Foundational
How coffee is traded, from farm to roaster
Who owns a coffee at each step between the farm and the roaster, what a contract fixes, what free on board means in the coffee trade, and where the risk sits.
In short
Between the tree and the roaster a coffee is usually sold more than once, and each sale is a contract. The contract fixes five things: what quality is promised, how much, at what price or by what rule the price will be set, when it ships, and the point at which the risk of loss passes from seller to buyer.
Most of what follows comes from the trade's own handbook, published by a United Nations and World Trade Organization agency in 2021. It describes practice; it is not law, and the contracts it describes are private documents this page has not read.
The chain, and who holds the coffee at each step
Sourced
The handbook divides the chain into five functions: production, processing, trade, roasting and marketing. Trade is shown here as its two halves, export and import. Real chains merge or skip steps: a large estate may mill and export its own coffee, and a co-operative may be grower, processor and exporter at once.
Production
A farm grows and picks the fruit. The handbook counts small, medium-sized and large farms together as producers.
Processing
The fruit is processed and dried, and the dry parchment skin is later removed by machine. The handbook lists co-operatives, private companies and government bodies as processors.
Export
The dry coffee is sorted by size and density and may be cleaned of defective beans for export. An exporter sells it abroad, mostly as unroasted green beans.
Import
An importer or trade house buys at origin, carries the coffee across the sea and sells it on. In North America, the handbook says, the importer usually handles landing and customs as well.
Roasting
A roaster buys green coffee, roasts and packs it. The handbook notes that producing countries roast and sell little coffee for export.
Marketingnot always done
Distributors, supermarkets, coffee shops and online sellers put the roasted coffee in front of the person who drinks it.
A model of the chain as the trade handbook draws it, not a record of any one coffee's route. It carries no quantities and no prices.
What a contract fixes
Sourced
The trade does not rewrite its terms for every sale. It uses standard forms of contract, and the handbook says those of the European Coffee Federation and of the Green Coffee Association in the United States are the most frequently used. A sale then needs only the details that differ: the quality, the quantity, the price, the shipment period and which standard form applies.
The handbook is plain about why this matters. Most coffee trading, it says, runs on thin margins and large volumes, so a small mistake can be the difference between profit and loss. Its advice is that a seller should tell the buyer at once if a shipment will be late or the quality is not what was sold, and it notes that the European contract states in terms that the buyer must be kept informed without delay.
Quantity is stated in kilograms, tonnes or bags, and where it is bags the contract has to say how heavy a bag is, because sixty, sixty-nine and seventy kilograms are all in use. The handbook gives the usual unit of shipment as the twenty-foot container, which it says holds up to 21 tonnes.
Three ways a contract says what the quality is
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As the handbook describes them.
- On description
- A country, a grade, a crop year and a few stock phrases. The handbook is candid that most of these are open to interpretation: fair average quality has no defined standard, and clean cup promises only the absence of an off-flavour. In its example, the only objective facts are the crop year, the country, and that size and defect count match what that country stipulates for the grade.
- Subject to approval of a sample
- The exporter sends a sample before shipping and the buyer need not accept coffee it has not approved. There are three recognised forms: no approval, no sale; a repeat basis, where a second or third sample may follow a rejection; and two or three samples sent at once for the buyer to choose from.
- On a stock-lot or type sample
- The sample is drawn from a parcel already in store, so shipment and sample should not differ. Once a few shipments have satisfied both sides they may agree to treat that quality as a type and trade without fresh samples.
Where the seller's risk ends
Sourced
The shipping term names the point at which risk and cost pass to the buyer. These are the handbook's descriptions.
| Variable | Typical range | What moving it does |
|---|---|---|
| Free carrier | Risk passes when the coffee is handed to the carrier inland | Common from landlocked countries. The buyer arranges transport to the port and onward by sea. |
| Free on board | The seller pays to load the coffee on the ship at the named port | The buyer pays the ocean freight. The handbook says most coffee contracts are in effect on this basis. |
| Cost and freight | The seller also pays the freight to the destination | Insurance is not included. |
| Cost, insurance and freight | The seller pays freight and marine insurance to the discharge point | The handbook says very few sales are made this way today. |
| Ex dock | Risk passes on the dock at the destination, after freight, landing charges and customs | The handbook says most North American roasters buy this way, from an importer. |
These are a trade handbook's summaries of private standard contracts that this page has not read. They are not legal definitions and not a guide to drafting a contract.
