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The international coffee trade: developing an export strategy.

Successful international marketing of coffee requires careful planning based on the strategic objectives set by a country or organization. If these objectives are not well defined, marketing decisions risk becoming haphazard and may at times run counter to an industry's strategic interests.

Depending on the particular situation, coffee may be exported by a country's central marketing board or individual exporters. Although the objectives of the two may not necessarily be identical, the process of developing a marketing strategy is similar in each case. The organization's export manager must first give careful consideration to the various risk factors involved in the marketing operation and then analyze the marketing objectives in the light of those. This assessment serves as the basis for defining the export strategy.

Marketing boards

Marketing boards should consider a number of different risk factors involved in international coffee sales when drawing up their export marketing strategies, as discussed below.

Risk factors:

Marketing boards and similar bodies are more often than not required to purchase, process, finance, store and sell the entire coffee crop. Even if some activities are carried out by agents, the boards remain in overall charge. This is a great responsibility as their strategy affects the country's economy and all those growing coffee.

The first element of a successful strategy is to define long-term objectives. This cannot be done without a clear appreciation of important macroeconomic issues, especially in smaller producing countries that are heavily dependent on coffee earnings.

In such countries changes in the value and regularity of foreign exchange earnings from coffee exports directly affect the economy as a whole. Marketing strategy must take this into account. Its prime objective should be, therefore, never to interrupt or reduce exports without compelling reasons. As coffee stocks require large amounts of seasonal finance, certain questions must be asked. For how long can or should such borrowings be sustained? Are interest rates real or are they subsidized? If subsidized, what is the opportunity or real cost of such borrowings to the economy if maintained for longer than absolutely necessary?

Marketing strategy should not ignore the considerable speculative element that accompanies coffee production. Any speculative marketing action must therefore be not only quantifiable but also subject to strict limits and unbiased supervision. Purchasing an entire harvest means engaging in considerable long speculation, whether for the board's own account, that of the grower or that of the government. For example, if a board has sold only half of its current 50,000-ton crop, and next year's crop, which it also has to buy, is already on the trees, it has a theoretical long position of 75,000 tons, partly in stock and partly to be delivered. This is quite substantial as far as long speculation is concerned, but is it recognized as such? It is true that the very nature of marketing monopolies forces them into this situation, but this does not alter the enormity of their exposure. Marketing decisions to limit or halt the sale and flow of coffee increase this exposure. As with any risk, exposure should be managed and where possible limited.

The importance and complexities of the international coffee trade make it imperative that only marketing personnel with the necessary product knowledge and trade experience are employed.

In most smaller producing countries some or all of the above issues play a role. Because of their constant need for foreign exchange, the lack and cost of finance, and the risks attached to speculation, their only realistic marketing strategy is:

* To ensure as far as possible that coffee is exported when it becomes available for shipment; and

* Not to withhold coffee from the market unnecessarily and not to speculate, other than perhaps by selling forward when prices look reasonable.

In short, the market should be followed and not anticipated.

Any decision to deviate from these fundamental principles must take into account all consequences and costs, a number of which are not immediately obvious, such as loss of quality. As buyers know the usual crop and shipment pattern, later shipment, necessarily of older coffee of different quality, often results in a correspondingly lower price. If financing, storage and opportunity costs are added, the real carrying cost can reach 3 to 4 cents per pound per month, before the macroeconomic issues are even considered. If after a two-month withdrawal from the market 8 or 10 cents per pound more are realized, the exercise may hardly have been worth it. In the meantime a number of regular buyers may have been upset and may have turned to competing suppliers. Worst of all, overall risk exposure has been increased to unacceptably high levels.

Regular sales and exports ensure that the average seasonal price is obtained, regular foreign exchange receipts are maintained and overall exposure is limited. This policy also teaches buyers that although their partner may be small, that partner is dependable.

Marketing strategy needs to be defined at government and industry levels and its implementation should be supervised on a regular basis, for example by a national marketing committee. In addition to formulating and monitoring policy, such a committee should also guide marketing executives when necessary. Marketing decisions of great significance should not be left to just one or two individuals. Shared responsibility is important.


Successful implementation of a marketing strategy depends on respect for a number of basic objectives.

The marketing board's strategy is greatly influenced by the need to keep the coffee flowing out and the funds coming in. To achieve this, a reliable and regular export processing programme is required to ensure that the crop is processed in time to allow the execution of a proper sales programme. Coffee mills should not be switched on and off at will -- they are industrial undertakings and must be run as such. The milling schedule forms the basis of the sales activity. If 5,000 tons are produced each month, this is the approximate monthly tonnage to be exported and sales must be programmed accordingly.

The first objective is to identify sufficient markets and buyers who will regularly purchase the quality and the quantity of coffee produced. If the mills produce standard bulk qualities, the quest for buyers must take this into account. The buyer of bulk coffees has more generalized quality demands than small roasters or importers. Buyers are happy to accept a standard quality within certain limits of liquor quality, bean size and consistency. To ensure that their product is acceptable, marketing personnel have to know and understand buyers' requirements. As buyers' ideas about quality may change, marketing personnel should continually study these ideas and assess competitors' responses to them. Maintaining quality is not always easy, especially if quality controls are ineffective. Marketing is directly affected by the efficiency of agricultural extension services, processing, milling and research. Marketing personnel should therefore understand how these services are run and have some say in the formulation of their objectives.

