Why does the ICE Arabica Contract Only Accept Washed Coffee?
One common question that we hear from our clients is why Brazilian and Ethiopian naturals are excluded from the ICE Arabica contract.
It’s a fair question. Afterall, Brazil accounts for most of the world’s Arabica production, and Ethiopia is the largest producer of coffee in Africa. Therefore, it stands to reason that accepting both washed and naturals would expand the supply of coffees available for certification and make for a less vulnerable contract.
When we look at the shortage in certified inventory of the last few years, a larger and more robust supply certainly seems appealing.
However, with this theoretical expansion of supply comes a cost: an expansion of potential quality. Moreover, the standardized nature of the contract tends to lead to an unintended consequence: a race to the bottom of quality.
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This would dramatically shift the purpose of the exchange from being a benchmark for high-quality washed Arabica coffee to a benchmark for low-quality coffee.
In this article, we’ll examine this matter. We’ll look at what the “C” contract is actually designed for, why adding naturals would drag it toward the bottom, and what that would do to volatility, hedging and the certified stocks themselves. We’ll also look at how ICE has widened the pool over the years (and why even that has been controversial).
The “C” Is a Washed Arabica Benchmark
The first thing to understand is that the “C” contract was never meant to represent arabica as a whole. It is a washed (or “mild”) arabica contract, historically built around Central American coffees (hence the "c" in C contract), and it serves as the benchmark for generally high-quality arabica.
Over time, ICE has added other origins to the contract, but always on one condition: the coffee has to be comparable to that same core quality. Wherever an origin isn’t quite at par, it is brought back to the benchmark through a differential (a premium or discount).
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So, all the deliverable origins are different versions of the same coffee: a clean, washed arabica. Stoppers know what they're getting, and any quality imbalances are mitigated by standard discounts and premiums.
Natural coffee is essentially a different category of coffee. If the “C” accepted Brazilian and Ethiopian naturals to certified stocks, it would change from a washed-milds contract into an omnibus arabica contract, and that isn’t what it was built to do.
Allowing the delivery of naturals would add additional uncertainties to stoppers of the futures who would not know whether they’re going to get an Ethiopian natural or a washed Costa Rican coffee. Whether they would receive a low-acidity Brazilian natural or a bright, washed Kenyan coffee.
The Race to the Bottom
Under the “C,” the seller chooses what to deliver and receives the same futures price for it (plus or minus the fixed origin differential), whatever the coffee, as long as it passes grading. So, there is always an incentive to deliver the lowest-quality, cheapest coffee that qualifies. No one delivers a premium coffee when a cheaper one earns the same.
To some degree, this is true in every trade. The difference in the physical market is that buyers can specify a grade, such as a Strictly Soft Fine Cup (SSFC) Brazil or a Strictly High Grown (SHG) Central American. Each grade raises the bar, and that is how buyers who want higher quality are able to get it. The “C” has a single standard, so whatever sits at the bottom of the deliverable range tends to set the tone.
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History shows this clearly. For years, Honduras, the lowest-quality of the Central American origins, dominated the exchange. When Brazil was added, Brazil then became the dominant origin.
Naturals would take this much further, because natural supply is highly concentrated.
Washed arabica comes from dozens of origins across Central America, South America, East Africa and Asia, so supply is spread out. One origin can make up a large share of the certs for a while, but none is big enough to dominate permanently. As prices shift between origins, the certified pool rotates and stays diversified over time, so no single origin sets the price.
Naturals are the opposite. Over 90% of the world’s natural arabica comes from Brazil and Ethiopia, mostly Brazil, and Brazilian naturals are typically among the cheapest arabica available in volume. So, if ICE accepted all arabica, Brazilian naturals would have the volume to flood the certs.
The Contract Would be a Worse Hedge
Quality also changes how prices behave. It isn’t always the case, but in general, large-supply, lower-grade coffees are less volatile in price. Demand for them is weaker, they are easier to produce, and they are less vulnerable to supply shocks. Higher-quality coffees need more precise, and more precarious, growing conditions and are in high demand, so their prices are more volatile.
