Early Contracting vs. Futures Contracts: Navigating the Specialty Coffee Market

Early contracting and futures contracts serve different purposes in the coffee industry, and each has distinct features. For a deeper dive into the intricacies of both, you can check out our previous post on futures contracts as a hedging strategy and our more recent post on early contracting. Since we discuss and refer to both semi-often, we thought we'd share a quick breakdown of their differences, particularly in the context of specialty coffee.

Nature and Purpose

Early Contracting

This refers to the advance agreements made between buyers (often roasters or importers) and suppliers (often producers or exporters) for the purchase of coffee from a forthcoming harvest or arrival.

Its primary purpose is to establish a relationship, assure supply, and sometimes secure a specific quality or type of coffee in advance. It allows buyers to access premium samples first, get priority allocations, and sometimes get better prices.

Futures Contracts

These are standardised agreements to buy or sell a particular commodity (in this case, coffee) at a predetermined price at a specified time in the future.

The primary purpose of futures contracts in the coffee industry is hedging against price fluctuations. They offer a way to mitigate risks related to volatile coffee prices.

Flexibility

Early Contracting

Given its direct nature, early contracting can be more flexible in terms of the quality, quantity, and specifics of the coffee being bought or sold. The details are often tailored to the needs and agreements of the two parties involved.

Futures Contracts

These contracts are standardised, meaning they have fixed terms that traders must adhere to, such as contract size, expiration date, and other specifications. They typically do not concern the specifics of the coffee's quality or origin but focus on the grade and quantity.

Market

Early Contracting

This is more prevalent in the specialty coffee sector, where quality, origin, and specific characteristics of the coffee are of paramount importance.

Futures Contracts

These are traded in commodity exchanges and are used by a variety of players in the coffee industry, from commercial producers to large roasters. Futures contracts deal primarily with standard or commercial grade coffee, not specialty coffee.

Relationship Aspect

Early Contracting

It often strengthens the relationship between the buyer and the seller. Given the direct nature of these contracts, trust, transparency, and long-term partnerships can be fostered.

Futures Contracts

These contracts are more impersonal since they're traded between anonymous parties on an exchange. The focus here is more on the financial aspect and less on building relationships.

In summary, while both early contracting and futures contracts serve as tools to secure coffee and manage risks, they cater to different needs and operate in distinct spaces within the coffee industry. Early contracting is more about establishing relationships and securing quality, whereas futures contracts are more about managing price risks in a volatile market.