Experienced Brokers/ Importers Reduce Risk For Coffee Buyers

by Kevin Daw
Posted On: 5/1/2018

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My article in the VT January issue was the first part of a fairly detailed discussion of the role "differentials" play in making volume purchase decisions about green coffee. Here is the second part:

Futures market level: When the market is high, many diffs, especially those of origins that are not part of the cause of the market's inflated level, will tend to decrease. (However, diffs of any origin directly related to the market's increase will remain the same or increase, sometimes substantially).

Conversely, when the market is lower, diffs will tend to increase. It is estimated that, in the large producing nations, growers are only profitable above a futures level of $1.40. (This is the latest figure I've heard). When the market is below this level, diffs are likely to be quoted at higher, and sometimes much higher, levels.

Quality and consistency: Some origins that are considered to be of a certain quality level, "milds" and "other milds" oftentimes, are not consistent enough in quality to be considered for purchase. Chinese arabica comes to mind as a "central" quality bean, but one in which, from chop to chop, variation in quality has been, to my determination, too high for confident buying. This particular coffee has improved in recent years but oftentimes the risk is not worth the savings, as consistency is a major factor in the coffees bought. This also affects volume buying, as I can never be certain that a particular coffee, from a particular broker, is of as high a quality as assumed. There's no way to know until the physical samples arrive. So if I were to buy a year's worth of Peru from one source, and it turned out that the Peru came in at the low end of the acceptable quality range, we would be stuck with that quality. This keeps me from putting too many eggs in one basket.

Storage and inventory: We only have so much space for green coffee. Any coffee booked above this level is left in storage and pulled as needed. As previously mentioned, this incurs carrying-costs in the form of interest and storage. Where we only use (say) 8,000 lb. per month of a coffee, we therefore must buy less than a container's worth or pay the extra charges. Either way, this greatly increases the per pound cost of that particular bean. This has much to do with higher costs associated with "micro-roasters." Yes, oftentimes the beans are of high quality, but some of the extra cost results from a lack of volume.

Use of brokers: We use brokers/importers because they have long-standing relationships with growers/exporters they have found to be reputable. For this assurance, they add somewhere between $.03 and $.09 depending on the size and purchasing-power of the clients served. We would not likely get the same deal as a large branded coffee roaster on the same origin coffee, in other words.

Why would a large branded roaster even use brokers? The broker takes all responsibility for the quality and delivery of the coffee purchased. There is great risk that a coffee offered from an exporter will not arrive at the expected, predetermined quality level. What appears to be a very attractive diff has little value when the coffee that eventually arrives is far inferior to assumptions. Getting recourse from the exporter is very difficult, and this is the responsibility of the broker. We have the right of refusal on every contract of coffee received.

Growers can renege on contracts outright. Say a grower sells coffee to a broker at a diff of $.08 over for a delivery eight months out. Six months later, the diffs for that same origin have increased to $.24 over. The grower can easily say, with great apology, that he cannot fulfill the contract – but it is still on the broker to deliver at the originally booked diff. This happens more often than one would imagine.

Brokers also give the roaster flexibility by allowing a carload's worth of beans to be of multiple origins, when needed to fit  the usage demands that the roaster expects. An example would be where Swiss Water Processed Decaf usage runs especially high during a particular month. I can ask a broker from whom we have a chop of Colombian to be shipped, to swap out 40 bags of the Colombian for the needed SWP decaf; and oftentimes, when they can, they will oblige. This is a great added benefit.

Brokers buy thousands of contracts annually and exporters know it. This keeps exporters from messing around too much. Someone our size could easily fall into  any of the above traps and get stuck. That hazard would not make it worthwhile to buy direct to save a few cents per pound, given the inherent risk. Roasters 50 times our size continue to use brokers for these same reasons.

I hope this brief explanation helps. I have likely missed a few points, but this covers much of what influences diffs and my purchasing decisions. The reality is that I, like any coffee buyer, can at times be wrong. In an ever-fluctuating market, this is inevitable. Just as with the futures market, if one could be always right, one would be the wealthiest individual on the planet.

As always, may your cup run full, and the brew, exquisite.

» KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a private-label roaster serving the breaktime management industries. A 30-year veteran of OCS, water delivery and vending operations, he has concentrated on coffee roasting for the past two decades.