If the “C” became anchored to lower-grade coffee, it would become less volatile, and a less volatile contract is less useful as a hedging instrument. The price moves that matter to most of the market would no longer show up in the futures. They would show up in the differentials instead, which would become much more volatile.
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Take a Colombian coffee whose flat price fluctuates between 200 and 300 c/lb. If the “C” captures 85% of that 100-cent move, the differential only has to absorb the remainder and varies within a range of about 15 cents. If the “C” only captures 50% of the move, the differential could swing by as much as 50 cents.
That would dilute the overall value of the underlying physical asset and make the C contract a less effective hedge for most of the market. A Colombian exporter or Kenyan cooperative hedging washed coffee would face far more basis risk, as they would be hedging against a different type of coffee.
Certs Need to Be Usable and Transferable
There’s also the question of what the certified stocks are actually used for.
First, the certs need to be usable. Certified stocks are largely past-crop washed coffees from Central America. In practice, they serve as a replacement for Brazil in roasters’ blends. That is a very large and common need for roasters, and it makes the certs a real benchmark for demand. If the certs became past-crop naturals, they would effectively be an undergrade, low-grade replacement. That is a much smaller, more niche need, and the futures price would reflect that.
Second, the certs need to be transferable. If naturals were deliverable, one of two things would happen. Either the certified pool would hold a wide variety of coffees with a large spread in value, from around +10 c/lb for Colombians to perhaps −50 c/lb for naturals (unlikely), or it would end up being almost entirely naturals (likely).
If it’s a mix, each cert becomes less useful and harder to plan around, and only the largest trade houses could manage that (which is already somewhat the case). If it’s all naturals, the “C” has simply become a naturals contract.
If anything, an Arabica-focused exchange accepting both natural and washed coffees could be a useful addition. Brazil already has one: BM&F, now part of B3. However, its Arabica futures contract is not exclusive to naturals and does not isolate natural-coffee volatility from the broader Arabica market.
The Pool Has Widened, But Carefully (and Not Without Criticism)
With all being said, there have been efforts to widen the deliverable pool, which used to be much tighter. Each step, though, has kept to the same rule: new coffees must be comparable in quality and brought back to the benchmark through differentials.
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Two milestones are worth highlighting:
Brazil became deliverable in 2013, but only as semi-washed coffee, which is processed closer to a washed coffee than a natural.
Vietnamese washed arabica becomes deliverable from 2027, adding another washed origin to the pool.
Even this careful widening has been controversial. One of the biggest criticisms of admitting semi-washed Brazil's is that it opens a back door: in practice, it becomes possible to blend natural Brazil's into coffee tendered as semi-washed. Critics argue this dilutes the quality, and therefore the value of the physical coffee underlying the contract.
That criticism shows the tension at the heart of our initial question: every expansion makes the contract more representative of global supply, but it also risks diluting the very thing that makes it useful as a benchmark.
Conclusions
Ironically, expanding the contract to include naturals would narrow it to only naturals. The race to the bottom would push out the higher-quality coffees, leaving a contract that is naturals in all but name. That would also reduce the contract’s volatility, making it less useful to hedgers and speculators alike, and that would in turn reduce open interest and volume. For now, the more niche BMF market in Brazil keeps natural-coffee volatility separate and provides a way to use naturals in futures contracts.
Ultimately, the “C” excludes naturals because it’s designed to be a reliable benchmark for washed arabica, not an average of all arabica. Washed coffee draws on many origins and offers consistent quality that buyers can accept sight unseen, two qualities that are central to making the “C” work.
That doesn’t mean naturals are left out of price discovery. They’re priced through differentials against the “C”, which adjust in real time to crop size and quality. As we discussed in Why There’s Only One Arabica Coffee Exchange?, the commodity market benefits from having a single benchmark, and the “C” does that job well by staying focused on washed coffees.
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