All About Coffee Part 61

[Ill.u.s.tration: GREEN COFFEE STORED ON THE DOCKS AT HAVRE, FRANCE]

[Ill.u.s.tration: HANDLING GREEN COFFEE AT TWO EUROPEAN PORTS]

_Coffee Exchanges and Trading Methods_

Green-coffee buyers in the large importing centers of the United States and Europe recognize two distinct markets in their operations. One of these is called the "spot" market; because the importers, brokers, jobbers, and roasters trading there deal in actual coffee in warehouses in the consuming country. In New York the spot market is located in the district of lower Wall Street, which includes a block or two each side on Front and Water Streets. Here, coffee importers, coffee roasters, coffee dealers, and coffee brokers conduct their "street" sales.

The other market is designated as the "futures" market; and the trading is not concerned with actual coffee, but with the purchase or sale of contracts for future delivery of coffee that may still be on the trees in the producing country. Futures, or "options" as they are frequently called, are dealt in only on a coffee exchange. The princ.i.p.al exchanges are in New York, Havre, and Hamburg. New Orleans and San Francisco exchange dealers trade on their local boards of trade.

Coffee-exchange contracts are dealt in just like stocks and bonds. They are settled by the payment of the difference, or "margin"; and the option of delivering actual coffee is seldom exercised. Generally, the operations are either in the nature of ordinary speculation on margin or for the legitimate purpose of effecting "hedges" against holdings or short sales of actual coffees.

The New York Coffee and Sugar Exchange--the most important in the world, because of the volume of its business--deals in all coffees from North, South, and Central America, the West Indies and the East Indies (except those of the Robusta variety) and uses Type No. 7 as the basis for all Exchange quotations. All other types are judged in relation to it. In determining the number of a type, the coffee is graded by the number of imperfections contained in it.

[Ill.u.s.tration: NEW YORK COFFEE AND SUGAR EXCHANGE

The building fronts on Hanover Square and extends through to Beaver Street. The exchange rooms are indicated by the arched windows on the second floor. The rest of the building is devoted to offices. The exchange was founded in 1881, and was the first national coffee trading organization in the world.]

These imperfections are black beans, broken beans, sh.e.l.ls, immature beans ("quakers"), stones, and pods. For counting the imperfections, the black bean has been taken as the basis unit, and all imperfections, no matter what they may be, are calculated in terms of black beans, according to a scale, which is practically as follows:

BLACK-BEAN SCALE

3 sh.e.l.ls equal 1 black bean 5 "quakers" equal 1 " "

5 broken beans equal 1 " "

1 pod equals 1 " "

1 medium size stone equals 1 " "

2 small stones equal 1 " "

1 large stone equals 2 to 3 " "

[Ill.u.s.tration: THE COFFEE PIT IN THE NEW YORK COFFEE AND SUGAR EXCHANGE]

By this scale a coffee containing no imperfections would be cla.s.sified as Type No. 1. The test is made on one-pound samples. If a sample shows six black beans, or equivalent imperfections, it is graded as No. 2; if thirteen black beans, as No. 3; if twenty-nine black beans, as No. 4; if sixty black beans, as No. 5; if one hundred and ten black beans, as No.

6, and if more than one hundred and ten black beans, as No. 7 or No. 8.

These two are graded by comparison with recognized exchange types.

Coffees grading lower than No. 8 are not admissible to this country.

The quotation relationship of other types with the basic Rio No. 7 is shown in the table below.

By this scale one can determine that when Rio No. 7 is quoted at 17.10, Rio No. 2 is 18.60, Santos No. 3, 19.10, and Bogota No. 5, 18.10. The quotations are on the pound and cents basis.

SCALE OF QUOTATION RELATIONSHIP

BRAZILIAN COFFEE-- SANTOS COFFEE OTHER KINDS--NOT NOT SANTOS BRAZILIAN Type Type Type No. 1--180 points above No. 1--260 points above No. 1--300 points above No. 2--150 points above No. 2--230 points above No. 2--250 points above No. 3--120 points above No. 3--200 points above No. 3--200 points above No. 4---90 points above No. 4--150 points above No. 4--150 points above No. 5---60 points above No. 5--100 points above No. 5--100 points above No. 6---30 points above No. 6-- 50 points above No. 6--50 points above No. 7---Basis No. 7--Basis No. 7--Basis No. 8---50 points below No. 8--50 points below No. 8--50 points below

A point is the hundredth part of a cent

In the spot market, a trader may also buy or sell coffee "to arrive"; that is, a consignment that is aboard ship on the way to the market.

