Coffee merchandising

Green coffee passes through seven stages of transportation in its route from plantation to roaster. These are: First, from the drying grounds or cleaning plant to the railroad, river, mule, or camel, that, secondly, carries it to the city of export; thirdly, into the warehouse at point of shipment; fourthly, into the steamer for movement overseas; fifthly, out of the steamer and on to the wharf at port of destination; sixthly, from the wharf into the receiving warehouses; seventhly, from the warehouse to the roasting room.

Green-coffee buyers in the large importing centers of the United States and Europe recognize two distinct markets in their operations. One of these is called the “spot” market, because the importers, brokers, jobbers, and roasters trading there deal in actual coffee in warehouses in the consuming country. In New York the spot market is in the district of lower Wall Street, which includes a block or two each side on Front and Water Streets. Importers, roasters, dealers, and brokers here conduct their “street” sales.

The other market is designated as the “futures” market, in which the trading is not concerned with actual coffee, but with the purchase or sale of contracts for future delivery of coffee that may still be on the trees in the producing country. Futures, or “options,” as they are frequently called, are dealt in only on a coffee exchange. The principal exchanges are in New York, Havre, and Hamburg. New Orleans and San Francisco exchange dealers trade on their local Boards of Trade.

Coffee-exchange contracts are dealt in just like stocks and bonds. They are settled by the payment of the difference, or “margin,” and it is seldom that the option of delivering actual coffee is executed. The operations generally are either in the nature of ordinary speculation on margin or for the legitimate purpose of effecting “hedges” against holdings or short sales of actual coffees.

How Coffee Is Graded

The New York Coffee & Sugar Exchange, the most important in the world, because of the volume of its business, deals in all coffees from North, South, and Central America, the West Indies, and the East Indies, except the Robusta variety, and uses type No. 7 as the basis for all exchange quotations; all other types are judged in relation to it.

In determining the type, the coffee is graded by the number of imperfections in it. These are black beans, broken beans, shells, immature beans (“quakers”), stones, and pods. For counting the imperfections, the black bean has been taken as the basis, and all imperfections, no matter what they may be, are calculated in terms of black beans, according to a scale, which is practically as follows:

By this scale, a coffee containing no imperfections would be classified as type No. 1. The test is made on one-pound samples. If a sample shows six black beans, or equivalent imperfections, it is graded as No. 2; if 13 black beans, as No. 3; if 29, as No. 4; if 60, as No. 5; if 110, as No. 6; if more than 110, as No. 7 or No. 8, which are graded by comparison with recognized exchange types. Coffees graded lower than No. 8 are not admissible to this country.

In the spot market, a trader may also buy or sell coffee “to arrive”; i. e., a consignment that is aboard ship on the way to market. Coffee is shipped to New York either on a consignment basis and sold for a commission, or it may have been bought in the shipping port and already be the property of an importer. When shipped on consignment, a wholesaler usually buys on the in-store contract, which provides that the purchaser must take delivery at the warehouse, though he is generally given a month’s storage privilege before removal of the coffee.

The practice among New York importers now is to buy coffee on either the basis of f. o. b. delivery steamer at loading port, or delivery c. & f. (cost and freight) or c. i. f. (cost, insurance, and freight), port of destination. Payment is made by letter of credit on a New York or London bank, entitling the exporter to draw at 90 days sight against the shipping documents, so that the shipment will be in the hands of the purchaser long before the draft is made.

Frequently, a jobber acts as his own importer of Brazil coffee, buying direct from the exporter without using the agency of a broker or a regular importing firm.

Buying Coffee C. & F.

The following analysis shows the method of buying Brazil coffee “cost and freight”:

The New York Coffee & Sugar Exchange was designed to be a market place for trading in coffee futures. As such it offers the protection of hedges to bankers and merchants. It operates after this fashion:

An American coffee importer buys a lot of coffee in Brazil. The coffee is likely to be on the way for 30 to 60 days, perhaps a longer or a shorter time. During all that time the merchant would be in a precarious position, having paid for the coffee in Brazil, probably partly on borrowed money or through banker’s credits, if he hadn’t immediately hedged that coffee in this market.

