraditional ownership structures that make the realization(the sale in debt execution) of the collateral impossible.
Even where rural agricultural land is held under title deed,
communal and political pressure may make its sale
impossible, so smallholder-owned land is often if not mostly
unsuitable as collateral.
Crops on the tree are also not meaningful as collateral until
they become goods entered into store against warehousereceipts. That is, credit will be advanced only once theharvest is stored. This is a most suitable arrangement forcrops that might otherwise have to be sold quickly to raisecash during seasonal periods of oversupply and consequent
low prices, but it is not necessarily right for coffee.
Even so, coffee is usually best marketed when it is still
fresh (new crop). Prolonged storage, (beyond the usual
marketing season), or retention for speculative purposes is
not recommended.
The most likely credit channels for smallholders are therefore
well run cooperatives or other forms of grower organizations,such as farmer groups that have the required critical mass andare in a position to guarantee and discipline their members.
Credit to such organizations will then largely be based on thesame principles discussed earlier in this section.

TRADE CREDIT AND RISK –SMALLHOLDERS

However, the search for alternative credit options has
produced some interesting initiatives of which two are
mentioned here by way of example. Both place a strongemphasis on development and sustainability issues.

CREDIT CHANNELS IN THE SMALLHOLDERSECTOR

Financial Alliance for Sustainable Trade

Commercial credit for smallholders is linked to risk in muchthe same way as it is for commercial growers and exporters.

The Financial Alliance for Sustainable Trade, FAST, www.
fastinternational.org is a member-driven, not-for-profit
international organization. Its membership represents small
and medium-sized enterprise (SME) producer organizations,CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

commercial and socially oriented lenders, development
focused NGOs, and other sustainable trade players. FAST’smembers are committed to promoting sustainable production
and trade within their respective capacities.
FAST’s mission is to facilitate a global collaborative effort
among its members to ensure continued growth of thesustainable trade sector. This is done through increasing
the number of producers in developing countries who can
successfully access affordable trade finance and longerterm loans for infrastructure, tailored to their business needs
as they enter sustainable markets and grow their businesses.
SME’s often face the problem that they are too small tobenefit from infrastructural finance programmes and at thesame time they are too big to qualify for micro-financing.
This is where FAST comes in. See www.fastinternational.org/
en/node/733 where a substantial number of resources isavailable.
FAST also requires detailed information from potential
borrowers such as: overview of the SME, amount required,certification, credit history, production and sales; businessplan, organizational chart and financial statements (balance
sheet and income statement for three years – cash flow
projection for one year). See www.fastinternational.org/en/
node/681

Sustainable Agriculture Guarantee FundThis revolving fund – often just called Agri Fund – offers
partial credit guarantees by way of stand-by letters of credit
as risk mitigating instruments to financial intermediaries
in South America, Africa and Asia. Agri Fund was initiatedby Rabobank International in response to a call from theDutch Government for ideas for public-private partnerships(PPP) that would contribute to improved access to financial
services and commodity export markets for growers indeveloping countries.
The Agri Fund aims to enhance access to local financial
services by agricultural cooperatives (or companies buying
from small producers). This enables them to purchase,process and trade agricultural commodities in theinternational market on commercial and sustainable terms.
Additionally, Agri Fund is committed to contributing towards
achieving sustainable changes in the approach of local
banks in emerging economies towards such cooperatives
or companies through offering such banks adequate
financial instruments.
The initiative has some unique characteristics, the mostimportant of which is that finance is provided for productionand export against sales contracts with pre-approved
international buyers. Contracts can be basis Fixed Price orPrice To Be Fixed (see chapter 9, Hedging ), and usually arefor execution within the same coffee campaign, i.e. from two
to four months ahead of shipment. Other lenders often ask
for additional security in the form of fixed assets, which thenmakes it impossible for borrowers to use these fixed assets
as security for their long-term financial needs.

Agri Fund obtains security by using sales contracts withpre-approved buyers as collateral, leaving the borrower’s
fixed assets free to be used as collateral for other financing
requirements. Agri Fund will issue (partial) credit guarantees
and provide other financial products as a risk-mitigating
instrument in favour of local financial intermediaries. This inturn allows these intermediaries to offer commercial financefor the production and export of agricultural produce atbetter pricing and conditions than would be possible
without such risk mitigating instruments. Fundamental isthat the risk mitigating instrument will be decreased on a
step-by-step basis, phasing out during a period of three
to four years. This means that the financial intermediary is
expected to increase its share in the risk (phasing in), but
in such a way that the conditions for the borrower will not
deteriorate.
Go to www.rabobank.com/guaranteefund for more
information and download the SAGF brochure from there or
directly at www.rabobank.com/content/images/G5334%20
RI_MVO_fund-LR_tcm43-50951.pdf.

RISK MANAGEMENT AND SMALLHOLDERS
Access to risk management solutions for small growers
would not only facilitate access to credit, but would also
reduce their exposure to price volatility. This in turn would
also help them to plan ahead.
Of all coffee producing countries only Brazil has been able
to establish a successful internal futures market for coffee,
the Brazilian Mercantile and Futures Exchange. Growers inall other producing countries must look abroad, directly or
indirectly, if they wish to make use of futures markets. See
chapter 8, Futures markets, for details.
In many countries small growers and smallholders aremostly locked out of risk management markets anyway, forreasons that include a lack of knowledge, high costs andinappropriate contract sizes.
As for gaining access to credit, potential solutions include
the aggregation of production and financial capacity
through the establishment of cooperatives or other forms
of producer groupings. Such groups can then decide
how they approach price risk management: simply as aninsurance that they purchase, or as part of the marketing
process. Unfortunately it cannot be ignored that in a numberof countries the performance record of cooperatives has notalways been impressive.
But even so, the most likely credit channels for smallholders
remain well-run cooperatives or other forms of grower
organizations that have the required critical mass, and thatare in a position to guarantee and discipline their members.
But without some limitation of the price risk, without someform of management of the price risk, access to affordable
credit will still remain a distant objective.

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PRICE RISK MANAGEMENT AS PURE
INSURANCE
Price risk management as pure insurance means there isno direct link between the insurance of the price risk and themarketing of the coffee.
Straight hedging by selling futures exposes the seller tomargin calls, bringing with it the risk of potential hedge
liquidity traps. Whether any lending institution or risk
solution provider will finance such an operation without firm
guarantees and collateral is doubtful. Indeed, the notion
will be a non-starter for most, small growers and solution
providers alike.
Buying put options, the right to sell futures at a stated priceat some point in the future, is much simpler than hedging.
The cost that needs to be financed is known up front, andno margin calls need to be faced. The premium will dependon circumstances, but can at times be very substantial.
Even so, it may be easier to raise finance for this than forstraight hedging. As always, the provider will still need to bereassured about how the cost of the option will eventually
be recouped.
Tailored solutions. Risk solution providers tailor risk
instruments to clients’ requirements. For example, options
can be graduated to extend over the usual marketing
season by spreading equal portions over two or three futures
trading positions, if so wished, at different strike prices.
Each individual portion can then be exercised individually.
Alternatively the solution provider may simply guarantee
a minimum price. Against payment of a premium, they
undertake to make good any shortfall between the insured
price (the minimum price the growers wish to secure) andthe price ruling for the stated trading positions in New Yorkor London, either at a given date or based on the average
price over a number of trading days. The producer has
bought a ‘floor’ – the guaranteed price less the cost of
the premium. (Consumers would buy a ‘cap’ to protect
themselves against future price rises.)
Swap agreements. Producers can also ‘swap’ price risk by
giving up the benefits from future price rises in exchange
for a guaranteed minimum price. Swap agreements could
also cover more than one crop year, with tonnages andsettlement dates set for each quarter.
The concept is nothing new, and has been extensively used
to limit exposure to currency and interest rate fluctuations.
Innumerable variables are possible, making it impossible toprovide a standard model.
Note: Solution providers and commodity trade banks can
put together different risk mitigation instruments, but only
for parties with the required critical mass, who are organized
and who can find and afford the finance necessary to buy
the price insurance they require.

Note also that the World Bank offers price risk management
training courses, both on CD-ROM and in workshop
settings. Visit www.agrisktraining.org for more on this.

PRICE RISK MANAGEMENT AS PART OF
MARKETING
Forward sales of physical coffee at a fixed price are themost straightforward form of price risk management as partof marketing. The size of the expected crop is reasonably
well known, prices are satisfactory, and buyers have enoughconfidence in the seller to commit to them on a forwardbasis. This is perhaps the ideal situation, but it is seldom
encountered nowadays. And when prices are very low, fixedprice forward contracts look attractive only to the buyer.
Selling physicals forward ‘PTBF buyer’s call’ means growers
lose all control over the fixation level, and therefore theprice, unless they simultaneously also sell a corresponding
amount of futures. But this would expose them to margin
calls and potential liquidity problems, assuming they could
even find the funds to finance the initial deposits. For more
on options, see chapter 9, Hedging.
Selling physicals forward ‘PTBF seller’s call’ might appear
to be the answer but this is not necessarily so either. Unlessthe seller fixes immediately, all such deals establish is acontractual obligation to deliver and accept physical coffee.
The PTBF sale sets the differential the buyer will pay inrelation to the underlying futures position(s), but the generalprice risk and the decision when to fix remain entirely open.
In other words, the PTBF sale does not mean the seller has
made a price decision – that will only be the case once they
fix. Many sellers are unable to bring themselves to fix at
unattractive levels, and in falling markets a good number
even roll fixations from one futures position to the next,
preferring to pay the cost (usually the difference in pricebetween the two positions) to gain more time in the hope thatprices will eventually rise. This does not happen only when
prices are generally low. In a falling market it is sometimes
very difficult for sellers to accept that today they must fix at
less than they could have done yesterday or the day before.
To avoid such fixation traps one should set internal ‘stops’
so that fixing takes place automatically when a certain price(up or down) is reached. Such orders to fix can be given to
whoever is responsible for the actual execution, basis GTCor ‘good till cancelled’.
Note: When fixed price sales are not feasible the simple
alternative is to sell PTBF and to fix immediately, thereby
fixing both the base price and the differential which, together,make up the final sales price. If there are concerns about‘fixing too early’ or ‘what if the market goes up’, then one
also buys a call option accepting that the cost comes out of
the sales price for the physicals.

CHAPTER 10 – RISK AND THE RELATION TO TRADE CREDIT

MICROFINANCE
Microfinance is of particular importance to many smallholders
in the coffee industry. Most of the world’s coffee is producedby smallholders, but they often lack access to reasonably
priced credit, particularly women coffee growers. (NB: thedefinition of smallholder varies from country to country.)
Many institutions today provide micro financing such ascommercial banks, micro deposit taking institutions, NGO’sand ‘NGO-like microfinance institutions’. However, theseare generally slanted towards the more urban areas and thefinancing of commercial activities. Cooperatives and ‘village
banks’ as well as self-help groups usually have a greaterrural outreach, but often their means and institutional
capacities to finance the coffee sector are quite limited, notleast also because of the remoteness of the areas many
operate in.
A detailed review of microfinance is beyond the scope of thisguide, but the following websites provide a good overview
of on-line information sources, including downloadable
training materials and links (not inclusive) to some of thebetter-known microfinance institutions.

General industry information, also
providing links to individual websites
The Consultative Group to Assist the Poor (CGAP), www.
cgap.org is a policy and research centre dedicated toadvancing financial access to the world’s poor. It is housed
at the World Bank and supported by over 30 development
agencies and private foundations.
The Microfinance Information Exchange (MIX), www.
mixmarket.org, founded by CGAP, is the leading businessinformation provider dedicated to strengthening the
microfinance sector.
The Microfinance Gateway, www.microfinancegateway.org,
also a product of CGAP, features research and publications,organization and consultant profiles and lists a very large
number of microfinance institutions and their contact details.
MicroCapital publishes The MicroCapital Monitor, www.
microcapital.org, and offers specialized news andinformation on international microfinance.
The Social Performance Task Force (SPTF), www.sptf.info,
provides links and overviews of social performance tools,
including tools specific to MFIs.
Planet Rating, www.planetrating.com, is a specialized
microfinance ratings agency. It gives a comprehensive
performance and risk analysis profile of microfinanceinstitutions (MFIs) and also evaluates funds that invest in
microfinance (microfinance investment vehicles or MIVs).

MicroRate, www.microrate.com, was the first agency to
specialize in the evaluation of microfinance institutions thatallows lenders and investors to measure the risk and thereturn on investment in microfinance.
MFTransparency,
www.mftransparency.org,
presents
information on credit products and their prices for a numberof MFIs and publishes country reports.

Training guides and best-practice resources
The Rural Finance Learning Center, www.ruralfinance.org,
managed by the Food and Agricultural Organization, offers
downloadable training materials for capacity building in thefield of rural finance.
The Rural Finance Network, www.ruralfinancenetwork.org,
hosts a virtual library of studies and training material in ruralfinance specific to eastern and southern Africa.
Women’s World Banking (WWB), www.swwb.org, a networkof 40 microfinance institutions and banks in 28 countries
worldwide, hosts a virtual library of publications and casestudies.
CERISE, www.cerise-microfinance.org, a network on bestpractices in microfinance, offers downloadable guides onrural microfinance for value chain development.
The Small Enterprise Education and Promotion (SEEP)
Network, www.seepnetwork.org, offers downloadable
microenterprise training materials also specifically for
microfinance.
MicroLINKS (Microenterprise Learning Information andKnowledge Sharing), www.microlinks.org, a service of the
USAID microenterprise development programme, offers
downloadable training materials for the development offinancial services, including value-chain finance.
The Microfinance Management Institute (MFMI), www.
themfmi.org, a US-based NGO, offers downloadable
training material for MFIs capacity building.
The Global Development Research Center (GDRC), www.
gdrc.org, hosts a virtual library on microfinance news andcase studies.

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COFFEE QUALITYTWO SPECIES AND TWO PROCESSING METHODS .................................................................................... 188
QUALITY SEGMENTATION – FOUR CATEGORIES ........................................................................................ 190
QUALITY AND PRODUCTION ........................................................................................................................... 191
HIGH QUALITY ARABICA .................................................................................................................................. 192
ROBUSTA ............................................................................................................................................................. 203

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COFFEE QUALITYTWO SPECIES AND TWO
PROCESSING METHODS
Coffee (Coffea) is the major genus of the Rubiaceae family,
which includes well over 500 genera and over 6,000 species.
The genus Coffea itself comprises numerous species. Only
two of them are currently of real economic importance: Coffea arabica, referred to in the trade as arabica andaccounting for 60%-70% of world productio; Coffea canephora (or coffea robusta) called robusta inthe trade and making up 30%-40% of world production.
Two other species are traded to a very limited extent: Coffea
liberica (liberica), and coffea excelsa (excelsa).
The share of arabica fell from about 80% of world productionin the 1960s to around 60% by the turn of the century. Initiallythis was because of strong growth of robusta productionin Brazil and parts of Africa, but more recently becauseof the emergence of Asia as the world’s leading robusta
producing region.
The original arabica strains generally produce good liquors
with acidity and flavour, but they are susceptible to pests
and diseases. This has led to the development of a numberof different varieties that show better tolerance. Some quality
purists consider that some of these varieties lack the quality
characteristics that created coffee’s popularity. Othersargue that the bottom line for many producers simply does
not permit them to concentrate on just the traditional or
original varieties.
There are two main primary processing methods: theunwashed or dry process, which produces naturals, and thewashed or wet process, which produces washed coffees. In
the dry process the ripe cherries are dried in their entirety
after which they are mechanically decorticated to produce
the green bean. In the washed or wet process the ripecherries are pulped and fermented to remove the sticky
sugary coating called mucilage that adheres to the beans(this can also be done mechanically), and the beans arethen washed and dried.
There is a third process in which the ripe cherry is pulped
and dried ‘as is’ with the mucilage still adhering to theparchment skin. Originally called semi-washed in Africa, thisprocess is gaining considerable importance in Brazil where
it occupies a place in-between the dry and wet processes
and is simply called ‘pulped natural’. In other countries, forexample in the Great Lakes region of Central Africa, semiwashed coffee has been laboriously produced for many
decades using small hand pulpers.

In all procedures the parchment skin is later removed
mechanically after drying.

THE DEFINITION OF QUALITY
There are many differing views as to what constitutes ‘quality’.
But it can be said that the quality of a parcel of coffee comesfrom a combination of the botanical variety, topographicalconditions, weather conditions, and the care taken during
growing, harvesting, storage, export preparation and transport.
Botanical variety and topographical conditions are constants
and therefore dominate the basic or inherent character ofa coffee. Weather conditions are variable and cannot be
influenced, resulting in fluctuating quality from one season
to another.
Growing, harvesting, storage, export preparation andtransport are variables that can be influenced. They involve
intervention by human beings, whose motivation is a key
factor in the determination of the end quality of a parcelof green coffee. Depending on their marketing priorities
people’s efforts will fluctuate between the highest possiblelevel, regardless of the cost, and the bare minimum, inorder to reduce costs and optimize revenues and margins.
Efforts to promote quality are prejudiced by world market
prices and the degree to which buyers are willing to reward
attention to the safeguarding and improvement of quality
with adequate premiums for better than average quality.
NB: The following sections are targeted mainly at assistingsmaller operators, growers and exporters alike, to makeheadway in the development of coffee quality (andmarketability). It therefore deals mostly with arabica quality
as it relates to the quality expectations in the exemplary andmedium quality segments of the market. Mainstream type
coffees and robustas are dealt with separately, although thediscussion on ‘quality’ is relevant to all those producing andexporting coffee. Quality requirements for exemplary typeor fine robustas, and for those used in espresso, are largely
comparable to those for arabica and just as stringent.

QUALITY AND AVAILABILITY DETERMINETHE TARGET MARKETThe trouble with the pursuit of quality is not just that the term
itself is a somewhat nebulous concept. First of all, the vastbulk of world coffee exports consists of medium to average
quality coffee: mainstream coffee. Secondly, the extra
effort to produce top quality may not always be adequately
rewarded and, thirdly, there is also a lively and substantial
world trade in coffee of poor and inferior quality.

CHAPTER 11 – COFFEE QUALITY

PROCESSING: SCHEMATIC OVERVIEW
Figure 11.1 Processing of coffee cherries and green coffee beans

WET PROCESS
Delivers washed coffee

DRY PROCESS
Delivers natural coffee or ‘naturals’Greens etc. to sun drying

Cherry reception/sorting

Rubbish to waste

Cherry reception/sorting

Floaters to sun drying

Flotation – wet feed(or dry feed)

Rubbish to waste

Flotation and skin dry(optional)

Water to recycling
Pulp to composting

Pregrader/pulper

Lights to repass pulper

Sun drying and raking

Pregrading channel
Fermentation tanks
Water to waste
Water to recyling

Washing
Grading channel
Heavies and lights separately toSkin drying = remove all
free/excess water
Sort out pods/skins

Sun and/or mechanical drying
Storage and conditioning, minimum 2 weeks

MILLING PROCESS

Rubbish/stones etc. to waste
Parchment shells to waste, furnace or other use

Precleaning/destoning

Rubbish/stones etc. to waste

Milling/hulling

Husk to composting – pods to repass

Air cleaning (catador)

Dust to waste – shells/ears to bagging off

Dust to waste – shells/ears to bagging off
Grading by bean size (screening)
Grading by bean density (gravity table)
Manual or machine sorting

Remove rejects and foreign matter

Quality evaluation and classification
Bagging off for shipment in bags or to silo for shipment in bulk

* The process may obviously differ from one country to another.

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Quality discussions are further complicated when one
separates coffee by species or by type of processing. There
are arabicas and robustas, both wet and dry processed, andeach with different quality aspects. Then there is also thequestion of whether the coffee will be sold as whole bean, as
roast and ground, or as soluble. Appearances can also causesome confusion. It would be a mistake to think that quality
means only exceptionally good looking (visually perfect), boldbeans. Small bean coffees can also show excellent quality.
Conversely, visually perfect, bold beans could in fact hide
very unpleasant cup characteristics. The pursuit of quality istherefore not restricted to top or exemplary coffee.
This is probably just as well, because not everyone iscapable of producing exemplary quality. In reality there isa market for almost everything, from expensive top quality
to qualities at the other end of the spectrum. There is roomin the marketplace for just about anyone who honours theircontractual obligations and who adequately satisfies themarket’s quality expectations for the type of coffee they
produce.
Different markets have different preferences. Producers andexporters should therefore know where their coffee is likely
to receive the best response and, as far as possible, tailor
the quality to the requirements of the buyer.

QUALITY SEGMENTATION –FOUR CATEGORIESEXEMPLARY QUALITY
Exemplary quality coffees have a high intrinsic value with afine or unique cup, and are usually of quite limited availability.
They are mostly retailed under straight estate or origin names.
These are usually very well presented washed coffees,
including some superior washed robustas, but also include
some naturals (Ethiopian Harars, Yemeni Mochas, someIndonesian arabicas) and top organic coffees. They are true
niche coffees.

HIGH QUALITY
High-quality coffees are good cupping coffees, wellpresented, but not necessarily visually perfect. They areretailed both as straight origins and as blends. This category
includes good quality, well-prepared organic coffees, andwashed as well as superior quality natural robustas. The
market for this quality band is much broader and includes agood percentage of today’s specialty coffee.

MAINSTREAM QUALITY
Mainstream quality coffee is fair average quality, reasonably
well presented, but certainly not visually perfect. It will offer

a decent, clean but not necessarily impressive cup. Many
robustas are included in this category. It is estimated thatmainstream qualities account for 85%-90% of world coffee
consumption, while the share of exemplary and high quality
coffee is less than 15% of the world market.
Mainstream qualities are often traded on description.
Descriptions can be fairly loosely written in the contracts,
but usually there is some degree of quality understanding.
That means seller and buyer have jointly established thequality parameters which the seller is expected to respect,
for shipment after shipment. It is to be hoped that buyers
will take this into consideration when talking price. The
advantage to the buyer is that they are virtually certain thatthe coffee will do for them what they expect from it, andthe seller knows the buyer will come back time and again
for more of the same, irrespective of whether the market
is up or down. This is one of the main factors that work
towards creating market security. Although given how easilyinterchangeable they are, for most of the more mundane
coffees, price will always play the major role. Note that noroaster will accept a coffee without tasting it first, regardlessof how it was described, which means that no exportershould ship any coffee without having done the same.
Qualitydescriptions
without
anaccompanying
understanding between buyer and seller as to quality canlead to problems. For example, ‘fair average quality (FAQ)’, or
simply specifying the screen size and defect count together
with ‘guaranteed clean cup’ or ‘sound merchantable quality’,all leave much to the imagination. Such descriptions say theabsolute minimum about a coffee’s quality and therefore thequality often fluctuates within a fairly wide range. Deliveries
can be good, mediocre or really disappointing. Although thebuyer has a quality requirement, they are likely to be modest
in their expectations of coffees bought on a relatively vague
description. Usually, this is reflected in the price that isoffered.

UNDERGRADES OR LOWGRADES
Finally, there are the undergrades or lowgrades, which arebasically everything that does not fit into any of the earlier
descriptions. There has traditionally been an active trade inundergrade coffees because there was a definite demand
for them. Not everyone always knows ‘the price’ for such
coffees, which can make trading them very opportunistic.
For the United States market, undergrade coffee is any
type of coffee that grades below GCA type 6 (120 defects
per 370 grams). In mid-2002, United States Customs
regulations prohibited the importation of coffee below GCA
type 8 (610 defects per 370 grams) with suggestions fromsome quarters that this should be raised to type 7 (240defects per 370 grams). Other importing markets do notnormally specify that particular grades of coffee should not
be imported, relying instead on general food and hygiene
regulations.

CHAPTER 11 – COFFEE QUALITY

The ICO has introduced a set of worldwide minimum export
standards in an attempt to remove the lowest coffees fromthe market altogether. The higher risk of mould and therefore
OTA, a mycotoxin occurring in lowgrades is also likely to
reduce the demand for such coffee. See also chapter 12.
As a result, it may be that over time lowgrades andrejects will lose some or most of their commercial value,
thereby becoming part of the producer’s or exporter’s costcalculation rather than representing an exportable coffee.

QUALITY AND PRODUCTION
Much, but not all, quality evaluation is subjective, and many
people buy certain coffees because they get what theywant from them. All exporters should know the market for
the type of coffee they produce; it is pointless to offer thewrong coffee to the wrong market. Once the ‘right’ quality
is established, it then needs to be produced in the mostefficient and consistent manner.
Production and processing systems influence quality.
Exporters can never be certain of all the components andinputs that make up consistent quality, but they should know
the basic norms in climate, soil and other agricultural factors
in the growing areas. Once this is known exporters canadjust their processing techniques to get the best result for
the given agricultural environment. Even annual variationsin climate can often be at least partly offset by processing
adjustments.
The best quality is obtained from selective picking in which
only red, ripe cherries are gathered by hand in successive
picking rounds until most of the crop has been harvested.
When coffee prices are low, this time and labour consuming
method is expensive whereas stripping allows individual
pickers to harvest between three and four times more perday, thereby reducing the number of picking rounds quiteconsiderably.
Mechanical harvesting is carried out using hand-heldmachines or by large wheeled mechanical harvesters, often
self-propelled. This reduces the number of picking rounds
still further. However, bulk mechanical harvesting is not
feasible in areas where coffee trees may carry ripe cherries
and flowers or pinheads at the same time, i.e. where theyear’s harvest is split between early crop and main crop for
example.
It is true that modern technology allows for fairly effective
separation of ripe, unripe and overripe cherries that canthen be processed separately. But even so, it is difficult to
produce exemplary quality coffee when the cherries are
simply stripped all at once, regardless of the degree ofmaturity.

VARIETY, SOILS AND ALTITUDE
The vast number of different coffees traded in the market
represent an almost immeasurable number of combinationsof variety, soil and altitude. The better combinations canobviously aspire to better prices but growers, especiallysmallholders, cannot easily change their location, thatis, change their soil type or altitude. Commercial growers
however can relatively easily change the variety they grow:depending on their cropping cycle, modern commercial
farms automatically replant 10%-15% of their tree park
annually. But the choice of variety can be difficult. It is in
the best interest of growers to stay informed of the types ofcoffee available for planting, and to match the best variety
to the soils and the altitude conditions of their farms. For
smallholders uprooting and replanting are especially costly
undertakings, requiring careful consideration and realistic
advice concerning all the potential consequences. Thisapplies equally to any genetically modified (GM) coffee
that may appear in future. As yet there is no commerciallyavailable GM coffee, but work in this area has been
underway during past decades.

RAIN FED OR IRRIGATEDStressed trees cannot produce decent, well-formedcherries. Coffee is drought resistant, but not drought proof.
It has remarkable recuperative power from dry spells, butlike all living things it needs water to produce.
Only very few coffees from marginal rainfall areas havemade it to the ranks of truly notable coffees. These notablecoffees have specific, inherent quality aspects (linked totheir variety) which command premiums high enough tocompensate for very low yields. Non-irrigated coffee inmarginal rainfall areas usually shows the greatest seasonalquality variation.

WET OR DRY PROCESSED
Washed arabica not only needs adequate rainfall or irrigation
for growth, but also requires water for wet processing. In
many areas it has not been uncommon to see multiple
washing stations (or wet beneficios) using common sourcesof water, either small rivers or streams. Below-average
rainfall can then result in insufficient or poor quality water
for washing, thereby affecting directly the quality that is
produced. Fortunately, in many areas the introduction ofsmall eco-friendly pulping units that require relatively little
water to function is helping to minimize water usage.
The preparation of natural or dry processed coffee does
not use water, but the trees still require adequate water for
growth. Harvesting and drying need dry conditions and thebest natural coffees are obtained from areas that have little
rain in the harvesting season. Examples are Yemeni Mochas

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and some Ethiopian Harars, but the largest group of natural
arabicas comes from Brazil, with the best originating fromareas where the cherry matures and dries quickly.

COST AND YIELD VERSUS QUALITY
If their coffee lacks the inherent quality to make it a bestseller capable of commanding premium prices, then mostgrowers, and specifically estates, cannot tolerate low yields
unless their input costs are low as well. Estates, especiallywhen using irrigation, can optimize yields much more easily
than can most smallholders. This can be done by planting
high yielding and/or disease-free varieties, by increasing
planting densities, or by applying larger amounts of inputs,
especially fertilizer (although excessive use of fertilizer can
result in thin, almost bitter liquors).
There is an element of truth in the often heard lament thatsuch actions at times reduce quality, especially whentaken to excess, for example very dense plant populations
necessitating very high fertilizer applications. But the bottom
line return from higher yields of medium to sometimes
mediocre quality is at times better than that from lower yields
of superior quality, even when higher prices are obtained.
Estate managers can usually take these considerations into
account and so make relatively well-informed decisions. But
when smallholders replant it is sometimes perhaps more acase of being recommended to do so, rather than a wellinformed choice on their part. Yet for many smallholders it
is not an easy matter to maintain the level of inputs requiredby higher yielding hybrids. In times of trouble, such as
when prices fall, they run into difficulty and may finally end
up with neither yield nor quality. Respect for the old adagethat ‘low inputs equal low yields, but also low and therefore
sustainable cost’ has in the past kept many smallholders,
especially those without access to irrigation, going but, assome would argue, perhaps it has also kept them poor.

ESTATE OR SMALLHOLDER GROWN
It is not true that smallholders can never match thequality standards of estates. For years and years manysmallholders in Kenya have consistently outperformed
large and well-managed estates while growing the same
varieties. But much depends on the personal circumstancesof each individual smallholder and it is fair to say that manysmallholders in the world face daunting circumstances.

to 10 hectares, to just a few hundred trees in all, sometimes
even less than that.
The world’s main resource of original coffees, and their
future, probably lies within the smallholder sector. Ironically,
because of the heterogeneity of most of these coffees (asingle shipment is made up from many small growers), theyoften fail to get into the exemplary segment of the specialty
market because they lack visual perfection, or they are‘unknown’ and it is easier to market well-known coffees. On
the other hand, their availability is also not always adequate
or regular enough to match expectation, which limits theirscope in the marketplace.

HIGH QUALITY ARABICAPREPARING HIGH QUALITY ARABICA – THE
BASICS
Before targeting a market one should understand one’s
own product, and know how it might fit into one or the otherof the many niches that make up the world coffee market.
Even where individual producers grow the same varieties,
there are differences in tree age, tree care, fertilization,
processing, general maintenance and sometimes irrigationthat cause coffee quality to vary from farm to farm, within
the same geographical area, on the same mountain slope,and so on. When these differences are not too obvious
it is possible to mix or blend such coffees into a stable,reasonably even quality. When the differences are too
great, any blend becomes as good (or as bad) as its lowest
components. One cannot hide poor quality by mixing it with
better coffee.
The degree of quality variation will depend on the size of the
production area or region, the variables in that area (altitude,soil, water), the number of individual growers, whether thecoffee faces north or south, and so on. Although not always
appreciated as such, the same applies to individual estates,
though to a lesser extent. Estates may also have excellent,good and mediocre blocks. By mixing all the coffee as itcomes off the trees an estate may produce an acceptableproduct, and if the variability is not too great it can evenbe a good product. Mixing is often the only way to obtaincommercially viable quantities and there is no problem withthis as long as it is done on an informed basis.

