Behind every delicious cup of specialty coffee is a lot of business. Before beans even reach the roaster, days of negotiation, financial management, and relationship building take place.
But how does selling green coffee work? By better understanding how it is bought and sold, you can make more informed choices, whether you’re a producer, roaster, or a consumer.
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Finca El Injerto, Guatemala. Credit: Finca El Injerto
The Importer/Exporter Model
Exporters can be an individual producer, a cooperative of farmers, or a third-party exporter. They trade with importers or directly with roasters. But importers have the contacts and financial capital necessary to buy large amounts of beans. This means that roasters often rely on importers to secure quality coffee from all over the world.
Importers buy large amounts of beans and store them while making sales to roasters. When green coffee is bought through an importer/exporter transaction, the importer holds an extensive inventory containing information about each producer they are in business with.
This can include the harvest season, varieties of coffee grown, and how many containers of beans the producer has available. If this information is accurate, it provides traceability and confidence in the quality of the product.
Green coffee beans ready to be roasted. Credit: Neil Soque
While direct trade is a popular option for those wanting more transparency and strong roaster-producer relationships, importers can also be beneficial to producers.
As dedicated, large-scale businesses, they have the resources to handle bulk logistics, international duties, and similar bureaucratic processes that can be off-putting to roasters considering direct trade.
Importers also represent a longer supply chain with profits divided among more players. More people isn’t necessarily a bad thing – a direct relationship between a single producer and roaster may appear ideal, but having several parties involved can make the logistics run more smoothly if there are obstacles.
Some importers also work hard to ensure transparency, and may even introduce roasters to the producers whose coffee they buy.
Direct trade is when producers sell their green beans directly to the roaster, either as individuals or through a coffee cooperative. Taking out the intermediaries and importer means that there is theoretically increased transparency and traceability. The buyer can visit the source, evaluate the product, and establish a relationship with the farmer.
Arturo Sáenz tells me that direct trade “should result in a better price, more transparency, and, if everything works well, it can build a very long relationship.”
But we should remember that direct trade also involves risk. Without agencies regulating the process, the success of the transaction is more dependent on trust among the participants and there is more potential for deals to fall through. Roasters and producers also need to educate themselves on business procedures, international importing procedures, and logistics.
Ena Galletti tells me that “the producer has to be certain that [the buyer] is committed to quality and appreciates loyalty. Sometimes taking the risk of making an advance payment is the only way to generate a long-lasting link with a coffee producing community.”
Direct trade has also been criticized as a marketing term. There are examples of “direct trade” importers and exporters that take the negotiation out of the hands of the producers but still using the term in their sales materials.
Use of the label is unregulated, so it’s not always clear what “direct trade” really means or how much better off the producers are with this model. Removing intermediaries, in theory, should mean more of the profit goes to the producer. However, because the price of direct trade coffee is negotiable and unregulated, it may not be as high as consumers expect. This type of trading can also be more time-consuming and riskier for producers, especially when roasters want to buy small amounts.
This doesn’t mean that direct trade is a bad thing; many producers advocate for its benefits. However, we should remember that it can have its cons as well as its pros.
Marta says, “Direct trade means different things to different people. I think we should think about creating mutually beneficial relationships.
“It begins with giving everyone, especially the producer, an equally weighted seat in the market.”
Find out more in What Does “Direct Trade” Really Mean?
Understanding Spot Buying & Forward Contracts
Whether by direct trade or in an importer/exporter model, there are two main ways that roasters buy green beans: spot buying and forward contracts.
Spot buying is when roasters buy coffee from the importer without any previous commitment. That is, “on the spot.” The beans are usually already in storage in a warehouse and ready to ship immediately.
This can be an expensive way to buy coffee because the importer has taken on the financial risk by buying and storing the beans and will include the cost of this in their sale price. The price may also change because it is likely to be tied to the C-price.
Coffee drying at a farm in Colombia. Credit: Paula Molina Ospina
With forward contracts, roasters plan to buy coffee from a particular producer in advance. Importers may be involved, or the roaster may work directly with the producer. With this method, there is better traceability and roasters can be confident that the beans are fresh. It also provides more security for farmers.
