Maximising your buying potential: “Buying Forward” in a nutshell
Our role as coffee traders at DR Wakefield is to ensure that our roasters have the right quality of coffee they need, at a time they need it, and at a sustainable price for all parties in the supply chain. This isn’t as simple as it may sound, and requires a certain amount of forethought, both on the traders part, and from a roaster/buyer perspective. So, with crystal ball in hand, we spoke to our newest Coffee Trader, Henry Clifford, about the pros and cons of the buying forward process, and what it means for roasters who are focused on growth.
So how does buying forward actually work?
Buying forward is fundamentally the process of agreeing with a trader to purchase a particular coffee at a specific time in the future, at a price secured today. The schedule of which coffee can be secured can be designed to fit with the roasting schedule, within a specific time period – often dictated by the seasonality of the coffee and its relative availability. This process works further down the supply chain as well, as DR Wakefield engages the same purchasing strategy with its suppliers from origin.
What are the benefits?
For the roaster, the benefits of buying forward are two-fold. In the first instance, buying forward allows an element of predictability. Knowing the price of coffee for a sustained period of time allows for effective budgeting – a fundamental need for any company is to know the cost of production. Buying forward enables this. With the coffee market demonstrating regular swings in price volatility, this stability can prove crucial.
The stability can also be reflected in quality and grade too. All too often, we see a roaster enjoying success with a particular coffee, only to find their trader has sold out of it before they can secure any more volume. Buying forward eliminates this risk, by ensuring enough stock is ‘reserved’ specifically for the roaster.
Buying on a forward basis also allows roasters to secure volume of coffee, without actually having to home it until it is needed. For growing roasters, space (and finances) can be stretched. Having coffee secured for release from their trader months into the future prevents the need to store the coffee immediately – taking up valuable shop floor / warehouse / roasting unit space, and also reduces cash usage improving the company’s cash flow, reducing expensive financing charges on idle stock. For roasters, it seems, it’s a win-win system!
Also, coffee is an agricultural product, and, therefore, a seasonal product. Its availability is generally not year round in many cases. But, unlike the delicate and perishable nature of the British strawberry, with careful planning and preparation, the life of these coffees can be extended to cover the period of the year where they are scarcely found. An effective buying strategy allows the roaster and trader to collaborate and create availability on coffee where normally there would be none.
One final benefit for buying forward is the exclusivity it affords. Provenance of a coffee, the name of the producer and the open traceability of the relationship over recent years have all become defining developments in the specialty coffee market. A roaster who can be in a position to have sole exclusivity on a certain lot is in an enviable position, indeed. Buying forward allows a roaster to take ownership of an entire lot of coffee, spread over a number of months with varying delivery dates.
Are there any risks or potential drawbacks for roasters?
Well, nothing is completely risk-free. Firstly, as discussed, buying forward allows a roaster to secure volume of coffee at a specific price. That’s great if the price increases between buying and taking delivery. However the price could also go down, such is the nature of coffee trading. A roaster is still legally obligated to take the coffee at the original price, even if the current price may be lower.
Secondly, predicting the future is not an exact science – a roaster may over or underestimate their needs. This leads to potential pitfalls that there won’t be enough coffee available to deliver when the time comes, or that there is too much for their needs.
What’s important to note is that once the option to buy forward has been agreed with the trader, a legally binding contract is enforced. Coffee must be delivered by DRW as agreed, and the roaster must accept the coffee as agreed.
What are the key points to take away:
Roasters need to keep clear and concise records of what they’ve agreed, with whom and when. This will eliminate any nasty surprises later on.
Buying forward is not a complete solution – there will always be an element of needing to buy spot purchases as and when the need arises.
Buying forward is not a strategy that will suit everyone, for those still fresh in the industry, unaware of what their potential needs might be, or without the capacity to commit to taking coffee that they may not need. But, managed correctly, the benefits are many.
Are you a small roaster looking to grow? Buying forward isn’t the only way of building your business. Keep checking back to the blog for more tips on getting your blend out to the world, or follow us on Twitter for the latest coffee market news.