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Buying spot versus buying forward

7 minute read

In this article we are going to look at buying coffee spot and buying coffee forward. They are ways of purchasing green coffee that represent different strategies when securing your coffee to roast. Depending on your business and approach to sourcing, it’s likely you will choose one method over the other. However, they are not mutually exclusive and often businesses will employ both methods as part of their overall strategy. First, we’re going to define these two methods of sourcing and then we will look at their pros and cons. We will illustrate how both methods of sourcing have great reasons to be employed and that the percentage of stock sourced using one method over the other will depend on your approach to risk and your customer base.

Checking the appearance of the coffee beans

Buying coffee on the spot market

If a coffee is ‘spot’ this signifies that the coffee is sat in a warehouse and is available for purchase. It would have gone through our usual quality control process (graded by our quality control team and cupped by our team of Q Graders) and be ready to leave the warehouse on to be roasted. If a coffee is ‘Spot UK warehouse’ this means the coffee is physically sat in a warehouse in the UK and is unsold. If the coffee is ‘Spot Europe’ this means the coffee is sat in a warehouse somewhere in Europe and is unsold. As you can see from the examples just mentioned, you can be as precise as you like when using the term. The sentiment of the term however, is nearby, and my definition of nearby could well be different to yours, so it’s generally preferable to have a warehouse and/or geographic area to go along with the term spot so you can ascertain how close the coffee is to you. If you’re in Ireland and someone offers you ‘Spot Europe’, if this coffee is in fact sat in a warehouse in Greece, this might not be so appealing when compared to coffee that is ‘Spot Antwerp’ for example, but ‘Spot Europe’ could legitimately refer to either. If someone offers you coffee ‘Spot CWT Tilbury’ and you decide to make that purchase, you agree to take delivery of that coffee now from CWT warehouse. Buying spot always refers to the here and now and is a solution to an immediate need.

Buying forward

When you buy forward, this means you enter into a contract to purchase a quantity of a particular coffee at an agreed price during a collection period in the future. For example, maybe you have looked at your roasting plan and you know you will need to take delivery of 150 bags of Kenya AA six months from now and another 150 bags three months after that. You make an inquiry and receive an offer for 150 bags of Kenya AA at 6,750 £/mt for April 2021 delivery and another 150 bags of Kenya AA at 6,850 £/mt for July 2021 delivery. You decide you would like to enter that contract and confirm the business. Although you have bought coffee by entering into a forward contract, you will not make any payment till the delivery period specified in the contract comes around. In our example, payment for the first delivery would not be made till April 2021, six months after you technically purchased the coffee. Although you won’t actually see the physical coffee for 6 months, you have made a forward purchase and you are contractually obliged to take delivery of that stock during the time period outlined in the contract. Unlike spot buying, buying forward relates to the coffee you will need in the future and is a solution to a future requirement.

As you can see from the explanations above, the first approach looks at what is available in warehouses close to you at the time of needing to roast the coffee, and the second approach ensures that the coffee you’d like to roast in the future is available for when you need to roast that coffee. You could say that buying spot is more reactive, whereas buying coffee forward is more proactive. However, there are benefits to the reactive approach that the proactive approach lacks. Let’s take a look at these two approaches and understand their positives and negatives.

What are the benefits of buy spot coffee?

  1. In an uncertain world forecasting is difficult (even without a global pandemic) and when you buy spot coffee, it’s generally quite accurate as the purchase is for an immediate, defined need.
  2. You are not committed to future contracts so if you lose a customer(s) and your demand drops off, you avoid the problem of having to take delivery of coffee you don’t need.
  3. You are exposed to price fluctuations and if market conditions are improving, you may be paying less for your coffee every time you purchase.

What are the disadvantages of buying spot coffee?

  1. Sometimes the coffee you would like to purchase may not be available as someone else has forward contracted all the remaining stock, leaving none left for sale.
  2. You are exposed to price fluctuations and if market conditions are worsening, you may be paying more for your coffee every time you purchase.

What are the benefits of buying forward?

  1. You benefit from a fixed price for the period of that future contract. This is helpful for budgeting purposes and also means you avoid the uncertainty of not knowing what the price will be next time you need to purchase coffee to roast.
  2. You secure the stock you need for the duration of the future contract.
  3. Working with future contracts means you can develop long term relationships with specific producer groups.
  4. You can buy coffee for a long time into the future when market conditions are favourable

What are the negatives of buying forward?

  1. If your demand goes below the quantity you contracted, you have to take delivery of more coffee than you actually need to roast.
  2. If you contracted at a time when markets conditions were worse than the present, you do not benefit from the current more favourable pricing.
  3. You cannot cancel a contract so you have less flexibility on your sourcing for the duration of the contract.

Even if you are a business that prefers contracting forward, if one of your customers suddenly needs to triple their order one month, then buying spot to top up the contract you already have in place is a good way of managing your stock levels. Equally if you usually buy spot but have a customer that only wants a very specific type of coffee that you know is in short supply, it might make sense to forward contract that coffee for a few months to ensure that you can provide that coffee over the short to medium term.

Both examples show how often the two approaches can be used in tandem and complement each other. There is never a simple answer in coffee and you never know when you might need to employ different tactics to tackle the challenges that confront you.