Glossary and Definitions

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    A

    Against actuals order

    Futures positions can be liquidated in the spot market privately under a pre-arranged trade. This type of transaction, called an against actuals trade, avoids the complexities of making a physical delivery under a futures contract. However, such transactions must take place under the rules of the exchange that supervises the futures contract. 

     

    Arbitrage

    The most common form of arbitrage for coffee is the Robusta/Arabica quality spread because the two major futures markets clearly show the arbitrage value, New York being Arabica-based and London Robusta-based. If the price difference between two comparable Arabica and Robusta delivery positions is considered overstated or understated, then arbitrageurs will buy the one and sell the other according to their convictions, speculating that the difference will move in their favour. 

    C

    Carries and inversions

    When the quotation for the forward positions stands at a premium to the spot price, the market is said to display a carry (also called forwardation or contango). The price of each successive forward position rises the further away it is from the spot position.

     

    Certification

    Certification guarantees (through a certificate) that specific rules and regulations of voluntary standards are met in a particular environment (e.g. individual producer, producer group, cooperative or even region). These producers must meet certain requirements - social, economic and/or environmental.

    Certification calls for independent third-party confirmation of this status, conducted by an accredited auditor. Typically, certifications must be renewed annually are designed to protect both buyers and suppliers. Roasters buying certified coffee benefit from the guarantee provided by the certificate and by using the sustainable branding on their retail packaging. This contributes to better marketing opportunities because of a specific market demand for certified goods. 

     

    A Circular Economy

    A Circular Economy model for the coffee sector designs, balances, and implements regenerative practices, resource efficiency, and waste reduction, while creating value from process outputs to achieve environmental, social and economic sustainability. Driven by a systemic and holistic approach, it draws inspiration from the dynamics of natural systems to regenerate, maintain, and create shared value for all stakeholders, across different contexts and within the entire coffee value circle.

    ITC Circular Economy Working Group (2024)

     

    Climate change adaptation

    Climate change adaptation is ‘the process of adjustment to actual or expected climate and its effects. In human systems, adaptation seeks to moderate or avoid harm or exploit beneficial opportunities.

    In some natural systems, human intervention may facilitate adjustment to expected climate and its effects’. This adjustment includes many areas such as infrastructure, agriculture and education. In the coffee sector, climate change adaptation typically consists of technical solutions to adapt coffee production and processing to climate changes. Long-term strategies are needed to improve conditions to adapt to future climate risks and build capacities as required, including the development of financing mechanisms.

    Intergovernmental Panel on Climate Change (2014) and ITC (2012).

     

    Climate change mitigation

    Climate change mitigation is a ‘human intervention to reduce the sources or enhance the sinks of greenhouse gases’. Human interventions reduce the sources of other substances that may directly or indirectly limit climate change. These include reducing particulate matter emissions that can directly alter the radiation balance (e.g. black carbon) or measures that control emissions of carbon monoxide, nitrogen oxides, volatile organic compounds and other pollutants that can change the concentration of tropospheric ozone, which has an indirect effect on the climate.

    In the coffee sector, climate change mitigation often refers to measures to reduce greenhouse gases to help protect the climate and generate carbon credits. It targets all value chain actors, from producer to consumer.

    Intergovernmental Panel on Climate Change (2014) and ITC (2012).

     

    Commitment of traders

    The Commodity Futures Trading Commission’s commitment of traders (COT) report breaks down the total open interest on the New York ‘C’ contract by category of traders. Large traders are called reportable, while small traders are non-reportable. The COT report further breaks down the open interest by commercial and non-commercial reportable traders. It is a very handy tool for exporters to get an idea of the long or short positions of the large speculative hedge funds. 

     

    Crop year

    Crop year. Coffee is a seasonal crop. Seasons vary from country to country, starting and finishing at different times throughout the year. This makes statistics on worldwide annual production very difficult to collate: any single 12-month period may encompass a whole crop year in one country, but will also include the tail end of the previous year’s crop and the beginning of the next year’s crop in others. To compare supply aggregates as well as supply with demand, where possible supply data have been converted from crop year to coffee year (which runs from October to September). It should be noted that this is not always possible.