There are no accurate data on the proportions of estateand smallholder coffee in the total world production, partly
because there is no definitive measure of what constitutes
a smallholder. But it is believed that over half the world’s
coffee crop is grown on farms of less than five hectares.

Perhaps the most important message here is that theuninformed mixing of different qualities or production
batches is nearly always bad for business and for profits.
Knowledgeable buyers will always recognize mixing, and in
the end the grower or exporter may have to start all overagain. In the meantime the reputation of the coffee or evenan entire region may have been affected.

In Africa only about 5%-6% of the annual output of about 15
million bags is grown on estates. The remaining 95% or so isgrown by people whose holdings range from perhaps 1 or 2

The meaning of the word ‘quality’ is often misinterpreted.
Unfortunately many producers and exporters appear tobelieve that all one needs to do to make quality coffee isCHAPTER 11 – COFFEE QUALITY

to clean up the appearance of their usual standard coffee
by some regrading and additional sorting. Expertise issometimes lacking, not only at the producing end but also
at the consuming end. Large quantities of so-called quality
coffee are traded which show no quality at all.
This is regrettable because, in the end, indifferent quality
causes consumers to lose interest, as happened for example
in the United States after the World War II, with devastatingconsequences for consumption there. Fortunately, in recent
years the market share of the United States specialty or
gourmet segment has been growing strongly, which has
helped to reverse that trend.
Accepting that not every grower, region or even country
can produce absolute top quality, or visually perfect coffee,then the alternative must be to present the best possible
coffee for those markets that show appreciation for that
quality by rewarding the effort that goes into producing it.
Without reward, growers cannot afford to invest the timeand energy required to produce quality. The words ‘present
the best possible coffee’ are used here because it is not theintention of this guide to praise or condemn any one cultivar
or variety. Preferences in different markets vary, and so do
the prospects of different varieties, types and qualities ofcoffee.
Other than the wild, extremely bitter tasting Mascarocoffea(found wild in the forest on Madagascar), inherently bad
tasting coffee does not exist. Even the poor Mascaro has aselling point – it is entirely free of caffeine – but apparently it
is also sterile when crossed.
True, certain new cultivars may not deliver the quality
characteristics of the original lines and this disappoints
many coffee enthusiasts. But there is no inherently bad
coffee, at least not when it is still on the tree. What happens
to degrade the quality from then onwards is nearly always
caused by human intervention.
When discussing quality from the production perspective it
is well to remember that someone, somewhere, is expected
to drink the coffee. When recommending planting or
replanting with disease-resistant or high-yielding hybrid
varieties, one should ensure that the growers are exposed to
all relevant information. So also, what is the expected quality
and marketability of the coffee? What are the experienceswith that coffee in the potential growers’ own environment?
The decision to change the variety one plants has to be an
informed decision, one that includes an assessment of thequality and marketing potential.

DEFINING QUALITY
Who defines quality? Behind every successful importer androaster stands a satisfied body of consumers. But the final
judge for growers is, simply put, the importer (or roaster)
who pays a satisfactory price for a coffee and who does
so on a sustained basis. Once you know what this person

takes into account when judging your coffee, you can relate
this to your entire production process and see where youneed to take corrective or supportive action.
The first impression can make or break a coffee’s prospects.
The first impression a potential buyer gets of any coffee iswhen a sample of the green coffee is put in front of them. If
the green immediately creates a negative impression thenthe least that will happen is that the coffee will be subject
to bias from then onwards. The worst scenario is that the
sample is not even tasted and is simply thrown away.
Many exporters complain of getting no response to samples
they send out, but green coffee buyers are usually very busy
people. Getting them to take time out to taste a new coffee
is not always easy, especially if their first impression is notvery positive. Hence, the need to target one’s markets. It is
not just costly, but almost pointless to send samples to all
and sundry in the hope of achieving the odd hit.

HIGH QUALITY ARABICA (GREEN)
The aspect (or style) and the colour shouldbe ‘even’
The green beans should be of compatible shape or style,colour and size. They, and the roasted beans or the roast
must give an impression of being reasonably even. This ismost important for coffee that is to be retailed as roasted
whole beans. Buyers know the green bean aspects that
affect the liquor negatively and they consider these whenevaluating any sample, irrespective of how they might use
the coffee. Buyers dislike uneven greens because they
can pose problems during roasting. The resulting unevenroasts do not appeal to consumers and in any case tend to
produce lower liquor quality than do even roasts. Usually,
uneven colour indicates the mixed harvesting of immatureand ripe cherry, which also reflects negatively in the cup.
The bean shape or style can vary with the cultivar. Usuallycoffee from the same cultivar will not show great variationin terms of shape and style, whereas uniformity of size isdetermined by the degree of size grading which takes place.
But mixing different cultivars within a single consignment
can produce uneven looking coffees, even if all the beansconform to the same screen size. This is especially so if
coffee from different cultivars that produce solid and softish
beans respectively are mixed into the same batch. Softish
beans usually have quite a different shape and style fromsolid beans; this will be especially evident in the roast.
If different cultivars have been interplanted, as could be thecase on a smallholding where there might be no room toseparate them, then there is little to be done at the harvest
stage. An estate with blocks of different cultivars on theother hand could harvest and process them on different
days, and hold them separately for example by colour
coding each batch.

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If coffee is collected commercially from different
geographical production areas, care should be taken
to verify its compatibility before mixing it, if necessary bymaking small trial blends by hand in proportion to thequantities to be mixed (bulked).

Colour is very important
The colour should be even and bright, especially so for mild,
washed arabicas, which should never be dull, mottled or
faded (going whitish).
Buyers dislike greens of uneven, faded, blotchy or dull colour
because this hints at poor processing, incorrect moisture
content and/or premature ageing of the coffee. All of thesetranslate into reduced liquor quality, progressively becoming
dull (bland) and common (ordinary). Remember that thebuyer knows the actual shipment will still take time to reachthem, so if the advance sample sent by air already showssuch signs, the coffee itself may look still worse on arrival.

Drying affects the colour
Like wet processing, drying is also of extreme importance.
At this stage a coffee’s quality can literally be destroyed.
Correct harvesting, processing and drying require maximum
management input: having spent an entire year tending toand investing in the crop, do not then entrust its harvestand handling to poorly trained, unsupervised labour. Many
potential candidate coffees fail to make it to the specialty
market, and certainly to the exemplary segment, because
their green appearance shows shortcomings during drying
and storage.
The green appearance of naturals (dried in the cherry)
habitually shows a brownish tinge and beans with brownsilver-skins (often called foxy beans). In naturals this isquite acceptable, but for wet-processed (washed) coffees
these are negative aspects because they can translate
into fruitiness, sourness and even an over-fermented taste.
The knowledgeable liquorer will usually downgrade sucha washed coffee even before it is liquored. But even if theliquor is satisfactory, the coffee may still be rejected because
the green appearance suggests it could hide something –the coffee looks unreliable.

Causes of poor colour
Dullish and sometimes brownish greens often result from(too rapid) mechanical drying, which also tends to flatten
the liquor quality. Uneven colour is usually a consequenceof poor drying techniques.
Uneven, mottled greens, often with mottled, blotchy, whitish
or soapy beans, suggest the coffee was spread too thickly
when drying, that it was not turned often enough, or that it
was dried too rapidly. Such beans subsequently show up as
mottled beans (also called quakers by some) in the roast.

Mechanical drying is often used if the climate or the tonnage
to be handled do not allow one to depend entirely on sun
drying, that is, if the weather is too unreliable during theharvest season, or the quantities of cherry to be handled
are simply too big. For washed robusta it is also a means of
avoiding (secondary) fermentation. Collectors (those who buy
parchment or dried coffee in cherry from small farmers) often
use mechanical drying to bring the moisture content down
to acceptable levels. Subsequent storage or conditioning inbulk bins with airflow capability then evens out the moisture
content throughout the entire parcel or stack.
Brownish tinges in arabica greens can result from theharvesting of overripe cherries, or from allowing too manyskins to enter the fermentation tanks. The use of dirty
water, under-fermentation, insufficient washing after natural
fermentation, or the mechanical removal of mucilage areother contributing causes. In washed arabicas foxy beans(where the silver-skin has turned reddish-brown) are usually
due to the harvesting of overripe cherry, or keeping cherries
overnight before pulping.
Fading is an indication of problems. A generally bleachedor fading colour suggests that the coffee is ageing, or that
it was over-dried, especially so in arabica. When the fading
is more pronounced around the edges of the beans (which
turn whitish) then this suggests the coffee was taken off thedrying racks or grounds too early, or it was stored in moist,
humid conditions, without adequate air circulation. If someof the beans are also generally softish and whitish then theexperienced buyer knows such a coffee will never make itto the specialty market, let alone the roasted whole beansegment. Such a sample may find its way directly to thewaste bin because such coffee has already lost its fresh
taste and will definitely show a dull (bland) and common(ordinary) liquor.
Prolonged storage can be another cause of loss of colour(and quality). In this respect the Mesoamerican Development
Institute first carried out experiments in 2005 in Costa Rica,
storing green coffee in airtight cocoons and comparing
quality against coffee from the same batch stored in theconventional manner. The two-piece hermetic storage
cocoon consisted of a top cover and bottom floor that are
joined with a PVC tongue and groove zipper, similar to thoseused to close environmental safety suits. Coffee stored inthis manner was found to have retained colour, flavour andquality much better, also over prolonged periods and without
risk of infestation by insects or fungi. Later experiments haveconfirmed this and advanced hermetic storage technology
is now gaining considerable ground in both the storage
and transportation of green coffee. Details of the original
research and subsequent applications are available on www.
mesoamerican.org and www.grainpro.com.

How to improve or maintain colour
When drying mechanically, experiment with the temperature.
Some older types of dryers expose coffee to very hightemperatures. Be careful coffee is not dried too rapidly or

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over-dried. Some modern (and quite simple) dryers use
ambient air circulation, which minimizes such problems.
Their suitability also depends on the prevailing climaticconditions.
For arabica coffee, try combining mechanical and sun
drying, with the initial drying done mechanically followed bya finishing-off period of exposure to sunlight. This improves
the colour generally and appears to reduce the effect on
colour of the mechanical drying. Some flat bed dryers
and pan dryers incorporate a sliding roof which permits
managed exposure to sunlight.
When sun drying, do not spread drying coffee, cherry andparchment, thicker than one hand’s width. Use an evendrying surface and spread the coffee evenly, with no hills
and valleys. Stir or turn the coffee regularly to ensure evendrying. Cover parchment coffee during the hottest time of the
day to avoid it cracking open and creating mottled beans.
Cover all coffee during rain and at night. For smallholders,
drying trays are an excellent drying method: easily taken out
and returned to store. If they are used under plastic roofing,then one simultaneously achieves good air circulation, heatretention and cover against rain.

Moisture content and drying
There is no exact standard for ideal moisture content. Not all
coffee is the same, and circumstances differ from country
to country. In general, 11% is probably a good target formost coffee, but in any case larger roasters are increasingly
prescribing what they consider an appropriate moisture
content. Coffee above 12.5% moisture should never be
shipped – the only exception could be some specialty
coffees that traditionally have high moisture content, such
as Indian monsooned coffees.
If past experience suggests buyers are generally satisfied
then stick to good established practice and monitor the
moisture content regularly. Remember that when coffee isdried on flat surfaces (such as tarpaulins or concrete) it will
heat up and thus dry out more rapidly than when it is spreadon raised tables or trays that allow air to circulate around
it. When getting close to the moisture target, monitor every
hour. Always use properly calibrated moisture meters andtest them regularly, before each season. If in doubt about
the exact percentage, take the coffee off a little earlier
rather than letting it become noticeably over-dried. This isespecially recommended if decent storage sheds or, better
still, ventilated bins or silos are available for conditioning.
Apart from later loss of cup quality, under-drying may
also cause mould. In severe cases, under-dried coffees
may develop fungi and moulds. These have always
been undesirable, but increasing consumer attention to
mycotoxins in agricultural produce, specifically ochratoxin
A (OTA), is a real cause for concern for some coffee
producers. Clean, proper and efficient drying and storageof coffee is probably the best defence against mould growthand its potential consequences. This and other food safetyissues are reviewed in detail in chapter 12.
To repeat once more: many receivers stipulate a maximum
permissible moisture content on both shipment and arrival.
Producers and exporters need to develop appropriate
moisture content management techniques if they are tocope with this.
Over-drying costs money. This makes it as serious asunder-drying: not only is weight, and therefore money, lost
unnecessarily, but the accompanying loss of colour alsotranslates directly into lower liquor quality. When moisture
drops below 10%, aroma, acidity and freshness begin
to fade away and at 8% or below they have completely
disappeared. For this reason the ICO wants to see
shipments of coffee below 8% moisture content prohibited.
Like under-dried coffee, over-dried coffee should not
be mixed with correctly dried coffee. The two are notcompatible. Remember also that climatic conditions inmany storage sheds are not ideal: they may be keeping thecoffee dry but they are certainly not keeping it cool and thecoffee may therefore continue drying out. Quality loss due
to over-drying cannot be reversed, and is unacceptable.
Over-dried coffee also breaks up more easily during milling.
This increases the percentage of ears, shells and brokenbeans, which further reduces both the quality and the value.
Finally, do everything possible to avoid letting coffee sitaround endlessly after it has been containerized for export.
This can be especially problematic for landlocked countries
from where coffee must travel long distances to the port of
shipment. If containers are kept in the open, exposed toopen sun in holding grounds, on railway flatcars or trucks
it could lead to overheating and condensation. See also
chapter 5.
Over-drying also affects the way a coffee roasts. Coffees
with a moisture content as low as 8% may certainly take theaverage specialty roaster by surprise. This is because such
coffees tend to roast to completion much faster than theseroasters expect. Smaller specialty roasters do not always
have moisture meters, and they can and do get into trouble
with such coffees. Quite apart from the reduction in acidityand flavour that over-drying causes, the end-user may also
be embarrassed – all good reasons never to buy that coffee
again.

Appearance – avoid obvious defects
Coffees containing black beans, obvious stinkers, waterdamaged beans and foreign matter stand no chance, notonly in the quality market, but also not for the great majorityof roasters. This should be obvious to anyone in the coffeebusiness, so what follows is limited to the perhaps not sowell recognized appearance (green) defects that put off
quality buyers and cause them to reject one coffee in favourof another. This explains why seemingly good samples are

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rejected or why some buyers simply do not respond to themat all.
‘Coated.’ Silver-skin has adhered to more than half a bean’ssurface. The immediate consequence is that the green
appearance suffers because the silver-skin obscures thebean’s surface and true colour. Too much coatedness does
not look good. The roaster also knows that the silver-skintends to burn off during roasting and the resultant chaff canpose problems.
Coated beans are caused by drought and by trees overbearing. Both of these tend to affect the cherry in similarways, and the coffee’s style and general aspect are usually
not impressive. General coatedness can also result fromunder-fermentation. Beans that are entirely coated may
originate from unripe cherry. Coffees with pronounced
coatedness often produce common, ordinary liquors.
The experienced coffee buyer will tend to instinctively
discriminate against such coffees, also because the roast
will usually contain ragged, soft and sometimes pale beans.
If possible one should not mix coffee from drought-affected
trees with that of others. However, many coated beans willlose their silver-skin during hulling (or polishing, where thisis installed). Very coated beans are usually also ragged andsmaller or lighter than the norm and may be removed during
grading and sorting.
Before rushing into polishing to remove the silver-skin,first establish whether the coatedness of your coffee is aproblem and, if so, what the cause might be. Dry polishingas such adds nothing to coffee quality, but does improvethe colour and overall appearance (unless the polisher
has excessively heated the beans, which has the opposite
effect). Correct (i.e. cool) polishing may make a coffee moreeasily saleable. Some robustas are (wet) polished as amatter of course, but for arabica it is advisable to first verify
whether polishing makes commercial sense.
‘Ragged or uneven.’ Ragged refers to drought-affected andmisshapen beans that give the green an uneven aspect. Toomany ragged beans in a coffee suggest less than optimal
quality in that neither green nor roast are pleasing to theeye and such coffee is not usually suitable for sale as wholeroasted bean. Ragged coffees often produce mediocre
liquors, but one cannot generalize because some soughtafter original coffees show beans with naturally meandering
centre cuts as a matter of course. Great care must be taken
therefore to distinguish between the visual or cosmetic
aspects of different coffees and the quality.

and heavy cherry before pulping (by grading or flotation:
smallholders can even do this using a simple bucket or
basin); systematic washing and grading after pulping; andintensive size and especially density separation during dry(export) processing. The most useful tool in this respect
is without any doubt the gravity table (table densimétriquein French). Properly set and supervised, this machine will
eliminate many, if not most, ragged beans.
‘Pulper-nipped beans’ are the result of incorrectly set pulpers.
They are very difficult to remove during export grading andsorting. If those beans are discoloured as well they can also
cause fermented, foul or unclean cups as described in thenext paragraph. Experienced buyers will notice pulper-nippedbeans and the risk message they convey.

Insect and pest damage
Controlling insects and other pests can be a problem,
especially in countries where coffee is grown in small
patches, sometimes of a few hundred trees only and often
widely dispersed and scattered over substantial areas. Such
conditions make effective treatment difficult. Insect damage
in the beans suggests less than optimal care of the trees. It
detracts from the coffee’s visual attraction, and buyers knowthat insect damaged beans cause common, ordinary andsometimes tainted liquors.
Most insect damage may be quite obvious to the eye, but
insects can also be the cause of invisible stinkers withdirty water penetrating an insect-stung (or pulper-nipped)bean during fermentation and causing an internal chemical
reaction. Such beans may look sound on the outside, but
can throw unclean or even fermented cups that degrade an
entire consignment.
Insect and pest damage can be controlled only in the field.
Eliminating damaged beans after harvesting costs more anddoes not address the root cause of the problem. However,the flotation (grading by density) of cherry before pulping
is of great importance, as is the subsequent separationof parchment into lights and heavies in the washing andgrading channel. These are important principles of wet
processing. Smallholders who use hand pulpers should try
floating the lights off in a bucket or basin filled with water
before pulping – usually this makes a major difference tothe end product.

An uneven green can also be the result of mixing different
coffees, for example a roundish bean (Bourbon) with aflattish bean (Typica), or a boat-shaped (Ethiopian) variety.
Where possible it is probably best to leave decisions on the
mixing of different cultivars and types to the buyer.

Failing this, the coffee miller’s best friend, the gravity table,
presents the best and cheapest option for eliminating
damaged and light beans. But of course the table works wellonly if it is properly set and operated; the attendants must
know why they are doing what they are doing. Catadors(pneumatic separation using blast air) do the same job, butless efficiently, and work best if the coffee has first been size
graded.

The fundamental causes of raggedness can be addressed
only in the field. All processing can do is: separate light

This is not the place to argue for or against the wet processing
or washing of coffee. There is no doubt, however, that

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Box 11.1 Screen sizes
Coffee is graded by size using rotating or shaking screens,replaceable metal sheets that have round holes in them thatretain beans over a certain size and allow smaller beans topass. Screen sizes are expressed as numbers (e.g. robusta
grade one screen 16), or by letters (e.g. arabica grade AA– indicating a bold bean), or by descriptions (e.g. bold,medium or small bean). It all depends on the trade custom
in any given country. Intermediate screen sizes (e.g. 16.5),
are important in some producing countries but disregardedin others. However, nearly all coffee for export is graded to
exclude the largest and smallest beans, as well as brokenbeans and other particles.

It is not always easy or possible to achieve a 100% accurate
screen (e.g. nil passing through screen 16). Where a 100%
accurate screen is required then marginally increasing thesize of the holes to give a small tolerance in the screen may
provide the required result.
Slotted screens with oblong slits (usually 4 mm or 4.50 mmwide) are used in some countries to remove peaberries (single
oblong beans in a cherry, the result of a genetic aberration
because normally there are two beans in a cherry), which aresought after in some consuming countries

Standard coffee round screen dimensions
Screen number

10

12

13

14

15

16

17

18

19

20

ISO dimensions (mm)

4.00

4.75

5.00

5.60

6.00

6.30

6.70

7.10

7.50

8.00

correctly operated washing stations are an important quality
control tool, at the very start of the processing chain.

Bean size‘Below-size’ and ‘light beans’ in a consignment are a directconsequence of inadequate size and density separation,
partly during primary processing but mostly during dry or
export processing. Not only do too many smalls and lights
spoil the coffee’s green appearance, but large and small, or
heavy and light beans, also do not roast well together. Thisis because smalls and lights will over-roast during the time
it takes for the roasting of the larger, heavier beans to becompleted. There are strict limits to the proportion of smalls
and lights roasters may tolerate in whole bean coffee; if
a coffee exceeds their in-house tolerance for smalls andlights, then out it goes.
Not all size grading is accurate. Opinions differ on theaccuracy of different size grading techniques (vibratory or
flatbed versus rotary or cylinder graders for example). But,
often, when operated at full design capacity, graders do notnecessarily produce accurate separation, so the throughput
must be regulated. This can be especially troublesome if
a grader is directly auto-fed by a preceding processing
unit, or if the product quality is quite variable. It is always
advisable therefore to have a manufacturer commission any
new milling, grading and sorting equipment, using the actual
product that is to be handled. Regulating the intake flow byplacing a buffer silo or feed hopper ahead of the grader can
improve grading accuracy quite considerably, but constantsupervision will always be necessary. The grading accuracy
should be verified regularly, using hand or sample screensthat should be kept handy, near the grader.

When grading whole bean type coffee, bear in mind thatsome very large beans may not be particularly attractive
as they are often soft or misshapen. Such beans become
especially noticeable in the roast appearance. They can beeasily removed by the insertion of a large size screen (number
20 screen for example) ahead of the regular screens. This isalso helpful when elephant beans are present (beans whichhave become inter-twined in the cherry and which nearly
always break up, if not during milling then during roasting).
One easy way to quickly verify whether a shipment
corresponds to the selling sample is to check the coffee’s
size and density composition. Pass 100 g or 200 g ofthe original sample and the shipment sample over theappropriate size screens and compare the percentages. Do
the same with the lights by counting them. Many shipments
appear visually to be a match, but turn out not to be when
this simple test is applied. Buyers know this, and so should
the exporter.

Bean density‘Lights,’ ‘shells’ or ‘ears,’ and ‘brokens’ are all beans or partsof beans that are notably lighter in weight (i.e. less dense)than the average bean in a particular size grade. Note this
distinction: although a small but solid bean will weigh lessthan a large one, it does not automatically follow that it isa light bean. Lights usually have natural causes such as
drought, stress, or picking of immature cherry. All of theseresult in misshapen, shrivelled and soft beans. The breaking
up of beans during hulling and other processing actions(including over-drying) results in shells, ears, brokens, chips
and so on. Such beans and bits and pieces detract from thegreen appearance. They cause similar roasting problems
to smalls in large bean grades, and they very definitely
depress the cup quality.

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Not only do light and broken beans reduce the flavour,
acidity and body of a coffee, but they often also introduce aflattish, common or ordinary taste. They can turn a potentiallyfine cup into a mediocre one. Proper density separation istherefore of extreme importance, especially when the coffee
beans to be dealt with are also somewhat heterogeneous(uneven) by nature.
Lights and brokens are removed pneumatically using strong
airflows (catador), or by a fluidization process (gravity table).
Both separate coffee by density but catadors are usuallyless accurate than gravity tables.
Catadors are most useful for the initial clean-up of a coffee,
directly after hulling (and polishing if installed). The strong
air current removes most chips and small lights that would
otherwise complicate or slow the subsequent processing.
However, gravity tables are at their most efficient when thecoffee has already been size graded. This is because thesize grader will have removed most of the remaining smalls,
and the product to be separated is therefore already ofreasonably uniform density.
Catador and gravity table settings must be based on thetype and quality of the coffee under process and on thedesired result. Constant, well-informed supervision isessential, especially if the product is not homogeneous, forexample if there has been no prior size grading. Again, anintermediate buffer silo or feed hopper permitting variable
feed can ensure that the intake flow is correctly set. This isessential if optimal results are to be achieved.
This applies to all grades of coffee, not only whole bean
grades, because the value of the small bean coffees thatare an inevitable by-product of the larger, whole bean,
grades must also be maximized. Small lights, ears andchips in a grade of whole but small beans (C grade, peaberry, screen 15 and even screen 14) cause exactly thesame problems: they make the coffee awkward to roastand degrade the liquor quality. There are good markets
for decent grinders (used for roast and ground only) if thecoffee is homogeneous and properly graded.

Sorting
Bleached, mottled, whitish, blotchy, soapy and discolouredbeans generally cannot be removed by size or density
grading but there is no place for them in quality coffee(although there is probably some tolerance for them in thelower priced segment of the general market). Nearly all suchbeans are caused by moisture and drying problems, but
discolouring can also be due to oxidization, contact withsoil, metal, dirty water and so on. The gravity table can help,
but in the end the only effective way to remove these beansis through manual or electronic sorting.
Not only do such beans effectively ruin the coffee’s green
appearance but they also show up in the roast as softs or
quakers, pales, mottled beans and so on, and they definitely

affect the cup quality. The buyer of quality coffees will not
tolerate such beans.
Modern sorting equipment is capable of many andextremely varied tasks. The most recent developments
use laser technology. Such equipment can be quite costly
though whereas in some countries sorting by hand is an
important source of otherwise scarce employment. Deciding
whether to hand or machine sort depends on individual
circumstances, the tonnages to be sorted, and the cost oflabour. Smaller producers of specialty coffee usually give
their coffee at least a quick going over by hand, especially
if labour is relatively cheap. Some expend much time andcare on sorting, depending on their target market.
Individual countries and operators have different ideas,
systems and methods when it comes to sorting green
coffee and there is no point in discussing these here
because different circumstances pose their own particularrequirements and problems. But there are two generalprinciples which are important.
 Know your sorting capabilities. When preparing
advance samples for dispatch abroad, ensure that yourexpectations of your sorting capacity do not exceed
reality. It is only human to remove more rather than fewer
defects from an advance sample ‘as the coffee will beproperly sorted in any case’. It is exceedingly annoying
for the buyer to find later that the coffee is ‘almost’ but notquite as well sorted as the advance sample.
 A good working environment and decent lighting isnecessary for people to sort coffee efficiently andcorrectly. Many manual sorting processes still consist ofpeople sitting on the floor in dark and dingy warehouses,
each facing a heap of coffee. The sorters closest to thedoor can see the best – the remainder have to make do.
This will never do for the preparation of quality coffee,
whether arabica or robusta, because the sorting will beneither optimal nor even. This kind of operation is best
kept hidden from visiting buyers altogether.
If sorting belts are too expensive, then at least invest in
sorting tables and benches. These are easily made up by
any competent carpenter. Such tables speed up the sorting
process, which then is also more easily supervised. Sorting
belts are moving conveyor belts, usually with auto-feed andauto-advance, providing room for 12 or 24 sorters to sit oneither side. Sorting tables are tables with a fluorescent lightover them, seating six or eight people. The tabletop is divided
into squares with raised edges. A small hole in each square
allows sorted coffee to fall into a bag attached underneath;rejects go into receptacles fixed to the table’s edge.

Sampling
The golden rule of quality coffee is to do the best possible
within one’s capabilities. This means demonstrating first of
all through the green appearance that a certain amount ofcare has gone into the coffee’s preparation. Such care willautomatically come through in the roast and in the liquor. If

CHAPTER 11 – COFFEE QUALITY

potential buyers do not see such signs of care in a green
coffee sample they may discard it without even tasting it.
The liquor will always show a coffee’s real character,however exciting or dull that may be, but at least the liquor
should never show any of the obvious defects mentioned
earlier. If it does, do not send the sample to someone who
you know buys only quality. Apart from the rejection thatwill follow, you may inadvertently ruin any chance of futurebusiness with that buyer because you have demonstrated
an obvious lack of expertise.
Samples must be representative. When you send a sample
be sure that it is fully representative of the actual coffee or,if you do not have the coffee in stock, be sure that you canmatch the quality. It is useful to note the following sampling
definitions: Stocklot samples are samples of the actual coffee thatwill be shipped if a contract is concluded.
 Approval samples are sent for coffees sold ‘subject
approval of sample’. Such samples must be drawn fromthe actual parcel intend for shipment. Remember, a sale
subject to approval is not really a sale until the buyer
approves the sample.
 Type samples represent a quality agreed with the buyer,
expected to be matched in all respects. If you cannot
match the sample quality in some respect, tell your buyer
sooner rather than later.
 Indication samples are an indication of what you expect
to be able to ship, usually followed later by an approval
sample which shows what you actually propose to ship.
 Shipment or outturn samples are fully representative
samples of the coffee that has actually been shipped.

HIGH QUALITY ARABICA (ROAST)
Type or quality
As with the green, first impressions are very important. A
roast that is dull, uneven, open and/or soft (with ears or
shells) immediately raises suspicion. Conversely, a bright orbrilliant, even and solid roast is not just pleasing to the eye,but also suggests good cupping potential. For the average
consumer of whole bean roasted coffee the most obvious
eye-catching aspect is probably the evenness. An evenroast is therefore a prerequisite for almost any coffee tomake it to the end consumer in whole bean form. There aresome exceptions: a few very well established naturals withless than optimal roast appearance are sold as whole bean,
but these are coffees with an established reputation. The
consumer is convinced they are good even if they do not‘look so good’. But ‘new’ coffees whose appearance does
not match the general perception of what quality coffee
should look like do not stand much chance in the wholebean market segment.

The potential causes and remedies for many individual roast
defects have been identified earlier. The following therefore
deals with more general roast defects that are under thecontrol of producers and exporters.
An even roast is all-important. In an even roast almost all thebeans have roasted to about the same colour and brightness,with a white or whitish centre-cut that is not too irregular. There
should be few obvious defects, preferably none.
Wet-processed coffees usually produce the best roasts,
especially when the parchment has been properly sun-dried.
Brilliant roasts with white centre-cuts are a hallmark of wellprepared and well-dried coffee. Under-drying, on the other
hand, produces dull roasts. The centre-cuts in particular are
indicative of the care taken during the processing and drying
of washed and semi-washed coffee. Naturals (dried in thecherry) usually show dullish roasts with brownish centrecuts and this makes it difficult to present most of them as
whole bean. Unless well managed, mechanical drying using
hot air may also dull the roast appearance.
A brilliant or bright roast almost shines up at the viewer. It
has a well defined, white to brilliantly white centre-cut andthe beans are usually fairly hard or solid. When considering
mixing or blending, one should always consider the roastof each individual component: mixing bright, solid roasts
with dull and usually softer roasts may well result in an
unattractive overall view that renders the coffee less suitablefor presentation as whole bean.
Dull and dullish roasts lack lustre and brightness. Thisis usually caused by under-drying, or sometimes bymechanical drying. Over-fermentation and the picking ofoverripe cherry can also cause dull roasts and will especiallyaffect the colour of the centre-cut.
In washed coffee, brownish centre-cuts or no centre-cuts
are suggestive of overripes, over-fermentation, use of dirty
water or the presence of too many skins in the fermentation
tanks. But naturals usually tend towards duller roasts, andbrownish or almost no centre-cuts as a matter of course.

