As your business grows and you are regularly purchasing full pallets of green coffee from Olam, you may be given the option of contracting coffee forward. When that day comes, here are some important points to keep in mind.
Part 1: Effective Strategies for Green Coffee Buyers — The SAS Contract, Coffee Roasters, and What They Should Know
Far from being a simple process, green coffee buying quickly reveals itself as deceptively complicated and takes up significantly more time than the entrepreneur envisioned when starting the enterprise. Add into this mix over 150 years of established tradition and insider jargon, complicated product seasonality and logistics, and an infinite array of choices and a green coffee buyer can find themselves in a stressful position, especially as they grow and are regularly purchasing full pallets. One of the most helpful tools available to growing coffee roasters is the forward contract.
Green coffee contracts are tools. Just like any other tool, they can be used to achieve an outcome, if you know how to use it correctly. But, if that tool seems overly complicated or intimidating, it is unlikely to be used. So let’s clear up some mysteries. Because the forward contract is definitely a tool that you want to be using when purchasing significant amounts of green coffee.
A green coffee contract is the foundation of all the transactions that occur from the farm to the roaster. Whether you see them or not, there is a contract from the farmer to the miller, the miller to the exporter, the exporter to the importer, and finally the importer to the roaster. Even if you are using an alternative model and eliminating or modifying some of these players, contracts are still used between the parties.
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Contracts are a stabilizing force in the industry because they are standardized and ubiquitous. Rather than seen as a high-pressure tactic, contracts allow parties to have confidence that each counterparty has an objective understanding of what they’ve agreed to, what their obligations are, and what happens if those obligations aren’t met. A contract provides clarity and allows us to focus on other important things, like quality and relationships and finding great coffee!
The Who, What, and Why of a Contract: Coffee Roasters & The SAS Contract
So how can a buyer use contracts to help improve their coffee buying? Let’s start with the most common usage: buying forward. One of the questions I am often asked is “How does roaster X always get such great coffee?” One of the answers is that experienced roasters don’t wait until the coffees they want are landed in the US and stocked into the warehouse, ready for sampling. Instead, they use the trust built up from their relationships with vendors to make conditional contracts for coffees that have not arrived. In some cases, these coffees haven’t shipped, or even been harvested! But the roaster knows the coffee by either reputation or prior experience, and they know that if they don’t raise their hand and commit to it at the earliest opportunity, someone else will buy it. How do they commit? The SAS contract. This is a game changer for coffee roasters.
Green coffee contracts come in many flavors — some are for immediate delivery and some are for future delivery. When you make a spot purchase from an importer and release it immediately, a sales contract is created to enable that sale. You may not see it, but it exists. It is simply created and executed on the same day. But if you’re buying enough coffee and have a history with a trader, you can also have a contract for coffee that will be delivered at some point in the future. “But I’m a quality-focused roaster!” you say. “I don’t buy coffee until I have sampled and cupped it.” Fair point, but let’s look at your verbiage here. What I would encourage you to say instead is that you don’t take delivery of coffees until you’ve tasted and approved them. See the difference? Don’t confuse making the commitment and taking possession of the coffee — they are two related but separate things.
Green coffee contracts have an approval clause. They specify a condition that must be fulfilled before coffee can be delivered to the client. When you buy spot coffee, the approval clause is “pre-approved.” But there are other options when buying forward. One of the most common is SAS: Subject to Approval of Sample. What this clause does to a contract is make the entire sale dependent upon sample approval. Without approval, there is no obligation of the buyer to take delivery. See how useful that can be? That’s the clause that experienced buyers use to get what they want. Coffee’s like our Kenya Karinga can be purchased before the harvest even starts, and when it’s ready, the buyer gets to taste it and approve it before they are obligated to take it. The importer gets the sale and the buyer gets the coffee they want. A win/win!
“Wow!” you say. “I want to buy all my coffee this way and get to just cup and cup and choose! This is great!” Hold on there, partner. There are a few rules, as there usually are on awesome things. Here’s some of them:
- A SAS contract is a privilege. They are entered into only at the discretion of the seller. Their experiences with you to date and your knowledge of how these contracts work are big factors in that decision. Trust is the coin of the realm.
- You can’t reject it because the market price has gone down, or because you no longer need the coffee. Well, you can…but it will be the last SAS contract you ever get. Honor your contract. Coffee roasters, it’s a small world out there!
- You can only reject based on non-compliance with the quality description. If the contract says “SHG EP, SCAA 82” and that’s what the sample is…you can’t reject it for not being “complex” enough. And so…
- No squatting. Your importer is buying 10 microlots from Ethiopia and you want to buy one — and only one — you can’t do 10 SAS contracts (effectively tying up the whole container) and then reject nine. As I’ve said on more than one occasion: It’s a contract, not a dinner reservation. You’ve got to show up!
Hopefully, this has somewhat de-mystified the SAS contract for you. There’s a lot more to learn about them, and of course, this is just the tip of the iceberg when it comes to using contracts as a purchasing tool. When the time comes.
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