    • Acidity: A desirable flavour that is sharp and pleasing, but not biting. The term ‘acid’ as used by the coffee trade refers to coffee that is smooth and rich and has verve, snap, and life, as against heavy, old, and mellow taste notes.
    • Aftertaste: A taste that remains in the mouth longer than usual after eating or drinking.
    • Aroma: Usually pleasant-smelling substances with the characteristic odour of coffee. Chemically, they are aldehydes, ketones, esters, volatile acids, phenols, etc.
    • Astringent: A taste that causes puckering and a sour and bitter impression.
    • Baggy: An undesirable off-flavour, resembling the smell of a bag made from jute. Often observed in coffees that have been stored for long periods in unsuitable conditions.
    • Baked: Generally unpleasant characteristic. Sign of coffee having been overroasted or roasted too slowly.
    • Balanced or round: Acidity and body are both present to the right extent.
    • Bitter: When strong, an unpleasant, sharp taste; biting like quinine.
    • Bland or neutral: Tasting smooth and flavourless, lacking coffee flavour and characteristics. However, this is not necessarily always a negative comment.
    • Body: A taste sensation or mouth feeling of more viscosity, used to describe the mouth feel of a drink corresponding to a certain consistency or an apparent viscosity, but not an increase in true viscosity. Sought after in most if not all coffees.
    • Carbolic, chemical: Chemical off-taste.
    • Carmelized: Carmelized sugar flavour.
    • Cherry: The fruit of the coffee tree. Dried coffee cherry is the dried fruit.
    • Coffee: General term for the fruits (cherries) and seeds (beans) of plants of the genus Coffea, as well as products from these fruits and seeds in different stages of processing and use.
    • Coffee bean: Commercial term designating the dried seed of the coffee plant.
    • Decaffeinated coffee: Green, roasted or soluble coffee from which caffeine has been extracted.
    • Earthy: Self-explanatory. Not to be confused with grassy.
    • Fermented: Chemical flavour caused by enzymes on the green coffee sugars. Very unpleasant odour and taste.
    • Foul: Objectionable cup profile often similar to rotten coffee pulp. Causes are mostly bad factory preparation or the use of polluted water. One badly discoloured bean is sufficient to give a foul cup to an otherwise good cup profile.
    • Fruity: Caused through ripening and/or by fermentation.
    • Grassy: A very pronounced green flavour can be most unpleasant.
    • Green, greenish: Flavour suggestive of hay. More common in early pickings, but seldom found in coffees that have been thoroughly dried.
    • Harsh: A harshness of body. Frequently caused by drought-stricken or overbearing trees producing mottled cherry.
    • Mailliard Effect: The chemical transformation that takes place in the beans during roasting. A non-enzymatic browning reaction caused when an amino acid reacts with a reducing sugar/monosaccharide.
    • Musty or mouldy: Caused by piling or bagging very wet parchment or by dry parchment getting wet.
    • Natural: The full body, slight bitterness indicative of natural processed coffee. It is a negative characteristic of a fully washed coffee.
    • Neutral: No predominant characteristics – can make a good base for blending.
    • Onion flavour: Often bordering on foul. Associated with the use of badly polluted and stagnant water.
    • Pungent: A taste sensation of overall bitterness of brew. A prickly, stinging or piercing sensation, not necessarily unpleasant.
    • Quakery: A peanut-like taste, usually associated with pales in the roast.
    • Rioy or phenolic: A taste with medicinal odour and off-notes, slightly iodized phenolic or carbolic. Cannot be dissimulated by blending as the taste always comes through.
    • Robusta: A type of coffee produced from a tree of the botanical species Coffea canephora.
    • Rubbery: Odour and taste of rubber. Usually present in fresh Robustas.
    • Sour, sourish: Unpleasant flavour, suggestive of rotting coffee pulp. Caused by faulty factory work or improper fermentation.
    • Soluble coffee: The dried water-soluble solids derived from roasted coffee.
    • Taint: A term used to denote the presence of foreign flavours that cannot be clearly defined or placed in any category. Where the foreign flavour can be defined, it is named accordingly.
    • Thin: Lacking body.
    • Types of coffee: The two main types of coffee traded internationally are Arabica and Robusta. Excelsa and Liberica coffees are also produced commercially, but in much smaller quantities.
    • Unclean: A coffee that has an undefined, unclean taste.
    • Winey: A fruity taste similar to fresh wine. Not necessarily unpleasant when the taste is in the background.
    • Woody: A coarse common flavour peculiar to old crop coffee. Coffee stored at low altitudes with high temperatures and humidity tends to become woody rather quickly. All coffees become woody if stored too long.