Uneven roasts
There are many potential causes of uneven roasts. They
include: the picking of immature or droughted cherry; unevenfermentation, including the mixing of different batches of
washed or semi-washed coffee, which have not necessarily
been fermented or washed to the same degree; too rapid
or uneven drying; and insufficient separation of light coffee
during primary and/or export processing. Incomplete
fermentation causes dull roasts, and when mixed with brighterroasting coffee, gives an aspect of general unevenness.
Immature cherry usually translates into pales or semi-palesin the roast (beans which are yellowish to yellow in colour).
But bleached or colourless green beans, including yellow
beans or ambers, also cause pales in the roast. Not only do(bright) pales ruin the roast appearance and cause clearly

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visible yellow particles in ground coffee, they also introduce
commonness into the liquor.
Mottled and blotchy beans are caused by uneven drying.
The end consumer may not necessarily notice them asa defect, but their appearance in the roast suggests to
examiners that the quality of the coffee is likely to deteriorate
rather quickly. This may cause them to reject it altogether.

Softs, brokens and raggedness‘Softs’ often go together with pales, but a roast can alsopresent a general aspect of softness. In this case the beans
are generally open, and the centre-cuts are not well definedand may be brownish in colour. Some cultivars have atendency towards soft roasts, especially when grown at low
altitudes, but in the main softs are caused by poor drying
and immature (very coated) coffee.
Bleached, soapy, mottled, discoloured and blighted beans
usually show up in the roast as softs or quakers, and also as
pales. Careful sorting of the green beans helps to eliminate
them, but it is difficult to achieve 100% accuracy.
Broken beans in a roast reflect inadequate separation during
processing (both wet and dry), over-drying, incorrectly set
equipment, and the presence of misshapen and deformedbeans that have broken up during the roasting: all problems
related to processing, although some cultivars do produce
larger proportions of deformed beans (elephant beans).
In some cases, drought or nutrition stress seems to result
in larger numbers of small elephant beans (these are of
considerable concern to the grower as they mostly breakup during processing and roasting).
Ragged roasts also suggest the wrong coffees have been
mixed together. For example, droughted coffee has been
mixed with good coffee, or incompatible cultivars havebeen mixed such as larger flat-shaped beans with smaller,
rounder or boat-shaped beans.

Measuring roast colour
Measuring roast colour is important. The type of roast –light, medium or dark – has a definite bearing on quality.
 The darker a roast, the less pronounced the acidity anddifferent flavour aspects (as well as defects) of the liquor,
but the heavier the body.
 The lighter a roast, the more pronounced the acidity andflavour (and defects), but the lighter the body.
Different markets roast coffee differently. Exporters should
understand the type of roast their buyers need. But ‘light,
medium and dark’ mean different things to different people:
they are subjective terms. See also chapter 12, Quality
control.
The Specialty Coffee Association of America (SCAA) has
developed a points system to classify the degree – thecolour – of different roast types. The system consists ofeight numbered colour disks against which one matchesa sample of finely ground, roasted coffee, usually pressed
into a laboratory petri dish. In this way one assigns the roast
an approximate number on what is commonly called theAgtron Gourmet Scale, ranging from #95 (lightest roast) atintervals of 10 down to #25 (the darkest common roast).
This helpful tool enables producers and roasters to speak
the same language when discussing ‘the roast’ of a coffee.
It is available from the SCAA’s resource centre in Long
Beach, California – see www.scaa.org.

HIGH QUALITY ARABICA (TASTE)
The importance of liquoringFirst impressions are vitally important. If the green does
not make it to the roasting room then the coffee will never
be tasted. It is pointless therefore to send samples which
do not demonstrate at least a minimal effort at creatinga presentable product – the amount of effort one puts independs on the market segment that is to be targeted or,
perhaps, the premium one is trying to attract.
Remember that, in principle, there is no inherently bad
coffee. If a coffee presents really poor quality, the cause
can usually be traced to poor harvesting and post harvest
processing, drying, storage and handling.
It is absolutely essential to maintain stringent standards ofcleanliness at all stages, especially in wet processing. If
this is done, almost any coffee has the potential to showa presentable green with at least a passable cup or liquor.
How your potential buyer judges that liquor will dependon the type of coffee, and on how it matches their specificpreferences and objectives. A buyer will not buy a coffee
that does not fit their requirements, even though they may
have appreciated it for what it was. Aspiring sellers therefore
need to understand the requirements of the market segment
they are thinking of targeting.
Without the ability to taste or liquor coffee one cannot bea successful exporter. All coffee is sold to be drunk, andsomeone, somewhere will taste a coffee before it is roasted.
Sending out samples of obviously unsuitable or even
unpleasant coffee is a recipe for disaster. It conveys theimpression that the seller does not know his own product,or does not care. Such samples also suggest that theseller might ship unclean-tasting coffee and many buyers,
especially smaller ones, will avoid them. Inexperienced
suppliers represent potential danger. If on arrival the cup
or liquor is no good, then the coffee cannot be used. This
causes a shortfall in supply, which has to be made up from
elsewhere, and the buyer has to find a way to dispose of
the offending coffee, which meanwhile may be taking up
finance and storage space.

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Liquoring is also important for other reasons. A seller who
cannot properly evaluate the quality of their own coffee also
cannot value it against the price at which the competitionor other origins are selling. Without liquoring it is nearly
impossible to judge whether one’s asking price, for example,
is too high or too low.

knows where the coffee came from, how it was brought tothe quality the buyer approved, and that within reason theseller can repeat the exercise in future. Of course, like wine,
no coffee is exactly the same from season to season. There
are good years, and then there are less good to sometimes
even bad years. Experienced buyers know this and will
never hold such variations against a seller.

Liquoring – the basics

Buyers hate exporters who knowingly ship coffee whose
quality is not up to standard. If unforeseen circumstances
mean one has difficulty in fulfilling a contract then the best
and, really, the only option is always to inform your buyer
as soon as you become aware of the problem. The buyer
may be able to assist you by granting an extension to theshipping period, or may agree to take a slightly different
quality (perhaps against a reduction in price), or may agree
to release you from the contract. But the buyer will rightly be
furious if the exporter simply ships a slightly different coffee
hoping to get away with it. This can cause real and serious
trouble, as shipping the wrong coffee disrupts the buyer’s
supply pipeline.

At the very minimum the liquor has to be clean. There should
be no off-flavours or taints in the cup. The liquor must be
reliable and constant: the coffee should liquor the same
every time it is tasted. When making up a shipment it is no
good tasting a single cup and thinking that the coffee is fine,when many buyers as a matter of course will taste five or ten
cups over two or more individual roasts.
When roasting your own coffee, remember the type of roast
your buyer prefers and match it in your own preparation.
But also remember that sometimes a lighter roast may
accentuate defective liquor aspects that darker roasts tend
to hide. Specialty roasters in particular usually roast small
batches and taste every batch. This means a coffee will betasted many times over. If it is unreliable (meaning different
or even unclean cups simply ‘appear’ from time to time) thiswill be spotted. Bulk users of commercial grade coffee also
sample very accurately and will easily spot an unreliable
parcel. See also chapter 5.
What constitutes ‘quality’ is a subjective judgement. Quality
is open to many interpretations, but experienced tasters will
seldom disagree on whether a coffee is clean in the cup ornot. What they may argue about is whether the type anddegree of uncleanliness, or off-flavour, is such as to render
the coffee unacceptable. Clearly one will be more tolerant ofquality defects in a bargain-priced grinder to be used in thegeneral mass market, than one would be of taste defects in
a top-priced, supposedly exemplary coffee.
Experienced buyers have a fair idea what to expect fromcertain origins and types of coffee. They know what thosecoffees can be used for. And so a sun-dried natural may
present flavours that buyers know, accept and evenappreciate in that type of coffee, but that they will absolutely
not accept in a washed coffee. For example, the full body andoften somewhat heavy, fruity taste of many good naturals
does not appeal to buyers looking for acidic coffees. The
experienced liquorer will know what coffee suits which buyer
or market. Anyone wishing to get into the business of selling
quality will have to find this out if they want to make theirmark.
Understand your buyer. Once a quality has been accepted it
is most important to understand exactly why the buyer likes
and continues to buy that particular coffee in preference toothers. There can be many reasons, but the most important
to mention here are continuity and mutual trust.
Continuity suggests not that this coffee is just an isolated
happening, never to be seen again, but rather that the seller

Roasters buy coffee for a specific objective. If on arrival itdoes not suit, it becomes virtually useless to them. It is no
good then to offer a price allowance or discount to try andsettle the matter. After all, if the roaster could have used alower quality he or she would presumably have bought thatin the first place.
Continuity and mutual trust mean both parties understandwhat is important in the coffee, that within reason they willcontinue to offer and buy that coffee, and that they canrely on each other to respect their obligations in every
respect. Not all obligations are specified in the contract.
For example, keeping buyers informed about the status ofpending contracts is an unwritten obligation, whether thenews to be passed on is good or not so good.

Serious liquor problems
There is a whole range of flavours, good and bad, whose
impact on quality varies in importance depending on thetype of coffee and on the type of buyer. But some flavours
are unacceptable in any coffee to virtually all buyers,certainly in the quality business.
‘Fermented’ or ‘foul’ is a very objectionable taste, not unlike
the odour of rotting coffee pulp. In its worst general form
this is due to over-fermentation, cherry left to rot in heaps,
the use of polluted water or stung beans with pollutants
entering them. Foul-tasting cups can also be produced bysingle beans left behind in fermentation tanks or washingchannels, or by beans that have been partly dried and thenre-wetted again under unsanitary conditions.
If a few such stinker beans are irregularly spread throughouta shipment then this is a typical example of an unreliable
coffee that occasionally produces an unclean or foul cup.
Note that there is no such thing as only a little ‘ferment’, justas there is no such thing as being almost honest.

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Most buyers would also consider ‘sour’ and ‘onion’ liquors
as totally unacceptable, arguing that both are just a stepaway from ferment. This is a persuasive argument becausesour and oniony liquors are caused by late pulping of cherry,and poor processing or drying techniques. Coffee does notnaturally come off the tree with such taints. Remember thatfermentation starts as soon as the cherry is picked. But there
are clever blenders who know how to use such coffees incombination with other specific taste characteristics, and in
so doing arrive at an acceptable final result. The real issue
may therefore be whether such a coffee is over the top ornot. In any case, as far as the quality market is concerned
one is best advised to stay well clear of such coffees.
‘Musty’ or ‘mouldy’ is a very unpleasant coarse harshflavour caused by the storage of under-dried coffee, or the
re-wetting of coffee after it has already been dried. Thisflavour also suggests potential mould problems (see also
chapter 12). ‘Earthy’ is a close relative. Contact with bareearth or dust are the main causes, which also imply poor
drying arrangements, and the possibility of mustiness andmouldiness.
Very strong taints will also render a coffee virtually unusable:
contact with petrol for example. Unclean can refer to any
offensive off-flavour or taint. It can also be taken to indicatethat an unspecified off-flavour is present.
Most of these taste defects tend to intensify with ageing.
The common thread linking them all is that they are not to
be tolerated in reasonably decent coffee.

transforms them into rather different, intense and sometimes
outright unpleasant tastes. So these tastes can be viewed
as positive or negative – it all depends on the intensity andon the buyer’s judgement. See also chapter 12.
‘Ordinary’, ‘common’ or ‘coarse’ tastes are strictly speaking
not off-flavours. Just as there is a market for vin ordinaire, so
there is one for café ordinaire. These flavour characteristics
are usually caused by problems such as drought, serious
stress or insect damage, or by processing or drying errors.
Such liquors are therefore unlikely to find much favour in thequality market. But there are also disease resistant or highyielding cultivars that present rather common liquors eventhough the coffee may be of attractive appearance andstyle. Sometimes such coffees may be upgraded throughblending, perhaps by adding another coffee with an oniony,fruity or winey flavour. The result may not be a candidate
for the exemplary market, but perhaps not a candidate foroutright rejection either.
A ‘woody’ or ‘aged’ taste is not unsimilar and is the direct
result of the ageing of a coffee, usually accompanied byloss of colour. It is not at all uncommon to find woody tasting
coffee at the retail end of the specialty business because it
sometimes takes months before coffees are roasted. Poorly
dried coffees age more quickly than do well prepared ones,
and lose colour more rapidly as well. The coffee ‘fades’
quickly. For 99 out of 100 offer samples from origin, a woody
taste or fading appearance suggests a risk of prematureageing during shipment and the time spent awaiting final
sale.

NB: The information on mycotoxins (see also chapter 12,
Quality control) in this guide has been drawn from industry
experts, from the findings of the ICO/FAO project ‘The
enhancement of coffee quality by prevention of mould
growth’, and from the book Coffee Futures: A Source Book
of Some Critical Issues Confronting the Coffee Industry,
published by CABI Commodities (2001 – ISBN 958-332356X) www.cabi.org.

‘Grassy’ is a greenish taste that tends to obscure theliquor’s finer aspects such as flavour or aroma. This taste
is reminiscent of hay and is mostly found in early season
coffee. Under-drying tends to accentuate grassiness.
‘Bricky’ is a close relative in that it also reduces flavour andacidity. Usually this commonish taste is associated with(slight) under-fermentation.

Less serious liquor problems

MAINSTREAM QUALITY

Less serious liquor problems are difficult territory: very
subjective and personal. What constitutes an acceptable
or unacceptable liquor depends on the individual buyer’s
judgment, so it is vital to understand your buyer. Appreciate
why the buyer takes certain coffees and not others – visit
them and taste different coffees together, including yourown.
‘Fruity’ or ‘winey’ are a good example of less serious liquor
problems because, within reason, such flavours can add
something interesting to a coffee. But the next step down
is ‘fruity-sour’ and then ‘sour’, which is undesirable. Winey
can move through ‘oniony’ to ‘onion’, which is a relative of
ferment. Within reason, these are not always necessarily
reasons to reject a coffee. However, in coffee to be used
for espresso fruity or winey are not wanted under any
circumstances because the espresso process often

Mainstream is the main business
Mainstream quality makes up the bulk of the global tradein coffee. Standard type coffees are used by large andmedium-sized roasters alike. These roasters have a supply
obligation to keep the shelves in supermarkets and otherretail stores filled with their product; a product that is always
available and that is always the same in terms of appearance
and taste. The largest roasters use many millions of bags ofsuch coffee each year. For reasons of blend composition,
logistics and simple supply security they cannot dependon just a single origin. Their main requirement therefore isthat the supply be reliable, which means such coffees must
be relatively easily substitutable and be available from anumber of countries.

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To satisfy their long-term delivery commitments for roasted
coffee, roasters also enter into long-term purchase contracts,
usually on the basis ‘price to be fixed – buyer’s call’ (seealso chapter 9, Hedging). Such long-term commitments
almost inevitably mean the coffee trade sells such coffees
short and expects to cover their sales later. Selling short is
risky by itself but, as discussed in chapter 9, most of the risk
can be hedged.
But selling a single origin short (in quantity and over an
extended period) is exceedingly risky in case of later supply
difficulties in that origin, so the trade instead sells a ‘basket’of acceptable coffees from a number of different origins. For
example, Guatemala, Prime Washed, and/or El Salvador,
Central Standard, and/or Costa Rica, Hard Bean, against
the appropriate delivery months of the New York arabica
contract, the C. Or, Uganda, Standard Grade, and/or Côte
d’Ivoire, Grade 2, against the LIFFE robusta contract.
The ‘baskets’ represent coffees that are acceptable for thesame purpose in many blends of roasted coffee. Suppliers
can fulfil their delivery commitments by providing one of thespecified types. Each individual shipment is still subject tothe roaster’s final approval of quality on arrival. By coupling
the use of these baskets with just-in-time delivery and theoften imposed requirement that any coffee not approvedon arrival be substituted immediately, one could say thatthe large roasters have taken most surprises out of the
procurement process.
All except price; but even here their main objective is not
to pay more than their competitors, rather than to look forbargains or play the market. Exporters must understand that
there is no place for emotion in these buying processes. All
that counts is price and performance.

Consequences of standardization
Interestingly, this standardization of mainstream quality not
only means that below par coffees are not acceptable. It
also means that coffees of better quality or better bean size
are not wanted – and no premiums will be paid. The primary
requirements are that the coffee must do for the blend
what the roaster expects, and that every shipment is thesame. There can be no question of accepting differencesin quality, or of settling such differences through paymentof allowances or through arbitration. If the coffee is not rightthen it will be rejected. Not only must the quality of eachdelivery be comparable to the previous one, it must also be
uniform throughout the entire parcel, from bag to bag andfrom container to container. Consistency is the key.
All that has been said previously concerning respect for
quality applies equally to mainstream or standard grades
as well. Clearly, the quality of such coffees is not as exciting;it would be fair to say that as a rule standard type coffees
are not particularly inspiring and offer easily matched cup
quality. For standard quality, price is a much more importantbusiness factor than it is for exemplary or specialty coffee,
where quality holds the key. Prices for standard quality are

generally also well known so the only way for an exporter tobeat the competition is to be more efficient, more reliable,
more consistent and more flexible.
Some accuse the large-scale roasting sector of gradually
lowering the quality of retail coffee through technicalinnovation and product changes such as high-speed, highyield roasting, steaming of robustas, the introduction ofliquid coffee, etc.
Germany is sometimes quoted as an example of shifting
quality preferences. In 1990, Colombian mild arabicas
and Other mild arabicas accounted for 73% of green bean
imports, with Colombia as top supplier. By 2010 Colombian
mild arabicas and Other mild arabicas were only 26%.
Indeed, Viet Nam alone provided almost 18% or 3.4 million
bags against just 0.3 million bags or less than 2% from
Colombia.
Others would argue that there simply is not enough quality
coffee in the world to permit today’s mega-roasters to raise
the quality of standard blends without creating serious pricedistortions, although other agro-industrial products such as
wine appear to cope easily enough with a widely segmented
price structure.
Also, the demand pattern in some countries is shifting, asin Germany where acidic coffees are now in less demand.
Wherever the truth may lie, smaller origins and exporters
cannot easily compete for what has become pure bulk
commodity business. They have no competitive advantages
and lack the economies of scale of larger players. It is
impossible for them to add value because only large
quantities of standard products are wanted. Mega-roasters
have neither the time nor the inclination to deal with small
quantities of exemplary coffees. Some do participate
indirectly in the specialty business, but through separatebusiness units. Despite the excitement of the specialty
market, never overlook the fact that the mainstream
business represents 85% or more of world coffee imports
and should not be ignored.

ROBUSTA
Robusta – the species
Coffea canephora, popularly known as robusta becauseof the hardy nature of the plant, was first discovered in theformer Belgian Congo in the 1800s. It is also known to be
indigenous to the tropical forests around the Lake Victoria
crescent in Uganda. It was introduced into Southeast Asia
in 1900, after coffee rust disease wiped out all arabica
cultivation in Ceylon in 1869 and destroyed most low
altitude plantations in Java in 1876. Currently, it represents
between 30% and 40% of world production. It is grown inWest and Central Africa, throughout Southeast Asia, and in

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parts of South America including Brazil, where it is known
as Conillon.
The robusta plant grows as a shrub or as a small tree up to
10 m in height. Generally, it is planted at lower densities thanarabica because of the larger plant size. Robusta exists inmany different forms and varieties in the wild. The crossbred strains of this variety of coffee are often hard to identify,
but two main types are generally recognized: Erecta, or
upright forms, and Nganda, or spreading forms.
Robusta is a diploid species. It is a larger bush than thearabica plant, and with robust growth. The root systemof robusta, though large, is rather shallow compared toarabica, with the mass of feeder roots being confined to theupper layers of the soil. The leaves are broad, large andpale green in colour. Flowers are white and fragrant, and areborne in larger clusters than in arabica. The flowers open
on the seventh or eighth day after receiving rain. Unlike
arabica, robusta is self-sterile, that is, its ovule cannot be
fertilized with its own pollen and hence cross-pollinationis necessary. The cherries are small, but larger in number
per node than arabica, varying from 40 to 60 or more. They
mature in about 10 to 11 months and are generally ready for
harvest two months later than arabica.
Robusta beans are smaller than arabica beans. Dependingon the plant strain, the bean shape is round, oval or ellipticalwith pointed tips. The colour of the beans depends on themethod of processing – grey when washed and goldenbrown when prepared by the dry cherry or natural method of
preparation. The caffeine content of robusta beans is nearly
twice as high as that of arabica beans (2% to 2.5% versus
1.1% to 1.5%).
Under normal conditions robusta coffee possesses several
useful characteristics such as high tolerance to leaf rust
pathogen, white stem borer and nematode invasion, andthe potential to give consistent yields. For these reasons, thecost of robusta cultivation is relatively low compared to thearabica variety. Inability to endure long drought conditions,late cropping, late stabilization of yields and somewhat lessattractive quality compared to arabica, are some of thenegative attributes of robusta coffee.
In general, robusta is harder than arabica and grows wellat low altitudes, in open humid conditions, with the cost of
production being lower than the arabica variety. In somecountries (Uganda and India, for example) robusta is also
cultivated at fairly high altitudes (above 1,200 m) and undershade. These features have helped in the production ofdense beans, with better cupping characteristics than thosenormally expected in the robusta cup, which could aid in the
preparation of specialty and possibly exemplary coffees.

Wet processing of robusta
The wet process helps to mute and mellow the striking notesof fruit and bitterness that are often at the core of the robusta
cup. Wet processing helps in developing ‘soft buttery notes’

in the cup, unlike the thick ‘robust’ notes that are observedin the average robusta cup. In a number of import markets,
quality washed robusta has replaced a percentage of
washed arabica in coffee blends. Such robustas have not
only provided the froth and bubbles for the much sought
after espresso, but have also helped in reducing the price ofsuch blends. Robusta beans with robust but clean notes ofstrength and fruitiness (but not fermented, i.e. with a neutral
liquor) also find ready acceptance in the preparation ofsoluble coffee.
Note, however, that the wet processing of robusta is riskier
and more difficult because the mucilage in robusta coffeeis thicker and stickier than it is in arabica. In some cases
fermentation may not be complete even after 72 hours and,considering the high temperatures at the low altitude atwhich most robusta is grown, the process requires extremely
careful monitoring to avoid over-fermentation. Such lengthy
fermentation periods also require much more tank spacethan the average processing facility can economicallyoperate, whereas large-scale friction (aqua) pulpers to strip
mucilage are costly in terms of water and power use.
However, the development of small and sometimes mobile
motorized processing units that combine depulping andfrictional mucilage removal with minimal water use is creating
new opportunities for smaller growers and smallholders
to benefit from the growing demand for wet processedrobustas. Some are combined with mechanical drying units
to ensure rapid and uniform drying, thus avoiding the risk of
secondary fermentation or off flavours. For information onsuch types of machines, also called eco-pulpers, visit for
example www.penagos.com and www.pinhalense.com.br.
Defectives and off-tastes found in robusta, and their causes,
do not differ markedly from those covered in the preceding
section. All the concerns and limitations concerning quality
and moisture content already stated are equally valid forrobusta coffee, both dry and wet processed. Nevertheless
it is appropriate to review some of them in the context ofrobusta production.

Defects in robusta coffees
Improper processing techniques, including use of incorrectequipment and improper handling, contribute to defects inquality. In washed robusta the major off-tastes caused by
improper processing techniques are ‘raw/green’, ‘fruity’,‘overripe’, ‘fermented’, ‘medicinal’, ‘chemical’, ‘stinkers’,‘stale’, ‘earthy’, ‘baggy/oily’, ‘spicy’ and to an extent ‘metallic’.
Unwashed or natural robusta coffee is less susceptible toquality deterioration. Off-tastes such as raw/green, fruity/
fermented, overripe, medicinal, chemical and stale occur
mainly because of negligence during processing.
Impact of immatures/greens, brown beans, fruity/overripe,
fermented and medicinal off-tastes. Selective picking ofcherries is essential for the production of high grade robusta.
The quality of the bags or baskets used for collection during

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harvesting should also be carefully checked. Cherries
collected in fertilizer bags or in bags previously used forchemicals could absorb an off-taste, especially when suchbags are tightly tied and left unattended for a length of timeor directly exposed to strong sunshine.
The raw/green off-taste in robusta coffee has been attributed
to incorrect harvesting techniques. For economic reasons,selective picking may not be practised. This results in unripe
cherries being pulped or dried along with ripe cherries. The
green or immature beans present among the unripe cherries
give a raw or green off-taste to the cup.
On the other hand, the presence of brown beans and an
off-taste of overripe could occur when the cherries havebeen picked in an overripe or even already dried condition.
Where feasible, growers are advised to sort the cherry after
picking, to ensure that the coffee to be pulped (or dried in
the cherry for natural preparation) does not contain unripe
or overripe cherries that lower the cup quality.
Fermented and so-called medicinal off-tastes have been
observed in natural (dry processed) robusta. The cause forthese could be delays in spreading the cherries for drying or
the deterioration of overripe cherry. (Late harvesting means
general over-ripeness, resulting in poor cups.)
Causes of ‘pulper-nipped’ ‘beans/cuts’, ‘stinkers’, ‘putrid/
rotting off-taste’. Invariably, not all coffee cherries will be
the same size. If they are not sorted on size, with the helpof mechanical cherry sorters, hand sieves or flotation, it isvery likely that the beans will be cut during pulping. This canalso happen if the pulper has not been suitably adjusted orfitted with flexible chops. Micro-organisms can enter pulpernipped beans through the injury and cause the formation ofstinkers or black beans, adversely affecting quality.
Causes of earthy, fruity and fermented off-tastes. The waterused for washing, as for all the stages of processing, should
be clean to ensure the quality of the end product. Uncleanwater or water contaminated with fine silt, and recirculated
water with a high solid content, could cause earthy, fruity or
fermented and other off-tastes.
Causes of mouldy and faded beans and impact of improper
drying and storage: During the preparation of natural robusta,
spreading the cherries in thick layers with no or inadequate
stirring and raking could result in mould formation. This canadversely affect the visual appearance and the cup qualityof the cherry beans. Lack of protection from rain and nightdew during drying can also cause mould growth. For moreon this go to chapter 12, Quality control issues.
The fading (of the colour) of coffee and the cup being describedas stale could be the result of inadequate drying facilities,
storage of beans with a high moisture content, or the storageof well dried coffee in improperly ventilated warehouses. Stale
cups can also be caused by improper storage on the farm,at the curing factory or at warehouses awaiting sale. Storageof coffee on the drying yards, inadequate covering of coffee

stacks, poorly ventilated warehouses, or stacking coffee in ahaphazard manner up to the ceiling of the warehouse can all
cause a stale off-taste to develop in the cup.
Spicy and chemical off-tastes could be due to packaging inpoor quality bags or bags in which spices or fertilizers havebeen packed earlier. Storing coffee with spices, chemicals,
fertilizers or fungicides could also cause these off-tastes.
Remember that coffee beans readily absorb taints andodours that could lower their aromatic quality and, therefore,
value.

Inspection and classification
Each coffee producing country has its own export
presentation system. See examples under Grading andclassification in chapter 1.
Whatever form this may take, it is essential to ensure that thecoffee offered for sale does not contain excessive amountsof defective beans or foreign matter, and that it is clean in
the cup. Some origins and exporters only assess robusta
quality visually and do not liquor the coffee.
This is to be discouraged. Coffee is meant for humanconsumption and its taste is of paramount importance. The
roaster liquors it before using it, so the shipper should liquor
it before dispatching it.
Based on visual quality, robusta beans could be categorized
into three grades: above FAQ (fair average quality), FAQ(average) and below FAQ. Note that for natural robusta wetpolishing helps to improve the appearance and, to someextent, also the quality.
Above average coffees would have good colour (grey witha hint of blue when washed and golden brown for naturals),possess uniformity in size and shape and conform to theprescribed grade specifications, emit a normal smell(cereal-like when washed and fruity when unwashed), andwould contain hardly any defectives. The beans would befree of extraneous or foreign matter, mould or toxins, andhave a moisture content definitely less than 12.5%.
Average coffees would be of a colour that is not faded,
conform to the grade description, have no mould or fungal
growth and contain a limited proportion of defects that do
not adversely affect the cup quality.
Below average coffees could be of varying qualities,
ranging from beans which have high moisture content
and are defective such as broken beans, blacks, browns
or extraneous matter, to very poor, bleached and mouldy
beans. Remember that coffees with more than 12.5%
moisture content should not be shipped, and that manyreceivers stipulate their own moisture content limits, both at
the time of shipment and upon arrival.
Based on liquor quality, robusta beans could be classified
as follows:

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CHAPTER 11 – COFFEE QUALITY Fine and special, where the liquor quality is soft, smoothand buttery, with good body, hardly any bitterness, andclean. This quality can be seen in robusta coffees which
are washed and processed with care, in robusta beansgrown at high altitudes and under shade, and in plantstrains with the inherent characteristics of lower caffeine
content, softness and mellow flavour notes.
 Good, where the liquor quality could be described as
good body, neutral, light bitterness and clean, with a hintof chocolate notes.
 Average, with a cup quality of fair body, fair neutrality,
average bitterness and clean.
 Below average, where the liquor, though of fair body, has
harsh notes of the robusta fruit, is bitter though clean,
and is flat with no flavour notes.
 Poor, a cup which is unclean, having medicinal, phenolicor rioy off-notes, or strong harsh robusta notes, with orwithout body, bitter and unpleasant to the taste.
What has been said above is not a universal methodology
followed by all robusta producing origins. It is only a means
to explain the quality attributes that could be encounteredin a robusta cup and the manner in which these attributes
could be classified. Individual buyers have their own
classification and evaluation methods, but usually theattributes and ratings will be comparable to those above.
See also chapter 1, World coffee trade.

