- ICE-certified futures contracts require washed coffees, but more and more Brazilian naturals have been added to bags
- Around 30% of approved ICE stock is from Brazil, and some believe most of it contains natural processed coffee
- At scale, this could disrupt the market in a number of ways
IN THE past, all ICE-certified futures were only deliverable provided they contained 100% washed coffees. However, in recent weeks, news has emerged that Brazilian semi-washed (honey) and unwashed (natural) coffees are being used to settle these contracts.
Brazil’s coffee exporters association Cecafe has confirmed these coffees are now being included in exchange stocks.
Approximately 30% of the approved stock currently stored in ICE warehouses is from Brazil. It’s been reported that nearly all of these bags contain honey or natural processed coffees.
What’s the context?
In broader terms, washed coffees are more costly to produce than naturals. Many Brazilian farmers have struggled to absorb the costs of producing these coffees while global prices remained so low for so many years. In response, many switched to naturals, which are cheaper to produce.
From 2020, however, volume started to increase regardless of category.
“What is driving the increase in certification of Brazilian coffee in the ICE is the result of the increase in arabica production – not only of naturals, but also of washed.” says an anonymous source. “Note that Brazil’s production reached its record during the 2020/21 crop, representing an increase of 24% compared to the previous year, generating a natural surplus.”
Towards the end of 2022, there was a significant influx of Brazilian arabica. The sheer volume arriving at the warehouse meant some people began to suspect that natural coffees were being added.
However, since the quality of these naturals has increased, they still technically meet the grading standards. This has led exporters to gradually increase the percentage of unwashed coffees in each bag while maintaining certification.
Is it ethical?
For some, this matter is black and white – if the contract doesn’t indicate the inclusion of natural coffees, then none should be included.
“Globally tight stocks have led people to be flexible in their contracts,” says an anonymous source. “When you let naturals pass as a blend in a 100% semi-washed contract, that is a rule being broken.”
However, others believe Brazilian naturals can meet the exchange requirements. The ICE Futures Coffee “C” Rulebook states a minimum standard for delivery is that “the coffee is sound and free from all unwashed and aged flavors in the cup”.
The requirement doesn’t specify that the coffee must be washed; it only needs to be devoid of “unwashed” flavours.
It’s also worth noting that the burden of risk doesn’t lie with the ICE here, but rather with the deliverer. If the coffee fails grading, the deliverer is effectively left looking for a buyer for these uncertified stocks elsewhere.
So what are the consequences?
With Brazilian naturals and honeys now acceptable for ICE certification, there could be significant implications for the overall global coffee market.
For instance, the sheer scale of Brazilian coffee production means that if this practice becomes more widespread, the C price could fall.
This, of course, would have implications for other coffee farmers around the world.
“Brazil being able to enter futures market stocks with natural coffees is not fair in the current market structure towards other origins,” says an anonymous source.
“As a coffee lover, I am also concerned with the concentration of production, the beauty of this unique beverage is the mixture of different flavours, different cultures and the concentration goes against that,” says another a different source.
“In my view, the global trading houses and large-scale roasters have an important role in trying to democratise the best practices currently used in countries like Vietnam and Brazil to other parts of the world – in order to allow small producers to increase their productivity and make their business more sustainable.”
Improving market mechanisms?
At the same time, some view the acceptance of Brazilian naturals in these stocks as a positive, as it provides a more accurate reflection of global coffee production. It could be argued that using the market price as a global benchmark doesn’t make sense if a significant percentage of all arabica coffee produced isn’t suitable for inclusion in ICE stocks.
Currently, the exchange uses washed Central American milds as a benchmark price, but market fluctuation is heavily sensitive to the Brazilian market. This means that the global benchmark doesn’t change despite volatility caused by weather and supply-related updates in the world’s biggest coffee-producing country.
For some, including naturals in coffee stocks means representing the wider coffee industry, in spite of the disruption.
Nevertheless, the situation, for now, is clear – Brazilian natural processed coffees have been included in ICE-certified stocks. Now they’re there, it’s likely that we’ll see more of them. It’s too early to tell what the impact will be for the C price and the market at large – but it could have a serious effect in the medium and long term.