    D

    Delivery

    Most futures transactions do not result in physical delivery of the commodity. Depending on their strategy, futures traders usually make conscious decisions either to avoid or accomplish delivery. That is, they either make an offsetting transaction before delivery, thereby avoiding physical coffee being tendered to them; or they consciously force the exchange to deliver (tender) physical coffee by allowing the contract to fall due. Delivery must be completed between the first and the last trading days of the delivery month, although the exact terms vary from one market to the other.

    E

    Electronic trading

    All participants can view all bids and offers. The computer system matches equivalent bids and offers without human intervention. Once the orders are matched through the system, the negotiation is concluded and the orders are registered with the clearing house. Thereafter, buyer and seller are responsible only to the clearing house. In this way, the clearing house is a party to every transaction made by both buyers and sellers.

     

    Exportable production

    Exportable production is total annual production less domestic consumption in producing countries. Availability for export is equivalent to the carry-over stocks from the previous year plus exportable production of the current year. Any difference between exportable production and actual exports (surplus or shortfall) results in an adjustment up or down of the carry-over stocks to the following year.

     

    Exportable supply

    Exportable supply is defined as supply minus domestic consumption and an amount deemed to be required for working stocks.

    F

    Financing margin

    Calls on open contracts can make using futures markets very expensive for producers and exporters, partly because variation margins are always paid in cash. This does not apply to trading deposits, which can be covered by securities such as bank guarantees and treasury bills.

     

    Fixed price day order

    The broker is instructed to buy or sell a given number of lots (contracts) for a particular month at a set price, for instance, two lots of coffee for December at $1.70/lb. The contract must be completed on the same day the order is given. If possible, the broker will buy (sell) at a lower (higher) price, but never at a higher (lower) price. This ensures that the client will get the desired price if a contract is made, though there is a risk that no contract will be made if the floor trader cannot execute the order on that day.

     

    Fixed price, open order

    A fixed price, open order is where the instructions stand for an indefinite period of time until the order is satisfied or cancelled by the client. This type of order is popularly known as "good until cancelled".

     

    Futures

    Futures contracts are standardized in that all terms are given, except the exact date of delivery, the names of the seller and buyer, and the price. The market rules are legally enforceable contract terms and therefore cannot be substantially altered during the period of the contract. Every futures contract specifies the quantity, quality and condition of the commodity upon delivery; the steps to be taken in the event of default in delivery; and the terms of final payment.

     

    Futures price

    Futures markets provide a public forum to enable producers, roasters, traders and speculators to exchange offers and bids until a price is reached that balances the day’s supply and demand. Only a negligible proportion of the physical coffee trade actually moves through exchange markets. The futures price is intended to reflect current and prospective supply and demand conditions.

    G

    Global coffee supply

    Global coffee supply = world production in that year + opening stocks in producing countries + opening stocks in importing countries, also called inventories.