Specific aspects affecting quality and priceHigh moisture content reduces coffee’s shelf life. Beans thatare at equilibrium and are inactive would have a moisture
content of well below 12.5%. Beans with a high moisture
content could be very actively respiring, giving up moistureand undergoing changes both physically and intrinsically.
Physically, there would be a fading in colour and, dependingon the moisture content, the temperature and the humidityof the surrounding area, the fading could intensify, resulting
in bleaching and finally mould growth. Intrinsically, the cup
quality could fade from a clean, strong and neutral cup to a‘woody’, ‘aged’ and ‘musty’ cup.
Colour. Poor visual colour, such as a brownish or whitish
appearance in washed robusta, or a green shrivelledappearance in natural robusta, could result in a low value. The
brown appearance of the beans in washed robusta coffee isa direct indication of incorrect processing techniques. In the
cup this could result in a fruity or fermented off-taste. The
whitish appearance of a consignment would result in heavy
discounts for the coffee, as again it reveals both incorrect
processing techniques and improper storage conditions.
Greenish shrivelled beans in natural robusta reflect improper
harvesting techniques; the farmer has stripped the coffee
plant of berries that were at different stages of ripening. Thisvisual defect detracts from the cleanliness and quality of agood cup of coffee.

Bean size could, to an extent, influence the price that is
paid for a consignment of coffee. Large sized beans roast
well and could have a better cup profile, provided theprocessing has been carried out carefully and correctly.
Broken beans, on the other hand, could result not only in ahigh roasting loss, but also in charring of the beans and apoor cup quality. Many robusta producing origins sell theircoffee based on the size of the beans and a permissible
tolerance to defects, with a classification of AA or grade/type I and so on, each grade denoting the size of the beans
and a measured tolerance of certain imperfections.
The defect count is the measured presence or absenceof defects such as blacks, browns, greens, faded andbleached beans, insect damaged beans, pulper cuts,
stinkers, sour beans and extraneous matter such as twigs,
sticks or stones. The presence of defects could lower thevalue of coffee; their absence could result in a premium.
Cupping or cup quality would be the final determining
factor for purchase or rejection of a consignment and for
determining the price. The presence of defects could resultin an unclean cup and thus lower the cup quality and price.

Steam cleaning
The steam treatment of coffee was developed by Professor
Karl Lendrich, and was patented in Germany in 1933.
Briefly, the process was developed with the objective to
make coffee more ‘acceptable’ to certain consumers who
were reporting varying degrees of stomach discomfort
when drinking regular coffee. The discussion as to exactly
which chemical components of the coffee bean were/areresponsible for this is ongoing, but ‘mild’ or ‘stomachfriendly’ coffees have been a regular feature of the Germanmarket ever since. Germany is the typical and possibly only
significant market for this kind of product.
The original procedure consists of a relatively gentle steamtreatment lasting between 30 and 60 minutes during which
the beans undergo chemical and physical changes. It ismostly, if not only, used on arabica where it reduces certain
acids and also causes certain taste changes.
In recent years, steam treatment has increasingly been used
to treat robusta because it was found that steam-treatedrobusta coffees were milder and could even develop someacidity. This first became of interest during periods of highcoffee prices when the price difference between arabica androbusta made it attractive to include a certain percentage
of steam treated robusta in a blend. However, this type of
steam treatment is more severe in that higher temperatures
are applied for longer periods. The end result of the harsher
treatment results in a different taste experience and it isunlikely such coffees will be used to any great extent in highquality blends.
It is difficult to estimate the extent to which steam treatedcoffees are being used except to say that the never ending

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quest to reduce costs will certainly keep this process under
the spotlight, especially when coffee prices are high. There
are no statistics available as to actual usage, but tradesources suggest it is growing.
It is worth noting as well that further research has shownthat certain phenolic compounds (causing off-flavours or
taints) can also be reduced or eliminated through steamtreatment or steam cleaning. This then makes it possible to‘clean’ coffees that otherwise would not have been useable,
to a ‘useable standard’. Therefore, if for example the pricedifference between arabica and robusta was to narrow
substantially, then the steam cleaning of certain arabicas
could also become a regular feature.

Robusta in espresso and other coffee
beverages
Until very recently, the Western hemisphere and many
South and Central American countries have been the
producers and exporters of specialty coffees. While 75%
to 80% of specialty coffee exports originate in Central orSouth America, the Caribbean and Hawaii, and over half
the remaining 20% to 25% are produced in Africa, Asia’scontribution barely exceeds 10%.
Historically, Colombia, Ethiopia, Jamaica and Kenya, which
are considered as producers of gourmet coffees, produce
only arabica. The North American consumer market, where
the specialty phenomenon was born, has so far mostly
bought robusta for use only as a filler or for soluble coffee
preparation.
However, robusta coffees are strong in body and can be
neutral and buttery in the cup. There are robusta varieties inAfrica, India and Indonesia whose cup quality, when washed,is supremely soft and buttery. This taste profile, with the added
attributes of high altitude and fairly low caffeine content, could
help in creating designer and premium robusta coffees.
(Liquor requirements and the liquoring of coffees for use inespresso blends are different from those used for traditional
preparation, see also chapter 12, Quality control.)Using only arabicas limits the diversity of coffees available for
consumption. Robusta origins, and the special acceptable
tastes inherent to robusta beans, could provide a solution.
Price could be an additional reason for creating exemplaryand specialty robustas. Robustas are traditionally cheaper
than arabicas, so there is an opportunity to develop premiumrobustas that are less expensive than premium arabicas,
thus catering to a new group of consumers.
A point worth mentioning is that on the consumer side there
has been no rejection of quality robusta. Even before the birthof the gourmet and specialty coffee phenomenon, selectfood stores all over the world were offering roasted coffees
by origin: monsooned robustas from India, washed robustas
from Papua New Guinea, and from Indonesia the famouswell washed robusta [originally called in Dutch West Indischebereiding or WIB (West Indian preparation, or pulped)], havebeen very popular. Some have earned the status of being
described as exemplary coffees. Increasing consumerawareness of the attractions of top quality robustas will in
itself also help to promote such coffees.
Quality robusta can be used in the preparation of today’s
coffee beverages. Clean and fresh, strong bodied, neutral,with hardly any acidity and with an undercurrent of chocolate
and malt notes, unwashed robustas can be used in themaking of espresso, canned or liquid coffee, and regularor filter coffees.
Well washed, soft robustas provide the aromatic crema forstrong espresso, provided they do not show fresh or fruity
tastes that can be unpleasantly accentuated by the espresso
extraction process. High-quality washed robusta coffees
are excellent for fortification of milk-based drinks such as
cappuccino and café latte, and as a component of highcaffeine blends.
However, there are different tasting requirements whenusing arabica or robusta in espresso. The concentrated
espresso cup exaggerates certain sensory aspects, notalways positively. Only well-matured and absolutely clean
cupping coffees can be considered, and their suitability can
only definitively be established by submitting the sample toactual espresso extraction. See also chapter 12.

Robusta, espresso and specialty
Global consumption of espresso today is such that it has
become a separate, stand-alone market alongside themarket for whole bean coffee, and that for roast and groundcoffee (R&G coffee). But, also in the espresso market one
finds blends that consist of commonplace, if not ordinary
coffees alongside really good quality. Basically, an entire
range of qualities that are all sold as espresso. So, espresso
can be both mainstream and specialty. The vast majority ofespresso brands are blends.
Views on this tend to differ between the United States andEurope. The United States view is that, mostly, it ranks as
specialty. This is probably due to the fact that for many inthis market espresso is a relatively new consumer productand, one that is ‘different’. Europe has known espresso for
many, many decades and consumers there definitely look at
it as a separate lifestyle product, but one whose quality can
range from ordinary to truly exceptional – as is the case withtraditional coffee.
What is beyond dispute is that the strong growth in theespresso segment has resulted in increased and new interestin robusta coffee. It is widely accepted that specialty (orgourmet) robustas exist and that there is also a market forthem. As such, starting with the 2008 World Championshipfor Cup Tasters, held by the Specialty Coffee Association ofEurope (www.scae.com), the tasting line-up for this event
now includes premium robustas.

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Additionally the Coffee Quality Institute (CQI – www.
coffeeinstitute.org) has since early 2010 been working on the
profiling of specialty robusta coffee (or fine robustas), thus
providing further proof of the renewed interest in premiumrobusta coffees. To date, the project’s main conclusion has
been that selectively harvested and correctly processedrobustas, both washed and natural, offer taste profiles thatcan be differentiated by their country and area of origin.
Provided such coffees are correctly roasted (the robusta
bean is harder than arabica, making the roasting process
more difficult to manage) the cupping characteristics canyield scores of 80+ points on a 100-point scale.
The main taste difference between premium and commercial
grade robustas is that premium robustas have a high sweet
aspect (versus a low bitter aspect), whereas commercial
grade robusta usually shows the exact opposite. The main
obstacle to improved robusta quality, and therefore pricing, isthe presence of defects that so often debase the cup quality
to the minimum acceptable, which is the commercial grade
product. Quality standards and quality controls for premiumrobustas therefore have to be of the same level as requiredfor premium arabicas. See also chapter 12.
Bringing about fundamental change in the way the market
perceives premium robustas requires both a radically different
approach to robusta ‘quality’ by producers, and high-levelpromotion of fine robusta to the market at large. This has
been done since 1999 for specialty arabicas through the Cupof Excellence initiative. Details at www.cupofexcellence.org.

CHAPTER 12QUALITY CONTROLQUALITY CONTROL ISSUES .............................................................................................................................210
ICO MINIMUM EXPORT STANDARDS...............................................................................................................210
ISO QUALITY SYSTEMS .....................................................................................................................................210
HAZARD ANALYSIS CRITICAL CONTROL POINTS – WHAT IS IT? ...............................................................211
HACCP: HOW TO MANAGE?..............................................................................................................................212
HACCP AND THE UNITED STATES: FOOD SAFETY AND BIOTERRORISM .................................................212
POTENTIAL HAZARDS ........................................................................................................................................213
MOULD PREVENTION – OTA..............................................................................................................................215
COFFEE TASTING (LIQUORING).......................................................................................................................218
CLASSIFICATION TERMS...................................................................................................................................223

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CHAPTER 12 – QUALITY CONTROLQUALITY CONTROLQUALITY CONTROL ISSUES
Quality control is essential, not only because of pricing
considerations (better quality equals better price), but also
to ensure that exports conform to food safety legislation in
major import markets. It also helps to reduce waste and loss
during the harvesting, processing and drying of coffee, andplays a role in the general move towards more sustainability
in the coffee industry.
Quality control at the primary (farm gate) level can assume
different forms:
 Government or coffee authorities attempt to ‘police’
harvesting, on-farm processing and drying. This is costly
in terms of qualified staff and does not have a good trackrecord.
 Penalties are imposed for lower than average quality. Thisis passive quality control: it does nothing to encourage
better than minimal or average quality.
 Premiums are offered for better than average quality.
This is active quality control: it rewards and encourages
the production of better quality. It can be combined witha refusal to purchase lower quality but this does leave
open the question of what then happens to such coffees.
Different producing countries have differing quality control
systems and attach differing values to certain aspects ofquality. General information on coffee quality standards canbe found at www.iso.org (for instance, ISO 10470, a draft
defect chart, but there are also many other ISO standards ofinterest to coffee exporters, including one detailing correct
sampling procedures – look under ICS 67.140.20 Coffee
and coffee substitutes). Information is also available fromcoffee authorities in producing countries.
When setting quality limits one should recognize thatwithout active quality control, such as paying premiums forbetter quality, the maximum permissible limit (on defects,
for instance) quickly becomes the new standard. And whensetting export taxes, care should be taken not to penalize
producers of better quality who manage to obtain premium
prices as a result of their effort.

ICO MINIMUM EXPORTSTANDARDS
Internationally, the very low coffee prices that resulted
from surplus production in the late 1990s and early 2000s

brought calls for the lowest qualities to be eliminatedfrom the market altogether, and the ICO Council passed
a resolution to this effect. Resolution 407 introduced
mandatory minimum standards for coffee exports in
February 2002, but this proved to be unenforceable so it
was subsequently amended by Resolution 420 (May 2004),
which recommends voluntary targets for the minimum
quality export standards for both arabica and robusta. The
objective remains to halt the export of substandard beans,
thereby tightening supply lines in the expectation this will
help lift prices. The ICO’s Coffee Quality-Improvement
Programme calls on producing members to endeavour
to restrict the export of arabica coffee with more than 86
defects per 300 g sample or robusta coffee with more than
150 defects per 300 g.
The programme also asks members to endeavour not
to allow arabica or robusta of any grade to be exported
whose moisture content is below 8% or above 12.5%, withthe proviso that this should not affect established, good
and accepted commercial practice. Thus, where moisture
percentages below 12.5% are currently being achieved,
exporters should endeavour to maintain or decrease these.
It is accepted that specialty coffees that traditionally have ahigh moisture content, such as Indian monsooned coffees,are exempt, but Resolution 420 of 21 May 2004 (see www.
ico.org) requires all producers to clearly identify on theCertificate of Origin any coffee which does not come up to
the recommended standard. For the first six months of 2011
the ICO reported that 23 exporting members, accounting
for nearly 40 million bags or over 72% of all exports duringthat period, provided information on the quality of the coffee
they exported. Of these exports nearly 36 million bags (90%)
were classified as being within the resolution’s defects andmoisture targets. The split was 92% arabica and 8% robusta.

ISO QUALITY SYSTEMSISO 9001 is a process-based quality management systemthat organizations can use to demonstrate the consistentquality of their products to customers and concerned
regulatory institutions. Customer satisfaction is then further
enhanced through continual improvement of their system.
As an example, in a factory producing pencils it would
be hopeless to inspect every single pencil manufactured– instead one monitors the process used to make them.
Similarly one can describe in documented procedures,such as production manuals, the process of converting the
fruit of the coffee tree into exportable green bean.

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When an organization’s quality management systemcomplies with ISO 9001 and when the coffee is processedin accordance with these procedures, then the quality
management system (not the product) can be ISO 9001
certified. During cultivation too many variables (weather,diseases, pests) are beyond the control of the producer.
This is why in the case of green coffee the process in the
ISO system starts when the cherry is picked, and ends
when the container is delivered to the ship’s side. This canwork for estate coffee that is exported under its own name,but is less easy to apply to smallholder coffee because
numerous small deliveries to collection points or washingstations automatically lose their identity. And blended coffee
shipped in bulk gains an identity only upon loading.
Nevertheless, good harvesting and processing standards
are essential to maintain quality, and ISO 9001 provides
those who process their own coffee for export withidentification and traceability for all the coffee produced.
The batch number can lead back to the day of picking,where on the farm, what the weather was then, how long it
took to dry the coffee, how well it was dried, and a numberof other variables – all useful information in determining
the cause of any quality problems that may subsequently
arise. Perhaps none of this provides any immediate or
direct economic advantage, but estate growers using thesystem say they have become better processors and are
better able to provide the sort of quality guarantees that thelarger commercial roasters demand. For current details goto www.iso.org and look for ISO 9001.
However, by themselves these ICO and ISO objectives do
not provide answers to the ever more stringent food safety
legislation being introduced at the consumer end, andthe potential impact of this on coffee exporters. But ISO
22000 incorporates the requirements of the hazard analysis
critical control points (HACCP) system developed by the
Codex Alimentarius Commission. HACCP has increasingly
become a mandatory requirement in the markets of various
countries since the 1990s, most notably for non-farm foodbusinesses in the EU since January 2006. As ISO 22000 is
an auditable standard, certified companies can demonstrate
their compliance to HACCP. Certification to ISO 22000 could
facilitate acceptance by global food retailers, as it also
covers the requirements of key standards developed byvarious global food retailer systems.

HAZARD ANALYSIS CRITICALCONTROL POINTS – WHAT IS IT?
The scope of quality control in developed countries
has expanded enormously in recent years. Today, it
encompasses not just the traditional commercial concernswith quality, but also all food health and hygiene concerns
associated with modern consumerism. Coffee is part of themodern food chain and health concerns are increasingly
shaping quality controls at the receiving end.
Gone are the days of settling claims on mould orcontamination damage internally through the paymentof a simple allowance. Not only may customs and healthauthorities in consuming countries order the destruction of‘hazardous’ parcels, but they will also trace responsibility
back to the source: the country, the shipper and even theindividual grower. Relatively light-hearted sounding phrases
such as tracking and tracing food products from ‘farm
to fork, stable to table or plough to plate’ are, in fact, thepolitical outcome of consumer pressure. People want toknow their food is safe and if one particular sector of thefood industry is found to pose a problem, then all othersectors are affected as well.
Food health and hygiene concerns are relatively easily
addressed in developed countries. The difficulty fordeveloping nations is that the resultant procedures andregulations are then applied equally to the food crops
they export to developed countries. The import trade isincreasingly passing such consumer-imposed food chain
management issues on to exporting countries that, in most
instances, have to find the answers or lose the business.
A particular food safety issue for coffee is concern over thepresence in foods and beverages of ochratoxin A (OTA), a
mycotoxin that is believed to cause kidney damage. OTA
is a probable human renal carcinogen (cancer producing
substance – IARC evaluation Class 2B). Although thetoxicological status of OTA has not yet been settled,importing countries are increasingly paying attention to its
occurrence in coffee and other products and are requiring
the adoption of preventative measures.

Tools on ISO 22000 and ISO 9001 have been developedby the International Trade Centre and are available on
the Internet: see www.intracen.org/eqm and go to ‘quality
management’.

HACCP is a management system in which food safety isaddressed through the analysis and control of biological,
chemical and physical hazards from raw food material
production to manufacturing and consumption.

HB 17 ISO 22000 Food Safety Management Systems – Aneasy-to-use checklist for small business – Are you ready?
is a software-based self-diagnostic tool on ISO 22000(published in 2007). The tool helps small businesses
operating in the food chain to understand the regulatory
requirements for food safety and to make an assessmentof their readiness to implement ISO 22000 and obtain somepreliminary guidance on applying the standard.

HACCP involves seven principles:
1. Analyse hazards, for instance microbiological (e.g.
bacteria, viruses, moulds, toxins), chemical (e.g. pesticide
residues), or physical (stones, wood, glass, etc.).
2. Identify critical control points. These are points in the food’s
production (from raw to processed to consumption) at
which a potential hazard can be controlled or eliminated.

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3. Establish preventative measures with critical limits(values) for each control point, such as a minimum drying
time to ensure mould growth cannot progress.
4. Establish procedures to monitor the critical control points(e.g. how to ensure that adequate drying occurs).
5. Establish corrective actions to be taken when monitoringshows that a critical limit has not been met, such as
disposing of potentially contaminated cherry.
6. Establish procedures to verify that the system is working
properly. For example, test drying facilities for leaks orcontamination.
7. Establish effective record keeping for documenting the
HACCP system, such as records of hazards and control
methods, the monitoring of safety requirements andactions taken to correct potential problems.

HACCP: HOW TO MANAGE?
Most enterprises in the coffee chain, including coffee
producers and exporters, will at some point need to apply
controls to guarantee product safety. These are usually
represented in a concise process flow diagram with
underlined points where hazards may occur. This must be
documented in a HACCP plan. Any discrepancies found,and the countermeasures taken to correct them, must be
registered.
In 2002, European Union food business operators werealready being obliged to implement HACCP systems on thebasis of existing legislation (Council Directive 93/43/EEC on
the hygiene of foodstuffs). Many food processors and their
suppliers have always had stringent quality controls that, inpractice, were close to a HACCP system. The difference now
is that a HACCP system requires a detailed description thatcan be subject to verification by food safety authorities. For
example, supplying an inferior grade of green coffee that isotherwise sound is a quality issue and does not necessarily
represent a food hazard. But a mouldy coffee does.
Control points can be divided into two groups: (i) The
main group includes all those points where certain controls
have to be applied and where loss of control may resultin a low probability of a health risk. These are known ascontrol points, or CP. (ii) The other group includes a very few
points where loss of control may result in a high probabilityof illness. These are known as critical control points, or CCP.
For example, quickly passing a critical stage in the coffee
drying process seems like a vital critical point in the HACCP
system.
Both HACCP and GAP (or Good Agricultural Practice – there
is also GMP or Good Manufacturing Practice) are quality
assurance systems, but they have different approaches.
HACCP concentrates on a few critical points, whereas GAP

tries to make all-round improvements. GAP is easier to set
up but does not necessarily zero in on the most important
steps that influence the occurrence or avoidance of toxins
in coffee. See www.fda.gov and search under Food – H –HACCP for a good introduction to the subject. See also
under Resources at www.coffee-ota.org for presentations
on HACCP in the coffee chain with particular reference tothe prevention of OTA.
The two processes are complimentary in that GAP will
improve coffee quality, whereas HACCP will provide thetype of disciplined monitoring and control that supermarket
chains and food manufacturers increasingly demand. More
importantly, it is only through the HACCP process that one
can establish where OTA enters the system and where
the fungi causing OTA first appear. This is essential if one
is to meet EU and presumably in due course also UnitedStates requirements for the reduction and prevention of OTA
contamination.
The World Trade Organization (WTO) offers a searchable
database of member governments’ measures related to the
Sanitary and Phytosanitary (SPS) Agreement, thus making
it easier to find out about other countries’ food safety
requirements and alerts.
The SPS Information Management System (SPS IMS)
allows users to search and obtain information on measuresthat member governments have submitted to the WTO.
These include notifications concerning new export andfood safety requirements, specific trade concerns thatgovernments have raised, documents of the WTO’s
sanitary and phytosanitary measures committee, detailsof the authorities who handle notifications and, particularly
useful for those seeking information, member governments’national enquiry contacts.
The SPS Information Management System is available at
http://spsims.wto.org. The site also offers a gateway into the
SPS portal itself.
The International Portal on Food Safety, Animal and Plant
Health – IPFSAPH is an alternative source. With over 35,000
records, the data sets incorporated into www.ipfsaph.
org include WTO’s SPS Information Management System(containing all WTO trade notifications and concerns) and
IAEA’s Clearance of Irradiated Foods Database.

HACCP AND THE UNITEDSTATES: FOOD SAFETY AND
BIOTERRORISM
Imports of coffee into the United States are all subject
to inspection by the U.S. Food and Drug Administration(FDA) under the provisions of the Federal Food, Drug andCosmetic Act. To pass for importation coffee must be free ofunapproved pesticide residues, have had no or only limited

CHAPTER 12 – QUALITY CONTROL

exposure to insect infestation in the field, and be free of all
chemical and other contamination including mould andlive insects. Insect damage by itself, pinholes for example,
exceeding 10% may also lead to rejection. The Green Coffee
Association (GCA) contracts routinely contain the clause ‘nopass – no sale’, which puts the responsibility for passing the
FDA inspection firmly on the exporter.
Different events have in recent years catapulted both
domestic and imported food security into top priority in
the United States, with consequent strengthening of FDA
surveillance of imported foods. This is visibly demonstrated
by much stricter FDA and customs inspection of coffee
containers and even coffee samples, and the distributionof an FDA Food Security Preventative Measures Guidance
circular to food importing operations. These measures also
include a large ‘track and trace’ element. For more informationon all this and FDA coffee regulations go to – www.fda.gov
and look for the New FDA Food Safety Modernization Act(FSMA) that was signed into law on 4 January 2011. Also,
ask for the information booklet, Health, Safety and Security
in the Importation of Green Coffee into the United Statesfrom the National Coffee Association of USA, Inc. – www.
ncausa.org.
The Public Health Security and Bioterrorism Preparedness
and Response Act requires all facilities engaged in the‘manufacturing, processing, packing or holding food for
consumption in the United States’ to be registered with the
FDA. This includes all exporters of coffee or for that matterany other primary commodity exporting to the United Statesand some processing plants. This information needs to be
updated each time there is a change. The regulations andmuch related information can be found on www.fda.gov/
Food/FoodDefense/Bioterrorism. The main point at issue
here is that food shipments from unregistered suppliers are
subject to refusal of admission into the United States. This
includes coffee!
A fact sheet is available at www.ncausa.org whereas related
information (on shipping security) is also available inchapter 5.

POTENTIAL HAZARDSHACCP system it is recommended to envisage measures
for mycotoxins in general.
Information on mycotoxins has been drawn from industry
experts, from the findings of the ICO-FAO project ‘The
enhancement of coffee quality by prevention of mould
growth’, and the 2001 book Coffee Futures published by
CABI Commodities, ISBN 958-332356-X.
The initial contamination of coffee with OTA takes placethrough spores in the air and in the ground. These spores
may produce a mould, but only if the right circumstances(humidity and temperature) prevail. The importance ofproper moisture management throughout the entire
processing and supply chain cannot be overemphasized.
Farmers, middlemen and exporters should also be awarethat in a shipment of coffee OTA contamination (mould)
may be very localized, making sampling extremely complex.
Careful inspection of visual appearance and any mouldy or
earthy smells can be a useful tool for checking.
Pesticide residues in coffee have only very rarely exceeded
the limit values so far, but this does not mean that theirmonitoring is not a vital aspect of an HACCP system. It isabsolutely essential that coffee growers maintain chemicalregisters that detail, in chronological order, the type andquantities of all chemicals used and the timing of theirapplication. Only chemicals that have been approved
for use on coffee may be used and then only within thewithholding limits specified by the manufacturers. Exporters
and shipping lines must ensure only clean containers areused, thus avoiding cross-contamination by previous
cargoes. Go to www.fao.org and search for the Draft Codeof Hygienic Practice for the Transport of Foodstuffs in Bulk
and Semi-Packed Foodstuffs of the Codex Alimentarius
Commission.
Hydrocarbon contamination is usually caused by jutecoffee bags because of the ‘batching oil’ used to soften thejute fibres before spinning. There have been instances ofcontaminated oil being used (old engine oil for example).
The International Jute Organization has establishedspecifications (IJO Standard 98/01) for the manufacture ofjute bags to be used in the food industry – see www.jute.org.

MYCOTOXINS, RESIDUES,CONTAMINATION Analytical criteria. Ingredients used as batching oils
must be non-toxic and approved for use in packaging
materials that will come into contact with food. Batchingoils must not contain compounds that could produce offflavours or off-tastes in food packed in jute or sisal bags.

Mycotoxins are caused by contamination by some naturally
occurring moulds. Not every type of mould produces
mycotoxins. Mycotoxins are ‘selective’ in the sense thata given type of mycotoxin occurs in specific foodstuffs:
aflatoxins in peanuts, grains and milk; patulin in apple
juice; OTA in grains, grapes and derived products, beansand pulses, cocoa, coffee and others. OTA is the most
relevant mycotoxin for coffee, but in the framework of an Chemical criteria. The amount of unsaponifiable
compounds (which cannot be converted into soap byboiling with alkali) shall be less than 1,250 mg/kg. The
method described in British Standard 3845:1990 isrecommended for the determination of the added oilcontent of jute yarn, rove and fabric. Method 2.401 of
the International Union of Pure and Applied Chemistry(IUPAC) is recommended for determining unsaponifiable
matter.

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CHAPTER 12 – QUALITY CONTROL Organoleptic criteria. Jute bags shall be analysed fortheir olfactory qualities. No undesirable odours, or odour
untypical of jute, shall be present. No unacceptableodours shall develop after artificial ageing of the sacks.
The ageing procedure to be followed shall be the one
described in European Standard EN 766 for use on
sacks for the transport of food.
To read the EU Packaging and Packaging Waste Directive(PPWD) go to www.eur-lex.europa.eu and search for
Directive 62 of 1994 (94/62/EC). Subsequent changes anda consolidated version dated 20 April 2009 are found underthe Bibliographic Notice.
Organizations and private companies in India and
Bangladesh have developed a hydrocarbon-free lubricant,based on vegetable oil, to soften the jute fibre. It is a nontoxic, biodegradable oil, and bags made with it can beclassified as food grade bags. However, the fact thatvegetable oil is used for batching is in itself not sufficient.
The oil used must be stable and may not turn rancid.

PESTICIDES: MAXIMUM RESIDUE LEVELSIN THE EU
The importance of the previous topic is emphasized by thefact that on 2 September 2008 European Union Regulation(EC) No. 396/2005 came into force for a large number ofcommodities, including green coffee beans. The Regulation
harmonizes what was previously a highly fragmented numberof national standards, applied by individual countries. Thisdevelopment is to be welcomed as it simplifies the trade ingreen coffee by ensuring that all stakeholders depart from thesame assertions. Go to www.eur-lex.europa.eu and search
for Regulation 396 of 2005. Subsequent changes and aconsolidated version dated 1 January 2011 are found underthe Bibliographic Notice.

– look for product reference 0620000 for the list of MRLs
currently applicable to coffee beans. The website also
provides the latest updates to the MRL database.
Other information sites are: www.ec.europa.eu/food/plant/
protection/pesticides/index_en.htm and www.ec.europa.eu/
food/plant/protection/pesticides/legislation_en.htm. See also
the site of the European Food Safety Authority at www.efsa.
europa.eu.
EU regulations quote permissible MRLs per kilogram whereas
other countries/systems may express such limits in terms of,for example, parts per million or per billion. The comparison
below is provided for ease of reference.
A mass concentration of

2 mg/kg = 2 ppm

A mass concentration of

2 μg/kg = 2 ppb

mg = milligram; μg = microgram; ppb = parts per billion; ppm =parts per million.

OBSOLETE PESTICIDES
When developed countries prohibit the use of dangerous
chemicals a logical question arises: what to do about
existing stocks in developing countries?
Over time stocks have accumulated worldwide of banned
chemicals and pesticides, some of which are Persistent
Organic Pollutants or POPs. Banning apart, these substances
also become obsolete through ageing, rendering them lesseffective (past sell-by date) but no less unsafe. They may beleft over from pest control campaigns or simply stay aroundbecause they are not wanted anymore.

Box 12.1 Persistent Organic Pollutants

It is important to note that the EU works on the basis thatmaximum residue level (MRLs) for active substances are
set at very low default levels (currently 0.01 mg/kg) unlessusers provide justification to set them higher. The coffee
trade has provided as much information as was obtained
from producing countries to ensure that MRLs relevant tocoffee were set at realistic levels. It is, however, not known
whether all active substances used by different producing
countries have in fact been so identified and assessed as not
all countries provided such information.

Of the 21 POPs currently (2011) listed by the 2001
Stockholm Convention on Persistent Organic Pollutants, 14
are pesticides: aldrin, alpha hexachlorocyclohexane, beta
hexachlorocyclohexane, chlordane, chlordocone, DDT,
dieldrin, endrin, henxachlorenebenzene, heptachlor, lindane,
mirex, pentachlorobenzene and toxaphene (campheclor).

However, the general consensus is that the current legislation
does not adversely affect the trade in green coffee, although
the cost and frequency of future inspections by EU authorities
of arrivals in EU ports remains to be established. It should
also be noted that from a contractual point of view green
coffee refused entry for exceeding the MRLs requirements
can be considered as not merchantable and therefore not incompliance with contractual obligations.

The condition of obsolete pesticide stocks and waste canvary from well-stored products that could still be used, toproducts leaking from corroded drums and other containers
into the soil. Disposal is sometimes attempted by dumping
in pits or burning and covering with soil. Over time severe
environmental harm in the form of soil and water pollution– often permanent – may occur. Storage sites are often
unsupervised and pose severe health risks, particularly tochildren. Previous WHO estimates have suggested as manyas 3 million people are poisoned by pesticides annually,
most of them in developing countries.