Product knowledge in the marketing department and understanding of market requirements in other departments are therefore prerequisites for effective marketing. An annual visit by marketing personnel to overseas importers and roasters is not a luxury but a necessity. Senior staff of other departments should also visit overseas markets occasionally for updates.

The second objective is to ensure that contracts are efficiently executed. This requires good communications and an effective shipping and documentation department. Many excellent marketing efforts will be nullified if the execution of contracts is sloppy, if shipping periods are not respected or if shipping documents arrive after vessels have docked overseas. Failure to keep buyers informed on the progress of their shipments is often highly embarrassing. The after-sales service is as important as the selling process itself.

The third objective is to provide individual service by respecting buyers' requirements. Although it is difficult for bulk producers to tailor quality to individual specifications, they must at least provide an impeccable service to avoid having to compete on price alone. If buyers want to see advance samples of each shipment, they must be given them. If they want different lot sizes, markings and documentation, they must get them. Most important, they should be kept informed on production, processing and quality.

How are these objectives translated into regular business at reasonable prices? Although exporters may choose to obtain the highest price possible on every deal, they must bear in mind that if they expect a buyer to work with them on long term, they must also show some goodwill. While the stated objective is to sell at acceptable prices, in reality the crop must be sold no matter what.

The fourth objective is therefore to develop sensible, efficient pricing and decision-making arrangements.

If the aim is to dispose of approximately 5,000 tons per month, one cannot insist on the same price for all consignments. The regular buyer of 500 tons at a time should not be compared with an occasional buyer of 15 tons. Flexibility is of the utmost importance -- endless discussions are often held over minute price differences. If sellers always counter offer 1 ct/lb more and settle at "splitting the difference," buyers will take that 1 cent into account when they make the first bid. If sellers refuse to give price indications or to make firm offers, they are in fact saying either that they do not know the value of their products or that they have none available for sale.

Such attitudes may cause loss of business because a buyer may have a firm offer of a comparable quality in hand. This may induce the buyer not to bother with the usual pricing ritual with the first supplier. Sellers often make the decision not to be in the market for a day or a week without much thought, even though the consequences are difficult to quantify. If, meanwhile, the buyer buys a different origin, the exporter may have lost a slot for the season. If exporters are not in the market, they may not even know that there is a slot to be filled.

If an exporter puts a price in the market and a buyer bids in response, it creates a very poor impression if the exporter then replies that he or she has withdrawn from the market. If the seller refuses to consider any counter offer, even if it is close to the indicated price, or if the seller counters with a price above the original quotation without any relevant change occurring in the market, this is equally annoying to buyers. If exporters say that they are in the market it means that they want to sell and should therefore be willing to talk price. Probably the worst offence an exporter can commit is not to reply or to reply late to bids or price queries. A bid represents a firm commitment by the potential buyer: an exporter's failure to reply may cost that seller future business.

Exporters should always maintain a reasonable diversity of buyers. The domination by one or two buyers of an exporter's sales tends to discourage other buyers which, in turn, further increases the exporter's dependence on this limited circle. Such domination is dangerous, as one buyer could drastically reduce trading volumes or even cease to exist. A range of markets and buyers must therefore be cultivated.

The overall objective is to meet buyers as equals, to be capable of efficient and informed reactions, to make decisions fast and responsibly and to execute obligations impeccably. Exporters expect buyers to honour their commitments exactly. In turn buyers have the right to expect the same from exporters.

Senior personnel of marketing boards must not forget that they are in the business of marketing and shipping physical coffee. Whether they sell spot or forward, on a fixed price basis or on differentials against futures markets; whether the talk is of options, "puts," "calls," arbitrage and so on -- in the end a crop has to be sold. For this regular buyers of physicals are needed. Although marketing personnel should understand futures markets and their operations, they should primarily be experts in the trade in physical coffee. Training should therefore be an integral part of marketing strategy.

Individual exporters

As with marketing boards, individual coffee exporters must also look at the risks involved in the marketing operation when drawing up their export strategies.

Risk factors:

Both individual exporters and marketing boards are in many respects subject to similar pressures and constraints. However, individual exporters are not obliged to buy coffee whenever it is available. They are free to decide the timing of their operations and can, if they wish, stay out of the market when circumstances do not suit them. Some consider this a negative aspect of the free market system but in reality no serious exporter can afford to be out of the market for any length of time. Although the exporter's refusal to purchase may drive local prices down, competitors will normally take advantage of this to offer lower prices abroad and so gain business. In addition, an exporter's inability or refusal to offer or sell incites the buyers to look for other suppliers, and once another firm has gained entry, the exporter may have acquired a competitor for life. An exporter or shipper should therefore maintain regular purchases and sales. Regular purchases help to maintain ties with producers. Regular offers and sales help to convince buyers abroad that they should reserve part of their business for that particular exporter. A serious exporter prefers regularity of business to windfall situations and never makes speculative moves that could threaten day-to-day business.

An exporter who goes heavily long in physicals in expectation of a price rise needs to finance this. There is of course a limit beyond which an exporter cannot go. If all finances are taken up by stocks and the market declines, the exporter falls into the trap mentioned earlier, i.e. the competition now pays less for similar coffee and makes correspondingly lower offers abroad. The exporter now has to choose between selling at a loss to keep the others out or staying put and losing business. The only consolation available to the holder of a long position is that he or she can at least fix the maximum loss by taking the decision to sell.