    • Ambers: Smooth, yellowish beans caused by iron deficiency and/or a high pH in the soil.
    • Antestia-damaged: Beans damaged by the Antestia bug, resulting in black depressions on the bean, which is often shrivelled.
    • Black beans: Caused by attacks by pest diseases, carbohydrate deficiency in the beans due to poor cultural practices and insufficient water during ripening, overripe cherries picked up off the ground, immature beans affected by faulty drying, beans/cherries subject to overfermentation by moulds, yeasts and subsequent drying, poor drying or rewetting. Blacks are often taken as the yardstick for rating a defect count.
    • Black-green bean: High temperatures affect immature beans, causing chemical transformation of the silverskin, which becomes dark or black-green.
    • Bleached beans: Colourless beans, often caused by drying too rapidly or overdrying. Also known as soapy and faded beans, usually associated with mechanical drying.
    • Blotchy beans: The result of uneven drying.
    • Broken, chipped and cut beans: Pulper-nipped beans during the wet-milling process.
    • Brown beans: Brown in colour. May be caused by faulty fermentation, improper washing or overdrying (see also ‘foxy’). Prolonged slow drying, frost damage or dieback on trees may also cause brown beans.
    • Coffee berry borer defect beans: Beans partially eaten away by an insect (Hypoththenemus) that bores galleries through the bean.
    • Coated beans: Beans to which the silverskin adheres. Caused by drought, overbearing or harvesting of unripe cherries.
    • Crushed beans: Pulper-damaged beans, which often split and fade. Also caused by manual pounding of dry cherry to separate beans from husk (pilonnage in French).
    • Dieback: Stunted growth, withering of new branches, necrosis of leaves, dryness of inflorescences and the death of one or more branches, caused by low carbohydrate reserves related to heavy cropping and other conditions.
    • Ears: Part of a broken elephant bean.
    • Earthy beans: Smell of earth, caused by collecting beans fallen on bare ground. Other causes may include drying on earthen/compacted dirt patios.
    • Elephant beans: A generic aberration resulting in two beans being joined together – usually deformed and likely to break up during processing/roasting (see also ‘ears’).
    • Faded beans: Beans from old crop or dried too rapidly.
    • Flaky beans: Usually very thin, light and ragged (see also ‘drought-affected’, ‘lights’ and ‘ragged’). Growth defect arising from nutritional deficiency.
    • Floaters: Underdeveloped, hollow beans – the fruit will float in water and is ‘floated off’ during wet processing. In washed coffee, a sign of inadequate grading during wet processing.
    • Foxy beans: Rust or reddish coloured, a result either of harvesting overripe, sometimes yellow, cherries, delays in pulping, improper fermentation or faulty washing.
    • Green, water-damaged: Self-explanatory – usually brought about by dry parchment or hulled coffee becoming wet.
    • Hail-damaged beans: These show blackish circular marks on the oval side of the bean.
    • Light bean: Bean whose weight is below normal – caused by drought or dieback.
    • Mottled beans: Are blotched, spotty or stained. Usually due to faulty drying or rewetting after drying.
    • Mouldy beans: Show mould growth visible by the naked eye or evidence of mould attack.
    • Musty beans: Partial or wholly discoloured, whitish fur-like colour and texture.
    • Overripe: Brownish-yellow appearance.
    • Peaberry: A single oblong or ovaloid roundish bean – a result of only one bean developing in a cherry instead of the usual two.
    • Pulper-nipped: Bean damaged by incorrect setting of the pulping knives – can become discoloured through oxidation during fermentation and may produce off-flavours.
    • Quakers: Blighted and undeveloped beans – show up as roast defects.
    • Ragged: This description often refers to drought-affected beans – harvesting a mixture of mature and immature cherries results in beans having a ragged appearance.
    • Stinkers: Beans that are overfermented because of improper cleaning of pulpers, fermenting tanks and washing channels.
    • Three-cornered beans: Triangular or wedge-shaped coffee beans. Genetic cause resulting from the development of three seeds in the cherry.
    • White bean: Discoloration of the surface due to bacteria of the Coccus genus during transport or storage. Generally associated with coffee from old crops. Also caused by rewetting after drying. Moisture absorbing during storage or transportation leading to deterioration by enzymatic activity.
    • Withered: Light and shrivelled beans caused by drought or poor husbandry.

    L

    Living Income

    'Living Income is the net annual income required for a household in a particular place to afford a decent standard of living for all members of that household.’

    Living Income Community of Practice, 2019

     

    Long and short

    A trader who buys a futures contract and has no other position on the exchange is long. If this purchase is not eventually offset by an equivalent sale of futures, then the buyer will have to take delivery of the commodity. Alternatively, a trader who sells a futures contract without an offsetting purchase of futures is said to be short.

    M

    Market on opening or on close order

    This additional information when placing an order with the broker will assure that the order is placed, before the market opens (market on opening) or at the closing of that same trading day (market on close). Orders have to queue at the opening and closing of the market and are therefore not all filled at the same price, particularly when trading volume is high in an active market. If one stipulates a price, then an order may not be executed if that price is not reached, or is exceeded.

     

    Market order

    A market order is an order that gives brokers more flexibility, allowing them to make a contract for the best possible price available at the time.

    O

    Offsetting transactions

    Traders who have taken either position in the market have two ways of liquidating it. The first involves the actual delivery or receipt of goods. Most traders choose the second option, which is to cancel an obligation to buy or sell by carrying out a reverse operation, called an offsetting transaction. By buying a matching contract, a futures trader in a short position will be released from the obligation to deliver. Similarly, a trader who is long can offset outstanding purchases by selling.

     

    Open interest

    This is the total of the clearing house’s long or short positions (which are always equal) outstanding at a given moment. At the end of each trading day, the clearing house assumes one side of all open contracts. If a trader has taken a long position, the clearing house takes the short position, and vice versa. The clearing house guarantees the performance of both sides of all open contracts to its members and each trader deals only with the clearing house after initiating a position.

