Rule Change Expected to Further Suppress Arabica Prices

For hundreds of years, coffee beans have made their way around the world in gunny sacks.

Now the use of these burlap bags, small enough to be hoisted by one person and a symbol of coffee’s artisanal character, is giving way to the modern demands of global trade.

IntercontinentalExchange Inc., ICE +2.52% home to the world’s most heavily traded coffee contract, last week said it would allow bean shipments to its certified warehouses to arrive in lined cargo containers, or “supersacks.” These plastic woven sacks often hold a metric ton of coffee, or enough beans to make about 125,000 shots of espresso.

To be delivered against ICE futures, coffee has had to arrive in specially marked bags. Those rules are changing. Above, a warehouse in Colombia. Bloomberg News

The move is expected to make it easier for big commodity traders and food companies to buy and sell coffee on the exchange. Cargo containers of loose beans already change hands in the physical-coffee market. But to be delivered against the ICE futures contract, arabica coffee beans generally must have arrived in the warehouse in bags that were marked at the beans’ origin, and be made of “sisal, henequen, jute, burlap or woven material having similar properties,” according to current rules.

At the same time, the loosening of packaging requirements could further suppress prices that already are weighed down by a glut of arabica beans, the variety used by roasters such as Starbucks Corp. SBUX +1.36% and Italy’s IllyCaffè SpA, traders and analysts say.

The new rule “is going to increase the amount available [in stockpiles],” said Jack Scoville, a vice president at brokerage Price Futures Group in Chicago. That likely would pressure prices even more, Mr. Scoville added.

Stockpiles of arabica are near 3½-year highs, caused largely by back-to-back record harvests in No. 1 grower Brazil. The glut has driven prices of arabica to their lowest levels since April 2009. Arabica futures rose 0.2% to $1.1525 a pound on the ICE Futures U.S. exchange on Wednesday.

Some market experts say that big incoming coffee shipments also could revive worries about the quality of the beans in ICE-certified warehouses, which could suppress futures prices relative to prices on the cash market. ICE tightened standards in late 2010 in response to concerns about the age, color and taste of coffee beans in storage amid a shortage of beans from Colombia, the world’s No. 2 arabica grower.

Many companies, from small Brooklyn, N.Y., roasters to Starbucks, have a policy of only using coffee beans that have traveled from the farm to roasting machines in gunny sacks.

Cheryl Kingan, head coffee buyer for Café Grumpy, a small roaster in Brooklyn, says she doesn’t receive coffee in a lined container.

“You wouldn’t know exactly what you’re getting,” Ms. Kingan says.

Critics of the new rule, which comes into force in late 2015, say it is more difficult to ensure that coffee beans originated from the country advertised if they are shipped in bulk and then rebagged. Certain beans, like those from Colombia, command a premium while the more plentiful, mechanically harvested Brazilian beans are traded at a discount to the benchmark futures contract.

“I’d rather see [the coffee] arrive in bags,” says Bob Phillips, a trader at Caturra Coffee Corp., a coffee importer based in Elmsford, N.Y. Referring to ICE’s rule change, Mr. Phillips added, “I don’t think it’s a wise idea because someone will find a way to misrepresent [the coffee]. Beans don’t have a stamp on them.”

ICE says the decision will help bring it into line with a growing trend of big, bulk deliveries of beans. Global coffee exports rose by 27% between 2002 and 2012, to 113.2 million bags, according to the International Coffee Organization.

Other coffee traders are defending the change.

“It’s really just reflecting what is going on in the physical [trading] world,” said a person involved in the decision-making process. “Welcome to the ’90s.”

J.M. Smucker Co., the maker of Folgers, and Kraft Foods Group Inc., which produces Maxwell House coffee, say they receive coffee shipments in big containers.

Even traders of some of the world’s most sought-after coffee say worries about quality are overblown. Companies that take coffee that meets the exchange’s minimum standards don’t have particularly high expectations, says Andi Trindle Mersch, a trader at Atlantic Specialty Coffee.

“Supersacks are quite acceptable for quality as far as I know,” Ms. Mersch says, adding that only about 5% of the coffee the company buys comes in large supersacks. Atlantic Specialty Coffee is a unit of Ecom Agroindustrial Corp., one of the world’s biggest coffee traders.

While the exchange is expanding the options to bring coffee to the warehouse, ICE isn’t changing how buyers can get it out. Under the new system, warehouse employees still will sort and bag the coffee in natural-fiber bags before handing it to the exchange’s graders. The coffee still must pass the exchange’s muster before it joins the certified stockpiles.

Still, many in the coffee market believe the really good beans always travel in small packages.

Costa Rica, which is famed for its coffee beans nourished by volcanic, mineral-rich soil, exports 90% of its crop in smaller bags, said Edgar Rojas, the deputy director of the Coffee Institute of Costa Rica, a government body that oversees the industry.

The bulk shipments “are cheaper” but smaller bags make “it easier to control the quality,” Mr. Rojas says.

For the same reason, Starbucks says it only uses gunny sacks.

“Starbucks only receives its coffee in unit-level bags,” said Starbucks spokeswoman Alisha Damodaran, referring to the industry standard bag that holds 60 kilograms, about 132 pounds. “It is an integral component to traceability and quality assurance.”

 

 

By

Leslie Josephs
Oct. 9, 2013 4:34 p.m. ET

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