If, on the other hand, exporters go heavily short in anticipation of a price fall they do not need to finance anything (unless they have traded on a futures market where margins are required), but their risk is now entirely open ended. If an unusual event occurs, the market may rise beyond all expectations and the exporters may be unable to purchase their requirements at any price. Alternatively, their already awkward short position will make them reluctant to engage in further sales. They therefore have to refuse additional business, even though prices are now higher than those they already have in their books. Their refusal again results in their buyers turning to competitors who are able to sell and who can therefore pay more on the local market.

The main objective of a private exporter's risk management strategy is to maintain a regular flow of purchases and sales and never to risk regular business on large speculative moves. In this respect it is pertinent to look more closely at long and short positions and at how these can be quantified. The long or short position is the difference between purchases or stocks and outstanding contracts: 1,500 tons of sales and 1,300 tons of stocks give a short position of 200 tons. With 1,300 tons of sales and 1,500 tons of stocks the exporter has a long position of 200 tons. Neither figure looks particularly impressive or dangerous. If, however, stocks consist of quality X and sales of quality Z, the exporter has in fact two positions because he or she is long in X and short in Z. It is not unusual for the price of one quality to move contrary to that of the other, and the exporter may end up losing on both positions.

The position report should therefore always specify whether stocks can be offset against existing sales and, if so, by how much. If the exporter has sold 1,500 tons of Z and the firm's stocks consist of 800 tons of X and 500 tons of Z, the exporter will need to purchase 1,000 tons of Z to be able to fulfill outstanding sales contracts. This requires financing for a total of 2,300 tons, i.e. 500 tons of Z already in stock, 1,000 tons of Z to be purchased, and 800 tons of X that are unsold and cannot be shipped against existing contracts. This puts the exporter's 200-ton short position in a rather different light: to liquidate it, the exporter must be able to finance 2,300 tons (if it is assumed that the 800 tons of X cannot be sold easily). The position report should therefore also quantify the financial implications of the trading position.

Careful exporters impose two limits on themselves or their trading managers: one physical, expressed as maximum X tons long or short, and one financial, expressed in monetary terms. The dual limit also serves to reduce exposure when coffee prices change dramatically. If prices rise from 100 to 150 cts/lb, the financial limit automatically enforces a reduction in the trading position. If prices fall to 75 cts/lb, the financial limit allows the exporter greater freedom, but the exporter is still subject to the physical limit on tonnages carried.

The objective of the dual limit is twofold. The financial limit ensures that the firm will always be able to finance its obligations, and the physical limit secures the firm against trading losses that might threaten its existence.

Marketing objectives:

The marketing strategy of a private exporter has the same basic elements as that of a board except that the exporter has to compete both for supplies and sales. The exporter's buyers can choose between different shippers and are often more demanding than when they are limited to a monopoly. The private exporter therefore has to provide a much more personalized service to satisfy individual requirements, whether in respect of quality, sampling, shipping or documentation.

As a result, many exporters tend to specialize in high or low quality, large or small buyers, specific geographical areas and so on. The objective is to provide excellent coverage of a limited section rather than indifferent coverage of the whole. Serious exporters endeavour to make themselves indispensable to their buyers by anticipating buyers' demands. The ability to adapt quality to a buyer's requirements is an important advantage for an exporter. An exporter has various choices: blend different coffees to match a previously agreed quality standard, sell on actual stock-lot sample, sell "equal to" a previous delivery that a buyer particularly liked, or sell subject to approval of sample and so on. In other words, an exporter can give the buyer many options as regards quality. This is of vital importance in today's market, which places more and more emphasis on quality, and this applies equally to Arabica and Robusta categories of coffee.

Reliability is another element. Whether exporters choose to trade in a complete range of qualities or only at the upper or lower end of the market, their motto must be to deliver what has been sold. Exporters who ship lower than agreed quality and then pay a quality discount if the buyer notices the difference will eventually lose out to those who meticulously respect quality standards and so earn a reputation for reliability. Whether a contract is attractively priced or not should never influence the quality finally delivered. (This is not an issue for marketing boards that export standard qualities. Conversely, boards are often unable to satisfy the quality requirements of individual buyers, which is one of the main advantages the private exporter has over them.)

Perseverance is another element of the exporter's marketing strategy. No buyer is obliged to work with any particular private exporter since there are alternative suppliers. In the prevailing climate of privatization in many countries, numerous new exporters are setting up businesses and some previously active exporters are re-establishing themselves. They will succeed if they provide the services that buyers want and if they accept that the coffee business does not create instant millionaires but rather rewards those who patiently and professionally persevere. Some roasters and trade houses are reluctant to do business with newly established exporters. The only option for such exporters is to send samples regularly, and to provide information and quotations until a first sale is made. As there is a limit to the number of buyers a single exporter can effectively cover, an exporter has to be selective. Having established a business relationship, an exporter must be able to look after it.