     

    Open position

    This is the number of contracts registered by the clearing house that are not offset by other contracts or tenders when the contracts become spot (the nearby contract month). The clearing house reports only the total of all operator positions, rather than that of any one member, which is left to the broker to report.

     

    Organic agriculture

    Organic agriculture is a production system that sustains the health of soils, ecosystems and people. It combines tradition, innovation and science to benefit the shared environment and promote fair relationships and a good quality of life for all involved.

    IFOAM - Organics International

    P

    Paradox, Coffee

    The coffee paradox is the stark divide between decreasing and unstable prices for farmers and increasing prices for consumers.

    Daviron and Ponte, 2005

    R

    • Brilliant, bright: Extremely bright, oily surface generally caused by roasting to high temperatures when coating the entire bean. Usually caused by oils travelling to the surface of the bean after storing for several days when oil is spotty.
    • Brokens: Self-explanatory. Presence of small elephant beans that always break apart during roasting or due to the mechanical actions of roasting.
    • Burned: Over-roasted.
    • Centre cut: The dividing line of silverskin running through the flat side of the bean.
    • Chaff: Silverskin that peels off during roasting.
    • Dullish, dull: Lacking lustre. Associated with processing and age.
    • Mailliard Effect: Name of the chemical transformation that takes place in the beans during roasting. A non-enzymatic browning reaction caused when an amino acid reacts with a reducing sugar/monosaccharide.
    • Open: An open bean is one in which the centre cut is inclined to split on roasting. Some open beans are derived from lighter coffee. Of these, some can be eliminated in the washing channel, and some by air or gravity separators at the mill. However, all open beans are not necessarily light coffee. Also typical of coffee grown at lower altitudes.
    • Ordinary: Self-explanatory.
    • Pales and semi-pales: Yellow in colour, they may release a bad odour when crushed or ground. Pales come from immature or drought-affected coffee and are beans with little or no grain. These can largely be eliminated in the washing channel. Amber beans and green parchment beans also frequently cause pales in the roast.
    • Ragged or deformed: Ugly, misshapen beans, semi-elephants and drought-affected coffee.
    • Softs: Good-quality coffee is often spoiled by the presence of softs. Soft beans have no grain, and are often of a dull, yellowish colour. Coated raw beans often produce softs to pales.

    S

    Stop-loss order

    A stop-loss order is triggered as soon as a predetermined price level is reached and herewith limits the client’s losses relative to the level at which the order is executed.

     

    Supply

    Supply is generally defined as the sum of production in a given coffee year plus stocks carried over from the previous year. 

    Global coffee supply = world production in that year + opening stocks in producing countries + opening stocks in importing countries, also called inventories.

    Exportable supply is defined as supply minus domestic consumption and an amount deemed to be required for working stocks.

     

    Sustainability

    Sustainability is a holistic approach that considers ecological, social and economic dimensions, recognizing that all must be considered together to find lasting prosperity.

    Sustainability consists of “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” This is not a new concept. The definition builds upon the 1987 definition of "Sustainable development” proposed in Our Common Future, also known as the Brundtland Report, that was published by the World Commission on Environment and Development.

    T

    Trading deposits (margins)

    Trading deposits (margins) are required upon initiation of a futures trade. Further deposits may be required daily to reflect changes in the price of the contracts, when the market moves against a trader’s position. If additional funds are required to restore the original margin (usually 5%–10% of the contract’s nominal value), then variation margins must be paid in unless adequate security was deposited when the account was established. Conversely, if the futures price move is favourable to the trader, the gains transferred into the account above the margin requirement level become immediately available to the trader.

    V

    Verification

    Verification enforces certain agreed criteria and practices, but does not use a certificate to market the claim to the final consumer. Instead, company standards or internal supply chain standards rely on verification processes that are not as rigid and costly as a certification process that has to be conducted by appointed auditors. Local third-party actors such as NGOs – or even second-party actors – may be asked to verify adherence to specific criteria. The timing between repeat verifications may be significantly less onerous than an annual recertification process.

    W

    Working stocks

    Working stocks are not precisely defined. They relate to the volume of coffee required to maintain a steady and planned flow of exports to the market. They are generally perceived as the amount of coffee in the pipeline in an exporting country at any one time. Harvesting and export patterns vary from country to country. As a result, working stocks are not defined as a fixed percentage or proportion of a country’s production or export capacity, but rather as an individual amount unique to every country. In many respects, the calculation of working stocks is arbitrary, but it is generally based on historical data for each country.