An MRL database is provided on www.ec.europa.eu/food/plant/protection/pesticides/database_pesticide_en.htm

DDT is, however, exempted for restricted use by somecountries in anti-malaria campaigns.

CHAPTER 12 – QUALITY CONTROL

There is also the risk that without formal cleanup and prevention
measures, obsolete pesticides may be repackaged andreappear in the market under different names. Many are very
persistent which, health and environmental hazards aside,
also makes them effective as pesticides for long periods andrenders them attractive for illegal resale.
Safe disposal requires sophisticated technology that, mostly,
is not available in poorer developing countries. The quantities
to be disposed of may however not warrant the establishmentof such facilities in individual countries. In many cases thisthen leaves export to approved disposal facilities elsewhereas the best option. Not only are the costs of this extremely
high, ranging from US$ 3,000/ton to US$ 5,000/ton, but
the material to be disposed of is not homogeneous. Thereis therefore no blanket solution for the disposal of obsolete
pesticides. It is clear though that unless the issue is properly
addressed, future generations in affected countries willcontinue to suffer the consequences of illegal disposal ofthese substances, many of which are used in agriculture.
Coffee producing countries worldwide are not immune fromthis. Different products may have been used in the past thatare now prohibited and whose safe disposal presents not
only safety and logistical problems, but is also very expensive.
Illegal repackaging and resale could cause enormous
problems whereas contamination into export crops is a realpossibility. Condemnation of a country’s green coffee exports
for containing residues of such substances would have very
serious, long-term economic consequences.
In Africa alone it is estimated that there could be as much as
50,000 tons of obsolete pesticides. In response to requests
for assistance from many African countries, the Africa
Stockpiles Programme (ASP) was therefore created to help
address issues around the identification, safeguarding,removal and safe disposal of obsolete pesticides, and toprevent future accumulation. Initially targeted at sevenpriority countries (as of early 2009) with more countries tobe added in due course.
Some of the international organizations partnering with
developing country governments in ASP include the Foodand Agricultural Organization of the UN, the World Bank,
The World Wide Fund for Nature, the Global Environment
Facility, the African Development Bank, the Pesticides
Action Network (PAN UK), and CropLife International. To
note that some trade pesticide products do not necessarily
indicate the active ingredients by name, making it difficult to
identify them correctly. However, a useful comparison tableof Pesticides Prohibited and Restricted in Coffee Standards
was prepared by PAN UK in 2011 and is available on requestfrom the 4C Coffee Association – www.4c-coffeeassociation.
org. The table lists a number of products by their active
ingredient.
See also www.africastockpiles.net andagriculture/crops/obsolete_pesticides/en/.

www.fao.org/

MOULD PREVENTION – OTA
Mould is undesirable in any product, and coffee is no
exception. In recent years mould in coffee has increasingly
become associated with concerns over the presence in foodand beverages of OTA. The toxicological status of OTA has
not yet been settled but most major importing countries arenevertheless paying increasing attention to its occurrencein coffee and other agricultural products, and are requiring
preventative measures.
In the European Union the following maximum limits apply
to finished coffee products, effective 1 March 2007: roasted
coffee – 5 ppb (parts per billion); soluble coffee – 10 ppb. No
limit has been set for green coffee but green coffee remains
under review; and there is provision for annual reporting of
the occurrence of OTA and prevention measures.
In the meantime, a number of individual European countries(Czech Republic, Finland, Greece, Hungary, Italy, Portugal,
Spain and Switzerland) have their own legislation or customs
regulations in place that also set (varying) maximum limits on
green coffee. Italy has limits on finished coffee products while
in some countries (e.g. the Netherlands) internal instructions
for food safety inspectors are in place. Germany, Europe’s
largest importer, applies the EU limits.
The danger for producers is that once a producing country
is identified publicly (for instance through the EU ‘rapid alert’system used by customs authorities to distribute information
on shipments with a food safety risk) as a potential sourceof OTA contamination, the reputation and marketability of
its coffee are likely to suffer. Italy has already establisheda system to identify ‘high-risk’ origins. Identification of a
shipment with an excessive OTA level automatically resultsin the producing country being placed on a ‘high risk’ list,
and it will be removed again only once a number of ‘clean’shipments have been received.
A further issue is how green coffee would be sampled for
OTA. As yet there is no universally agreed OTA related
sampling and testing method for green coffee and thedanger is that individual countries will establish theirown individual procedures. It is in everyone’s interest
that sampling and testing procedures are standardized
worldwide, including producing countries, and that adequate
preventative measures are taken in producing countries
because it is there that the problem can be addressed atsource. More information on testing green coffee for OTA atwww.europroxima.com/uk/food-safety/mycotoxins/ and www.
vicam.com.
The importance of mould prevention cannot be stressedenough. Returning a shipment that is rejected at the externalborder of the EU is now subject to Article 21 of Regulation
882/2004 of 29 April 2004 on official controls. The relevant
part of this article, applicable to green coffee and imported
finished coffee products, reads as follows.
Re-dispatch of consignments shall be allowed by competentauthority only if:

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CHAPTER 12 – QUALITY CONTROL The destination has been agreed with the feed or foodbusiness operator responsible for the consignment; The feed or food business operator has first informed thecompetent authority of the third country of origin or third
country of destination, if different, of the reasons andcircumstances preventing the placing on the market ofthe feed or food concerned within the Community; When the third country of destination is not the countryof origin, the competent authority of the third country ofdestination has notified the competent authority of its
preparedness to accept the consignment.

Studies have shown that the most important sources of OTA
contamination in green coffee are (i) inadequate sun drying ofcherries leading to OTA formation in the pods and parchment
husks, and (ii) defectives (including black beans), pods andhusks (and dust). The drying stage is the most favourable time
for the development of OTA. Adequate drying to uniformly
low moisture levels and avoiding local wet spots, caused
for example by uneven drying, rewetting or condensation,is crucial in prevention. Simple and cheap devices for solar
drying of coffee can be of great help in improving drying
practices, including prevention of rewetting by rain or dew.

Logically then, failure or inability to re-export will result in
destruction of a rejected consignment. Hence it is entirely
possible that in time the well-known United States contract
condition ‘no pass no sale’ could also be introduced forcoffees shipped to Europe and elsewhere.

Tests have also shown that the presence of an earthy/mouldy
smell in green coffee is an early indicator of the presence ofmould damage. Not every mould is OTA-forming, but an earthy
smell (or cup) should trigger further investigation. Similarly,
visually clean coffees that show no visible damage (rewetted
bags/beans, broken beans, insect-damaged beans) are verymuch less likely to be significantly contaminated. The use ofgreen coffee with a higher contamination level than 15 ppb is
not recommended. Given a reduction of OTA contamination
through processing of 2/3rd (this is a conservative figure,used to be on the safe side as the actual reduction may
be higher), green coffee with a contamination level of lessthan 15 ppb can reasonably be expected not to present any
problem in the finished coffee.

To note also that it is prohibited to mix foodstuffs complying
with the maximum levels with foodstuffs exceeding thesemaximum limits. This does not affect green coffee for which
there are no maximum limits, but would mean that it would
not be permissible to mix equal volumes of, for example,
roasted coffee containing 7 ppb of OTA with roasted coffee
containing 2 ppb to achieve an average of 4.5 ppb.
Visit www.ecf-coffee.org and look under publications forextensive, practical information on OTA as an issue in the
production and trading of green coffee, including detailsof relevant legislation on OTA in the European Union. Visit
www.coffee-ota.org for more extensive coverage and click on
Training Tool for presentations on HACCP and the preventionof OTA along the coffee chain, including a CD-ROM version.
For an overview of European Food Law generally go to www.
ec.europa.eu/food/food/foodlaw/index_en.htm.
In the United States the presence of OTA in agricultural
products is one of a number of food safety aspects thatreceive routine attention at the FDA. Although the FDA
monitors for contaminants, including mould, based on a risk
assessment analysis no specific guidelines exist concerning
OTA levels in coffee products.

OTA – IN COFFEE
In coffee OTA is produced by fungi of the Aspergillus
genus (A. ochraceus, A. carbonarius, A. niger). It is mostly
concentrated in the husk, which suggests that naturals(coffees dried in the cherry) are most at risk of contamination.
Identified factors affecting mycotoxin levels in the coffee
chain include: Environmental factors: temperature, moisture, mechanicalinjury (insect or bird damage, micro-organisms);
 Harvesting factors: crop maturity, temperature, moisture; Primary processing: drying, removal of defects;
 Storage: temperature, moisture; Distribution and processing: condensation.

The preventative steps listed in this section apply as much towet processed coffees as they do to dry processed (natural)arabica and robusta. Good housekeeping is essential.
Prevention is currently the only available effective way at farmlevel to combat OTA, although it should be noted that theremoval of mouldy cherry, or the reprocessing of mouldy
coffee, does not guarantee that the clean bean will be freefrom micro particles or spores.
Visit www.coffee-ota.org for an overview of research work
done and in progress. Visit also www.ecf-coffee.org and lookunder Publications for extensive, practical information on OTA
as an issue in the production and trading of green coffee.

OTA – PREVENTION DURING
PRODUCTION, HARVESTING AND
PROCESSING
Production
Work being done by the Food and Agricultural Organizationof the United Nations (FAO) indicates that under certain
conditions some coffee may become contaminated with
OTA, while still on the tree. Guidelines are therefore being
developed that aim at minimizing any spore load from
OTA-producing fungi in the plantation itself. Once theseguidelines have been finalized, further information will bemade available at www.coffee-ota.org.

CHAPTER 12 – QUALITY CONTROL

Harvesting and processing
 Cover the soil below the trees with clean plastic during
picking to prevent cherries coming into contact with dirt orsoil, or getting mixed with old, mouldy cherries left behindfrom previous picking rounds or the previous season.
 Do not use cherries that have been in contact with bareearth – they are susceptible to developing mould growth.
 Process fresh cherry as soon as possible. Either pulp
them or commence drying on the day they are picked. Do
not store fresh cherry, especially if fully ripe or overripe,
as such storage promotes mould growth; do not holdcherry in bags.
 Never dry on bare earth, because mould spores remainin the soil and can contaminate cherry. Use mats, trays or
tarpaulins. Raised drying tables, allowing air circulation,
remain one of the most effective drying systems though.
 During the first two to three days of drying ensure thelayer of drying cherry is as thin as possible to speed theprocess. After this, the layer should not be more than 4
cm (1½ inch) thick. Drying cherry should constantly be
raked and turned, and should be covered at night andduring rainfall.
Never allow partly or wholly dried cherry to get wet again;
protect it at all times against rain, morning dew and accidental
wetting.

OTA – PREVENTION DURING PROCESSING
Prevention during wet processing
 Dispose of pulp from wet processing away from drying or
clean coffee. Compost it before using as mulch in the field.
 Pulp on day of picking. Separate floaters and control
water quality. Monitor the quality of fresh cherry. What
proportion of unpulped cherry and, conversely, nipped/
naked beans do you accept? Are skins effectively
separated? Ensure these factors are monitored.
 Remove pulp and skins from parchment. Sanitize
equipment daily.
 Skin dry wet parchment to remove water quickly. If
necessary remove excess water with forced drying.
Then dry the parchment slowly to avoid cracking. Turn
regularly; do not spread more than 4 cm (1½ inch) thick.
 Remove any pods and skins from the parchment by hand.
 Use drying mats or drying tables where possible. Never dry
on bare earth, because mould spores remain in the soil andcan cause contamination. Use mats, trays or tarpaulins.
Again, raised drying tables, allowing air circulation, remain
one of the most effective drying systems.

Prevention during dry processing
 Site the dry processing or hulling plant in a dry area,
away from swamps.

 Do not buy or process wet coffee. If you must, then keep
it separate and dry it immediately and correctly.
 Keep equipment and buildings clean. Do not allow dust
and husk to accumulate and so contaminate clean(green) coffee.
 Ensure clean coffee contains no husk; more than 90%
of mould originates from the husk of sun-dried cherry.
Remove also dust, mouldy beans, unhulled cherries(pods) and so forth.
 Avoid adding husk or pods on purpose (in order to reacha maximum permitted defect level in the specification).
 Use only clean, dry bags for storage. Always keep
cleaned coffee in a separate area, well closed off fromthe hulling area and the waste husk disposal site.
 Ideally moisture content should be even throughout.
Use correctly calibrated moisture meters and ensure
all meters are recalibrated at the start of each season,
preferably more often. See also chapter 11.
 The risk of fungi growth is at its strongest when coffee isstored with a moisture content of over 12.5% (ISO 6673)
and at high temperatures (over 25° C).
 Cover bags during transport to avoid any chance ofrewetting. Load and offload only during dry weather
or under cover. Store in well-ventilated, leak-proof
warehouses. Always store away from walls and on pallets
to allow ventilation and avoid storm water damage.
Obvious indicators of potential OTA presence in green
coffee include wet or mouldy bags or beans, the presenceof husks and pods, an earthy or mouldy smell, and earthy
notes in the cup itself. But, OTA has also been found incompletely clean coffee.
The ICO agreed method of moisture content analysis is
ISO standard 6673; heating at 105° C during 16 hours,
or moisture measuring equipment calibrated to the same
standard. The sampling method referred to in ISO 6673 is
ISO 4072. For details go to www.iso.org or www.ecf-coffee.
org – publications.
Websites where information on moisture meters can beobtained include www.sinar.co.uk, www.farmcomp.fi/index.
php?id=56, www.enercorp.com, www.agric.gov.ab.ca/
index.html (search for moisture meters), www.decagon.
com/aqualab/ and www.aqua-boy.co.uk.
www.coffee-ota.org has extensive coverage on all aspectsof the OTA issue.

OTA – PREVENTION DURING SHIPMENT
Condensation occurs because moisture is always present in
the air and hygroscopic (water-attracting) materials such as
coffee normally contain a certain amount of moisture as well.
Coffee with a moisture content in excess of 12.5% (ISO 6673)
should never be shipped, whether in containers or bagged,
as beyond this point the risk of condensation and therefore

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fungi growth occurring becomes unacceptably high. Under
ICO minimum export standards, the only exceptions could
be specialty coffees that traditionally have a high moisture
content, such as Indian monsooned coffees.
This is not to suggest that a moisture content of 12.5% iscommercially acceptable for all coffee – for certain coffees,
certain origins and certain buyers it is definitely not. The
figure of 12.5% simply represents a known technical point at
which the risk of damage from condensation and growth ofmould during storage and transport becomes unacceptably
high. Shippers who normally ship their coffee at moisture
percentages below 12.5% should definitely continue to do so.
An increasing number of buyers now include a maximum
permissible moisture content in purchasing contracts.
Increasing preoccupations with food health and hygienein consuming countries suggest strongly that exporters will
be well advised to acquaint themselves with their buyers’
requirements in this regard.

OTA – bagged coffee in containers
Condensation cannot always be avoided, but it is possible
to avoid or reduce damage by observing these basic
precautions.
 Containers must be technically impeccable: watertight;
free of holes and free of corrosion on the roof or sides; andintact door locks, rubber and sealing devices. They must
always be swept clean and must be dry and odourless.
 When stuffing takes place at the shipper’s premises
the shipper must inspect the containers. An inspector
should go inside the container and close the doors. If
any daylight is visible the container must be rejected
immediately. Also check that all rubber door seals arewhole and tight.
 The actual stuffing of the container should take place
under cover, just in case a rain shower occurs. Bags
should be sound: no leaking, slack or torn bags; no wet
bags; and no stained bags. Containers should never befilled to absolute capacity – always leave sufficient room
above the stow.
 Best practice is to line the container with cardboard (ideal)
or two layers of kraft paper, preferably corrugated, with thecorrugation facing the steel structure, so bags do not comein contact with unexposed metal from the container. When
stuffing is complete, fit a double layer of kraft paper on
top of the bags all the way to the floor in the doorway. This
will ensure that the paper will, at least partly, absorb any
condensation from the roof. Note that although desiccants
or dry bags are meant to absorb moisture during thevoyage they should only be used with the express priorpermission of the receiver. Many receivers do not permit
their use under any circumstances.
 When making a booking with the carrier always give theinstruction ‘stow away from heat, cool stow and sun/weather protected’. The term ‘stow under deck’ is nolonger appropriate for modern container vessels.

Experience shows that most of the condensation problems
encountered during maritime transport are caused at origin(containers are stuffed too early ahead of actual shipment,
or not properly lined), or immediately after offloading(particularly for containers arriving in winter). It is thereforeof utmost importance to limit both transit times and the dwellor intermediate storage periods and land legs of the transit
as much as possible.

OTA – bulk coffee in containers
Recent years have seen a substantial increase in the
movement of coffee in bulk, using normal dry containers
fitted with a liner. One advantage is the savings for shippers
on the cost of bags (and no need to dispose of them at
the receiving end), minus the cost of the liner. Anotheradvantage is the higher carrying capacity. But there areother, not always immediately apparent advantages.
Coffee shipped in bulk, using normal dry containers fittedwith a liner, always arrives in a better condition than coffee
in bags when shipped under similar conditions. Shipping inbulk avoids most of the problems associated with bagged
cargo: no baggy smells, no weight losses due to handling,
and generally better preservation of quality.
Air caught inside the closed liner is called interstitial air.
Interstitial air in a bulk load hardly moves as the individual
beans are obstructing the free flow of air, and so the hot air
cannot easily move to the edge. As a result, there is lesstransport of moisture to the roof and walls and the risk ofcondensation is thereby reduced.
Provided correct liners and procedures are used, and thecoffee is shipped at the correct moisture content, thenthe incidence of claims on bulk cargo is vastly reduced
compared to bagged cargo – according to some by asmuch as two-thirds.
The general principles for choosing a container are thesame as when shipping bagged coffee.

COFFEE TASTING (LIQUORING)
Before entering into this subject it is appropriate to look atsome aspects of quality that aspiring tasters or ‘cuppers’should understand.

BLENDING
Most roasted coffee sold is blended. Usually only specialty
coffee roasters offer straight coffees, i.e. exclusively fromindividual origins and mostly at very high prices. However,
the authors do not share the belief held by some thatblended coffees are necessarily always inferior to straight
origin coffees; it all depends on what the blend consists of,

CHAPTER 12 – QUALITY CONTROL

and at which market segment it is aimed. There are blended
coffees that easily outclass some of the ‘straight origin
coffees’ one finds on the average retail shelf.
To clarify the practice of blending it is important to noteagain that the global market for coffee consists of threebroad quality segments:
 Exemplary quality: Coffees with a high intrinsic value
because of their fine or unique cup quality (taste). Usuallyof quite limited availability and mostly retailed understraight origin or estate names. Because by their nature
exemplary coffees are of limited availability their adherents
usually know this and accept that their favourite coffee
may not always be available, and may not taste exactly
the same from year to year. Limited availability translates
into high prices, i.e. a marketing advantage.
 High quality or premium brands: Good tasting
coffees well presented but not necessarily visuallyperfect. Retailed both as straight origins and as blends.
This quality band is much broader and includes a goodnumber of today’s specialty coffees. It is also producedby leading multinational coffee companies and marketed
through supermarkets. High-quality or premium brands
are expected to be available always, and to taste thesame, also always. Therefore, for such a coffee to bemarketed as a straight origin, the supply must be large
enough to be offered throughout the year. If not, thenthe only option is to create the required quality from themixing, the blending of a number of compatible coffees
that, between them, can offer year-round availability.
 Mainstream quality: Coffees of average quality,
reasonably well presented, but certainly not imperfect. It
offers an average taste experience and probably accounts
for over 90% of the world market. Mainstream coffees areproduced, traded and roasted in large quantities. Most
are blends for two main reasons: large roasters cannot
rely on just one or two origins for security of supply, andmore often than not, consumer tastes in different markets
cannot be satisfied by just a single origin in any case.
To summarize:
 Blending a number of compatible coffees creates a taste or
flavour profile that can be maintained, also when individual
origin availability changes. If subsequently a particularcoffee is not available then it is replaced by another (orothers), always maintaining an unchanged taste profile.
 Blending broadens the roaster’s choice of raw materialand so enhances supply security; availability does notdepend on a single origin only. Also, coffee is available
when needed.
 Blending aims to maintain the preferred taste or flavour
profile at the lowest possible cost. This means thatcoffees are interchanged, not only on the basis of quality
but also on the basis of their cost. The more flexible
the blend the greater the money saving possibilities, afact that unfortunately at times clashes with the quality
requirements, especially in the lower end of the market.

The relationship between blending andtaste or flavour profiles
Flavour profiles are a description of the taste sensation
the average coffee drinker will encounter from a particularcoffee. The art of blending is the means by which a roasterstrives to maintain the same taste, throughout the yearor throughout the life of a particular brand. Recording
a specification of the required end result, i.e. the taste or
flavour profile, helps achieve this. Basic profiles standardize
certain objectives. For example:
 For a fresh, clean cup with some acidity use washed ormild arabicas;
 For a more full-bodied cup add natural arabicas;
 For higher cup yield and lower prices: add robustas.
The blending action combines any or all of these threebasic taste groups in different proportions to achieve acertain taste sensation. But, within each base group there
are many potential supply options. For mainstream blends
the number of potential supply options usually is quite
large, whereas for higher quality and specialty blends thenumber of potential candidate coffees shrinks fairly rapidly.
For top quality blends the number will be quite small. Water
quality in the target market may also play a role, sometimes
necessitating the production of slightly different versions of
the same brand for different markets.
The blend master will profile the taste of each component of
the blend by recording acidity, body, flavour, aftertaste etc.
He will record the proportion of each component used in
the final blend and will record the flavour profile of that final
blend. The objective are:
 Stability: maintain the blend taste profile vis-à-vis theend-user, batch after batch.
 Security: select different coffees when availability changes
or when the delivered quality of a purchase disappoints,
by matching other coffees against the required profile.
 Profit: produce each batch at the lowest possible priceby juggling components.
The blend master has the choice to blend the green coffeecomponents first and then roast the mixture. Or, the blender
can roast the individual components separately and blend
them afterwards. This choice will depend on personal
preference and appreciation of the blend components thatare to be used.
Profiling also enables the blend master not to bother withcoffees or origins for which he knows the flavour profile tobe unsuitable. This is why so many samples that exporters
send are never acknowledged or reported upon – the buyer
knows they are unlikely to fit the required profile.
Finally, some specialty coffee flavour profiles have become
incredibly complex, to the point where the average coffee
consumer probably becomes completely lost and simply
accepts that what is claimed is true. At the other end of

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the scale we find the erosion of blend quality, for example
when quality is sacrificed because of higher prices or lackof availability.
Whatever the market, for an exporter the most important
point to bear in mind is that having established a profilethat a particular buyer accepts and uses, each and every
subsequent delivery should be a full match. If at some stage
this proves to be impossible then advise the buyer of the
problem, openly and honestly. Never simply ship such a
coffee and hope to get away with it.

THE ROAST
Coffee quality is assessed in terms of the green appearance,
the roast appearance and by taste (cup or liquor).
The green appearance is discussed extensively inchapter 11.
Coffee quality is greatly influenced by the roasting process.
Dark roasts tend to obscure the finer aspects but enhance
the body. Light roasts emphasize acidity but result ina weaker brew. See chapter 11 for the Agtron systemof roast colour measurements. The degree of roasting
depends therefore on one’s marketing objectives. Fromthe professional taster’s point of view, it is easier to detect
quality and any off-flavours when coffee is roasted lighter
rather than darker. A light roast also makes it easier to spot
immature and green beans, which tend to show up as
yellowish pale in colour rather than brown when roasted.
All pales affect the cup quality, but extreme cases of pales(bright yellow beans) spoil the cup by giving it a ‘quakery’or ‘peanut’ taste.
The roast of naturals (sun-dried coffees) tends to lack thebright whitish centre cuts of wet-processed arabicas. In
general, dull roasts also suggest imperfectly processed oraged coffees, whereas bright roasts indicate freshness andgood processing. The following descriptions are commonlyused: Fine roast. Bright, brilliant, uniform and even, no pales.
 Good to fine. Bright, uniform, even, no pales.
 Good roast. Bright to dullish, reasonably even,occasional pale, no other defects such as ears or
brokens.
 Good to fair. Dullish, slightly uneven, mottled, a few
pales and other defects, can be soft and open.
 Fair to poor. Dull and uneven, a number of pales andother defects, generally soft and open, often containing
many brokens.
 Poor. Anything below fair to poor.
Uneven bean size produces uneven roasts because
small, broken and light beans roast faster than whole andsolid beans. Very small pieces or chips may even burnup altogether. Some roasters prefer to roast coffees fromdifferent origins separately and then to combine themafterwards. Strong growth in the specialty and wholebean segments of the consumer market has rekindled theemphasis on a coffee’s roast appearance, and at the retailend the roast is perhaps the first thing the consumer really
looks at.

THE CUP OR LIQUOR
The cup remains the most important determinant of acoffee’s usefulness and value. All exporters grade coffee
visually, by size and defect count, but not all cup test. Only
the cup can reveal a coffee’s true value, however, andexporters who cannot taste cannot bargain as equals with
importers and roasters who always taste.
Taste is a highly subjective matter and different tasters
or liquorers will have different opinions on the quality,
appeal and value of a particular cup or liquor. There are nointernational cupping standards and nor is the terminology
standardized. This adds to the subjectivity. Coffee tasting
and wine tasting are comparable: both are done todetermine quality, usefulness and price.
As a rule of thumb, cup characteristics can be loosely
characterized in the following ways:
 Robustas. Mostly supplied as unwashed, sun-dried or
naturals. Taste varies from neutral to coarse with strongrobusta flavour. Neutral coffees are preferred for blending
whereas those with strong robusta flavour are particularly
suitable for soluble coffee. Well-prepared pulped andwashed robustas are appreciated for their good bodyand neutral taste and the absence of off-flavours whereas
there is growing interest in differentiating high quality orfine robustas by origin and cup characteristics.
 Washed arabicas. The most appreciated are those witha well-balanced (rounded) cup where good acidity andbody, together with some flavour or aroma, complement
each other. Marks for acidity range from pronounced
through good, fair and slight to lacking; for body fromheavy through good, medium and light to lacking; andfor flavour from excellent through good, some and slightto lacking.
 Unwashed arabicas or naturals. This group (mainly
Brazils, Ecuadors and sun-dried Ethiopians) tends tohave less well-balanced body and acidity. Ecuadors areoften fruity and occasionally sourish. Brazils frequently
have a harsh or ‘Rio’ taste especially coffees grown incertain zones of the states of Espirito Santo, São Pauloand Rio de Janeiro. Unwashed Brazils that are free from
‘Rio’ or ‘Rio taint’ are known as soft or strictly soft andcommand a premium over hard or Rioish and Rio-type
coffees.
 Pulped Brazils. This is a relatively new form of coffee
from Brazil in which the cherry is pulped immediately after
harvesting and is then sun-dried, so without fermentation
or washing as in the normal wet process. Such coffees

CHAPTER 12 – QUALITY CONTROL

tend to combine good body with a sweeter cup than isfound in traditional Brazils that are dried in the cherry.
These coffees are making inroads into the traditional
market for secondary mild arabicas.

THE COFFEE LIQUORER (THE CUPPER)
Most people can acquire the liquoring technique, but ittakes years of on-the-job training in the liquoring roomsof exporters, importers and roasters. Exporters must
understand the preoccupations of the roasters, and a top
liquorer will have experience of both sides of the ‘divide’.
Trading quality coffee is impossible without liquoring
expertise. It remains surprising that not all producing
countries offer formal training courses and official
recognition to coffee professionals.
The liquorer’s first objective is to determine if a coffee
is acceptable in terms of type and standard. The lesssophisticated the standard the easier it is to approve a
coffee. But when it comes to better coffees then it is not only
acceptability but also marketability that count. The liquorer
must be able to assess not only a coffee’s marketability andpotential usage, but also its price range.
Marketability. Who can use this? Who wants this? Know
your markets and know your buyers. Travel and cup testwith them.
Price. What will they pay for this? Know the quality yourcompetitors supply. Know what other origins offer. Again,
travel, attend tradeshows and visit roasters. It is only by
cupping your coffee against that of others that you canassess which has the advantage.

Tasting – traditional versus espresso
Following the introduction of soluble coffee in the 1950s,
the next major change at the consumer level was theintroduction of the home coffee-maker, the drip machine.
This tended to split the market into roast and ground for
those preferring convenience, and whole bean roasted
for those who prefer to grind their own coffee at home.
Further differentiation has come through the introduction ofhome coffee making machines that use pods, for example
Nespresso and Senseo. But the next largest major change
has probably been the huge inroads made by espresso
in importing countries during the 1990s. Most coffee bars
and cafés in the United States, Europe and Asia today haveextended their product menu to include different types of
espresso coffee.
Traditionally, coffee tasting has been done on the premisethat the coffee would be used as soluble, roast and groundor whole bean. This permitted more or less the same
methodology and terminology to be used to evaluate thequality. But there are significant differences between thebrewing processes of traditional coffee and espresso, somuch so that traditional liquoring alone cannot provide

a correct evaluation of a coffee’s suitability for use as
espresso.
The steps before tasting the liquid coffee are always thesame (examining the green and the roast, smelling the
ground coffee and so on). For traditional tasting, about 10 gof ground coffee is brewed in cups containing about 230 gof boiling water. This is not a scientific process: the watertemperature may vary, the weight is not always exactly 10 g
and the water measure may not always be exactly right. The
temperature of the water changes as the cups are poured
and so on. But experienced cup testers know all this andso will taste more than a single cup per sample. They may
also taste the sample various times. In the end it is the cup
tester’s personal assessment of all the different factors andsensations that determines what they will do with the sample
in question. In real life consumers do not use a scientificprocess to prepare or evaluate their coffee either. They likeit or they do not, and it is the cup tester’s job to make surethey do.
But this method does not work for espresso. The espresso
cup is a concentrated beverage, which can be said to
exaggerate all the aromas, and fragrances found in thecoffee bean.
Unlike the traditional coffee served in many bars and hotels,
espresso must always be fresh. It can only be made on
demand. The customer has to wait for the coffee, not theother way around. It was the desire to supply many cupsof fresh coffee quickly and efficiently that led to a majorinnovation for traditional brewing systems. Italian inventors
introduced the use of water pressure to speed up the
extraction process.
Today, making espresso is a mixture of art and science.
Italy is home to a large and fast-growing manufacturing
and export business not only of espresso machines andall the accompanying accessories, but also of espresso
coffee roasted and packed in Italy. Names such as Illy and
Lavazza are but two of many found all over the world; they
are even found in producing countries. The introduction of
the espresso pod (pre-packed dosages of coffee ready foruse ‘as is’ in the espresso machine), the growth of specialty
coffee chains such as Starbucks, and increasingly efficientmini espresso machines for home use have all contributed
to Italy’s spectacular growth as a coffee processing andexporting centre.

