BUYING AND SELLING GREEN COFFEE AT WHOLESALE
_The seven stages of transportation—Handling
coffee at New York—How green coffee is
graded—Spot-market trading—Buying coffee C.
& F.—Futures and hedging—Buying and selling
commissions—Brokers—The Exchange Clearing
House—Brazil quotations—London, Havre, and
Hamburg markets—Rulings._
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:
3 shells equal 1 black bean
5 quakers equal 1 ” ”
5 broken beans equal 1 ” ”
1 pod equals 1 ” ”
1 medium-size stone equals 1 ” ”
2 small stones equal 1 ” ”
1 large stone equals 2 to 3 ” ”
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”:
Minimum lots sold by reputable firms are 250 bags of a
grade. Coffee from Brazil is shipped and billed on a
uniform weight of 60 kilos, equal to 132 pounds a bag
American.
The quotation for shipments from Brazil is “cost and
freight,” which means that the price covers the cost of
the coffee and the freight to the seaport at which
delivery is made. The freight is not prepaid by the
shipper, but is deducted from the invoice, and only the
net amount of the invoice is drawn for.
The buyer may elect to buy the coffee to be graded, on
the types of the New York Coffee & Sugar Exchange, or he
may take it on what is known as “Brazil grading.” If he
elects to take it to be graded, the coffee on arrival
is graded on the types, and if superior to the grade he
must pay the excess; if it is below, the shipper pays for
the deficiency. If bought on Brazil grading, the grade
as shipped is final and must be accepted by the buyer.
Probably 90 percent of the coffee sold to America is taken
on Brazil grading, and it is really the most satisfactory
way for the buyer to operate, assuming that he places his
orders with thoroughly reputable shippers.
Marine insurance must be covered by the buyer, and it
is customary for this insurance to cover the coffee up
to time of arrival at buyer’s warehouse, without extra
charge. Premiums on marine insurance for first-class
vessels are about 30 cents per $100. It is customary for
the trade to insure say 10 percent over the cost.
Shippers require that the buyer shall have issued in
their favor a satisfactory and first-class letter of
credit. Against such credits drafts are drawn at 90
days sight and invariably must be payable in New
York. Bankers issuing credits demand that a set of
documents—bill of lading, copy of the invoice, and
consular certificate—accompany the draft. The draft is
then sent from the shipping port for acceptance, and, if
the documents are in order and as required by the terms of
the letter of credit, drafts are accepted by the issuing
banker and payable 90 days after it has been accepted.
This practically means that the buyer usually has 75 to 85
days after the coffee arrives in America to pay for it.
Buyers should use fully as much care in buying for import
as they do when selling their own merchandise, if not
more, for a letter of credit is irrevocable and once
issued cannot be canceled except by agreement of both
parties to the document, the issuer and the receiver.
For a buyer of moderate-size lots, especially of described
coffees, it is very important that his order be placed
only with a house of established reputation and standing.
While coffee is shipped from Brazil at 132 pounds net
weight, there is a loss in weight on the voyage up,
generally due to climatic conditions, leakage in the bags,
etc., and certainly not less than three-quarters of one
percent must be added to the cost for this deficiency. The
loss by leakage in the bags is made up by what is known
as “ship fills.” All of the coffee that leaks out of the
bags in a cargo is collected at the seaports by the agents
of the lines and apportioned equally among those having
shipments on the steamer. These ship fills, of course, are
a conglomeration of everything on the boat, and as a rule
the loss from this feature is not at all excessive and
frequently nothing at all.
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)
_Floor_
_Commission_ _brokerage_
_for buying_ _for buying_
_or selling_ _or selling_
Below 10 cents $6.25 $1.50
10 cents up to 19.99 cents 7.50 1.75
20 cents and above 10.00 2.00
For non-members residing within the United States, double
the above rates of commission shall be charged.
For members and non-members residing outside of the United
States, a commission of $2.50 shall be charged in addition
to the above rates.
Whenever before 30 minutes after the close of the exchange
a member gives to another member for clearance purchases
and sales of contracts corresponding in all respects
except as to price, made during the day by himself or
for his account _when present on the floor_ of the
exchange, a charge for each contract shall be made equal
to the corresponding floor brokerage rate for buying and
selling, in addition to any floor brokerage incurred.
Members procuring business for other members may, by
agreement, be entitled to one-half the commission rates
for non-members prescribed in this section, less the
corresponding brokerage charge, whether paid or not.
When a transferable notice is given or received by a
customer in fulfillment of a contract, the brokerage
in that case shall be not less than one-half of the
corresponding buying or selling commission prescribed
in Section 103.
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:
_Brazilian Coffee—Not Santos_
Office of____________________
New York_______________________19____
Sold for M_____________________
To M_____________________
Thirty-two thousand five hundred pounds in about 250
bags coffee, growth of North, South, or Central America,
West Indies, or East Indies, excepting coffee known as
_Robusta_, and also any coffee of new or unknown
growth, deliverable from licensed warehouse in the port of
New York, between the first and last days of _______next,
inclusive. The delivery within such time to be at seller’s
option, upon a notice to buyer of either five, six, or
seven days, as may be prescribed by the trade rules. The
coffee to be of any grade, from No. 8 to No. 1 inclusive
(no coffee to grade below No. 8), provided the average
grade of Brazilian coffees shall not be above No. 3.
Nothing in this contract, however, shall be construed as
prohibiting a delivery averaging above No. 3 at the No.
3 grade. At the rate of________________cents per pound
for No. 7, with additions or deductions for other grades
according to the rates of the New York Coffee & Sugar
Exchange, existing on the afternoon of the day previous
to the date of the notice of delivery. Either party to
have the right to call for margins as the variations of
the market for like deliveries may warrant, which margins
shall be kept good.
This contract is made in view of and in all respect
subject to the rules and conditions established by the New
York Coffee & Sugar Exchange, and in full accordance with
section 102 of the bylaws.
________________________________Brokers
Across the face is the following:
For and in consideration of one dollar
to_____________________ in hand paid, receipt whereof is
hereby acknowledged,____________ accept this contract with
all its obligations and conditions.
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.
[Illustration]
[Illustration: Flat bean and Bourbon Santos.]
[Illustration: Rio.
SAMPLES OF TYPICAL ROASTED COFFEE BEANS]