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Incoterms and contract structures

This topic explains the basics of Incoterms (international commercial terms) and contract structures in green coffee trade, outlining how responsibilities, risks, and costs are divided between buyers and sellers.

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Incoterms and contract structures

What Are Incoterms?

  • Incoterms = standardized international trade terms defined by the International Chamber of Commerce (ICC).
  • They clarify which party (buyer or seller) is responsible for costs, risk, and logistics at each stage of shipment.

Common Incoterms in Coffee Trade

  • FOB (Free on Board): Seller delivers coffee to port of export; buyer covers shipping, insurance, and import.
  • CIF (Cost, Insurance, Freight): Seller covers cost, insurance, and freight to destination port; buyer covers import duties.
  • EXW (Ex Works): Buyer responsible from seller’s warehouse onward.
  • DDP (Delivered Duty Paid): Seller covers all costs until delivery at buyer’s premises.
  • FCA (Free Carrier): Seller delivers coffee to a carrier chosen by buyer at an agreed location.

Why Incoterms Matter

  • Prevents disputes by defining who pays for what.
  • Establishes risk transfer point (e.g., FOB = risk shifts once goods are on board).
  • Provides global consistency in trade contracts.

Coffee Contract Structures

Spot Contracts

  • One-time purchase for immediate delivery.
  • Based on current market price.

Forward Contracts

  • Agreement to buy/sell at a future date, often at fixed or differential price.
  • Reduces risk of market volatility.

Differential Contracts

  • Price set as a differential to a market benchmark (e.g., ICE futures).
  • Common in commercial coffee trade.

Direct Trade Agreements

  • Buyer and producer negotiate directly.
  • Often includes quality, sustainability, and relationship-based terms.

Key Clauses in Coffee Contracts

  • Quantity & quality specs: Screen size, defects, SCA score.
  • Shipment period: Export window defined.
  • Payment terms: Often via letters of credit or wire transfer.
  • Dispute resolution: Arbitration procedures (e.g., via Green Coffee Association).

Benefits of Clear Contracts

  • Protects both buyer and seller from misunderstandings.
  • Provides financial security and accountability.
  • Enhances traceability and trust.

Lasting Importance

Incoterms and contract structures are the foundation of international coffee trade. By defining responsibilities, costs, and risks clearly, they ensure smooth logistics and fair transactions, protecting both producers and buyers in a volatile market.

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Coffee Basics Nerds

Written by : Coffee Basics Nerds

Expert coffee historians and brewing enthusiasts dedicated to sharing the rich heritage and techniques behind your perfect cup of coffee.

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