Tasting – traditional versus espresso:
differences to watch
Espresso is a brew obtained by percolation of hot, notboiling, water under pressure through a cake of roasted
ground coffee. The energy of the water pressure is spent
within the cake, according to Espresso Coffee by Andrea Illyand Rinantonio Viani, Academic Press, London 1995. The
pressure accentuates taste aspects that are not immediately
obvious in cups prepared in the traditional way. Sharp

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acidity turns into bitterness, freshness or slight fruitinessturns into sourness and fruity turns into fermented because
all the flavour components are extracted. And this is not all;espresso is nearly always sugared, and the interaction ofsugar and these intense flavours can again alter the final
taste palette the taster encounters. Some flavours benefit,
others are ‘turned’ and become negative.
For example, a pleasant tasting coffee that is slightly winey
may be eminently suitable for sale as an exemplary quality
in a niche market. But it will probably never make the gradefor espresso, because once concentrated, the same winey
flavour may turn into something quite unpleasant.
The other aspect to bear in mind is the foam or crema that isalways present in every well made cup of espresso. Briefly,
the machine pressure is allowed to drop, which permits thecup to be filled. The drop in pressure releases dissolved
gases into the cup and this is what produces the foam. The
foam must survive at least a few minutes before breaking up
and starting to show the dark surface of the liquid itself. A
perfect espresso looks as good as it tastes.
Some coffees produce excellent foam; others do not. Most
espresso coffee is therefore a blend of different coffees thattogether produce the desired combination of both taste andcup appearance.
Green coffee exporters wanting to supply the important
espresso market on a sustained basis must familiarize
themselves with the differences between their traditional
cupping and the basics of espresso liquoring. Better still,they should practice espresso liquoring alongside theirtraditional cupping by acquiring the necessary equipment.

The Q Coffee System of quality control
The Q Coffee System, developed by the Coffee Quality
Institute, is an ongoing initiative to introduce internationallyaccepted standards for quality, both cup and grade, for the
specialty coffee trade. The underlying assumption is thatwhile anyone can state they have quality, companies thathave their coffees graded through the Q Coffee System
will have the ability to provide their customers a guarantee
from a credible and independent third-party. The Q Coffee
System is presented as an effective way to source coffees,
allowing companies to develop specifications unique tothem, and more effectively differentiate themselves against
the competition.
Using technical standards developed by the Specialty
Coffee Association of America (SCAA – www.scaa.org), theQ Coffee System institutes a common language for qualitythat makes quality less subjective, levelling the playing
field for producers. In the Q Coffee System, three licensed
Q graders, professionally accredited cuppers, evaluate
the coffees. The scores are then averaged to produce a
Q Certificate that includes a point rating and a cup profileof the coffee. The Q Certificate provides the necessary

information to communicate quality to customers andconsumers, fostering their interest in the coffee you offer.
On the basis that sustainability begins with economic
viability, the promoters of the Q Coffee System argue that it
takes a market-based approach to economic viability, andtherefore sustainability, by giving producers a tool to improvetheir incomes. The Q Coffee System also places roasters
in a proactive position regarding responsible sourcing as
opposed to a defensive one. Thus, the Q is a valuable
component of corporate social responsibility programmes
and an ideal complement to social and environmental
certifications. Only with quality and cooperation cansustainability truly become a reality.
The Q Coffee System is presented visually below, reproduced
courtesy of the Coffee Quality Institute from whom more
information can be obtained – see www.coffeeinstitute.org.

The Q Coffee System – overview

CHAPTER 12 – QUALITY CONTROLBlackish beans: Pulper-nipped beans which have partly
oxidized.
Bleached beans: Colourless beans, often caused bydrying too rapidly or over-drying. Also known as soapy andfaded beans, usually associated with mechanical drying.
Blotchy beans: The result of uneven drying.
Broca-damaged beans: Beans partially eaten away byan insect (Stephanoderes hampei) which bores galleries
through the bean.
Brown beans: Brown in colour. May be caused by faulty
fermentation, improper washing or over drying – see also
‘foxy’.
Coated beans: Beans to which the silverskin adheres.
Caused by drought, over-bearing or harvesting of unripe
cherries (see also chapter 11).
Crushed beans: Pulper-damaged beans, which often split
and fade. Also caused by manual pounding of dry cherry toseparate beans from husk (pilonnage in French).

How the Q Coffee System works:

Discoloured beans: Often pulper-damaged. Other causes
are contact with earth, metal and foul water as well as
damage after drying and beans left over in fermenting tanks(see also ‘stinkers’).

 Quality is defined, measured and standardized throughinternationally recognized protocols.

Drought-affected beans: Either coated or misshapen,
pale and light in weight.

 Highly-skilled coffee cuppers (licenced Q graders) areutilized throughout origin and consuming countries.

Dull, unnatural coloured beans: Due to faulty drying,often associated with metal contamination.

 In-country partners are established at origin to manageand oversee coffee grading.

Ears: Part of a broken elephant bean.

 Coffees are graded by three licenced Q graders, scores
are averaged and provided in the form of a Q Certificate
or technical report.
Building on the experience gained with creating the Q Coffee
System in arabica, the Coffee Quality Institute has also
developed a protocol and cupping form for fine robusta andcommenced the training and licensing of R graders. For
more information contact the CQI at www.coffeeinstitute.org.

CLASSIFICATION TERMSGLOSSARY – GREEN OR RAW COFFEE
Ambers: Smooth yellowish beans caused by soil conditions.
Antestia-damaged: Beans damaged by the Antestia bug,
resulting in black depressions on the bean, which is often
completely shrivelled.
Black beans: Caused by harvesting immature beans orgathering them after they have dropped to the ground.
Blacks are often taken as the yardstick for rating a defectcount.

Earthy beans: Smell of earth, caused by collecting beans
fallen on bare ground.
Elephant beans: A generic aberration resulting in twobeans being joined together – usually deformed and likely
to break up during processing/roasting (see also ‘ears’,
above).
Faded beans: Beans from old crop or dried too rapidly.
Flaky beans: Usually very thin, light and ragged (see also
‘drought-affected’, ‘lights’ and ‘ragged’).
Floats or floaters/lights: Under-developed, hollow beans– the fruit will float in water and is ‘floated off’ during wet
processing. In washed coffee a sign of inadequate grading
during wet processing.
Foxy beans: Rust or reddish coloured, a result either of
harvesting overripe, sometimes yellow, cherries, delays in
pulping, improper fermentation or faulty washing.
Green, water-damaged: Self-explanatory – usually brought
about by dry parchment or hulled coffee becoming wet.
Hail-damaged beans: Show blackish circular marks on theoval side of the bean.
Light bean: Bean the specific weight of which is below
normal – caused by drought or die-back.

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Mottled beans: Are blotched, spotty or stained. Usually
due to uneven drying.

Balanced or round: Acidity and body are both present to
the right extent.

Musty (mouldy) beans: Partial or wholly discoloured,
whitish fur-like colour and texture (see also chapter 11).
Show mould growth visible by the naked eye or evidenceof mould attack.

Bitter: When strong, an unpleasant, sharp taste; biting likequinine. Similar to acidity, but lacking smoothness.

Overripe: Brownish-yellow appearance; also known as foxy.
Peaberry: A single oblong or ovaloid roundish bean – aresult of only one bean developing in a cherry instead of theusual two.
Pulper-nipped: Bean damaged by incorrect setting of thepulping knives – can become discoloured through oxidation
during fermentation and may produce off-flavours.
Quakers: Blighted and undeveloped beans – show up as
roast defects.
Ragged: This description often refers to drought-affectedbeans – harvesting a mixture of mature and immature
cherries results in beans having a ragged appearance.
Stinkers: Beans which are over-fermented owing to
improper cleaning of pulpers, fermenting tanks and washingchannels.
Three-cornered beans: Semi-peaberry in character.
Withered: Light and shrivelled beans caused by drought orpoor husbandry.
NB: The exporters/traders/roasters’ technical vocabularycontains many more terms such as sticks, stones, pods
(cherry), parchment, under-dried, under-fermented, etc.
These are, however, all self-explanatory.

GLOSSARY – LIQUOR OR CUP
Acidy: A desirable flavour that is sharp and pleasing, but
not biting. The term ‘acid’ as used by the coffee trade refers
to coffee that is smooth and rich, and has verve, snap andlife as against heavy, old and mellow taste notes.
Acrid: A burnt flavour that is sharp, bitter and perhaps
irritating.
Astringent: A taste that causes puckering and a bitter
impression.

Bland or neutral: Tasting smooth and flavourless, lacking
coffee flavour and characteristics. However, this is notnecessarily always a negative comment.
Body: A taste sensation or mouth feeling of more viscosity,used to describe the mouth feel of a drink corresponding
to a certain consistency or an apparent viscosity, but not
an increase in true viscosity. Sought after in most if not all
coffees.
Carbolic, chemical: Self-explanatory. Workers who have
had wounds on legs treated with disinfectant and havethen worked in tanks can cause this type of flavour. Certain
emulsions in the manufacture of sacks are also a problem.
Carmelized: Burnt-like flavour; carmelized sugar flavour.
Usually associated with spray-dried instant coffee, butsometimes found in roasted coffee.
Common, commonish: Poor liquor, lacking acidity but withfull body. Usually associated with coated raw beans andsofts and pales in roast.
Earthy: Self-explanatory. Not to be confused with grassy.
Fermented: Chemical flavour caused by enzymes on thegreen coffee sugars. Very unpleasant odour and taste. In its
strongest form sometimes referred to as ‘hidey’ referring tosmell of untreated animal hides.
Foul: Objectionable liquor often similar to rotten coffee
pulp. Sometimes the most advanced stage of fruity andsour coffees. Causes are mostly bad factory preparationor the use of polluted water. It must be noted that one
badly discoloured bean is sufficient to give a foul cup to anotherwise good liquor.
Fruity: First stage of sourness. Caused by overripe andyellow cherry or by fermentation with too many skins.
Grassy: A very pronounced green flavour can be most
unpleasant.
Green, greenish: Flavour suggestive of hay. More common
in early pickings. In some coffees this flavour is lost a few
weeks after curing. Seldom found in coffees which havebeen thoroughly dried.

Aftertaste: A taste that remains in the mouth longer thanusual after eating or drinking.

Harsh: A harshness of body. Coffee of immature raw
appearance (but not necessarily from green cherry) frequently
has a harsh taste. Drought-stricken or over-bearing trees
producing mottled cherry frequently give this flavour.

Aroma: Usually, pleasant-smelling substances withthe characteristic odour of coffee. Chemically, they arealdehydes, ketones, esters, volatile acids, phenols, etc.

Musty or mouldy: Self-explanatory. Caused by piling or
bagging very wet parchment or by dry parchment getting
wet. (See ‘musty’, under Green or raw coffee, above.)

Baggy: An undesirable taint, resembling the smell of a bag
made from jute. Often observed in coffees that have been
stored for long periods under unsuitable conditions.

Natural: Natural characteristic is the full body, slight
bitterness indicative of natural processed coffee. It is anegative characteristic of a fully washed coffee.

Baked: Generally unpleasant characteristic. Sign of coffee
having been over-roasted or roasted too slowly.

Neutral: No predominant characteristics – can make agood base for blending.

CHAPTER 12 – QUALITY CONTROL

Onion flavour: Often bordering on foul. Associated with theuse of badly polluted and stagnant water.
Pungent: A taste sensation of overall bitterness of brew.
A prickly, stinging, or piercing sensation not necessarily
unpleasant.
Quakery: A peanutty taste, usually associated with palesin the roast.
Rioy or Phenolic: A taste with medicinal odour and off
notes, slightly iodized phenolic or carbolic. Cannot be
hidden by blending – always returns.
Rubbery: Odour and taste of rubber. Usually present infresh robustas.
Sour, sourish: Unpleasant flavour, suggestive of rotting
coffee pulp. Caused by faulty factory work, improper
fermentation resulting in a continuation of the fermentation
process during early stages of drying, overripe and yellow
cherry, or delayed drying causing a heating of the coffee,excess fermentation with many skins. Discoloured pulpernipped beans are a frequent cause (see also chapter 11).
Strong: Unbalanced liquor where body predominates tothe point of being tainted.
Taint: A term used to denote the presence of flavours thatare foreign to good clean liquor, but which cannot be clearly
defined or placed in any category. It is often described as
an offtaste or peculiar flavour for lack of a clear definition.
Where the foreign flavour can be defined it is, of course,
named accordingly.
Thin: Lacking body.
Twisty: A liquor which, although not directly unclean, issuspect and may become unclean.
Unclean: Self-explanatory. A coffee which has an undefined
unclean taste.
Winey: A fruity taste similar to fresh wine. Not necessarily
unpleasant when the taste is in the background.
Woody: A coarse common flavour peculiar to old crop
coffee. Coffee stored at low altitudes with high temperaturesand humidity (as in many ports of shipment) tends to become
woody rather quickly. Storage at higher altitudes where
feasible or in temperate climates is therefore recommended
for long-term warehousing. All coffees, however, become
woody if stored for too long.

PHENOLIC TASTE, RIO FLAVOUR AND
FERMENTED
It is worthwhile to review these phenomena in some detailas they are often confused.

Phenolic taste
Synonyms for phenol include carbolic acid andhydroxybenzene. As far as is known the occurrence ofphenolic taste, like a number of other off-tastes, is linked tothe chemical composition of the bean. Such beans cannot
be detected by visual inspection, nor is there any recognizedmethod for combating their occurrence. Different sources
offer differing causes, but it should be understood that not
everyone understands the same by phenolic taste. For
example, some cuppers wrongly identify certain types ofover-fermentation as phenolic taste. Others believe it can becaused by poor sanitation or mould infestation during wet
processing or drying but, although these may be variations
on the same taste theme, the causes are not necessarily thesame. See also chapter 11.
True phenolic beans, according to some, are more likely tobe produced by drought and heat-affected trees. That is tosay, the bean’s chemical composition changes as a resultof extreme growing conditions and so does the taste. If so,then the chemical change might in fact represent somekind of natural reaction, in response to the unfavourable
environment. This appears to be entirely logical because
healthy, vigorous trees always produce better quality thanstressed trees. The most likely remedy would therefore
appear to be the application of at least a minimal level ofirrigation, assuming of course this resource is available.
Other beans that cause equally unpleasant off-tastes
include what is known as invisible stinkers; beans that havebeen affected by chemical substances as carbolic acid forexample; or beans that have suffered bacterial infection
during the growing stage. These off-tastes may in somecases be mistaken for phenolic taste but it is important torecognize that the cause is different.
Invisible stinkers are beans that have been over-fermented
during wet processing, but not to the point where actual
decomposition sets in, i.e. they maintain a bluish-green
appearance and are hard to spot. Or, the beans have sufferedinsect stings or minute cracks that allow fermentation waterto enter and so continue the process. Beans that havebeen affected by unsanitary conditions or mould infestation
during processing and drying are also invisible stinkers.
Bacterial infections can occur when coffee cherries are stungby insects while on the tree, with the sting damage allowing
bacterial infection to take place, for example producing
potato flavour or peasiness. This is fairly prevalent in certain
countries.
These three groups of off-beans share one common trait:
their chemical composition is different from that of soundbeans. In most instances, they can only be recognized andremoved through ultraviolet sorting.
The question of why beans of good green appearance
nevertheless sometimes produce off-tastes has always
been of interest because such beans can cause unexpected
problems for roasters. This is particularly so for gourmet/
specialty roasters who normally roast smallish batches thatoffer little chance of the offending bean being dispersed
over a large quantity.

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Already in June 1975, at the 7th International Scientific
Colloquium on Coffee in Hamburg, the East African Industrial
Research Organization in Nairobi presented a paper dealing
with the identification of over-fermented beans (stinkers)
through exposure to ultraviolet light that made such beans
fluoresce because their chemical composition was different
from that of sound beans. Yet, such beans were often
unrecognizable with the naked eye, which is an important
finding.
Note though that as coffee ages, its chemical compositionchanges as well. The resultant woody or old taste is infact the result of chemical change. This means that as thebeans age, so most or all of them begin to fluoresce. This
makes it impossible to select the offending beans that were
the original target. Therefore, as we understand it, for theultraviolet sorting process to work well it should only be
used for fresh coffee, promptly after milling. Also, the coffee
should not be overly coated, i.e. not too much silver skinremains attached to the beans. Within these limitations
we estimate that for certain producers ultraviolet sorting(or UV sorting) equipment may be of interest. For further
information we suggest to visit www.Satake-USA.com. Some
success has also been achieved using near infrared sorting
to detect those infected beans not picked by ultra violet but
this method remains experimental and only worthwhile inspecific instances.
For more scientific questions and discussion we suggest
visiting www.asic-cafe.org to make contact with the
Association scientifique internationale du café (ASIC).

The difference between Rio flavour,phenolic taste and fermented
These taste phenomena have different causes such as
climatic conditions, bacterial infection, contamination,
poor sanitation, poor quality control, mismanagement,
or a combination of some of these. Within each off-taste
description one encounters varying degrees of intensity and,indeed, different ‘tastes’. All unpleasant, but some are worse
than others. This variability can and does lead to confusion
amongst cuppers with some simply labeling an offending
coffee as ‘unclean’ and discarding it. But for serious quality
analysis, especially with a view to finding the cause of aparticular off-taste, more in-depth evaluation is absolutely
necessary. The authors’ understanding is as follows:
Rio flavour (or Rioy flavour) is typically associatedwith certain Brazilian coffees (but is also encounteredelsewhere). A taste with medicinal odour and off notes,
slightly iodised phenolic or carbolic. To note though thatcertain markets have an actual preference for ‘astringent’or ‘hardish’ coffees. In Coffee – ISBN 0-582-46359-9– Gordon Wrigley refers to Rio as a very characteristic
harsh, even acid or acrid, flavour which is sometimes
described as being medicinal or having an iodine flavour.
Espresso Coffee: The Chemistry of Quality – ISBN 0-12370670-X, edited by Andrea Illy and Rinantonio Viani –reports on Rioy beans as smelling ‘dusty, musty, earthy,

woody, corky, cereal, iodine-like, phenolic; and tastingof bitterness, burned, rubbery, rioy, phenolic, acrid,
pungent, earthy, corky, musty, stale and medicinal’.
In some countries Rio flavour is considered equivalent tophenolic, but there is an important difference. Phenolic taste
is close in that when cupping phenolic beans separately one
encounters a medicinal taste that is similar to Rio. However,true phenolic beans (the result of climatic conditions) can
occur sporadically in a parcel (hence the earlier reference
to UV sorting). However, Rio is usually encountered much
more generally, making sorting more or less impossible.
The two, Rio (or Rioy) and phenolic, have in common thatthe taste cannot be hidden through blending, i.e. cannot be
diluted through mixing with other coffees. The difference isthat Rio flavour usually occurs as a general taste aspect,
whereas true phenolic beans occur only sporadically and,
under certain circumstances, can be identified throughultraviolet or UV sorting.
Fermented or over-fermented is quite different. Ferment
covers a range of objectionable off-tastes, best described
as being associated with decay. In its early stages ‘ferment’can present itself as a sweetish, overripe, fruity/oniony tastethat for some (not many) can still be acceptable. In its worst
stage one can encounter a totally putrid, foul taste that ismost off-putting. In between these extremes is found aquite a range of varying taste sensations. Note that for mostroasters there is no such thing as ‘just a little ferment’. See
also chapter 11.
As a broad generalization one could perhaps briefly classify
the causes of these different off-tastes as follows: Rio flavour: very high humidity during the growing season.
 Phenolic flavour: very hot and dry conditions during thegrowing season.
 Natural fermentation: overripe cherry left for some timeon the tree.
 Fermentation/contamination: overripe cherry left forsome time on the ground.
 Over-fermentation: poor management control during wet
processing.

CHAPTER 13

CLIMATE CHANGE AND
THE COFFEE INDUSTRY

RISING TEMPERATURES – CONSEQUENCES AND CHALLENGES ............................................................228
POSSIBLE INTERVENTIONS AND SUPPORT MEASURES .............................................................................230
FROM STRATEGY TO ACTUAL RESPONSES .................................................................................................234
CARBON CREDITS .............................................................................................................................................237
ADDITIONAL RELEVANT WEBSITES ................................................................................................................240

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CLIMATE CHANGE AND
THE COFFEE INDUSTRY
RISING TEMPERATURES– CONSEQUENCES AND
CHALLENGES
While climate change is just one of numerous factors
affecting global coffee production, the International Coffee
Organization considers it is likely to be one of the mostimportant ones. Smallholders (who produce the majorityof the world’s coffee) are the most vulnerable group – andthe least equipped to cope with the changes. Moreover, it isimportant to note that current initiatives to reduce the extent of
global warming are mostly aimed at limiting further warming,
not to rapidly reverse it.
Complexity and uncertainty make it hard to be precise, but
it is generally accepted that climate change affects botharabica and robusta producers. Rising temperatures are
expected to render certain producing areas less suitableor even completely unsuitable for coffee growing, meaningproduction may have to shift and alternative crops will have tobe identified. Incidences of pests and diseases will increase
and coffee quality is likely to suffer; both factors could limit
the viability of current high quality producers. More coffee
may need to be grown under irrigation, thereby increasingpressure on scarce water resources.
All the foregoing will increase the cost of production, whereas
in the future fewer parts of the world may be suitable forcoffee production. If so, then the already evident growthin concentration could become even more pronounced,
bringing with it an increased risk of high volatility. For example,
if an extreme event should severely curtail the output of one of
the major producers.

SOME CONSIDERATIONS
New scientific evidence suggests that climate change isaccelerating at a much faster pace than previously thought
and that important tipping points, leading to irreversible
changes in major Earth systems and ecosystems, may alreadyhave been reached or even overtaken. (Text taken from theforeword by Mr. Ban Ki-moon, UN Secretary-General, to the
Climate Change Science Compendium 2009, published by
the United Nations Environment Programme.)
Human beings depend for their livelihood on agriculture
more than on any other economic activity. This is particularly

true for small farmers in developing countries whose
economic well-being and food security hinges primarily
on farming. Because of this and its high dependence on
climate, agriculture has received a great deal of attention
promoting studies and debates over how developing
countries might adapt to the impact of climate change.
The subject is exceedingly complex, not only from theagricultural perspective, but also because of its implications
for the global agricultural and trade policies that impact
agricultural production and food security.
While climate change is just one of numerous factors that
may affect global coffee production, it is nonetheless likely
to be one of the most important ones. It is true that a great
degree of uncertainty still exists with regard to how individual
producing regions will be affected, and how climate change
will affect overall coffee production. However, experts expect
some changes to occur and these could be significant insome regions. To complicate matters further, the potential
impact will not only vary between countries, but also within
producing areas in individual countries, for example due todifferent altitudes.

Box 13.1 The Kyoto Protocol
The first formal global reaction to the need to isolate
greenhouse gases (GHG) from the atmosphere and to limit
their emission was materialized in a document called the
Kyoto Protocol. See details in www.unfccc.int/2860.php.
The protocol arose from the need for defining mechanisms
for isolating GHG from the atmosphere and goals
for limited GHG emissions. The global response wasmaterialized in a document called the Kyoto Protocol. The
most publicized source of global warning are fossil fuels(electricity generation, manufacturing, transport, etc.). But
deforestation in non-industrialized countries also contributes
quite considerably as it reduces the available tree park.
Trees are efficient absorbers of CO2, whereas burning themreleases carbon dioxide into the atmosphere.
Industries and others that produce GHG can calculate theiremissions and offset these against certificates of emission
reduction or CER. For example by investing in planting
new trees or sources of renewable energy, either directlyor (mostly) through the purchase of offset or renewableenergy certificates generated by others who engage inthese activities. The international market for such certificatesis developing rapidly and is generally referred to as theemissions offset market. Much background information isavailable at www.v-c-s.org.

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CLIMATE CHANGE AND COFFEEPRODUCTION
Climatic variability has always been the main factor
responsible for the fluctuation of coffee yields in the world.
Climate change, as a result of global warming, is expected
to result in actual shifts on where and how coffee may be
produced in future. This will affect millions of producers aswell as all other participants in the value chain, right up to
the end-consumer and presents a major challenge to thecoffee industry. How to mitigate the impact?
The current change in global climate is – to an extent thatis disputed, also among scientists – due to the burning offossil energy (coal, oil, natural gas) and to the mineralizationof organic matter as a result of land use. These processes
are caused by humankind’s exploitation of fossil resources,
clearing of natural vegetation (forests for example) and useof these soils for agriculture. The result is a measurable
increase in the carbon dioxide (CO2) content of theatmosphere, an increase that results in global warming.
This is so because CO2 hinders the reflection of sunlightback into space, thereby trapping more of it in the Earth’s
atmosphere. Other contributing GHG are methane (CH4),
nitrous oxide (N2O), hydro fluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).
It is important to note that different forms of agriculture,including coffee production, also contribute to GHG
emissions, and hence to climate change. But so do all otherlinks in the chain: processing, trading, transport, roasting,packaging, retailing, brewing, serving, etc. Thus, there is aneed for all participants to collaborate on limiting coffee’s
contribution to the GHG problem. However, coffee growers
are by far the most numerous group that is directly affected
and the most vulnerable to the impact of global warming.

POSSIBLE EFFECTS OF CLIMATE CHANGE
ON COFFEE PRODUCTION(Text in this section is based on ‘Global warming: the impact on global
coffee’ by Dr. Peter Baker and Dr. Jeremy Haggar.)

Quality: As temperature rises, coffee ripens more quickly
leading to a fall in inherent quality. This statement is
supported by the fact that low-grown arabica from tropicalareas with higher temperatures mostly shows less quality
in the cup compared to the same coffee grown at higher
altitudes. The beans are softer and may well be larger but,lack that quality. In this regard it is estimated that if by theend of this century temperatures rise by 3° C (some experts
believe an increase of up to 5° C is possible), then the lower
altitude limit for growing good quality arabica may rise bysome 15 ft (5 m) per annum, meaning that over time areasthat are currently too cold for coffee could become suitable.
But it is uncertain whether land at higher altitudes would infact become available (or be rendered suitable) for coffee
production.

Yield: If climatic events such as overly high temperatures
occur during sensitive periods of the life of the crop, forexample during flowering or fruit setting, then yields will be
adversely affected, particularly if accompanied by reduced
rainfall.
Pests and diseases: Higher temperatures will not only
favour the proliferation of certain pests and diseases, butwill also result in these spreading to regions where they were
not normally present. Research suggest that the incidenceof pests and diseases such as coffee berry borer, leaf miner,
nematodes, coffee rust and others will increase as futuretemperatures rise. The consequent need for more control
will make coffee production both more complicated andexpensive.
Irrigation: Areas currently not requiring this may do so in the
future due to increased evaporation that reduces the soil’s
moisture content. Other areas may experience increases inboth rainfall and the variability thereof.
Erratic rains: Unseasonal rain during flowering affects fruit
set, whereas rain during the harvest season will complicate
the sun drying of coffee and affect quality.
As already mentioned, complexity and uncertainty make it
hard to be precise. Nevertheless, there is a real possibility thatfewer parts of the world will be suitable for growing coffee.
If so, then the already evident growth in the concentrationof production could become even more pronounced. Thisin turn could make global production more prone to highfluctuations, as any severe disruption in output from one of
the major producers would drastically curtail global output.
The cost of production will increase more than would havebeen the case without global warming and thirdly, competition
from other crops for available arable land may increase. In
the context of this brief review perhaps the most important
point to note is that to date initiatives to reduce the extent of
global warming are mostly aimed at limiting further warming,
not to reverse it rapidly. This means everyone in the coffee
value chain needs to adapt by taking actions to minimize andcope with the seemingly inevitable effects.
Events of recent years have shown the veracity of theforegoing paragraphs. Both floods and droughts are on theincrease in a number of coffee producing countries, whereas
there are widespread reports of pests and diseases moving
into areas where previously they did not exist. Individual
farmers in different countries complain of unseasonal rainfall
affecting flowering and fruit set, with others cite drying andquality problems due to rain during the harvest season.

CLIMATE CHANGE AND SOIL
DEGRADATION
According to the Intergovernmental Panel on Climate Change(IPCC) land management practices will be the most influential
factor on the organic matter content of the soil during the next
decades. Climate change is likely to increase the frequency
and distribution of stronger winds and increased rainfall, both

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major determinants of erosion, likely leading to reduced soil
capacity to hold water. This is of particular importance to crop
production in semi-arid and arid areas, particularly if coupledwith rising temperatures.

 Changing agricultural practices;

Water availability: In a warmer world, the hydrologicalcycle is expected to become more intense, likely toresult in ‘very wet’ and ‘very dry’ areas compared to pastmeasurements. Globally, the number of people exposed
to extreme droughts at any one time is also expected toincrease as a result of climate change.

Strategic support areas include:

Extreme events: These can influence agriculture quiteheavily, but projecting their impact is hard. Probably thebest known such event is the El Niño phenomenon that
happens irregularly but dramatically affects the weather inmany parts of the world. The term El Niño refers to the largescale warming of surface waters of the Pacific Ocean every
three to six years, which usually lasts for 9–12 months, but
may continue for up to 18 months and dramatically affectthe weather worldwide. Predicting the occurrence of El Niño
events (but not their impact on agriculture) has only beenpossible since the 1980s when computing power became
large enough to do so.

ADAPTATION AND MITIGATION

The impact of El Niño on coffee production has been closely
studied in Colombia. During its occurrence in the Andean
region of Colombia, rainfall decreases while sun intensity
and temperatures increase. This causes production to fallin some regions, particularly in low-lying areas where rainfall
is less than 1,500 mm/year and there is low retention ofmoisture and high exposure of the crop to sunlight. Lackof water during the critical stages of fruit development also
brings about a high risk of black beans, small beans andother defects, as well as increased incidence of pests suchas coffee berry borer.

POSSIBLE INTERVENTIONS ANDSUPPORT MEASURESThis guide is part of ITC’s mission to contribute tosustainable development through technical assistance inexport promotion and international business development.
As such the guide’s main emphasis is on international
green coffee trade matters, rather than on issues related
to production. However, in recent years concern about thepotential impact of climate change, coupled with the quest
to achieve sustainability throughout the coffee value chain,is increasingly interlinking many producer and trade issues.
The information here highlights climate change andsustainability issues of particular relevance to the coffeeindustry, bearing in mind that it is not possible to offer
a comprehensive insight into this enormous subject.
Therefore, wherever possible sources of more extensive
information are indicated.
Areas of possible intervention include: Creating social organization;
 Participating in new market strategies.

 Improving access to information;
 Establishing financial mechanisms;
 Investing in social capital.

