Editor’s Note: A version of this article first appeared in Perfect Daily Grind on November 28, 2017.
There are a lot of perks to being a coffee buyer: traveling to origin, meeting producers, experiencing the coffee harvest. As glamorous as this role can be there is a ton of work that comes between a farm visit and a first production roast. Coffee must be sampled and approved, shipping and insurance must be arranged, and payment terms must be settled. All this work would be worthless without the appropriate tools for understanding and crafting good contracts.
Mutually amicable and agreed-upon contracts are critical to the health and longevity of trade relationships – whether it’s a long-term direct-trade partnership or a one-time transaction. Using a common language for coffee buying and shipping can help avoid confusion and streamline a lengthy, complicated process.
Let’s take a look at some of the most common contract terms and their definitions, including some of the most important ways that contracts describe sampling, quality, transfer of risk, and payments.
Samples & Quality
Tasting and approving samples prior to purchase is a critical stage in the coffee-buying process. At many different steps along the supply chain, coffee may be sampled for physical and sensory quality, in various states of preparation.
Let’s disambiguate some sample types:
- Type Sample: This is a non-representative sample, meaning it does not directly correspond to a specific lot of coffee for sale. It may be used as an introduction to a new relationship (i.e., “This is the type of coffee we often carry”) or as a substitute for many representative samples in a long-term, high-trust relationship (e.g., “Here’s the type sample for the 10 containers we will sell you this season”).
- Representative or Stocklot Sample: This sample type corresponds directly to a specific quantity of coffee in a specified location. Representative samples typically draw from multiple bags of the same stocklot in an attempt to provide a holistic and accurate depiction of the coffee in question, but standards vary from warehouse to warehouse.
- Offer Sample: A representative or stocklot sample of coffee that is “offered” with a quantity available for purchase. This sample type is not associated with an existing contract. However, if the buyer likes it, it might be used as a pre-shipment approval in some cases.
- Pre-Shipment Sample (PSS): Typically offered as a “fulfillment option” for existing agreements, this is usually the point of no return for a buyer. The coffee in question may already be milled and ready for transporting, or the sample may have been specially prepared in advance of dry milling. In either case, an approval of a PSS is taken as an agreement to move forward with preparing and exporting the finished coffee to the buyer.
Approving Samples & Contractual Requirements:
Setting certain quality standards can be an important part of building a contract between a coffee buyer and seller. It’s important to remember the various roles that contributors along the supply chain will have in terms of quality. A farmer may not have any control over the timeliness of ocean transit or the screen sizes of the coffee, for example. Keeping this in mind, contracts and expectations should take into account when and where the coffee is sampled, and who is responsible for its quality preservation at any given time.
A common term used in contracts is SAS, or “Subject to Approval of Sample.” This is where a buyer will sign a contract with a seller in advance of receiving a sample. However, fulfillment of that contract is contingent upon approval of the sample. The buyer does not necessarily need to justify their decision, other than to say that the coffee does or does not meet their quality standards (although feedback to the seller can be quite useful in securing the correct sensory and physical quality).
SAS terms may be “no approval, no sale” (NANS). Alternatively, they may be “replace” (or “repeat”), meaning a new pre-shipment sample would be offered in place of the rejected sample. In some cases, a seller might offer multiple options for the buyer.
When a PSS is approved and the coffee is shipped but arrives in a different state than expected (e.g., diminished sensory quality or higher physical defect count), arbitration is often not necessary (and, in my opinion, should be taken only as a last resort). More frequently, shipments of a disappointing physical or sensory quality can result in a quality “claim”. This is where the buyer requests a discount on future purchases or a partial refund from the seller. These disputes can often be resolved amicably if communication channels are open and clear.
Shipping Terms & Risk
The details of shipments, insurance, and ownership of risk can be intimidating for buyers and producers, particularly because of the propensity for those familiar with this side of the business to use abbreviations and industry-specific terminology.
When a buyer commits to a coffee at a price per pound, that per pound cost actually includes far more than just the product itself. It includes the cost of things like labor, fertilizer, post-harvest processing, storage, and the partial or total cost of shipping and insurance in varying degrees. This can depend greatly on terms set forth in contracts, and may vary widely from transaction to transaction.
As of such, both the buyer and the seller should be crystal clear on who’s responsible for what transportation, where, and when. Incoterms (International Commerce Terms) is a set of terms defined by the International Chamber of Commerce; these are used broadly throughout commodity trading markets. They clarify who is responsible for ensuring the coffee (in our case) gets to a predefined location and who assumes the risk.
(We use this “transfer of risk” to understand who is accountable in the case of the loss or damage of beans. Sometimes the party who pays for the transit is not the same party that owns the risk. Remember that for our purposes, in most cases the seller will be an exporter or producer, and the buyer will be an importer or roaster.)
The Most Common Shipping Types:
- FOB – “Free on Board”: This means the seller must deliver the coffee onto the ship at the port in the country of embarkation. Any overland transportation costs from mills or warehouses to the port of origin must be paid for by the seller. The buyer agrees to book and pay for oversea shipping, insurance, and any drayage/transportation, customs, and overland freight costs incurred on arrival to the port of destination.
- FAS – “Free Alongside Ship”: The seller relinquishes risk at the dock rather than on the ship.
- FOT – “Free on Truck”: The buyer, not the seller, is required to organize and pay for overland transport to the dock and account for any loading and drayage fees at the port. The transfer of risk occurs when the coffee is loaded onto a truck from a given warehouse.