Marta Dalton is the founder and CEO of Coffee Bird, in Guatemala. She tells me that forward contracts are beneficial for farmers because “they ease their minds [and avoid] worrying who is going to buy their coffee.”
Producers can plan ahead and may have better access to credit with a secure forward contract. This means they may be able to invest in infrastructure and equipment that could raise the long-term quality of their coffee.
Learn more in Forward vs Spot Coffee Buying: The Pros & Cons
A view of plantations at Finca El Injerto, Guatemala. Credit: Finca El Injerto
Arturo Aguirre Sáenz is a producer at Finca El Injerto in Guatemala. He tells me that forward buying “works perfectly both ways, because the producer knows how much income they’re expecting and the consumer knows the exact amount of money to spend, and has guaranteed coffee for the next years.”
Regardless of the model, communication is crucial. “In order to empower the producers in this business, it’s important that they have full understanding of the rules and a sense of what a sustainable industry is all about,” says Ena Galletti, a coffee exporter at Galletti, in Ecuador.
Bags of coffee at a warehouse in Guatemala. Credit: Devon Barker
You may know in-country buyers as middlemen, brokers, or coyote. These are the people who act as a liaison between producer and buyer. Coffee sold to middlemen is normally of low quality and is sold at very low prices.
In-country buyers have a reputation as profit-seekers, since they essentially take a cut of the payment to producers. But coffee farmers rely on them to have access to roasters. When producers don’t have the necessary connections, logistical knowledge, and legal know-how, the middlemen are vital to selling coffee.
They are also likely to be from the same community as the producers they work with. This can be an important factor in an industry based on trust and repeat trade.
Speculation on The Futures Market
Green coffee buying and selling may seem straightforward so far. But traders can influence the coffee price without ever interacting with the beans.
Coffee is traded as a commodity, meaning that it is bought and sold on regulated markets. The trading price of Arabica is known as the C-Price, and it is this figure that affects the buying price of coffee. All coffee is treated as one raw material, regardless of origin or other factors. Even specialty coffee prices are usually linked to the C-Price, plus a premium.
Speculators buy and sell prices based on a product – in this case coffee. The price that they negotiate is the amount traders expect to pay for the product in the future. The coffee may never even leave the original warehouse and speculators have no intention of possessing the physical beans. Instead, it acts as a trading tool that is used to create profit.
The actions of speculators affects market patterns, and this is one of the reasons that the price of coffee is so volatile.
Green coffee at Jubilee Coffee in Colorado, USA. Credit: Devon Barker
Public sales of green coffee are another method of selling green beans and they attract buyers from around the world. Auctions provides an opportunity for producers to promote their product and build relationships through the supply chain. This helps strengthen the industry and provides traceability.
In Latin American producing countries, auctions are where you will typically find the highest-quality beans. Here, the auction system is an efficient way to analyze the market. It provides an opportunity to see how much roasters are paying for their coffee and what kind of beans they’re looking for. But it’s important to keep in mind that the high quality of these beans means you’ll also find higher than average prices.
In many African producing countries, auctions are often the standard way of buying and selling beans. Producers in these countries typically do not have direct contact with international importers and roasters. So, auctions are often the only opportunity to sell their beans.
For example, most Kenyan coffee is purchased via a central auction. But in these auctions, only licensed coffee dealers only are allowed to bid. Smallholder producers don’t meet buyers and are unable to advocate for their coffee.
Find out more in How Micro-Cooperatives Are Transforming The Kenyan Coffee Trade
Bags of green coffee. Credit: Neil Soque
What’s The Best Method To Buy & Sell Green Coffee?
There’s no perfect method of buying and selling coffee. Each model involves learning about the pros and cons, and the possible risks. Marta says that “The best way to buy coffee is to choose the way in which you are most comfortable with the risks.”
So take a look at your own situation and consider your budget and resources. Identify which model fits with your level of knowledge and comfort in negotiating.
Focus on your objectives, develop your relationships, and do some business.
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Written by Vanessa Bocchi.
Perfect Daily Grind
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