Coffee production contributes to the emission of greenhousegases (GHG) (as do other links in the chain). The industry
therefore must not only focus on adaptation (help producers
cope with climate change), but also on mitigation (reduce
its own contribution to GHG emissions). It is important todifferentiate between these two aspects, even though they
are closely intertwined. Finally, the industry also needs togear up to exploit the benefits that will spring from generating
marketable carbon offset credits.
Short-term adaptation strategies include better farming
practices and more efficient on-farm processing. Most
progressive farmers apply these as a matter of course, but
smallholders do not always have the necessary resources
and/or knowledge to do so. Longer-term strategies include
capacity building, mapping of climate data, improving soil
fertility, examining different production models, developing/planting drought and disease resistant varieties. And some,in the extreme, diversify out of coffee and/or shift production
to more suitable areas.
Short-term mitigation strategies include calculating andreducing the on-farm carbon footprint, and determining thefeasibility of creating carbon sinks. A longer-term strategy
would be to link producers, especially smallholders, with thecarbon markets to exploit carbon footprint opportunities.
Smallholders produce the bulk of the world’s coffee and theindustry cannot afford steeply falling output in this sector.
Yet, the ability of smallholders to cope with climate change
is limited.
Not all views on how to go forward concur but these priority
areas for smallholders are indicated:
Adaptation: Short-term technical solutions for adapting
coffee production and processing to current climate
variability, aimed at producers.
Long-term strategies to improve framework conditions foradaptation to future climate risks, and to build the necessary
capacities including financing mechanisms.
Mitigation: Measures to reduce GHG and so contribute toclimate protection and carbon credit generation, aimed at
all participants in the value chain.

CHAPTER 13 – CLIMATE CHANGE AND THE COFFEE INDUSTRYThis is confirmed by previous surveys in the Mesoamerican
region (the joint name for the Central American region and
Mexico) that ranked five potential areas of intervention as
follows:
 More important: (i) changes in agricultural practices and(ii) social organization.
 Important: (iii) participation in new marketing strategies.
 Less important: (iv) new economic activities, and (v) new
cash crops.

Box 13.2 Carbon footprints and sinks
Carbon footprint opportunities arise from the wish byindustry in developed countries to reduce or offset theircarbon footprint, i.e. the total amount of GHG emissions
caused directly or indirectly by an organization or a product.
Carbon sinks are natural or constructed reservoirs that canabsorb or ‘sequester’ carbon dioxide from the atmosphereand include forests, soils, peat, permafrost, ocean water andcarbonate deposits in the deep ocean. The most commonlyreferenced form of carbon sink is that of forests. Plants
and trees absorb carbon dioxide from the atmospherevia photosynthesis, retain the carbon component as thebuilding block of plant fibre and release oxygen back into
the atmosphere. Therefore, long-lived, high biomass plants,
such as trees and forests represent effective carbon sinks
as long as they are maintained.
Carbon sequestration is the process of increasing the carbon
content of a carbon reservoir other than the atmosphere.
Biological approaches to sequestration include direct
removal of carbon dioxide from the atmosphere throughland-use change, afforestation, reforestation, and practices
that enhance soil carbon in agriculture. Physical approaches
include separation and disposal of carbon dioxide from fluegases or from processing fossil fuels to produce hydrogenand carbon dioxide-rich fractions and long-term storage
underground in depleted oil and gas reservoirs, coalseams and saline aquifers. Basically any process, activity
or mechanism that removes a greenhouse gas, an aerosol,or a precursor of a greenhouse gas or aerosol from theatmosphere can be considered a carbon sink.

Strategic recommendations include, in addition torecognizing the value of human capital, i.e. the collective
farming knowledge that already exists in the smallholder
sector: Improving access to information, including market
information, farming technology, etc., and developing theability to interpret such information;
 Establishing financial mechanisms, including climate
insurance, access to micro-credit to facilitate adaptation,i.e. organic, substitute crops, new varieties, shading, etc.;
 Investing in social capital, i.e. building structures thatenable smallholders to access the resources necessary
to adapt to climate change, access new markets andexploit the social and environmental value of their farming
activities.
Although considerable preparatory progress has been
made in the development of both methodologies andtools, it is obvious that the industry as a whole is still in
the preliminary stages of trying to transform strategy into
widespread action.

CARBON CREDITSAgricultural carbon credits, i.e. credits generated throughagricultural practices like coffee production, are not eligible
under the mandatory carbon market, including the Clean
Development Mechanism (CDM). Therefore, marketablecarbon credits do not yet feature in coffee production andby mid-2011 only one CDM project (the Coopeagri Forestry
Project in Costa Rica) listed coffee growers among its
indirect beneficiaries. For more information on all categories
of CDM projects, visit www.cdm.unfccc.int/Projects/index.
html.
There is more scope for land-use based projects under thesmaller voluntary carbon offset market – this is discussed
later in this chapter. Given the complexities surrounding CDM
the general consensus among researchers appears to bethat the voluntary carbon markets system presents the better
option for coffee growers. Examples include the CarbonFix
Standard AdapCC initiated Sierra Piura reforestation projectin Peru, run by the CEPICAFE cooperative – www.carbonfix.
info/RSP, and the Scolel Té project in Mexico – www.
planvivo.org/projects/registeredprojects/scolel-te-mexico.
Nevertheless, by late 2011 there were no obvious signs yetof any full-scale application in the coffee sector.
Meanwhile the retail end of the industry is increasingly
looking across the supply chain to reduce the carbon
footprint of products, including coffee, but so far measuring
coffee’s Product Carbon Footprint (PCF) has been costly
and complex, whereas the calculating and reporting of
PCFs is not always consistent. Nevertheless, for coffee
an encouraging start has been made through a study
sponsored by the major German roaster Tchibo, covering
coffee produced in the United Republic of Tanzania andconsumed in Germany – also mentioned later in this chapter.
For more on soil carbon methodology see also www.v-c-s.
org/methodologies/adoption-sustainable-agricultural-landmanagement-salm.
Developing carbon projects is both complicated andtime consuming, whereas credible carbon monitoring
methodologies for coffee farms have only recently come tothe fore. But, a number of tools are now available and different
initiatives are conducting or planning pilot projects that indue course should facilitate extending carbon projects tothe majority of coffee producing countries. See for example
the Cool Farm Tool, www.sustainablefood.org/projects/
climate and the Sustainable Agriculture Initiative, www.
saiplatform.org/activities/alias/climate-change. Provided the

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necessary capacity building and legislative support in thosecountries is forthcoming, it may be assumed that progress
will accelerate from 2011 onwards.

TERMINOLOGY
The debate over climate change has generated a host of
terminology that is not always clear to the average reader.The
United Nations Framework Convention on Climate Change(UNFCC) has therefore published a detailed Glossary ofclimate change acronyms that can be accessed at www.
unfccc.int/essential_background/glossary/items/3666.php.
The United Nation’s Food and Agricultural Organization
offers a similar but possibly somewhat more agriculture
related glossary. Visit www.fao.org/climatechange/en and inparticular www.fao.org/climatechange/65923/en.

MEASURING AND FORECASTING CLIMATECHANGE
Global climate change models make projections about
future climates based on current understanding of what
drives climate change. These are then related to thepotential impacts on crops, particularly cereal crops, given
the importance of global food security.
Field experiments grow crops in controlled environments
where variables can be varied, for example the concentrationof different gases in the atmosphere; the availability of water;
and temperature levels. This is crucial in understanding
how climate change affects individual crops. However,incorporating the results into large-scale climate change
models remains wrought with uncertainty.
Integrated climate-crop models attempt to address someof these problems, including the fact that individual crops
react differently to outside drivers. But other factors, likechanges in land use for example, may independently affectlocal climates, making it difficult for such models to be allencompassing.
Statistical analysis of past climates is used to determine
the impact on past crop production and to estimate howsuch crops may respond in future. But this assumes that
adequate historical data is available, which is not always thecase. Nor is it certain that past reactions will be repeated.
Climate change scenarios have been developed by theIntergovernmental Panel on Climate Change (IPCC – www.
ipcc.ch), based on four different storylines of different futureworlds. These differ in terms of projections in population
growth, world gross domestic product changes, differencesin per capita income between developed and developing
countries, and the energy level of the economy (related toemission levels).

COMPLEXITY MIXED WITH UNCERTAINTY
Thus, models have to simplify certain parameters, someof which may have large implications on their outcome.
Generally, uncertainties become larger the further into
the future projections are made. Furthermore, there is a
substantial scale-gap between large-scale global climate
models (which generally have a resolution of over 100 km)
and the small-scale of most farming systems (generally lessthan 10 km). Current climate modelling studies also havesignificant regional biases due to a lack of data in many
developing countries, for example on precipitation patterns.
Also, different crops are believed to react differently to CO2concentrations in the atmosphere. And finally there are events
such as floods and droughts that are expected to become
more frequent and more severe as a result of climate change.
But predicting their impact is currently very difficult.
Most modelling studies related to agricultural crops include
projections of: Changes in yields due to changes in seasonal climates;
 Changes in production potential in relation to factors
such as yield, land availability and longer/shorter growing
seasons; Crop response to changes in atmospheric conditions; Changes in prices and trade patterns due to climaticchange; Changes in food security, i.e. the number of people atrisk of hunger; Water run-off and related water stress.
However, there are other relevant aspects and potential
impacts that are hard to include in current models.

COFFEE SPECIES AND CLIMATE CHANGE
Temperature and rainfall conditions are the main drivers
when it comes to yield, i.e. production. In this respect the twomain species, arabica and robusta that together account for
about 99% of world production, have different requirements.
Arabica coffee evolved in the cool, shady environment of
the Ethiopian highland forests where there is a single dry
season coinciding with the winter months. The optimum
temperature range is somewhere between 15° and 24° C.
Much higher temperatures tend to impact negatively on
both yield and quality. Rainfall requirements are between
1,500 mm and 2,000 mm per annum, although the use of
irrigation today allows arabica to be grown also in areas withotherwise insufficient rainfall.
Robusta coffee evolved across lowland Equatorial Africa,
particularly in the forests of the Congo River Basin andaround the Lake Victoria Crescent in Uganda. It grows bestin areas with abundant rainfall of around 2,000 mm perannum, at altitudes ranging from sea level to about 800 m.

CHAPTER 13 – CLIMATE CHANGE AND THE COFFEE INDUSTRY

Rainfall must be well distributed throughout most of theyear because the robusta tree has a relatively shallow rootsystem. The optimum temperature ranges from 22° to 26° C
and the species is less tolerant of very high as well as very
low temperatures than arabica.

HELPING PRODUCERS PREPARE
Potential strategies to make coffee producers better
prepared include the following: Detailed monitoring of changes in climate andproduction. This would allow the mapping of areas
prone to the spread of specific pests according to thelikely impact of climate change. This would assist in
determining which crops are best produced where
and could help ensure that government guidance andassistance are correctly targeted.
 Mapping of likely climate change within each coffee
region. The United Nations Framework Convention
on Climate Change (UNFCC) assists least developed
countries to identify their immediate priorities for adaptation
options. Over 40 countries have received assistance toprepare their National Adaptation Programmes of Action
and many have already submitted their action plans. Seea list of proposed project details and plans at www.unfccc.
int/national_reports/napa/items/2719.php.
 Migration of production – latitudinal and altitudinal.
Latitudinal migration could be northwards or southwards
in search of more appropriate climatic conditions.
However, widespread latitudinal changes will be difficult
given the susceptibility of both arabica and robusta tochanges in the intensity and availability of sunlight that
impact on the photosynthesis process. Effects range froma noticeable decrease of the growth phase to an inhibitionof flower development. Altitudinal migration would moveproduction to areas of higher altitude where the climate
will become more suitable. After all, coffee does grow inareas outside the ‘normal’ tropical distribution range ofcoffee cultivation (Nepal and China’s Yunnan province).
Nevertheless, both movements in geographical locationand in altitude may be restricted, for example by thepotential impact on quality.
 Estimating the potential impact of climate change
on coffee quality. Higher temperatures mean coffee will
ripen more quickly, leading to a fall in quality. This means
areas currently favourable for coffee production may nolonger be so in 20 years, and others currently too cold
may become suitable. But this dislocation of existingareas to new ones is highly problematic, given theincreasing competition for fertile land across all regions.
 Devising strategies to diversify out of coffee where
necessary. To date diversification has proven particularly
challenging, mainly because of the lack of adequate
substitute crops. However, with increasing pressure on
food crops land currently used for coffee may become
subject to competition from (more) profitable crops.

 Evaluating available adaptation techniques, suchas shade management systems. Although originallya shade tree, coffee also prospers without shade inzones with adequate climate and soils. However, shade
management is highly advisable when coffee is grown inless desirable areas, or in areas that will become affectedby climate change. The main effects are decreasing air
temperatures (as much as 3°–4° C), decreasing windspeeds and increasing air humidity. Shading also helps
avoid large reductions in night temperatures at highelevations, or in high latitudes such as Parana State in
Brazil.
 High-density planting, vegetated soils andirrigation. All these aim at maintaining and/or increasingorganic matter and soil water retention capacity, thereby
enhancing the viability of cultivation under adverse
climatic conditions.
 Genetic breeding. The main objectives under thisconcept are the development of higher yields, better
quality and strength, and longevity. However, it is equallyimportant that genetic improvement based on selective
breeding contributes to the long-term sustainability ofcoffee cultivation in lands potentially affected by climatechange. Research on varieties that are less water
demanding is equally important. Some research has
focused on developing varieties that could cope withhigher temperatures and remain highly productive at thesame time.

WEBSITES ON CLIMATE CHANGE
www.unfccc.int/2860.php – United Nations Framework
Convention on Climate Change (UNFCC). Home of the Kyoto
Protocol – supports all institutions involved in the climatechange process. Offers overviews of the Kyoto Protocol, theClean Development Mechanism, data on greenhouse gases,
national reports, science and CDM projects.
www.ccdcommission.org – The International Commission on
Climate Change and Development offers a comprehensive
overview of climate change and disaster risk reduction andoffers recommendations to strengthen the resilience ofvulnerable countries and communities in a comprehensive
report entitled ‘Closing the gap.’
www.unfccc.int/essential_background/glossary/items/3666.
php offers an extensive glossary of climate change related
acronyms and terminology.
www.gefweb.org – Global Environment Facility (GEF). Intergovernmental organization offering project funding for a large
range of climate change and environment related issues
to developing countries and countries with economies intransition.
www.unep.org/climatechange – United Nations Environment
Programme (UNEP). Offers a wide range of insights andinformation on climate change related news and activities,

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including financing of climate change mitigation andadaptation.

of the Social Accountability in Sustainable Agriculture project(SASA) and is of interest to coffee growers generally.

www.undp.org/climatechange/adapt – United Nations
Development Programme (UNDP). Provides resources inrespect of the programming of climate change adaptation
projects and their integration into mainstream development.
Also offers an Adaptation Learning Mechanism (ALM). A
global knowledge sharing platform, mapping good practices
and information on climate adaptation.

www.cgiar.org – The Consultative Group on International
Agricultural Research (CGIAR) is a strategic partnership
whose 64 members support 15 international research centres
for which links and contact details are provided.

www.fao.org/climatechange/en/ – Food and Agricultural
Organization of the United Nations (FAO). Information andresources related to climate change with particular emphasis
on food security and agriculture. Extensive glossary of climatechange terminology.
www.odi.org.uk/themes/climate-change-environment/default.
asp – Overseas Development Institute (ODI). Independent
think tank on development issues, active in research on
climate change issues in developing countries.
www.solutions-site.org The Horizon Solutions Site is acollaborative program with UNDP, UNEP, UNFPA, UNICEF, theIDRC, Yale and Horizon’s colleagues at Harvard that presents
answers to problems in environment, health, population anddevelopment, in case-studies (peer-reviewed), articles andexhibits.
www.sustainablecommodities.org – The Sustainable
Commodity Initiative (a joint venture by IISD and UNCTAD)
aims to promote sustainable practices in commodity
production and trade. Site links into FAST (Finance Alliancefor Sustainable Trade), SCAN (Sustainable Commodity
Assistance Network), SSI (Reporting: State of Sustainability
Initiatives) and COSA (Committee on Sustainability Analysis).
www.un.org/wcm/content/site/climatechange/gateway. This
United Nations site offers a gateway to the work of over 30
UN organizations in the field of climate change, including
a link to the World Meteorological Organization’s Global
Climate Observing System (www.wmo.ch/pages/prog/gcos/
index.php?name=about).
www.climatehotmap.org/index.html is an initiative by a numberof concerned NGO’s, including the World Wildlife Fund, andoffers an inter-active ‘Early Warning Signs’ map, detailing a
number of potential global warming effects by region.
w w w. s d w e b x . w o r l d b a n k . o r g / c l i m a t e p o r t a l / h o m e .
cfm?page=globlemap – The World Bank’s Climate Change
Data Portal. Provides information on climate change and anumber of tools.
www.adaptationlearning.net – The United Nation’s
Development Programme’s Adaptation Learning Mechanism
is a knowledge-sharing platform on climate change.
www.isealalliance.org – The International Social andEnvironmental Accreditation and Labelling Alliance (ISEAL) is
the global association for social and environmental standards
systems. Site includes the complete output and documents

www.iwmi.cgiar.org – The International Water Management
Institute (IWMI) is one of the 15 CGIAR-linked research
centres. Its mission is to improve the management of land
and water resources for food, livelihoods and nature. Look
for its Water Policy Brief at www.iwmi.cgiar.org/Publications/
Water_Policy_Briefs/PDF/WPB31.pdf.
www.ifpri.org – The International Food Policy ResearchInstitute (IFPRI) is another of the CGIAR-linked research
centres and concentrates on food security issues. Theirreport entitled ‘Climate change: Impact on agriculture andcosts of adaptation’ presents research results that quantify
climate-change impacts, assesses the consequences forfood security, and estimates the investments that would offset
the negative consequences for human well-being. Although
not directly coffee-related, this analysis brings together, forthe first time, detailed modelling of crop growth under climatechange with insights from an extremely detailed global
agriculture model, using two climate scenarios to simulate
future climate.
http://www.wbcsd.org – The World Business Council for
Sustainable Development (WBCSD) is a global businessinitiative. Although not directly relevant to coffee the sitenevertheless offers interesting information, for example onwater and forest products.
http://climatechange.worldbank.org – The World Bank offers
the entire text of its report Development and Climate Change– 2010.

FROM STRATEGY TO ACTUALRESPONSES
WHAT ARE THE PRIORITIES?
Smallholders are amongst the most vulnerable groups
when it comes to the potential impact of climate change.
Smallholders also produce the majority of the world’s
coffee, but for many their ability to adapt to climate change
is limited by insufficient or no access to the resources andtechnical assistance that this requires. This is not to suggestthat all such resources have been identified, far from it,
but what is clear is that the coffee industry cannot afford
severely reducing smallholder production, neither in termsof quantity nor in terms of quality and quality diversity. This
therefore confirms the need for concerted industry-wide
initiatives. But how?

CHAPTER 13 – CLIMATE CHANGE AND THE COFFEE INDUSTRY

NB. This brief discussion is limited to the coffee sector andas such no reference will be made to the debate on climatechange between industrialized and developing countries.

verification standards that are active. But, it is obvious thatclimate change itself cannot be adequately addressed at theindividual farm level.

Not all views on how to go forward concur, but it would
seem reasonable to argue that there are three main areas
for action to be undertaken as suggested in Adaptationfor Smallholders to Climate Change by Mario Donga andKathleen Jährmann – www.adapcc.org/en/downloads.htm– a joint project of Cafédirect and German International
Cooperation (GIZ). Action areas include:

The reduction and trapping of GHG by coffee growers willvery likely, if not automatically, also help towards mitigating atleast some of the effects of climate change they are alreadyexperiencing.

 Short-term technical solutions for adapting coffee
production and processing to current climate variability,
aimed at producers;
 Measures to reduce GHG and so contribute to climate
protection and carbon credit generation, aimed at all
participants in the value chain; Long-term strategies to improve framework conditions
for adaptation to future climate risks and to build thenecessary capacities – aimed at all in the value chain,but mostly producers.
Short-term technical solutions will vary from country tocountry and between areas in a single coffee producing
country. Farmers are already experiencing climate change,
they know their circumstances better than anyone and many
have innovative ideas on how to combat at least some of theeffects. In other words, external assistance is needed, but tobe successful it should combine with local stakeholders tojointly develop adaptation and mitigation processes.
Measures to reduce GHG are equally important, but it isproving difficult for farmers to gain carbon offset credits,
mostly because projects to reduce GHG emissions must
demonstrate their additionality. That is to say, they must show
an additional/added value effect in the GHG scenario. Under
this concept coffee farms have to prove that they create GHG
savings that are additional to anything that might happen
anyway. Ironically, it is technically probably easier for otherpartners in the value chain to generate carbon offsets than it
is for the grower. This is demonstrated by the fact that to dateagri-based offsets are not widespread.
Long-term strategies at the production level are essential andrequire major industry support and supporting legislation.
Many of these are identified and discussed in the ICO’spaper on ‘Climate Change and Coffee’ – referred to earlier inthis chapter. Suffice it here to add that the March 2009 Coffee
Issues Management Forum (organized by the National
Coffee Association of USA) identified producer sustainability
as the prime priority issue with adaptation to climate change
listed as the most important sub-issue under this heading.
In the meantime, however, coffee producers require mostly
short-term solutions to try and help them cope as things
move along in the world of climate.
To a limited extent, progress towards mitigating the effects ofclimate change is assisted by adhering to Good Agricultural
Practices or GAP, further aligned to coffee production throughobservance of one or more of the different certification orWhile it is not possible to ‘sell coffee or shade trees’, it ispossible to work towards producing carbon credits that canbe traded, either through the mandatory CDM process, or
through voluntary arrangements. For individual smallholders
CDM type coffee carbon credits may be very difficult toachieve. For them the better route is probably through‘umbrella projects’ that encompass larger areas and takea holistic approach to the issue as described later in thischapter.

REALISTICALLY, WHAT CAN BE DONE?
It is important to differentiate between mitigation andadaptation, i.e. actions that would help to reduce climatechange, and actions that could help coffee growers toadapt to the impact of climate change.
 Coffee production itself contributes to GHG emissions.
How can those emissions be reduced? And, how could
carbon sinks be increased?
 In practical terms, what – if anything – can coffee growers
do to adapt to the effects of climate change?
However, it is equally important to appreciate that, collectively,
smallholders possess a vast amount of practical farming
knowledge and history, meaning they understand what haschanged or is changing in their area. The value of this humancapital should not be ignored. A survey and policy brief inthis regard, published by the Centro Agronómico Tropicalde Investigación y Enseñanza (CATIE) in Costa Rica – www.
catie.ac.cr, identifies three main responses by Mesoamerican
coffee growers to past crises and ongoing change in thecoffee sector. (September 2009 ‘Building resilience to globalchange for coffee farmers in Mesoamerica’ by Hallie Eakin,
Edwin Castellanos and Jeremy Haggar): Changes in agricultural practices, directed at reducing
costs, improving soil fertility, or meeting sustainability
criteria for new markets;
 Social organization, necessary for small producers toaccess new markets, technologies or support programs,
and to help farmers recover or respond to global changes;
 Participation in new marketing strategies, to help them
identify and develop the social and environmental valueof their products.
Other responses have included diversification to nonagricultural activities, adopting more profitable crops,
decreasing the area dedicated to coffee, lessening labour
and input use, and even migration to urban centres or moredeveloped countries.

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Surveys that were conducted ranked five potential areas ofintervention as follows: More important: (i) changes in agricultural practices and(ii) social organization;– Make better use of dry milling by-products (fuel,charcoal briquettes, board).
 Longer-term options– Strengthening institutions; Important: (iii) participation in new marketing strategies;– Improving access to climate data; Less important: (iv) new economic activities, and (v) new
cash crops.

– Mapping potential climate change impact on coffee
areas;In addition to recognizing the value of human capital, i.e.
the collective farming knowledge that already exists in thesmallholder sector, strategic recommendations include: Improving access to information, including market
information, farming technology etc., and developing theability to interpret such information.
 Establishing financial mechanisms, including climate
insurance, access to micro-credit to facilitate adaptation,i.e. organic, substitute crops, new varieties, shading, etc.
 Investing in social capital, i.e. build structures that enable
smallholders to access the resources necessary to adapt
to climate change, access new markets and exploit thesocial and environmental value of their farming activities.
A number of projects elsewhere in the world have conducted
or are conducting similar surveys. The indications are thatthe results may not be all that different.

ADAPTING TO CLIMATE CHANGE IN
PRACTICEGood farming practices automatically help conserve soil
and water and in so doing also make it easier to adapt to
global warming, while at the same time lessening its impact.
But the necessary resources are not always available,
especially not in the smallholder sector.
Hands-on options include the following: In the field– Mulching to reduce evaporation, avoid erosion andimprove soil fertility;– Terracing/contouring, drainage and trapping/storing
run-off rain water;– Planting hedges, planting contours to mitigate wind
and water damage;– More effective
management;

irrigation

and

water

resources– Shading to mitigate increased solar brilliance, reduce
temperature variations and help retain moisture.
 Processing– Reduce water usage with eco-friendly pulpers;– Improve wastewater management and disposal;– Make effective use of all compostable materials;– Use solar energy, i.e. sun drying where feasible;– Use renewable energy sources for mechanical drying;– Improving soil fertility;– Examining different production models, for example
high density planting;– Developing/planting disease and drought resistantvarieties;– Shifting production to more suitable areas where
feasible;– Developing finance mechanisms to facilitate all orsome of these.
Examples of climate mapping can be found at www.ciat.
cgiar.org, Centro Internacional de Agricultura Tropical orInternational Center for Tropical Agriculture in Colombia, andat www.iac.sp.gov.br, Instituto Agronômico de Campinas(IAC) in Brazil.
 Carbon sequestration and sinks– Calculating and reducing the on-farm carbon footprint;– Determine the feasibility of creating marketable carbon
sinks;– Linking smallholders to carbon markets to exploit
carbon footprint opportunities.
The list above is obviously not exhaustive. Many – if not
all – of the options are of course also promoted by thedifferent certification and verification standards as Organic,
Rainforest Alliance, Utz Certified, 4C Association andcorporate standards as the Nespresso’s AAA program, theStarbucks Coffee Company initiated C.A.F.E. (Coffee andFarmer Equity) Practices, and others.
The 4C Climate Code is an example of the work being
done by a number of organizations to bring climate change
adaptation and mitigation closer to the coffee producer.
The (voluntary) add-on module identifies 15 principles andprovides accompanying step by step indicators to measureprogress from red (unacceptable) to green (compliant) in
four main areas: Enabling Environment; Natural Resource
Management; Soil and Crop Management; and GHG
Emissions and Stocks.
Although the module is subject to further refinement, it
nevertheless represents a practical roadmap for growers
wishing to implement climate change adaptation andmitigation measures. The module is largely based on work
done by a three-year public-private partnership in Kenya
by Sangana Commodities Ltd and German International
Cooperation. Further partners were the 4C Association,
Tchibo GmbH and the World Bank’s Bio-Carbon Fund.

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The module, training manuals and further information,
also on climate change generally, are available at www.4ccoffeeassociation.org/en/work-on-climate-change-php.

CARBON CREDITSORIGIN AND LIMITATIONS
A frequently encountered assumption is that coffee growers
can (easily) benefit from what is called the carbon offset or
carbon credit market. This because supermarket chains,other retailers and consumer organizations are, sometimes
publicly so, asking the coffee distribution chain (importers,
roasters, others) to move to what is called a carbon neutral
product footprint. This is a situation wherein the carbon
emissions (carbon-dioxide or CO2) that the coffee chain
produces are offset by carbon reducing activities. And yes,in principle coffee growing offers potential for this but it must
be stressed that agri-based offsets are not widespread as
yet – for reasons that are explained below.
It is important to have in mind that different ecosystems eachhave a distinct potential to trap carbon atoms. A tropicalforest will isolate more carbon than a temperate forest,
grasslands or an agricultural ecosystem. In the same way,different agricultural coffee systems have distinct potential
to trap carbon atoms: forest coffee, smallholder plots,commercial plantations, coffee with or without shade, with orwithout intercropping, etc. But, whereas coffee production isoften assumed not to contribute to GHG emissions, the fact
is that auditing of an entire farming operation will reveal GHG
leakages, the most obvious of which are the use of tractors,
vehicles, electric motors, burning of firewood and the like that
contribute to GHG emissions.
The Kyoto Protocol referred to at the beginning of thischapter created what is known as the Clean Development
Mechanism (CDM). This allows developed countries to invest
in projects in developing countries to reduce GHG emissions,and to promote sustainable development through structured
projects that can result in the selling of Certified Emission
Reductions (CER). CDM projects must demonstrate theiradditionality, i.e. they have an additional/added value effectin the GHG scenario. Under the additionality concept, coffee
farms would have to prove that they create GHG savings thatare additional to anything that might happen anyway. The
additionality margin is always confronted against a baselinethat is traced comparing the farms with and without the CDM
Project.

WHAT DOES THIS MEAN?
 Established stands of both coffee and shade trees are nottaken into account as they are part of an already existing
situation. However, the conservation of existing forest
cover and improvement of general agricultural practices,
resulting in more eco-friendly coffee stands, are otheravenues towards earning carbon credits, provided net
GHG gains can be shown.
 New activities such as the introduction of intercroppingwith suitable GHG absorbing plants, the planting ofadditional shade trees and the rehabilitation of degradedlands and hillsides can count. This could include theplanting of additional coffee and shade trees, but only if
it can be proven that the land in question had previously
been in a prolonged state of degradation.
 The calculations to determine the net result of different
activities are complex and the final result may only justify
the effort if larger areas are covered. This makes it difficult
if not impossible for individual smallholders to participate
directly in carbon offsets.
The advantage of the CDM process is that it results in ‘certified’
carbon credits that offer the traceability and credibility as set
out in the Kyoto Protocol procedures. These credits can be
traded on established, formal markets with transparent pricing
procedures. In practical terms, however, the CDM approach
may not be the best suited for smallholder coffee becauseof the difficulty to measure the different coffee production
processes accurately in terms of GHG impact.