Free on board means something particular in coffee
Sourced
Free on board has a general definition, published by the International Chamber of Commerce in its rules for shipping terms, and the handbook says the standard coffee contracts depart from it. Under both, a seller on these terms still has to book the space on the ship, arrange the shipment and produce the full set of shipping documents. The handbook calls the European contract an ill-defined cost-and-freight contract with the freight left to the buyer's account.
The two contracts also draw the line for insurance in different places. Under the European one, the handbook says, the duty to keep the coffee insured passes to the buyer when it leaves the last place of storage at the port. Under the American one, title passes when the coffee crosses the ship's rail, so the shipper insures it up to that point.
The handbook adds that neither contract refers to the International Chamber of Commerce's rules at all, not out of disagreement but to keep the coffee contracts self-contained.
Weights, payment and the documents
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Coffee gains and loses moisture in store and at sea, so it can arrive a little lighter than it left. Standard contracts set a weight franchise, a loss the seller need not refund, and the handbook gives it as 0.5 per cent under both the European and the American forms as they stood in 2021. A contract also says whose scales count: the weight at shipment, or a reweighing on arrival.
Payment is usually made against documents and not against the coffee itself. The handbook describes payment by letter of credit, in which the buyer's bank undertakes to pay once the seller presents an agreed set of papers such as the invoice, certificate of origin, weight note and bill of lading. It is emphatic that a seller who misses a condition, even a spelling, may be left with an unpaid shipment in a foreign port. One certifier writes the same custom into its rules: the Fairtrade coffee standard, in its version of July 2021, requires buyers to pay net cash against a full set of original documents on first presentation.
Coffee bound for the United States carries one further condition the handbook describes: a clause known as no pass, no sale, under which a contract is void for any part of the coffee refused entry at the port.
Why it is priced in dollars, and who carries the currency risk
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Arabica is generally quoted in United States cents a pound and robusta in dollars a tonne. The handbook gives its reasons for the dollar's hold: both futures markets are priced in it, it estimates that 80 to 90 per cent of the market is mainstream coffee priced or hedged against them, and the London robusta market itself moved from sterling to dollars in 1992.
The consequence falls on the seller. An exporter buys coffee from growers in local currency and is paid in dollars, so a local currency that strengthens between the two leaves less to pass back. The handbook's rule of thumb is that exporting a commodity and speculating on a currency do not go together.
Who finances whom
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Coffee is paid for long before it is drunk, and somebody has to carry the cost in between. The handbook separates money that comes from inside the chain from money that comes from banks and funds outside it. Inside the chain, large buyers and international traders lend to exporters before shipment, and exporters in turn lend to co-operatives and small firms for the season.
Its judgement on how this reaches growers is unfavourable. It says these lending practices are often highly disadvantageous for producers, who receive finance on terms that take no account of their share of the production risk, and who get working capital but no funds for long-term investment. It also describes smallholders as price takers, without the means to use the futures markets that others use to manage price risk.
Auctions and direct trade
Sourced
Not all coffee is sold by private contract. The handbook names Brazil, Ethiopia, Kenya and Tanzania as countries that sell part of their coffee through an auction or a national commodity exchange, and reports both the claim that auctions discover price well and growers' suspicion of them. CoffeeHQ's entries on Kenya and Ethiopia describe those two systems from their own sources.
Direct trade, the handbook says, has no single definition. It describes the term as used when a buyer is in direct contact with the source, and says the model has grown more slowly than predicted because it needs logistics and trading knowledge that small farms and small roasters often lack, so exporters and importers usually remain involved at both ends.
What this page does not tell you about the trade
CoffeeHQ explanation
It quotes no contract. The European and American standard forms were not opened, and everything said about them is a trade handbook's account, as they stood when it was published in 2021.
It gives no margin for any step in the chain and no route for any particular coffee, and it does not say how common each shipping term is beyond the handbook's own words. It says nothing of transport costs, insurance rates or bank charges.
It is a description of how a trade works. It is not legal, financial or commercial advice, and nobody should draft or sign a contract on the strength of it.
What to do next
- How coffee prices are formed — The price clause of a contract is its own subject: the exchange, differentials and what reaches the farm.
- Buying and judging green coffee — What the samples named in a contract are actually assessed for when they arrive.
- Storing and shipping green coffee — What happens to the coffee inside the container between the two ports.
- Kenya — A country whose coffee has been sold through an auction since the 1930s, described from its own documents.