Coffee is shipped to New York either on a consignment basis and sold for a commission, or it may have been bought in the shipping port and be already the property of an importer. When shipped on consignment, a wholesaler usually buys on the in-store contract, which provides that the purchaser must take delivery at the warehouse, though he is generally given a month's storage privilege before removal of the coffee. The practise among New York importers at present is to buy coffee on either the basis of F.O.B. delivery steamer at loading port, or delivery C. & F. (cost and freight), or C.I.F. (cost, insurance, and freight), port of destination. Payment is made by letter of credit drawn on a New York or London bank, ent.i.tling the exporter to draw at ninety days' sight against the shipping doc.u.ments, so that the shipment will be in the hands of the purchaser long before the draft is made. Frequently a jobber acts as his own importer of Brazil coffee, buying direct from the exporter without utilizing the agency of a broker or a regular importing firm.

Brazil coffee is bought with the stipulation that differences between samples and the coffee actually delivered may be adjusted either on "Brazil grading," "half difference," or "full difference"; and with the further provision that, if the delivery is a full type higher or lower than specified in the contract, the entire shipment may be rejected.

Under the "Brazil grading" provision, the buyer must accept delivery if the coffee is better than the next lower type, even though not up to the type ordered; and if the coffee is of a higher type than contracted for, he need not pay premium for it. In buying on the "half difference" or "full difference" basis, the buyer is ent.i.tled to payment for half the difference or the full difference, respectively, for any undergrading, or must pay the seller accordingly if there is any overgrading. When a buyer specifies special features of description, in addition to type, some sellers protect themselves against claims for difference on this score by inserting in the contract a clause to the effect that the description is given in good faith, but is not guaranteed by the seller.

[Ill.u.s.tration: TWO OF THE COFFEE EXCHANGE BLACKBOARDS

The one on the right is a record of transactions in the coffee pit. As soon as a trade is made, it is noted in the proper column on the lower part, the entry showing the time of the transaction, the number of "250-pound bag lots," and the price. The left-hand board gives Santos and Rio future quotations. For a detailed description of these and other exchange quotation boards, see page 457]

_How the New York Exchange Functions_

When the New York Coffee Exchange was incorporated in 1881, its charter stated its purposes to be "to provide, regulate and maintain a suitable building, room or rooms for the purchase and sales of coffees and other similar grocery articles in the city of New York, to adjust controversies between members, to inculcate and establish just and equitable principles in the trade, to establish and maintain uniformity in its rules, regulations and usages, to adopt standards of cla.s.sification, to acquire, preserve and disseminate useful and valuable business information, and generally to promote the above mentioned trade in the city of New York, increase its amount, and augment the facilities with which it may be conducted."

In the promotion of trade at New York the Exchange has been highly successful. From time to time it has been criticized; and, more than once, coffee traders in the East and in the West have raised a question as to its value to non-speculating members. There are those who believe it serves a useful purpose, and others who call it a huge pool room. To say that, on the whole, it is not of benefit to the trade would be untrue. As one of its champions pointed out in 1914, when it shut down for a period of four months on account of the World War:

The ability to discount the future is a necessity, and demands the facilities that a unit of centralization like the Exchange affords.

There is no difference between a purchase of coffee and one of a future month on options.

The experience gained here and abroad demonstrates that any check placed upon such dealings is detrimental, with far-reaching effects upon the whole body of the trade. Unquestionably the Exchange is a powerful factor as a regulator of extremes in the market.

The experience gained in Germany, where an embargo was placed upon transactions in futures, is illuminating. The disastrous effects were so plain that the authorities were forced to abandon their objections and permit a resumption of the business along the old lines.

But a good thing can be abused, and the opportunity to gamble in options availed of by so many is the increment that disturbs the legitimacy of the market and creates the opposition to the whole proposition. When the Exchange is ready to insist that every transaction in futures must be a legitimate one, and that every trader under its jurisdiction using the facilities of the Exchange is made to realize that any operations that are purely of a gambling nature will subject him to severe discipline, then the Coffee Exchange will begin to stem the tide of an ever-growing opposition by the general public.

[Ill.u.s.tration: THE "COFFEE AFLOAT" BLACKBOARD]

The New York State legislative committee on speculations in securities and commodities had the following to say on the Coffee Exchange in its report to Governor Charles E. Hughes in 1909:

It [the Coffee Exchange] was established in order to supply a daily market where coffee could be bought and sold and to fix quotations therefor, in distinction from the former method of alternate glut and scarcity, with wide variations in price--in short, to create stability and certainty in trading in an important article of commerce. This it has accomplished; and it has made New York the most important primary coffee market in the United States. But there has been recently introduced a non-commercial factor known as "valorization," a governmental scheme of Brazil, by which the public treasury has a.s.sumed to purchase and hold a certain percentage of the coffee grown there, in order to prevent a decline of the price. This has created abnormal conditions in the coffee trade.