CARBON CREDITS DEFINED
Carbon credits are a key component of national andinternational attempts to mitigate the growth in concentrationsof GHG. One carbon credit is equal to one ton of carbon
dioxide equivalents. It is the unit of measurement for the carbon
market – much like a barrel of oil or liter of milk. Since there ismore than one GHG and because each of them has different
global warming potential, the carbon dioxide equivalent is theterm used to standardize the unit of measurement. Carbon
trading is an application of an emission trading approach,and to have a basis for comparison all GHG are calculated in
CO2 equivalents.
Greenhouse gas emissions are capped and then markets
are used to allocate the emissions among the group of
regulated sources. The idea is to allow market mechanisms
to drive industrial and commercial processes in the directionof low emissions or ‘less carbon intensive’ approaches thanthey would use when there is no cost to emitting carbon
dioxide and other GHG into the atmosphere. Because GHG
mitigation projects generate credits, this approach can beused to finance carbon reduction projects between trading
partners and around the world.
There are also companies that sell carbon credits tocommercial and individual customers interested in lowering
their carbon footprint on a voluntary basis. These offset
traders purchase the credits from an investment fund or acarbon development company that has aggregated thecredits from individual projects. The quality of the credits isbased in part on the validation process and sophistication of
the fund or development company that acted as the sponsor
to the carbon project. This is reflected in their price. NonCDM or voluntary units typically have less value than the units
obtained through the Clean Development Mechanism. Their

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prices are risk-driven; more risk for the seller means higher
price whereas more risk for the buyer means lower price.
Voluntary market standards try to define quality by setting
criteria; the stricter these are the better the quality of thecertificate and, therefore, the higher the potential price.
There are two distinct types of carbon credits:
 Carbon Offset Credits (COCs): generated by clean formsof energy production, wind, solar, hydro and bio fuels.
 Carbon Reduction Credits (CRCs): generated by thecollection and storage of carbon from the atmospherethrough bio-sequestration (reforestation, forestation),
ocean and soil collection and storage efforts.
Both approaches are recognized as effective ways toreduce the global carbon emissions crisis.

PRODUCT CARBON FOOTPRINTS
Industry in developed countries, including the coffee industry,is increasingly looking for ways to reduce their carbon
footprint but, if the footprint cannot be reliably measured, how
can it be managed?
Product carbon footprint (PCF) describes the sum ofgreenhouse gases accumulated during the full life cycle of a
product (good or service) in a specified application.
This definition was developed by participants in the PCF
Pilot Project Germany, an initiative that aims to draw up
recommendations for the methodical development andinternational coordination for implementing a transparent andscientifically substantiated method for measuring PCF. An
added objective is to adapt this within the coffee community
to a common standard (or at least a benchmark) that will
facilitate PCF measuring by coffee growers and others.
A pilot study Privat Kaffee Rarity Machare has been carried out
on coffee from the United Republic of Tanzania. The results,
together with other reports, are available at www.pcf-projekt.
de/main/results/case-studies.
The major German roaster Tchibo GmbH partnered in thisstudy, which identifies a number of stages in the coffee chain
as contributors to emissions to the air, to the water and to
the soil. The study offers schematic overviews of what takes
place where, and what generates what in terms of GHG. Of
interest here is the contribution to GHG emissions of thedifferent processes within the producing country (on-farmcultivation, processing, transport, milling and packaging), andthe consuming countries (overseas transportation, roasting,packaging, distribution, grinding/purchasing, consumption
and waste disposal).
The authors conclude that in this particular case study the
on-farm processes (production/processing and upstream
processes, including the production of agro-chemicals)
and the actual consumer phase (shopping and preparation)
are the main CO2 emission drivers. They point out howeverthat the production methods on the two farms studied areof a very high standard and more conventional production
systems may produce different results.
The authors also comment that in many instances it is difficult
to trace individual coffees back to their original production site
given that so much coffee is mixed at origin and is shipped
overseas in bulk. They recommend the coffee industry should
develop harmonized standards for compensation methods
within the coffee chain and stress the importance of ensuring
both transparency and credibility when it comes to making
public statements regarding PCF. Without consistency in themethods for calculation and reporting of PCF it can be difficult
to compare published footprints. See www.carbontrust.co.uk
for more.
To note here that the Carbon Disclosure Project at www.
cdproject.net collects information on the carbon footprint ofsome 2,500 large companies worldwide, including the world’s
leading multinational roasting companies. Participantsmeasure and disclose their greenhouse gas emissions
and climate change strategies through the project in orderthat they can set reduction targets and make performance
improvements. To access these reports one has to registerwith the project.
Of course there are many initiatives that deal with PCF
reduction in industry generally, not limited to coffee. Slower
vessel speeds, more efficient use of transport, using recycled
packaging material, cleaner fuels and reduced energy use,
but these are not within the scope of this discussion.

CLEAN DEVELOPMENT MECHANISMPROJECTS
The World Bank’s Carbon Finance Unit website at www.
go.worldbank.org/9IGUMTMED0 provides useful informationand tools in respect of the development and financing of CDM
projects. It offers assistance with both capacity building andproject preparation and it lists registered service providers.
Project assistance includes preparation of the carbon
documentation necessary to create a ‘carbon asset’ that will
deliver marketable VERs (Verified Emission Reductions) or
CERs (Certified Emission Reductions).
Also available are a CDM Methodology Overview, a CDM
Methodology Database and a CDM Methodology Paper(reports on methodological issues, workshops, etc.). These
provide easily accessible information that helps to understandthe CDM rules of procedures and basic concepts of approved
methodologies for CDM projects. However, the information
provided in this section does not eliminate the need always
to consult the approved methodologies and the guidance
provided by the CDM Executive Board, which is recordedon the official CDM website and can be accessed at www.
cdm.unfccc.int. Work is also ongoing on the development ofa Validation and Verification Manual.
CDM projects are also listed at www.carboncatalog.org/
projects, whereas project documentation is available at www.
wbcarbonfinance.org.

CHAPTER 13 – CLIMATE CHANGE AND THE COFFEE INDUSTRY

Also of interest to coffee producers is the Forest Carbon
Partnership Facility (FCPF) at www.forestcarbonpartnership.
org/fcp. It has information on ways to reduce emissions
from deforestation and forest degradation (called REDD) by
providing value to standing forests.
The majority of CDM projects appear to go to Asia and Latin
America, in particular China, India and Brazil. As a result, theCarbon Finance Assist facility was created to promote a morewidespread flow of CDM projects by offering assistance with
the identification and creation of CDM projects. Visit www.
go.worldbank.org/T93VFJSRL0. But for many coffee growers
the CDM route is unfortunately still too cumbersome and may
be out of reach.

THE VOLUNTARY MARKETS FOR CARBON
OFFSETS
Voluntary markets do not require as much documentationand financial investment as do the mandatory (CDM)
markets. However, prices are highly variable because theproject developers have the freedom to adopt standards ornot, to create new methodologies, and to have or not havethird party verifications. To note also that as of late 2011 there
were no indications yet of any full-scale application in thecoffee sector.
Furthermore, this freedom of negotiation affects the pricesof the credits as these are directly related to the quality
and credibility of the methodology that was used, and thedegree of verification by third part audits or other assurance
mechanisms. Critics refer to a lack of regulated methodologies
for setting up the credits and the impossibility of tracing backthe volume of GHG alleged to have been sequestrated. Lackof regulations could possibly result in double counting ofcredits, intentionally or unintentionally, and having to trustthat already purchased credits will be accounted for in the
future. After all, projects can fail, whereas the standards orverification systems used could turn out to be inadequate.
The voluntary route is more appropriate for small or medium
sized initiatives (projects) that may lack the capacity andknowledge to develop fully fledged CDM type coffee carbon
credits. Widening the sphere of activities and extending thetarget areas might also result in more people or communities
being able to participate. Additionally, investing in social or
producer organization would facilitate smallholder access tothe potential benefits offered by the carbon markets.
Standards leading to verified carbon credits that could
potentially be adopted by coffee growers include thefollowing: The Voluntary Carbon Standard, www.v-c-s.org, which
has a useful section on agricultural land management(coffee trees, vegetation, soil and waste water).
 Plan Vivo, www.planvivi.org, whose Scolel Té project in
Mexico includes a section dealing with shade trees incoffee plantations.

 CarbonFix, www.carbonfix.info, whose CarbonFix
Standard was developed for climate forestation projects.
 The Chicago Climate Exchange, www.theice.com/ccx.
jhtml, maintains an Offsets Registry Program to register
verified emission reductions based on a comprehensive
set of established protocols, including Forestry Carbon
Sequestration.
See also Making Sense of the Voluntary Carbon Market:
A Comparison of Carbon Offset Standards at www.
co2offsetresearch.org.
The Climate, Community and Biodiversity Alliance Standards,
www.climate-standards.org, include three kinds of credits:
Approved, Silver and Gold depending on the findings of theaudit process. However, if verified carbon credits are to beissued they must be verified by one of the other voluntarystandards.

VOLUNTARY MARKET PROJECTS
Coffee farms generally and smallholdings especially do notcontribute greatly to GHG emissions, but this is not to saythat growers should not engage in mitigation measures, i.e.
reduce their carbon footprint. However, coffee farms in many
if not most countries often offer potential to increase their tree
cover, either through the planting of (more) shade trees or byextending the total forest cover on a farm or in a demarcatedarea. Provided this is an additional activity, i.e. it would not
happen without the incentive of earning carbon credits, suchplantings can generate marketable carbon credits throughthe carbon sequestration process that the additional trees
generate. An interesting aspect of forestry projects is thatplantings can be monitored through satellite imagery, e.g.
through Google Maps, www.maps.google.com.
It needs to be stressed again that credible reporting andverification of carbon credits requires that one carbon credit
unit is always the same, regardless of where or how it was
produced. To be credible a project therefore needs to be
based on accepted standards and procedures, includingtransparent accreditation, validation and verification. It needs
to be properly structured and adequate records must be
kept. See also www.adapcc.org/download/LPedroni-CarbonCredits.pdf.

ENVIRONMENTAL SERVICES
A particularly interesting discussion, potentially of great
importance for the coffee sector, is whether maintaining
shaded coffee farms, i.e. conserve existing shade trees andtheir carbon stocks, should count towards earning carbon
credits. After all, coffee farms under shade conserve morecarbon than coffee grown in direct sunlight, but at the cost oflower yields. There is therefore potentially an opportunity costto adopting such conservation measures over sun growncoffee. Although in some cases this can be compensatedfor if linked to premium prices like for organic, the lack of

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incentives for farmers to provide environmental services in thisway is evident. Furthermore, should farmers not be rewarded
for conserving existing shade grown coffee as is proposed forforests under REDD (Reduce Emissions from Deforestation
and Forest Degradation in Developing Countries)?
The current requirement is that farmers growing shadecoffee plant additional trees before they may qualify for any
carbon credits. In effect that means that the environmental
services they already provide are being ignored.

WHERE TO GO, WHERE TO LOOK?
Many developing countries find it difficult to participate in
the CDM. This is why the World Bank’s BioCarbon Fund
provides carbon finance for projects that sequester orconserve GHG in forests, agro- and other ecosystems.
Visit www.go.worldbank.org/IVUUKC9210. By late 2011
the fund supported around 25 reforestation projects, three
REDD projects Emissions from Deforestation and Forest
Degradation in Colombia, Honduras and Madagascar (seethe website), and is embarking on so-called soil carbon
pilot projects. The BioCarbon fund is also working with
Kenya’s Green Belt Movement (GBM) on the reforestation of
degraded land. This pilot project will pay local communities
and provide them with the technology and knowledge toreforest these lands and manage the new forest. Carbon
payments will allow GBM to expand this technique and its
benefits to additional areas.
NB. Registering with the BioCarbon Fund website gives
access to a number of documents, including reports on thestate of the carbon markets (both CDM and voluntary).
Helpful information is also available from the Rainforest
Alliance that has produced a manual entitled Guidanceon Coffee Carbon Development using the simplified
Agroforestry Methodology. This comprehensive manual
deals with the entire project sequence – from identification
to marketing carbon credits. It can be read in English and in
Spanish at www.rainforest-alliance.org/climate/documents/
coffee_carbon_guidance.pdf.
Three interesting initiatives:
 CATIE, the Centro Agronómico Tropical de Investigacióny Enseñanza in Costa Rica, www.catie.ac.cr, in
2004–2006 developed a technical manual on how toestimate carbon – Carbon Capture and Development ofEnvironmental Markets for Indigenous Cocoa Farms andOther Agroforestry Systems.
 CATIE is also working with the Costa Rican Fondo
Nacional de Financiamiento Forestal (FONAFIFO) on a
Payment for Environmental Services Scheme to establish
criteria for environmental payments to shaded coffee
farms.
 The Rainforest Alliance, www.rainforest-alliance.org,
with funding from the International Finance Corporation,completed a two-year project (2008/2009) entitled

Creating and testing a credible carbon monitoring
methodology for Coffee Farms with the objective tocombat climate change while promoting reforestation;
enable farmers to sell the carbon these incremental trees
take out of the atmosphere; avoid the high transaction
costs usually associated with carbon offset projects;
and develop methodology that can be used in otherregions and sectors. A project outline is available at www.
rainforest-alliance.org/climate.cfm?id=carbon_coffeewith an update at www.eco-index.org/search/results.
cfm?ProjectID=1476.
NB. See also The Global Forest and Trade Network at www.
gftn.panda.org. GFTN is a WWF Global initiative and offers
information, contacts and tools in respect of sustainable
forest management and forest certification.

ADDITIONAL RELEVANTWEBSITES
These selected websites offer information on GHG emission
issues, standards, offsets, product carbon footprints,
project preparation and financing.
www.ipcc.ch – The Intergovernmental Panel on Climate
Change (IPCC) is the leading scientific body for theassessment of climate change. It reviews and assesses
the most recent scientific, technical and socio-economic
information produced worldwide relevant to theunderstanding of climate change. Very informative technicalinsights in the origin, potential effects and mitigation of GHG
emissions are available.
www.cdm.unfccc.int/index.html – The Clean Development
Mechanism allows emission-reduction (or emission removal)
projects in developing countries to earn Certified Emission
Reduction (CER) credits, each equivalent to one ton of CO2.
CER can be traded and sold and used by industrializedcountries to meet a part of their emission reduction targets
under the Kyoto Protocol.
www.usaid.gov/our_work/environment/climate – The UnitedStates Agency for International Development (USAID)
supports climate change initiatives in a number of countries.
Visit this website for an overview.
www.pcf-projekt.de – The Product Carbon Footprint Pilot
Project Germany aims at the methodical development andinternational coordination for implementing transparent andscientifically substantiated methods for measuring PCF.
Site offers explanations of how PCF are measured and anumber of downloadable studies, including one on coffee
from the United Republic of Tanzania.
www.v-c-s.org – Verified Carbon Standard Association(VCS) aims to standardize and provide transparency andcredibility to the voluntary offset market, thereby enhancing
consumer and government confidence in voluntary offsets,

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by creating a trusted and tradable voluntary offset credit, theVerified Carbon Unit (VCU). VCS provides much information
on standards for the reduction of GHG, project regulations
and certification, and the marketing of Certificates ofEmission Reduction or CER.

German International Cooperation (GIZ, previously GTZ)
website. Go to www.gtz.de and in particular www.gtz.de/en/themen/umwelt-infrastruktur/umweltpolitik/4859.htm. Note:
With the change from GTZ to GIZ existing GTZ website links
are likely to change.

www.climatestandards.org – The Climate, Community andBiodiversity Alliance (CCB) is a private sector-civil society
partnership. It aims at setting standards to be used forthe identification of projects that simultaneously address
climate change, support local communities and conserve
biodiversity.

Acknowledgement: Several parts of this chapter are basedon the report Climate Change and Coffee published by theInternational Coffee Organization (ICO) in September 2009.
The full report, including a list of selected organizations thatare funding mitigation and adaptation to climate change
initiatives, is available on the ICO website. See www.dev.
ico.org/documents/icc-103-6-r1e-climate-change.pdf. The
ICO’s permission to make use of this report is gratefully
acknowledged.

www.co2offsetresearch.org – The Carbon Offset Researchand Education Initiative (CORE) is a project of the Stockholm
Environment Institute and provides an analysis and synthesisof the most influential offset programmes and activities.
www.carbontrust.co.uk/Pages/Default.aspx – The Carbon
Trust is a United Kingdom Government initiative to accelerate
the move towards a low carbon economy. It offers advice on
reducing carbon footprints and helps develop low carbon
methodologies and products. In particular look for thereport entitled The Carbon Trust three stage approach todeveloping a robust offsetting strategy.
www.cdmgoldstandard.org – The Gold Standard Foundation
is a civil society initiative that operates a certification service
for premium carbon credits. Apart from the Gold Standard
the site also lists accredited service providers in different
fields, including project development financing.
www.carbonneutral.com – The Carbon Neutral Company isa private sector carbon offset and management business.
www.carbonfootprint.com – Carbon Footprint Ltd is acarbon management and offset consultancy. Site includes
calculator and management tools.
www.ieta.org – The International Emissions Trading
Association aims to develop a functional internationalframework for trading in GHG emission reductions. The site
offers a number of publications and explanations.
www.chicagoclimatex.com and www.ecx.eu are formal
exchanges for the pricing and trading of carbon offsets.
They offer information on how and by who this can be done.
www.ecosystemmarketplace.com – The Ecosystem
Marketplace, a private initiative of Forest Trends, is a leading
source of news, data, and analytics on markets, prices andpayments for ecosystem services such as water quality,
carbon sequestration and biodiversity. The site offers wideranging information on environmental markets, ecosystem
markets and carbon markets and a comprehensive glossary.
It also offers a number of tools.
Finally, a very useful listing of a large number of annotated
and thematically sorted links to websites focusing on
climate protection and development is available from the241

CHAPTER 14

QUESTIONS & ANSWERS AT
WWW.THECOFFEEGUIDE.ORG

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CHAPTER 14 – QUESTIONS & ANSWERS AT WWW.THECOFFEEGUIDE.ORG

QUESTIONS & ANSWERS AT
WWW.THECOFFEEGUIDE.ORG
In 2005, ITC opened the Coffee Guide website www.
thecoffeeguide.org – a continuously updated version of thisguide. Over the years, the website’s Questions & Answers
service has posted more than 240 detailed answers toquestions from users – with priority given to questions fromproducing countries.
Here are just a few of the many questions raised over theyears with two examples of answers posted in the website’s
Q&A Archive – in English, French and Spanish.
QA 004

Should desiccants (or dry-sacs) be used incontainers or not?

QA 010

Are the ECC Contract (Europe) and the GCA
Contract (New York) valid for sales to markets
outside Europe and North America, particularly
Japan?

QA 131

How to differentiate between the mainstream
and the specialty industry?

QA 134

What duties are payable and what
documentation do US Customs require to clear
green coffee imports?

QA 142

What is the function of ‘middlemen’ in the coffee
chain? Are they necessary?

QA 144

Are consumer tastes in Germany changing?

QA 145

Who is liable for missing bags when container
seals show no sign of tampering?

QA 150

For robusta, is there any difference in yield
between dry and wet processing?

QA 163Why vacuum-pack coffee?

QA 168How to export very small lots, say 50 bags or
less?

QA 172

What is the meaning of ‘squeeze’ in London
robusta futures?

QA 175

Does polishing add value to quality coffee?

QA 178What are the differences between pulped
natural, semi-washed and washed coffee?

QA 180On what grounds, if any, could a buyer rejecta shipment and what would the consequencesbe?

QA 018What are the credit risks involved in direct sales?

QA 032

How to approach potential buyers?

QA 051

What role do investment funds play in the coffee
trade?

QA 054In market analysis, what is the difference
between ‘fundamentals’ and ‘technicals’?

QA 061

When damage occurs en route to an FCL
shipment, who is responsible?

QA 064

In percentage terms, how much soluble coffee
can be extracted from roasted coffee beans?

QA 181How do destoners and catadors work?

QA 199What can a buyer do when his shipper defaults?

QA 079What prevents growers from marketing finishedproducts direct to (wholesale) consumers?

QA 208If quality deteriorates during (delayed) transit,
who is responsible?

QA 088Is there a standard form for cup tasting, i.e. torecord coffee quality?

QA 209Who is liable for fumigation costs on arrival ofinfested shipments?

QA 100In a Code of Conduct or coffee standard, whatis the difference between certification andverification?

QA 212Can brokers usually link coffee producers andimporters on a commission basis?

QA 103

Affordable credit for small growers versus pricerisk: what are the options?

QA 215

Damage during loading – who should initiate
insurance action?

QA 104

In coffee tasting: when, if at all, does ‘fruity’ passfrom acceptable to unacceptable?

QA 218Who is responsible when bags go missing froman LCL/FCL shipment?

QA 116How should one approach the Japanesemarket?

QA 227

Why and how deliver coffee from origin to the
London LIFFE futures market?

QA 126

Can growers use put options to manage pricerisk?

QA 237

Why do some producing countries use altitudein their descriptions and others bean size?

QA 126

Is delayed payment sufficient cause to cancel acontract?

QA 238Under ECC, who is liable when arrival weights
show a loss of over 0.5%?

QA 128What is the exact difference between aTrademark and a Geographical Indication?

QA 242

What are the terms of trade and premium for
4C-compliant coffee?

CHAPTER 14 – QUESTIONS & ANSWERS AT WWW.THECOFFEEGUIDE.ORG

ANSWER TO QUESTION 032
Question: How to approach potential buyers?
Asked by: Cooperative – Central Africa
Background: Until now we have always sold our coffee tolocal exporters but our members are pressing us to establish
an alternative sales channel by entering the export market.
We have never approached any roasters or importers andwe wonder what the best approach would be, i.e. how do
we convince potential buyers to take us seriously? After all,no one knows us and we, basically, know no one either.
Answer: Importers and roasters receive many approaches,some serious but many not. Many aspiring sellers approach
potential buyers on a hit or miss basis, hoping one or twoof their missives may bring a result. But most of theseapproaches are recognized for what they are and end up in
the wastepaper basket.
Our first recommendation is to peruse ITC's Coffee Guide insome considerable detail, including the advice given under‘I want to sell coffee’ on our homepage.
This apart, we do not think there is an ’ideal way’ in which
to approach potential buyers, but we can point out someof the more common factors that play a role in determining
whether a buyer may see you as a potential supplier.
Know your coffee. Is it exemplary quality? Specialty quality?
Mainstream quality? How have your prices compared withthose of others around you? Answers to these questions will
suggest which market segment to target.
Know yourself. What quantities can you realistically supply
over what period of time? Can you afford to reserve someof your production to back your export drive? Trying to raiseinterest without having the coffee to back it is pointless.
Is your interest in exporting purely price driven, or are you
looking for diversification? Trying for top dollar from day one
is equally self-defeating.
Have a story and state your credentials. Know yourarea, know what makes you different. Explain how you growand process your coffee, how you will export it, what you areable to do to support your buyer, what you expect in return.
How long have you been in the coffee business? How has
your business progressed? Provide names and addressesof those you have done business with, both in your own
country and abroad; which associations you are a member
of. State your long-term vision, but be brief. At this stage noone has the time to read more than three pages.
Send a fact sheet. Give information on variety, altitude,soils, annual rainfall, location, annual production by grade
and or type, harvesting/marketing season, labour practices,
processing system, anti-pollution measures, warehousing,dry processing, distance to port, shipping opportunities tothe target market, etc. Be transparent.

Send a sample. A sample (500 g) is better than athousand words (just like a picture). A sample suggests
you understand the importance of quality, that you know
your quality and that you have confidence in it. But be sure
you send the right sample. It should be fully representativeof what you can supply and drawn from a parcel of coffee
that itself is fully homogeneous. Understand that the buyer
takes a risk when making a first purchase – if the coffee that
arrives is no good, what can he do? Propose that shipments
can be checked by a third party, both as regards quality andweight. Ask for comments on the quality and suitability ofyour coffee. What is the buyer’s preferred method of doing
business? If you can, propose setting up appointments tovisit buyers. This demonstrates your seriousness and will
go a long way to establishing interest. Get samples to them
before you arrive so that you can cup your samples (andothers that may compete against you) together.
Do not make generalized statements about what you
can do. Instead be precise and factual. Show that you
understand the importance of correct contract execution,
the absolute need to ship precisely the quality that was sold,the need for documentation to be in order, etc. Buyers needconvincing that you understand these issues and that you
are capable of satisfying their requirements.
Do not make promises you cannot keep. If necessary
explain you are a novice but that you are keen to learn.
Do not make claims you know not to be true. Not only
will a buyer quickly pick this up but bear in mind that buyers
also talk to each other.
Remember that many roasters, for example in the UnitedStates, are not keen to deal direct and prefer to buy throughexporters/importers. Therefore, do not concentrate on one
sector only, but investigate what will be your best options
in each individual market. Recognize the importance ofintermediaries. Futures markets, language barriers, different
time zones, the risk of default on both sides, etc., all support
the need for exporters, importers, local agents, traders andbrokers.
Match your client to yourself. If you are producing 80
tons annually, do not go to one of the majors like Kraft, Sara
Lee or Nestlé. But also do not spend a fortune wooing aroaster who only needs 40 bags a year.
Posted 19 July 2005
Related chapter(s): 03 – Niche markets, environment andsocial aspects; 02 – The markets for coffee
Related Q&A: QA 029

245

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CHAPTER 14 – QUESTIONS & ANSWERS AT WWW.THECOFFEEGUIDE.ORG

ANSWER TO QUESTION 142
Question: What is the function of ‘middlemen’ in the coffee
chain? Are they necessary?
Asked by: Grower – West Africa
Background: Why are there are so many middlemen in
the coffee chain between grower and roaster? They must
charge a lot for their services because grower prices arevery low compared to retail prices for roasted coffee. Are
these people really necessary and why should we not beable to sell direct?
Answer: Many people who compare grower prices with retailprices for roasted coffee, particularly specialty coffee, wonder
who benefits from the mark up.
The discussion over ‘middlemen’ often fails torecognize the many stages coffee (and similarcommodities) pass through between grower andconsumer: Collection, primary processing, export
processing, marketing, financing, transport to port, export
clearing and shipping, import discharge and clearing, inlandtransportation to roaster, roasting, packaging, marketing,promotion, distribution/wholesale and retail to final
consumer. All these are necessary stages that involve third
parties, i.e. middlemen, because someone has to performthese functions, obviously at a cost that of course includes
a profit margin. Therefore, removing the ‘middleman’ does
not remove the ‘middle function’.
Put differently, everyone who handles coffee between
the grower and the end-consumer, including theroaster and the retailer, is a middleman. But at thesame time, we would all agree that roasting and retailingare not functions a grower or a grower organization could
easily undertake, if at all, and so people do not see roasters
and retailers as middlemen. Yet, different value chain data
indicate that over 80% of the mark up (costs and margins)on specialty coffee in fact goes to these last two sectors.
Internal marketing systems in individual producing countries
have different intermediate marketing stages and layers
so we will not comment on these. Similarly, it is relatively
pointless to delve into roasting and retailing activities
because these are functions most individual growers cannot
undertake. This then leaves us with the functions performedin the transition between exporter and roaster.
Exporters and importers carry out specific service
functions but, more importantly, they also assume anumber of risks. Thus, whereas both growers (or roasters)
wishing to deal direct can probably purchase the transitional
services they need (shipping, clearing, insurance etc.), they
will also have to assume the additional risks this entails.
For a grower exporting direct some of these risks
include: Credit risk (the roaster does not pay – please see Q&A
018 and 035 that deal with precisely this); Quality risk (the goods are rejected on arrival, either bycustoms or by the roaster).
For the roaster importing direct some of the majorrisks will be: Performance risk (the goods are not shipped), and again;
 Quality risk (the goods are rejected by customs, or thequality is not what had been agreed).
These are typical examples of the risk-taking function
exporters and importers assume as a matter of course.
Other examples include: Currency risk (coffee bought in one currency, sold in
another); Shipping risk (goods are delayed or damaged en route);
 Provision of extended credit and so on.
In our view there are basically no unnecessaryfunctions in the value chain. But of course there are
additional margins that could accrue to growers if they areprepared to extend the number of functions they carry out
themselves, for example, by exporting themselves. However,contrary to popular belief, the major costs and margins are
not incurred by exporters and importers as evidenced by
the example on the next page of a value chain for Kenya
specialty coffee to the United States.
Although the calculations in the example were made whencoffee prices were quite low, the findings are corroborated
by a further study (ERR-38 – March 2007) released by the
Economic Research Service of the United States Departmentof Agriculture. This study found that, on average, a 10-centincrease in the cost of a pound of green coffee beans in agiven quarter results in a 2-cent increase in manufacturer andretail prices in the current quarter. If a cost change persists
for several quarters, it will be incorporated into manufacturer
prices approximately cent-for-cent with the commodity costchange. Given the substantial fixed costs and markups
involved in coffee manufacturing, this translates into about
a 3% change in retail prices for a 10% change in commodity
prices. The study also noted that cross-sectional pricedifferences were substantially larger at the retail level thanat the wholesale level.
In our example some 87% of the retail cost of roasted
coffee is incurred at the roaster and retailer level whereas
the grower price represents around 7% of the retail value.
However, this assumes a straightforward transaction, butmany smaller roasters regularly require importers to holdstocks on their behalf. Delivery then has to be spread overa number of months, at fixed prices and at extended credit
terms, thereby of course increasing the ‘middleman’s’ costs.

CHAPTER 14 – QUESTIONS & ANSWERS AT WWW.THECOFFEEGUIDE.ORG

A similar calculation for mainstream coffee to Germany
concluded that 84% of the roast and ground retail value
accrued to the roasting and retail segments. About 6% went
to processing cum export costs and intermediaries, leaving
about 10% of the R&G retail value for the grower.

US$/kg
US$/kggreen
R&G
coffeePercentage
split

Retail price per kg roasted
coffee

24.36

100%

Retail costs and margin

8.05

33.1%

Posted 23 March 2007

Wholesale price

16.31

Roaster profit (gross)

1.74

7.1%

Roaster overheads

1.22

5.0%

Roaster marketing/advertising

4.09

16.9%

Related chapter(s): 01 – World coffee trade; 03 – Niche
markets, environment and social aspects; 02 – The markets
for coffee

Roasting/packaging/
distribution

6.04

24.9%

In-plant cost to roaster per
kg roasted

3.23

In-plant cost to roaster per
kg green

2.72

Transport to roaster

0.02

Insurance/financing (incl.
hedging)

0.11

Warehousing

0.04

Traders' margin

0.04

Port charges

0.02

CIF landed cost per kg
roasted

1.0%

2.97

CIF landed cost per kg
green

2.50

Freight and shipping costs

0.12

FOB price per kg roasted

0.5%
2.83

FOB price per kg green

2.38

Exporter costs and margin

0.21

0.9%

Levies0.09

0.3%

Marketing agent andmilling*

0.17

0.7%

Cooperative primaryprocessing

0.43

1.8%

Grower price per kg
roastedGrower price per kg green

1.75

7.2%

1.47

Source: Various reports and ITC's own estimates.
* Current legislation in Kenya requires growers wishing to sell direct(i.e. bypassing the auction system) to employ a marketing agent. The
need for this link between grower and exporter is not entirely clear.
Note: Percentages do not add up due to rounding; Conversion green/roasted – ratio of 1.19 as per ICO rules.

Exporting smaller quantities (less than a container load)
is also quite difficult. This is one of the reasons whyroasters taking part in Cup of Excellence auctions (www.
cupofexcellence.org) rely on exporters and importers toship/import their purchases. Further proof that for many
growers the number of ‘middleman’ functions they canassume is, in fact, quite limited.

Related Q&A: Q&A 018, 032, 035, 046, 065, 079, 083, 090,
094

247

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