FOB, FOT, and FAS terms are typically followed by the location of the transfer, e.g., FOB Buenaventura or FOT Kigali. These terms are of the utmost significance for direct trade buyers and coffee importers, as they are the most common for purchasing directly from a farmer or exporter.
Other Shipping Types You Might Experience:
- CFR / CIF – “Cost and Freight” / “Cost, Insurance, and Freight”: Like FOB and FOT, CFR and CIF transfer risk once the coffee is on the ocean vessel. The difference is that the seller, not the buyer, is responsible for contracting and paying for the oversea transit. In the case of CIF, the seller must also provide minimum insurance coverage. In both of these cases, the location will be listed as the destination port (e.g., CFR New York).
- EXW – “Ex Works” or sometimes “Ex Warehouse”: A bit like FOT, this indicates that the buyer takes responsibility for overland transport. However, for EXW there is no overseas shipment. Most domestic coffee sales will transfer ownership this way, for example a roaster will buy “spot” or arrived coffee EXW from the warehouse of an importer and also pay the additional cost of trucking it to their facility. In casual conversation, a trader might say “Ex Oakland” or “Ex Continental”; this indicates that the coffee is coming from a warehouse in Oakland or Continental Terminals in New Jersey, respectively.
- FCA / CPT / CIP – “Free Carrier” / “Carriage Paid To” / “Carriage and Insurance Paid To”: The land-transit versions of CFR and CIF, these mean that the seller – not the buyer – arranges and pays for overland transportation. FCA brings the coffee to the buyer’s doorstep, while CPT and CIP will designate a specified location other than the buyer’s address.
- DAT / DAP / DDP – “Delivered at Terminal” / “Delivered at Place” / “Delivered Duty Paid”: These indicate delivery in terms of risk, meaning that the buyer should not assume the coffee will be delivered to their doorstep. Rather, the seller relinquishes risk at the port terminal or another specified location (“at place”). Duty Paid terms require the seller to also pay for import and customs. The buyer must then arrange for any fees not covered at the docks, plus overland shipment and insurance.
Container Loads: The Contractual Definition
Modern container shipping methods have almost completely replaced the older methods of shipping where bags were loaded loose onto the ship (known as “break bulk”). But how much is a container?
In most cases, containers are shipped as Full Container Loads (FCL). This is loosely defined: it simply indicates that the container is filled – generally around 40,000 lbs of coffee and usually no less than a C-contract of 37,500 lbs.
Most commonly, coffee is packed in jute or similar fiber bags of 60 kg (~132 lbs) – 70 kg (~154 lbs) each. Commonly used 20-foot containers are usually filled at about 325 x 60 kg bags or 275 x 70 kg bags, though numbers may vary slightly depending on the organization or persons “stuffing” (loading) the container.
In some cases, Less than Container Loads (LCL) are acceptable… but keep in mind that shipping charges both for space and by weight. As such, it is cheaper pound-for-pound to ship a full load. Partial containers are also more susceptible to damage during shipment because the contents are loose, rather than packed solid.
Proof of Shipment
Additionally, it’s common to include Advice of Shipment in a contract. This requires the seller to advise the buyer as soon as possible of the date of embarkation and other relevant shipping line information.
In addition to this shipping advice, the seller is almost always required to provide the buyer with a “clean” (that is, the coffee appears to have not suffered damage in transit) Bill of Lading (B/L or BoL). This important document is necessary for clearing customs and is often the trigger for a transfer of funds.
Incoterms highlight the complexity and importance of clarity in shipment – however, they only refer to shipment. They don’t deal directly with the transfer of money or actual ownership. This is done separately.
In the case of a direct trade exchange or the purchase of a coffee in FOB terms (for example), payment is usually expected upon the buyer’s receipt of the Bill of Lading. This is typically in the form of a wire transfer. Some contracts specify the need for receipt of a physical B/L while others may accept a digital copy.
Credit & Commitments to Buy
It is uncommon for exporters and farmers to extend credit to coffee buyers. Rather, the opposite may occur: a farmer or exporter may request an official signed commitment to purchase from the buyer well in advance.
This can enable the supplier to secure financing up-front for the costs of processing and overland shipments, for example. Coffee growing and processing is often seen as a risky investment by bankers. Financing options can be limited for farmers without a committed buyer.
However, credit terms from an importer to a roaster are far more common. A good credit application can result in a friendly relationship with a domestic coffee seller, who is able to extend financing to the roaster.
Credit terms typically cover two things: the amount to be paid and the timeframe for payment. A common example might be “Net 30” where the buyer has to resolve the unpaid balance (the “net” sum) within 30 days.
Sometimes, this might be preceded by an additional set of numbers – and in some cases, a discount might be offered for early payments. That might look like this: “2/10 Net 30.” In this example, the buyer has 30 days to pay the net balance, but if it’s paid within 10 days they’ll receive a 2% discount.
Coffee buying can be thrilling work, but to be successful you should equip yourself with the appropriate tools and knowledge of the trade. Understanding contract terms and sampling procedures will go a long ways toward securing great coffee and enjoying excellent relations with farmers, producers, suppliers, and vendors.
Perhaps the most important piece of advice I can offer, however, is this: if you don’t understand something, ask! You have much less to lose by asking a question than by accepting terms with which you don’t agree.