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Tenderable Parity Analysis Update:

Exploring Economic Viability of Semi-Washed Brazilian Coffee and Blend Variations

In a previous paper (Tenderable Parity Analysis: Exploring Economic Viability of Semi-Washed Brazilian Coffee Blends) we explored the viability of tendering new coffees from Brazil to the exchange and concluded that differential prices were too far away to make it economical to tender. Today, with weakened differentials and new coffees appearing on the exchange for certification, we have re-examined tenderable parity. Our conclusion remains that current prices do not support certification of new, semi-washed coffees, however with very aggressive blending of non-certifiable coffees we could just barely be profitable.

While only semi-washed Brazilian coffees are tenderable to the Intercontinental Exchange (ICE), it is common knowledge that it is difficult to distinguish when small amounts of natural coffees have been blended in. Since natural coffees are sold at a significant discount to semi-washed coffees, there is a strong economic incentive to try and blend these coffees with semi-washed and receive a certification. On top of this, it is also possible that older, past-crop coffees (even cheaper) could also be blended in with fresh crop semi-washed to make it even cheaper.

The primary way that ICE prevents excessive amounts of non-certifiable natural or past crop coffee from being submitted as semi-washed is through sensory analysis: visual inspection and human tasting (“cupping”). Although the human graders who perform this function are extremely experienced and must pass rigorous testing, the economic incentives push the boundaries of what is acceptable and not acceptable.

Our recent analysis of the tenderable parity rates of various types of coffee find that Brazilian coffees are not economically viable for any officially ICE recognized semi-washed coffee. Even most of the natural coffees are not economical to certify, however, some the lower quality naturals would be economically viable to certify. That is, they could be certified and sold at a small profit.

However, in order to make a blend that would be profitable, it would require an extremely aggressive adulteration of the tenderable quality with non-tenderable qualities and even then, it would only just barely be profitable. In Blend 4 in the table above, we can see that we are using 85% of a cheap, natural coffee and only 15% of a tenderable semi-washed coffee. It is also possible that a past-crop natural coffee could be used in a hypothetical blend as well, as some of the natural flavor could actually mellow a bit in a past-crop coffee.

Based on the recent pass rates of only 22% from “new” coffees being submitted to the exchange (“new” as in, not-previously-certified coffees), it seems very likely that these coffees were blended with non-certifiable coffees to try and bring the price down sufficiently to make them economical to grade.

Going forward, the easiest solution to the low certified stocks will be if differentials come down sufficiently to make official semi-washed coffee tenderable. However, in the meantime we should look at the current coffees being submitted as something of a probing process. Trade houses with the means to certify coffee are likely experimenting with blends to see what can pass grading. If a blend can be found that is both economical and of sufficient quality that it can pass grading, then we should expect to see many more of these coffees submitted to the board in the next few weeks and months.

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