Forward Contracting to Secure Quality, Quantity and Relationships

Forward Contracting to Secure Quality, Quantity and Relationships

   2.5 Minute Read

Anthony Auger
North America Sales Representative



Let’s start by presenting a common scenario: you receive a sample of coffee that you enjoy so much that you decide to purchase and feature this coffee. Your customers also enjoy the coffee, so much so that it’s flying off the shelves, spurring you to contact the supplier to inquire if the coffee will be available again next harvest. At this point, your supplier can do one of two things: wait until next harvest to see what is delivered for spot contracts or write a forward contract for this coffee. Each of these options have some pros and cons.

While there are some minor benefits for waiting until the following harvest, these benefits are far outweighed by the uncertainty throughout the supply chain, from producer, to supplier, to roaster. With forward contracting, you are not the only party committing to an outcome; your supplier and their growing partners are committing as well. By contracting prior to the harvest, you have shared risk, essentially providing an element of security within the entire supply chain.

Forward contracting also provides the opportunity to demonstrate professionalism and responsibility to all parties involved in the contract. The producer has the responsibility to produce a product that meets the specifications agreed to. The supplier Caravela is responsible for paying the proper price for the quality while delivering a good product to the roaster. Lastly, the roaster is responsible for being honest on their scoring and paying the price that the coffee is worth.

All of this lays the groundwork for long lasting relationships between coffee producers, suppliers and roasters. There is a lot of trust which needs to be built for this type of relationship to work, and the most effective ways for all sides to develop long lasting trust is by contractually obliging themselves to work together, being responsible, and demonstrating professionalism. Buyers who forward contract also nurture the sustainability of the system by providing opportunities to be fulfilled by the producer, increasing farm profitability, investment, and certainty of sale.

This is why at Caravela, the majority of coffee we contract with our customers is on a forward contract basis. We take this idea one step further and add our quality tiers (RTB, A, AA, AAA, ML) to forward contracts. What this means, is that we can contractually agree to find and sell what is needed, with the required flavor profile and cup score while preserving and helping to create more opportunities for producers. We do this to help remove variables that would concern both green buyers and producers alike, including unreliable volumes, quality, consistency and delivery times, providing extra security across the supply chain.

If all of this sounds very appealing to you, a great question to ask yourself before venturing into the world of forward contracting, is “Why do I want to secure this coffee again?”; the answer will present options as to how you should proceed with your contracts. If it’s to secure quantity, you should ensure that your projections are accurate and that you have budgeted sufficiently to release on time. If it’s to secure quality and/or consistency, maybe look at buying community blends, which are renowned for their consistency from harvest to harvest. Lastly, if the relationship is the most important aspect, you could set up a forward contract between you and a specific producer or producer group.

Ultimately a signed contract will go much further than a handshake or a one-off purchase. Respecting your producer partners and the work they do creates an environment of support, and helps producers achieve their potential. This is a mutually beneficial relationship, as it gives producers a real incentive to continue growing a quality product that will end up benefiting the entire supply chain.

   2.5 Minute Read

Anthony Auger
North America Sales Representative



Let’s start by presenting a common scenario: you receive a sample of coffee that you enjoy so much that you decide to purchase and feature this coffee. Your customers also enjoy the coffee, so much so that it’s flying off the shelves, spurring you to contact the supplier to inquire if the coffee will be available again next harvest. At this point, your supplier can do one of two things: wait until next harvest to see what is delivered for spot contracts or write a forward contract for this coffee. Each of these options have some pros and cons.

While there are some minor benefits for waiting until the following harvest, these benefits are far outweighed by the uncertainty throughout the supply chain, from producer, to supplier, to roaster. With forward contracting, you are not the only party committing to an outcome; your supplier and their growing partners are committing as well. By contracting prior to the harvest, you have shared risk, essentially providing an element of security within the entire supply chain.

Forward contracting also provides the opportunity to demonstrate professionalism and responsibility to all parties involved in the contract. The producer has the responsibility to produce a product that meets the specifications agreed to. The supplier Caravela is responsible for paying the proper price for the quality while delivering a good product to the roaster. Lastly, the roaster is responsible for being honest on their scoring and paying the price that the coffee is worth.

All of this lays the groundwork for long lasting relationships between coffee producers, suppliers and roasters. There is a lot of trust which needs to be built for this type of relationship to work, and the most effective ways for all sides to develop long lasting trust is by contractually obliging themselves to work together, being responsible, and demonstrating professionalism. Buyers who forward contract also nurture the sustainability of the system by providing opportunities to be fulfilled by the producer, increasing farm profitability, investment, and certainty of sale.

This is why at Caravela, the majority of coffee we contract with our customers is on a forward contract basis. We take this idea one step further and add our quality tiers (RTB, A, AA, AAA, ML) to forward contracts. What this means, is that we can contractually agree to find and sell what is needed, with the required flavor profile and cup score while preserving and helping to create more opportunities for producers. We do this to help remove variables that would concern both green buyers and producers alike, including unreliable volumes, quality, consistency and delivery times, providing extra security across the supply chain.

If all of this sounds very appealing to you, a great question to ask yourself before venturing into the world of forward contracting, is “Why do I want to secure this coffee again?”; the answer will present options as to how you should proceed with your contracts. If it’s to secure quantity, you should ensure that your projections are accurate and that you have budgeted sufficiently to release on time. If it’s to secure quality and/or consistency, maybe look at buying community blends, which are renowned for their consistency from harvest to harvest. Lastly, if the relationship is the most important aspect, you could set up a forward contract between you and a specific producer or producer group.

Ultimately a signed contract will go much further than a handshake or a one-off purchase. Respecting your producer partners and the work they do creates an environment of support, and helps producers achieve their potential. This is a mutually beneficial relationship, as it gives producers a real incentive to continue growing a quality product that will end up benefiting the entire supply chain.

2 Comments

  1. Coffee Behind The Scenes

    Very interesting article. I do see more pros than cons in forward contracting both for the producers and the buyers.

    One question though: what would be the liability and the possible sanctions in case the contract would not be complied?
    I mean… let’s imagine that due to an external l, somehow foreseeable but uncontrollable factor (climate change for example), there’s less quantity available. Or it has generated a problem with fermentation and drying and thus a slightly lower quality.
    How would you act as a buyer? Will you call for the liability of your provider as you would be legally in your right to do so? Or you will simply pay him less?
    I’m asking as I think that in specialty coffee that type of forward contracting actually materialize a long term relationship of mutual support between the parties. And I think it’s also important to talk about how to act when things are not going well, especially if we want to make the coffee industry more transparent and sustainable without falling into charity kind of models.

    Reply
    • Caravela Coffee

      Hello! Thank you for your interest!

      In the case of a force majeure event that prevents the producers from delivering either the coffee or the quality that has been contracted the key is to try to find solutions that minimize the impact to both producers and roasters.

      This could mean offering a replacement coffee to the roaster while delaying the delivery of the coffee to the next crop, or in other cases negotiating quality discounts.
      The key issue is to build effective communication prior to any event to create trust between the parties. This allows for hard conversations to take place in a solution driven environment and hopefully lead to stronger relationships.

      Reply

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