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Euro-Differential Coffee vs. Euro-Prep.

Euro-Differential Coffee vs. Euro-Prep

A question frequently asked since the opening of the Euro-Differential Coffee (Euro-Diff) contract is whether the coffee which is certified for delivery on the contract is of comparable quality to what is commonly used in Europe. We asked James J. Bowe, senior vice president/market development & planning at the Coffee, Sugar & Cocoa Exchange who stated that the answer is, emphatically, yes.

What is the difference between "Euro-prep" coffee and the "C" quality coffee deliverably on the European-Differential contract? Nothing

"C" quality coffee and Euro-prep coffee are very similar in quality, both commanding premiums in the Arabica cash market. This issue of quality has been confused by a comparison of Euro-prep coffee versus American preparation (American-prep) coffee. American-prep quality is an undefined standard; it merely represents coffee that is delivered to the United States from origin and really carries no particular distinction or markings.

Not all American-prep coffee can meet the standards for delivery on coffee "C" contract. The standards for "C" quality certification are higher than the undefined American-prep quality. The American-prep coffee (non-certified) will still be sold in the American cash market, but without the premium afforded to coffee which has met "C" contract standards.

Only "C" quality coffee may be delivered on the Euro-Diff contract, the standards for delivery on the Euro-Diff contract being identical to those for delivery on the Exchange's Coffee "C" contract. If delivery is to occur, only coffee that has been sampled, graded, and certified according to Coffee, Sugar & Cocoa Exchange rules and procedures is acceptable.

An important fact to remember is that there has never been an independent set of standards defining Euro-prep coffee. Rather, Euro-prep reflected a more careful preparation of coffee prior to shipment, providing a premium to the origin country. The standards for delivery were then determined by individual roasters, placing the coffee merchant at risk if Arabica coffee moved from origin to Europe did not meet a particular roaster's standards. As a result, the Exchange was asked to create a vehicle that could be used to hedge price risks for Arabica coffee in or destined for the European market.

Since "C" quality is a known standard that has been in existence for a long period of time, is well known to the Arabica cash market and benefits from a large pool of experienced graders, it was the obvious measure for this new product.

The appropriateness of "C" quality standards is evident in that the CSCE coffee graders have certified (through the middle of June) almost 14,000 bags of coffee for European delivery. It may or may not meet a particular roaster's needs, but the Exchange contract is not designed to satisfy all of a roaster's physical coffee requirements. Instead the futures market provides a price hedging mechanism and also allows for delivery of a suitable quality of coffee to insure the effectiveness of its pricing function - just like every other futures contract.

The CSCE has now licensed at least one warehouse in each of the port cities where delivery is permitted for the Euro-Differential Coffee contract (Antwerp, Bremen, Hamburg, and Rotterdam-Amsterdam). The CSCE is also reviewing additional warehouse license applications. Current licensed warehouse capacity is almost two million bags of coffee.

Coffee deliverable on the Euro-Differential Coffee contract meets the standard of Euro-prep quality. European warehouses continue to apply for licenses to meet the needs of their customers, and coffee for delivery on the Euro-Differential contract continues to be submitted for grading. The Euro-Differential market is still in its infancy but it is growing and becoming stronger everyday. I believe this contract gives the European trading community a much needed hedging capability and we are well along in the development process for a useful new market.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:international trade coffee quality standards
Publication:Tea & Coffee Trade Journal
Date:Jul 1, 1991
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