If you are a green buyer, you deal with coffee contracts. Not the most exciting part of the job, but you have to develop an understanding of the terms and conditions if you want to avoid making buying mistakes.
So, are you new to buying green coffee? Read our coffee contract breakdown, and;
A coffee contract is simply an agreement between a seller and a buyer. The contract tells you under which terms and conditions you buy the coffee.
The price takes center point in a contract. All other components of the contract – like quantity, quality, delivery period – find their origin in the price.
A contract starts with the official names of the seller and buyer. Then you find the details of the sale. Please bear with us because this is dry material – it will get more interesting when you reach the terms of payment and sample approval:
Then, you find the terms of the sale:
Two contract components could use some more explanation: terms of delivery and the sample approval terms.
Moving coffee around the globe is an expensive and risk-involved business. That is why the International Chamber of Commerce defined Incoterms®.
The terms act as a common code between companies that trade overseas and in counties of destination.
The terms of delivery we use in contracts are based on the Incoterms®. They tell you two important things:
who organizes and pays for the transport,
and when and where the seller transfers the responsibility to the buyer.
When you buy coffee from a green coffee importer, the coffee already traveled to a warehouse near you. The question for you, as a green buyer, is; will you pick up the coffee yourself or do you want your importer to arrange transport. So, which terms of delivery can you choose?
As a green buyer, you can pick 4 terms of delivery; Ex Warehouse (EXW), Free Carrier (FCA), Cost, Insurance, and Freight (CIF), and Delivery Duty Paid (DDP).
When you read the terms of delivery listed below, take the two dimensions in mind: 1) who pays what and 2) when does the responsibility transfer take place.
The risk transfers from importer to roaster at the warehouse. If you choose this option, you agree to arrange the transport yourself. The importer only needs to prepare the coffee before pick up.
In ‘coffee trade slang’, Ex-warehouse is called Ex-works. On your contract, you will find the term ‘Ex-works’ followed by the warehouse and the reference to the Incoterms 2010.
At the warehouse, the importer loads the coffee unto a carrier and passes on the risk to the roaster at that point. The coffee roaster pays for the transport, insurance, and any loss that might occur. On the contract, you will see FCA followed by the specific warehouse where you pick up the coffee.
The importer pays the cost of insurance and freight: from origin to the port of destination. Either a seaport, airport or dry port. But when the importer loads the coffee unto a carrier, the risk of loss transfers to the roaster. After the coffee reaches the port of destination, the roaster is responsible to arrange insurance for the remaining transport.
The importer pays for transport and takes the risk for the entire delivery. The risk transfers when the coffee arrives at the roasters facility. The Delivery Duty Paid alleviates a roaster from arranging and paying for shipment, insurance, and carrying any risk.
Before coffee ships from origin and arrives in a warehouse near you, you can book the coffee without paying. We call this pre-booking. Many experienced green buyers pre-book their best coffees ahead of the season. Some pre-book before the coffee is even picked.
Buyers use the ‘Subject to Approval of Sample’, or just SAS terms to do this. The SAS terms simply tell you under which terms you can approve or reject a coffee. You can approve when a coffee batch is as expected. But if you find the quality disappointing, you can reject.
A SAS contract is based on a quality specification and a price. Not a specific coffee per se. You agree on a profile and price and an importer seeks the perfect fit.
An importer offers you a few SAS options.
Subject to Approval of Sample No Approval No Sale. A straight forward term. If you cup, and the quality does not match with the contract, the sale is canceled.
Subject to Approval of Pre-Shipment Sample. Your importer draws a sample of a batch that has not shipped yet and sends it to you. You approve or reject on the basis of the pre-shipment sample.
Subject to Approval of Sample Replacement. For instance, you cup the sample and it ‘fails’. You can then request a replacement. Your importer offers a new coffee that matches the quality and price stated in the contract.
Terms can also be combined. For instance, Subject to Approval of Pre-Shipment sample on a replacement basis. This depends on the relationship between a coffee importer and roasters.
As Trabocca, we use SAS terms as a tool for relationship building and trust. We can discuss terms if coffee roasters take a serious approach towards green buying.
You’ve covered the basics of coffee contracts. Still unanswered questions? Reach out to one of our Traders or Logistic Supervisors and Coordinators. Or, visit the Green Coffee Association website. They offer high-value resources that give a comprehensive perspective on the green coffee trade.
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