Hedging means selling “futures” in a quantity approximately equal to the shipment he is going to receive. When the coffee reaches New York, the merchant has it sampled, stored, etc., under the regulations of the exchange. He may sell a portion of it to a coffee roaster. Then he takes in his “hedges.” If a roaster buys more than he has immediate needs for, he too may put out hedges against it. Any grocer dealer may, in this way, buy more than he needs and protect himself by using futures.

Buying and Selling Commissions

The minimum rates of commission on coffee “per contract of 250 bags, for members of the exchange residing in the United States, are based upon a price” as seen on the next page, quoting from the exchange bylaws adopted June 8, 1920:

Coffee Exchange Commission Rates

(Per contract of 250 bags)

In the coffee trade there are three kinds of brokers,—floor, spot, and cost and freight. Floor brokers are those who buy and sell options on the Coffee Exchange for a fixed consideration per lot of 250 bags.

Spot brokers are those who deal in actual coffee, selling from jobber to jobber, or representing out-of-town houses; the seller paying a commission of about 15 cents a bag in small lots, and half of one percent in large lots.

Cost-and-freight brokers represent Brazilian accounts, and generally receive a brokerage of one and one-quarter percent. On out-of-town business, they usually split the commission with the out-of-town or “local” brokers. The out-of-town brokers sometimes, however, deal direct with the importer. All brokers except floor brokers are sometimes called “street brokers.” Most of the large New York, New Orleans, and San Francisco brokerage houses also do a commission business, handling one or more Brazilian or other coffee-producing country accounts.

There is considerable trading in future contracts; and a standard form has been adopted by the exchange. No future contracts are valid unless they are made in the following form:

Across the face is the following:

All deliveries on such future contracts must be made from licensed warehouses. There is a separate “to arrive contract”; but this likewise requires delivery at a licensed warehouse, unless the buyer and the seller have a mutual understanding to deliver the coffee from dock or ex ship. Margins to protect the contract may be called for by either party. The largest deposit for margins was made in 1904, when $22,661,710 was deposited with the superintendent as required by the exchange rules.

The basic grade in a future sale is No. 7, but variations are provided as follows: 30 points for Rio, Victoria, and Bahia of all grades between 7 and 1, and of 50 points between 7 and 8; 50 points are allowed on Santos and all other coffees except between grades 1 and 2 and 2 and 3 Santos, which are allowed 30 points. Thus, the buyer and the seller when entering upon a transaction know exactly what the difference will be between the standard No. 7 and the coffee that can be delivered. The right to deliver any grade in a future transaction has done much to lessen the probability of corners in coffee; but this protection is further given by the stringent rule that the maximum fluctuations on the exchange can be only two cents a pound on coffee in one day and one cent on sugar. If greater changes should threaten, the exchange operations would automatically cease.

False or fictitious sales are prohibited, and all contracts must be reported to the superintendent. All contracts are binding and call for actual delivery.

The exchange, after careful investigation, issues licenses to certain specified warehouses, graders, and weighers, so that parties trading under its rules and regulations are well and fully protected.

The board of managers has power to close the exchange or to suspend trading on such days or parts of days as would in their judgment be for the exchange’s best interest.

The Exchange Clearing House

The Clearing Association is a recent outgrowth of the exchange, and is composed exclusively of exchange members. Every member has to bring his contracts up to market closing every night, either by making a deposit with the association to cover his balances, or by withdrawing in case he should be over. Members deposit $15,000 at the time of joining as a guaranty fund; and, if the surplus is not sufficient to take care of balances, the bylaws provide for the levying of assessments.

The daily quotations on the Coffee Exchanges of New York, Havre, and (before the war) of Hamburg determine to a large extent the price of green coffee the world over. The prices prevailing on the New York Coffee & Sugar Exchange are studied by coffee traders in all countries, the fluctuations being reflected in foreign markets as the reports come from the United States. Quotations are cabled from one great market to another; and, as each must heed those of the others to some extent, the coffee trade thus obtains a world price, and the effect on supply and demand is universal rather than local, as would be the case if quotations were not exchanged. In 1921, the exchange adopted an amendment to the trade rules which abolished the one-day transferable notice for both coffee and sugar.