Roasters buy different coffees from different origins and blend them to arrive at a desired consumer quality. Roasters try to keep the components of their blends as flexible as possible in order to have more options when purchasing. Even so, they limit themselves to a certain number of origins and shippers with whom they do business, whether directly or through international trade houses. Exporters who manage to gain entry as suppliers of some of a roaster's range of blend components can create a stable business for themselves as long as they respect quality and guarantee fairly regular shipments. The advantage is twofold. Exporters can look forward to making sales to their roasters or importers whether the market is active or not. Their price negotiations are based on more than just the state of the market because, apart from price, the relationship is now also based on mutual trust and respect.

International coffee trade houses play an extremely important role. These houses accept risks and problems that do not interest roasters, facilitate traffic between sectors of the coffee market and, most important, create markets. Roasters purchase coffee for use and are not always in the market. By contrast trade houses nearly always offer a price for almost any coffee within reasonable limits. This service is extremely important as it maintains market liquidity and keeps coffee moving. Although some have called it speculation, this is not the case. Without trade houses, coffee would not flow as easily as it does; many small producers and exporters would find it difficult if not impossible to operate successfully; and many roasters would find it problematic to buy when they want to. International trade houses deal with many origins and are able to offer the roaster a wide range not only of qualities but also of delivery and payment options. Coffee production does not always match demand from roasters, and one of the natural functions of the trade is to bridge any gaps. Its other functions are the provision of hedging facilities and foreign exchange cover to those unable or unwilling to arrange these themselves, including shippers at origin.

Many exporters cannot work directly with roasters because they lack the expertise or the facilities to satisfy the latter's demands. The trade then assumes a number of the exporter's functions and in so doing ensures that eventually all coffee finds a home. Members of the international trade are sometimes referred to as "middlemen," but it should be appreciated that there are no closed doors in the coffee business, and the producers' best interests are served by maintaining good relations with both roasters and the trade. Those who believe they are prevented in some way from reaching the end-user directly should identify the real reasons for this.

Use of intermediaries

Logistics, time differences and sometimes language problems make it impossible for an exporter to be in direct contact with all potential buyers. There are hundreds of coffee importers, traders and roasters in the world's consumer markets and many, if not all, exporters would find it very difficult to be in regular contact with more than a few of them. Many exporters therefore make use of intermediaries. The advantage of intermediaries is that they are on the spot, speak the language and know the buyers. It is easy for them to have daily conversations with buyers during which they pass on information from the exporter and gain knowledge of buyers' requirements and market views, as well as of the activities of competitors. Not only do intermediaries provide a two-way information flow, but they are also often able to prevent minor difficulties from becoming real problems.

Sole agents:

A sole agency involves an agreement -- between an exporter and a firm in an importing country -- which stipulates that the exporter shall have dealings with that country only through the agent. In return the agent must not have any dealings with other exporters in the producing country in question. Both exporter and agent are naturally free to deal as they wish in any other country. An exporter may therefore have agents in various importing countries, just as an agent may represent exporters from different producing countries.

The agency agreement specifies the geographical area that the agent may cover, for example, North America, i.e. the United States and Canada.

It also stipulates whether any buyers are excluded from the agreement. For example, there are multinational roasters that purchase through subsidiary companies in different countries as well as through central buying organizations, established mainly in Switzerland. If an exporter already has direct contact with such a central office in Switzerland, he or she may decide to exclude this office from any agency agreement that is concluded for sales to other Swiss buyers. Really large buyers often prefer to deal direct with exporters or trade houses as, for obvious reasons, they prefer to restrict information on their particular buying interest and operations to as small a circle as possible.

The agreement also stipulates the commission percentage or amount due to the agent, when it becomes payable, and how it is to be paid.

Having an agent gives exporters the advantage of a single channel through which they can simultaneously address many (if not all) potential buyers in a given market. Market information, samples, quotations and firm offers can be channelled through the agent. The agent feeds information back to the exporter and so keeps him or her advised of developments in the particular market. Many individual buyers and smaller buyers especially have little interest in contacting exporters direct, but are happy to exchange views with a local agent who is well known to them. Exporters inform their agent of their interest to sell, and a good agent will always have a fair idea of the buyers' requirements.

Perhaps the greatest single advantage of having a good agent is that an exporter can give out a firm offer for a certain period that the agent then pursues with all potential buyers. A firm offer of 1,000 bags can thus be placed in front of (perhaps) ten buyers, but sales are automatically limited to 1,000 bags. If exporters tried to make the same sale directly, they would have to make ten such offers simultaneously and could find themselves contracting to sell up to 10,000 bags -- and this may not be their intention at all. Furthermore, there are numerous buyers who often react only to a firm offer and many do not like to give out firm bids for any length of time. If agents are allowed to use their discretion they may be able to negotiate on the spot and conclude a contract.

Good agents protect the interests of their principals, i.e. the exporters. For example, an exporter can expect that an agent, if there is a serious disturbance in the market and prices move up sharply, will not proceed to sell quickly to a privileged client against firm offers the exporter may already have received. Exporters must also be sure that the information they provide does not find its way into the hands of any competitors. There have been instances of agency firms operating under more than one trading name and so representing competing exporters -- unknown to those exporters.

The agent is the intermediary between exporter and buyer: either the agent or the exporter issues the contract, but settlement is usually made between exporter and buyer. The contract is signed by all three parties and the agent normally plays no official role in the execution and settlement of the contract. Even so, an exporter can demand that the agent pass on information to buyers regarding shipping declarations, for example. It is advisable to mention such matters in the agency agreement. Commissions are normally only due once the exporter has received payment.