All transactions must be reported by the seller to the superintendent of the Exchange, with an exact statement of the time and terms of delivery. The record shows that the average annual sales in the past five years have been in excess of 16,000,000 bags of 130 pounds each.

Contracts may be transferred or offset by voluntary clearings by groups of members. There is no general clearing system.[319] There is a commendable rule providing that, in case of a "corner," the officials may fix a settlement price for contracts to avoid disastrous failures.

The original initiation fee was $250. Seats on the Exchange once sold for as low as $110. In January, 1916, there was a sale at $3,000; in October, 1916, there was a sale for $5,000; in April, 1921, three seats were sold for $5,500 each; but the record price of $8,600 was paid in 1919. Seats are now (1922) worth about $6,000.

The Exchange includes in its membership 323 brokers, importers, dealers, and roasters. Membership is pa.s.sed upon by a committee on membership; but any one twenty-one years old, resident or non-resident, of good character and commercial standing, is eligible when proposed and seconded by Exchange members. The committee refers the application with its recommendation to the board of managers, which takes a ballot. The adverse vote of one-third of all votes cast rejects.

The Exchange elects annually a president, a vice-president, and a treasurer, who perform the usual duties of Exchange officers. The real governing body is the board of managers, consisting of the president, vice-president, treasurer, and twelve other members. This governing board, meeting monthly, appoints the necessary subordinate officers and employees, and fixes their compensation, and may "summon before them any officer or member for any purpose whatsoever." It appoints the secretary of the Exchange from among its own number, a superintendent of the Exchange, and the numerous committees which are in active charge of specified activities. It also licenses the necessary coffee graders, warehous.e.m.e.n, weighmasters, and samplers of the Exchange.

A brief discussion of the duties of the superintendent and the various committees will help to explain the methods of the Exchange market. The superintendent, under the direction of the board of managers, has charge of the details of its work and of that of the various committees. He keeps all the books and doc.u.ments of the Exchange; collects and pays over to the treasurer all moneys due the Exchange not otherwise provided for; receives, deposits, and pays over all margins on coffee contracts; has active charge of the Exchange rooms and the bulletin board; and manages and appoints, with the consent of the board of managers, the a.s.sistants needed to perform the details of the work under his charge.

One of the functions of the Exchange is to grade and to cla.s.sify coffee, in which it takes every possible precaution. The rules provide for eight standard grades; and only licensed graders are permitted to pa.s.s upon the product handled on the Exchange. There are twenty-five of these graders; one of whom is appointed as a supervisor of types, to provide fresh standards and to "maintain them as nearly as possible on an equality." When these standards are approved by the board and the Exchange, they remain in force for a year.

When coffee is received at a licensed warehouse, two official graders are chosen, one by the buyer and one by the seller. These graders receive four cents a bag if employed by a member; and eight cents a bag, if employed by a non-member.

If the graders disagree, their differences are referred to the board of coffee arbitrators, consisting of ten experts appointed by the board of managers. The superintendent selects by lot three of these arbitrators, who decide on the basis of the samples submitted, but will not make a decision lowering the grade below that of the lowest submitted nor higher than the highest. If the disputants do not change the grading to come within the arbitrators' findings, the samples are sent to the entire board of arbitrators, exclusive of those who may have been the original graders, and final decision is made by majority vote. As soon as the coffee is graded, a certificate is issued stating the grades, and bearing the signatures of the superintendent and graders. This certificate is conclusive evidence of the grade as far as the parties involved are concerned, for the subsequent twelve months. The buyer receives the original, and the seller a duplicate.

The rules provide that weights decided upon at the initial delivery are good during the life of the grading certificate for re-delivery, with definite allowances to the receiver, on re-delivery, of a quarter of a pound a bag a month, instead of having to re-weigh and re-sample for every separate delivery, as formerly.

As claims and trade controversies occasionally arise, the Exchange has provided means for their peaceful settlement. The board of managers elects annually an arbitration committee of five members, who swear to decide disputes fairly. This is the only committee on the Exchange that has power to adjudicate disputes between members and non-members; and its services must be sought by the disputants, who must agree to abide by its decision. An adjudication committee of seven is annually chosen from the membership by the managers, to adjust all claims and controversies between members arising out of any merchandise transaction, "if notice in writing of such claim or controversy, and of the intention to demand an adjudication thereon, be served by either party thereto within ten days from the ascertainment thereof."