Brazil Coffee Quotations

Brazil coffee cable quotations are the market prices in Rio or Santos of 10 kilograms of coffee; the price stated in milreis, the monetary unit of Brazil money. The basic grade of coffee at Rio is the No. 7 of the New York Coffee Exchange, and at Santos the international standard of good average (“g. a.”) Santos. One kilogram (often written “kilo” or abbreviated to K.) is equal to 2⅕ pounds, and the 10-kilogram standard of quantity is therefore equivalent to 22 pounds, just one-sixth of a standard Brazil bag.

The money value is not so simple, since Brazilian paper currency is unstable; and the milreis quotation means nothing unless it is considered in connection with the rate of exchange for the same day; i. e., the current gold value of the milreis. This gold value is always given with the daily quotations from Brazil, and is expressed in British pence. The par value of the paper milreis (1,000 reis) is 32.45 cents of United States money, but its present actual value is only about 11¼. Our dollar sign is used to denote milreis, placing it after the whole number, and before the fractional part expressed in one-thousandths. Thus, 8¼ milreis would be written 8$250 Rs.

Suppose, for example, a Rio quotation is given at 8$400, with exchange at 7½d. (15 cents.) This means that 22 pounds of coffee have a gold value of 63 British pence (8.4 × 7½ = 63.0), or 5/3, as the Englishman would write it, which is equal to $1.27½, or 5.8 cents a pound.

Of course, the person familiar with Brazil quotations will not need to make this reduction to the pound-cent term in order to understand the figures. They will have a proper relative meaning to him in their original form; and it must not be overlooked that it is in this form only that they express correctly the value of the coffee in Brazil. It may make a great difference to the Brazil planter or exporter whether an increased gold value of his coffee arises through a higher milreis bid or an appreciated exchange, simply on account of local currency considerations. That is to say, the purchasing power of a milreis in Brazil will not necessarily vary exactly in proportion to the rate of exchange on London.

London, Havre, and Hamburg

London quotations are made in shillings and pence, on one hundredweight (cwt.) of coffee. This cwt. is not 100 pounds, but 112 pounds, one-twentieth of the English ton (our long ton) of 2,240 pounds, and in all English coffee statistics the coffee quantities are expressed in this ton. A London quotation of 30/9 (30 shillings and 9 pence), for example, is equivalent to $7.44 for 112 pounds of coffee, or 6.64 cents a pound at the normal rate of exchange (which is figured as being $4.80 to $4.86 the pound sterling).

At Havre, the coffee price is given in francs, on a quantity of 50 kilograms. This is 110 pounds, almost as much as the British cwt. In normal times the franc is equal to 19.3 cents. A French quotation of 37½, for instance, means, therefore, $7.19 for 110 pounds of coffee, or 6.54 cents a pound.

The Hamburg quotation (formerly from Brazil per 50 kilos) is made on one pound German, equal to half-kilogram, and is expressed in pfennigs. One pfennig is one-hundredth of a mark, and the mark was once equal to 23.8 cents. A German quotation of, say, 31 means, therefore, 7.38 cents (31 × .238 = 7.378) for 1.1 pounds, or 6.71 cents a pound.

Rulings Affecting Coffee Trading

Under the government rulings no coffee grading below exchange type No. 8 may be imported to this country. Coffees below No. 8 generally contain a large proportion of sour or damaged beans, known in the trade as “black jack,” or damaged coffee, as found in “skimmings.” “Black jack” is a term applied to coffee that has turned black during the process of curing, or in the hold of a ship during transportation, or it may be due to a blighting disease.

Another ruling is intended to prevent the sale of artificially “sweated” coffee, which has been submitted to a steaming process to give the beans the extra-brown appearance of high-grade East India and Mocha coffees which have been naturally “sweated” in the holds of vessels during the long journey to American ports.

Other rulings are to the effect that only coffees grown on the island of Java may be called Java; only Yemen coffee from Arabia may be labeled Mocha; painted, coated, or polished coffees are prohibited; Minas coffee may not be called Santos; also Coffea rubusta may not be sold as Java, even though it may have been grown on the island of Java.