If an agent does not declare the name of the buyer but instead takes the contract over his or her name the agent is no longer considered an agent but is now a trader. This will make other traders reluctant to deal with the agent in the capacity as an agent since they cannot be certain that the agent is in fact their competitor. If the exporter allows the agent to buy for his or her own account, the exporter too faces this problem as the agent will of course try to sell his or her own purchase first. The agency agreement will usually therefore stipulate that the agent requires the exporter's permission to buy for his or her own account or to take contracts over the exporter's name.

An agent who deals with a number of exporters from the same country is a commission agent. Although smaller exporters may be unable to get a good agent to agree to restrict the agent's activities to their firm, it may still be in their interest to be represented by that particular agent. Hence, some agency firms have developed a stable of exporters, each of whom may have a certain speciality. This can work satisfactorily provided that the agency firm does not play one exporter against another and does not pass privileged information among them.

Any agency agreement must include provisions for its termination and the settlement of disputes.


In the past, brokers bought and sold within given geographical areas. Many brokers were active in cities such as London, Le Havre, Amsterdam, Bremen, Hamburg and New York. They brought local buyers and sellers together and concluded deals on a commission basis. With the growth in international telecommunications and with the internationalization of the coffee trade, many brokers have become international themselves and now make second-hand deals between traders and roasters in different countries. Brokers are free to deal with whomever they choose but do not normally deal with origin, that is, exporters. The true broker declares the names of buyers and sellers and is not involved in the settlement of a deal. If brokers take contracts over their name they become traders.

Both agents and brokers conclude deals on the basis of the various standard forms of contract, depending on the wishes of the parties concerned.

Importers and traders:

The distinction between these types of intermediary has become very blurred. In the past an importer would be someone who purchased coffee abroad for his or her own account, imported it into the country and then distributed it to inland buyers. The role of specialized coffee importers has changed with the internationalization of the trade and the dwindling number of small inland roasters. As a result many importers have gone out of business. There are, however, some signs of their revival in the rapidly growing speciality or gourmet market, with small roasters and coffee houses once again requiring the services of specialized importing firms.

Most, if not all, of today's large trade houses purchase coffee abroad and deliver it direct to roasting plants, at a date and time specified in the contract. These firms cannot be considered to be importers however, even though they go through the physical motions of importing. No trade house will import coffee into a market unless it has been sold to a roaster. Unsold lots are stored in bonded warehouses or free ports where they do not attract customs duties or taxes until they are imported.

Exporters may decide to appoint an importer or a trade house to represent them in a given market rather than to use the services of an agent. While this will limit direct access to information and feedback, it may enable the exporter to conclude forward sales more easily and to obtain advance financing against such sales or against stocks. This type of exclusive arrangement is more difficult to monitor, but it can have many advantages. The decision on whether to go ahead depends on individual circumstances and preferences.

Sales terms and conditions

Numerous details must be worked out before coffee sales can be concluded. In addition to quality, quantity and price, an offer to sell must specify the shipment period, the conditions of sale and the period of validity of the offer. In a well established business relationship the basic conditions of sale will be known to both parties and may not always need repeating in every offer or bid.

The international trade in coffee would not be possible without standard forms of contract. The paragraphs below serve to indicate what the seller must know and do before beginning to market coffee and how the choice of available options may influence an exporter's competitiveness.

Quality offered:

The quality of the coffee being offered must be specified in one of a number of ways.

On description: The quality must correspond to a known set of parameters mainly pertaining to origin, appearance and liquor quality. Most of these parameters are open to varying interpretations.

The only real specifics in the description "XYZ Arabica Grade One Fair Average Quality, crop 1991/92, even roast, clean cup" are that the coffee must have been produced in country XYZ during 1991/92 and that the size of the beans should correspond to the screen size stipulated by country XYZ for Grade One. Although not standardized, "fair average quality" essentially means that the coffee must represent the average quality for the crop year. "Even roast" implies that the roasted coffee must not contain too many pales (yellow beans) and must have a reasonably even appearance. "Clean cup" indicates that the liquor must not have any unclean taste or off flavours, but this says nothing about the positive aspects of quality. Nevertheless, buyers know what the liquor quality ought to be and, for example, if the cup is completely "flat," they would argue that this is not consistent with fair average quality for country XYZ.

The Robusta trade is to a large extent based on descriptions. These succeed fairly well in conveying to buyers and sellers the quality being sold. As the liquor quality of Robusta does not normally fluctuate as widely as Arabica's, the coffee is more easily described. Even though descriptions greatly facilitate trade, one should never forget that the roaster (the end-user) will always base the assessment on the liquor quality. The quality FAQ (fair average quality) will vary from season to season, but this is known and accepted by all. "FAQ of the season" means that the quality will be comparable to the average delivery during that season by the time shipment is effected; arbitrators will judge any claims on that basis. If quality is known to vary widely within a season, the seller may stipulate instead "FAQ at the time and place of shipment."

Buyers know that different sellers have their own interpretation of a description and prefer to buy from shippers whose interpretation is acceptable to them. However, an international trade house wishing to sell XYZ Arabica Grade One FAQ short, does not necessarily know in advance who will ship the coffee. It may therefore include the term "first class shipper" in the description, i.e. the coffee should be shipped by a reputable exporter. The word "reputable" is not precise, so the trade house may stipulate three or four known shippers, one of which will eventually effect the shipment.

Large roasters do not always depend on a single origin for their requirements of a particular quality. They therefore often agree to quality descriptions, which offers the seller the option to deliver one of a number of specified origins.

Buying subject to approval of sample: Buying subject to approval of sample (SAS) is one way to eliminate most of the quality risk inherent in the business of buying unseen coffee from unknown shippers. This procedure obliges the supplier to provide a sample of the goods before shipment. If the buyers disapprove of the quality, they can ask the supplier to submit alternatives. Buyers are not obliged to accept any shipment that they have not first approved. Contracts sometimes stipulate that three different approval samples must be submitted simultaneously from which the buyer can select one. If the buyer unreasonably refuses to approve any sample, the supplier can go to arbitration. Exporters must therefore be selective when agreeing to sell on this basis. If suppliers deliberately submit inferior samples (because the sale does not suit them any more), buyers can also go to arbitration.

Selling on stock-lot sample: Selling on stock-lot sample avoids the above problem. The sample represents a parcel in stock. There should be no discrepancy between the sample and the coffee itself, including screen size, even though this need not be stipulated. It is impossible to insist on stock-lot samples for all deals, as business would become too cumbersome. However, the newly established exporter or one who wishes to break into a specific market may well have to start with sales on a stock-lot basis.

Once a satisfactory delivery has been made, the exporter may wish to sell a similar quality again and, rather than send new samples, may offer "quality equal to stock lot no. X." This states that the coffee is of the same quality and suitable for the same use as the original purchase. Being a product of nature the coffee may not be exactly the same -- hence the term "equal to." If the exporter feels the quality is very similar but that a little latitude is needed as to the coffee's size or appearance, he or she will say "quality about equal to stock lot no. X." The buyer will accept this term on the basis of an assessment of the exporter's expertise and reliability. If the buyer lacks confidence in the person responsible for the shipment's preparation, he or she will continue to insist on samples.

Selling on type: Once a few transactions on stock-lot sample have been satisfactorily concluded, buyer and seller may decide to make this quality into a "type." Business can now proceed without samples and with both parties confident that the quality will be respected. Types are normally confidential between a shipper and a buyer. "Type business" can also be covered subject to approval of sample. Top qualities are mostly sold on the basis of sample or type. Sales on description usually involve medium and standard qualities.

Shipping period: The shipping period offered needs to be specified.

The date of shipment is the date of the bill of lading, which in turn is the date of loading on board ship. Contracts should always stipulate from which port(s) shipment is to be made.

"Spot goods" refer to coffee that has already arrived overseas and is available ex warehouse, for example ex warehouse Hamburg.

"Afloat" refers to coffee that is en route, i.e. on board a vessel that has already sailed.

"Named vessel" indicates that shipment will be made on the vessel specified in the contract.

"Immediate shipment" means a shipment will be made within 15 calendar days of the date of contract.

"Prompt shipment" denotes that shipment will be made within 15 calendar days of the date of contract.

"Shipment February" (or other month) signifies that shipment will be made on any day within that month (also called "single month"). "Shipment February/March" indicates that shipment will be made on any day within those two months (also called "double month").

The shorter the shipping period, the shorter the roaster's exposure to market fluctuations and the more precise the roaster's 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 can be effected at any time during a 61-day period, thereby making it difficult for the roaster to plan ahead. Landlocked countries or those with inefficient shipping services are often forced to sell on double months. By contrast, countries such as Brazil and Colombia can guarantee that coffee will arrive in Europe within 14 days or less from the date of sale. Inability to offer precise shipment details such as named vessel, immediate shipment, prompt shipment or first half of a month is a marketing handicap unfortunately largely beyond the control of an exporter.

The "port of destination," if not advised when the transaction is concluded, must be declared by the buyer within the period laid down by the standard contract. If no such terms existed, a buyer could simply refuse to declare a port of destination and so frustrate the execution of a contract (which, for example, might have become unfavourable owing to changes in the market).

Buyers may not be in a position to declare a final destination if they have not yet resold the coffee to an end-user. They may instead declare a range of ports, for example Rotterdam, option Bremen/Hamburg. The effect will be that the goods will be stowed on board in such a way as to make discharge possible at any of these ports. This improves their saleability. The shipping company charges fees for this service, which are for the account of the buyer. The trade calls this "options" or "optional ports."

Delivery conditions: The offer must stipulate the point at which the seller will have fulfilled the delivery commitment and where the seller's risk and responsibility end and those of the buyer commence.

"Ex warehouse" refers to delivery from a warehouse in a specified location, either locally or abroad.

"FOB" indicates that the goods will be loaded free of charge on board a vessel at a location stipulated in detail in the contract, for instance FOB Santos. The seller's responsibilities and risk end as the goods cross the ship's rail. All charges from then on are for the buyer's account.

Sales from landlocked countries can also be made "FOT" (free on truck) and "FOR" (free on rail). The buyers themselves arrange transport to the nearest ocean port and onward carriage by sea.

"C&F" (cost and freight) to a named port of destination means that the seller is responsible for paying the freight to the agreed destination.

"CIF" (cost, insurance, freight) signifies that in addition to obligations under C&F terms, the seller is also responsible for taking out and paying the marine insurance up to the agreed point of discharge.

In all cases it is the responsibility of the seller to deliver the shipping documents to the buyer.

The International Chamber of Commerce's Guide to Incoterms (1990) contains a more detailed description of these and other shipping terms. It should be noted, however, that standard contracts used in the coffee trade all state or imply that the seller is responsible for booking space, arranging shipment and producing a full set of shipping documents. These stipulations differ from, and supersede, the Incoterms.

Issue of bills of lading: When a parcel of coffee is loaded, a ship's officer issues a "mate's receipt" to the ship's agent. This receipt is the legal basis for the bill of lading, which should be prepared and issued immediately. The exporter is entitled to the bill of lading as soon as the goods have been loaded, but many ports do not issue bills of lading until the vessel has completed loading and sails. This practice increases the exporter's financing costs.

Payment and calculation of ocean freight: Most contracts are concluded on an FOB basis under which buyers pay the freight. Many buyers prefer this because they are able to negotiate quantity discounts that individual exporters may be unable to do. For this reason bills of lading do not always indicate the freight charge or only quote a gross rate without mentioning any discounts that may be payable.

Freights are often negotiated between buyers and shipping companies without the involvement of the producing country itself. As buyers pay the freight costs, they are free to negotiate directly with anyone they choose.

Whenever freight costs increase, buyers adjust their cost calculation for the origin in question because they cost all coffee on the basis of "landed port or roasting plant of destination." When the freight costs for a particular country increase, the prices bid for coffee from that origin will be reduced if freights from comparable origins have not also risen. It can therefore be seen that it is ultimately the producers who pay the freight charges. However, without these arrangements some freights would be higher than they are now.

Weights: "Net shipped weights" mean that the weights established at the time of shipment are final. "Net delivered (or landed) weights" indicate that the goods will be reweighed upon arrival and that final payment will be on the basis of the weights then established.

Buyers may not agree to net shipped weights if they are not certain of their accuracy. Alternatively they can require "weighing under supervision" by a certified public weigher, a Lloyd's agent or other person. Sellers may demand the same for net delivered weights or when weights are disputed.

Coffee is hygroscopic and attracts or loses moisture depending on climatic conditions. It may therefore lose a little weight during storage and transport. To counter this weight loss, a number of countries and individual exporters traditionally pack a few hundred grams more per bag than they actually invoice. This helps to ensure that arrival weights are as close to the agreed standard weight as possible. Buyers know from experience what losses in weight to expect from most origins and take this into account when calculating the cost landed destination or roasting plant.

Most standard forms of contract stipulate that natural loss in weight exceeding a certain percentage is to be refunded by the sellers. This is known as the "weight franchise."

Payment conditions: These are normally agreed on in advance and are already known to both parties, especially if the business relationship has existed for some time. When offering to a new buyer the exporter must specify the payment conditions in the offer.

Payment against letter of credit: Payment against letter of credit (l/c) requires the buyer to establish a letter of credit before shipment is effected. A letter of credit is an undertaking from the buyer's bank to the exporter's bank that payment will be made against certain documents such as the invoice, certificate of origin, weight note, certificate of quality and bill of lading (for sea transport) or waybill (for road or rail transport). An exporter should check that the documents specified in the letter of credit are obtainable. Sometimes a buyer requires verification of documents by an embassy or consulate not located in the exporter's country. The buyer may insist on documents that the exporter is not contractually required to provide. If the terms and conditions of the letter of credit are not met, the exporter's bank will not pay the exporter until the buyer has confirmed that 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 faced with an unpaid shipment in some foreign port. The importance of conforming with all the conditions in a letter of credit cannot be stressed enough. Exporters should always consult their bankers before they assume that a letter of credit is acceptable. One reason for this is that an ordinary (or unconfirmed) letter of credit is nothing more than an uncertain promise to pay if certain documentation is submitted.

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 has received the funds from the bank that established the letter of credit. This can create problems if the buyer argues that the documents are not correct or if the buyer's bank is slow in making payment, for example.

Under a "confirmed and irrevocable letter of credit" the exporter'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, the exporter's bank therefore guarantees payment. If the negotiating bank discovers a minor discrepancy in the documents such as a spelling error, it may still negotiate them provided that the exporter signs a guarantee that in case of refusal by the buyer, the exporter will refund the payment received, until the matter is settled.

Whenever exporters feel that a letter of credit is required, they should insist that it is confirmed and irrevocable. Even then, extreme care must always be taken to ensure that all details are respected, even to the spelling of words and shipping marks, and the description of the goods as stipulated in the letter of credit.

Payment net cash against documents: Payment net cash against documents (NCAD) on first presentation requires buyers to make payment when the documents are first presented to them. Exporters will agree to this method of payment if they know their buyer well and have confidence in the buyer's financial strength and integrity. Exporters can submit the documents through the intermediary of their own bank, which then asks a correspondent bank abroad to present them to the buyer, collect the payment and remit the funds, less collection costs, to the first bank for the account of the exporter. In this way the documents remain within the banking system until payment has been received, thus ensuring that the exporter does not lose control of the goods. If exporters are in need of prompt payment they can instead sell the documents to their own bank, which will advance them a slightly lower value in cash. This is known as "negotiation of documents." In this case the exporter still remains responsible until the buyer makes payment: if the buyer does not pay, the exporter's bank will demand its money back.

An exporter may also send documents direct to the buyer and request the buyer to make payment upon receipt of the documents. This is known as "sending documents in trust" and, 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: This means that the buyer will pay when the goods arrive at the port of destination. Exporters sometimes have to agree to this but should always stipulate that, after expiry of a certain period, payment must be made whether the goods have arrived or not. There will clearly be problems if the goods arrive six months late because the vessel has run into difficulty, or if they do not arrive at all because the vessel has sunk. The contract should therefore stipulate "payment net cash against shipping documents upon arrival of the goods at destination but not later than X days after date of bill of lading" (perhaps 30 or 60 days for X).

Payment and credit policy: Exporters must decide for themselves which payment conditions to accept. They must assess the financial status of their buyers and act accordingly. Some information can be obtained from bankers' reports that banks will provide to indicate their clients' creditworthiness. However, although such reports are useful, they cannot give all the information on any situation, nor do they place any responsibility on the bank that issues them.

When entering into contracts and deciding on payment terms, a seller should investigate the identity of the buyer. International trading groups often work through foreign and local subsidiaries whose commitments are not necessarily guaranteed by the parent firm, even though they may trade under 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 a given subsidiary.

Payment policy is unfortunately often dictated from the top, for example by central banks that insist that all exports must be covered by letters of credit to avoid possible loss of foreign exchange. This kind of blanket regulation results in some of the world's largest corporations having to establish letters of credit in favour of comparatively small organizations. Some markets and buyers simply refuse to establish letters of credit. In general, therefore, exporters should be allowed to make their own commercial judgement. After all, governments can control the movement of goods and payments without letters of credit by insisting that waybills and bills of lading are issued in favour of authorized commercial banks. If the shipping documents are then always presented to buyers abroad through the intermediary of banks, perfect control of the foreign exchange flow can be achieved without having to dictate the exporter's terms of trade.

When buyers make a bid for coffee they calculate the cost of establishing a letter of credit. It can be argued, therefore, that exporters indirectly pay for them. Rigid insistence on letters of credit for all shipments can make direct trade with certain markets and buyers impossible, thus forcing exporters to use middlemen instead.

Scope and validity of an offer: The scope and validity of an offer (or bid) must be specified. If exporters wish to indicate an approximate price they use terms such as "price idea" or "offer subject to availability" or "subject unsold." This indicates to the buyer that there is a good chance that the buyer will obtain the coffee if he or she accepts the offered price. Although the exporter is not bound to sell if the buyer accepts the quoted price, the buyer has some reason to be annoyed if the exporter refuses to sell for no valid reason. Offering "firm," however, does commit the seller if the buyer accepts the offer within a reasonable time. The word "reasonable" is open to interpretation and the seller should therefore stipulate a time limit after which the offer lapses. The same applies to bids that a buyer makes: the buyer must be specific. The statement "subject to immediate reply" implies that the reply should be immediate. However, as even "immediate" is somewhat vague, it would be better to say, for example, "subject to reply here by 3 PM our time."

The choice of time limit depends on the situation of both the exporter and the buyer to whom the offer is addressed. If an exporter is keen to sell he or she may wish to try various markets at the same time. If the exporter has only limited stocks of the coffee in question a firm offer cannot be made and the exporter will instead offer subject to availability or subject unsold. Alternatively, the exporter can make firm offers to one or two buyers but limit the validity of the offers to one or two hours only. If an offer does not succeed, the exporter still has the opportunity to try elsewhere. Finally, the exporter can decide to give a buyer, or more probably an agent, an entire day to work with an offer by offering "subject to reply by close of business today." When working with large time differences such as between Asia and the United States, an offer can be left firm "overnight." This means that the buyer may reply by the close of business at the buyer's end and the exporter will find the reply when arriving in the office the following morning.

Acceptance of a firm offer or bid constitutes a binding contract. Any disputes can be submitted to arbitration, but this would be extremely embarrassing for all concerned. It is essential therefore to be exact when wording offers or bids, for example:

"We offer firm for reply here today 5 PM our time, 1000 bags XYZ Arabica Grade One as per sample 3511 at United States cents 100/lb, FOB Mombasa nsw, shipment during April/May 1992 our option, payment NCAD first presentation."

If the buyer responds positively within the time limit, a binding contract is established. If the buyer's response is late, the exporter is entitled to refuse. (The exporter should of course first consider the effect this may have on the future relationship with the buyer.)

The same applies to bids from buyers. If a firm bid is accepted within the stipulated period, a binding contract is established. It is always advisable to confirm transactions concluded over the telephone, by telex or facsimile to ensure that a written record exists and that all details are clear.

Jan van Hilten is a consultant on coffee production and marketing who has carried out assignments for ITC, the World Bank and other UN organizations in a number of coffee-producing countries. He was the coordinator and joint principal author of a new ITC publication, Coffee: An Exporter's Guide, from which this article is taken.
COPYRIGHT 1992 International Trade Centre UNCTAD/GATT
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Author:Hilten, Jan van
Publication:International Trade Forum
Article Type:Cover Story
Date:Jul 1, 1992
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