CME Europe Cocoa Futures...Introduction CME Europe’s cocoa futures contracts offers answers to industry concerns over currency risk, correlation with the physical market and even

How the world advances

CME Europe Cocoa Futures The Future of Cocoa Trading

CME Europe’s Cocoa Futures Answer the Industry’s Concerns

http://www.cmegroup.com

ContentsCME Europe’s Cocoa Futures Seeks to Answer the Industry’s Concerns .......................... 4

CME Europe’s Cocoa Improving Prospects for Cocoa Price Convergence ........................ 8

CME Europe Cocoa Contract Reduces Potential Conflicts of Interest ............................. 12

How CME Europe’s Unique In-house Depository Can Save You Money and Time .......... .15

CME Europe’s Cocoa Quality Analysis ..................................................................................... 19

CME Europe’s Cocoa Quality Analysis – Independent Sampling and Grading aligned

to the underlying Physical Market to provide a better hedging medium ........................ 22

IntroductionCME Europe’s cocoa futures contracts offers answers to industry concerns over currency risk, correlation with the physical market and even sustainability with the prospect of improved price convergence.

On.January.27,.2015.CME.Europe.announced.the.launch.of.two.cocoa.futures.contracts.

to.be.cleared.in.London..First.a.Euro-denominated.cocoa.futures.contract.with.delivery.

in.certain.northern.European.ports.and.second,.a.cash-settled.US.Dollar.denominated.

contract.to.be.settled.on.the.basis.of.the.close.of.cocoa.in.New.York..Trading.in.these.

contracts,.which.have.been.drafted.in.response.to.consultation.with.the.international.cocoa.

trade.and.industry,.will.begin.at.the.end.of.March.2015..

In.designing.the.Euro-denominated.cocoa.futures.contract,.CME.Europe.aimed.to.address.

the.main.causes.of.conflict.in.the.cocoa.market.and.so.offer.participants.not.only.a.choice.of.

where.to.place.their.hedges.but.also.a.relevant.and.effective.hedging.and.pricing.mechanism.

Futures.markets.exist.to.aid.price.discovery,.where.the.price.of.a.transaction.between.buyer.

and.seller.in.a.competitive.market.place.signals.the.value.of.the.goods.concerned,.and.to.

help.participants.take.protection.against.their.price.risk.exposure,.where.the.gain.or.loss.

resulting.from.a.hedged.position.should.offset.the.gain.or.loss.of.the.physical.position..This.

is.true.providing,.and.here.is.the.essence.of.a.delivered.futures.contract,.that.the.futures.

price.converges.with.the.cash.price.at.expiration..And.here,.changing.trends.have.caused.

some.concerns.

4 CME EUROPE COCOA FUTURES

CME Europe’s Cocoa Futures Seeks to Answer the Industry’s ConcernsFirst, denominationHistorically,.the.relationship.between.Great.Britain.and.its.cocoa.producing.colonies.of.

Ghana.and.Nigeria.resulted.in.a.sterling.based.European.cocoa.market..Times.have.changed.

and.now.the.Euro.is.both.the.accounting.currency.for.most.of.the.cocoa.industry.in.Europe.

and.the.currency.base.for.those.exporting.cocoa.from.countries.using.the.CFA.Franc,.

significantly.key.growers.Cote.d’Ivoire.and.Cameroon,.which.have.seen.their.share.of.world.

cocoa.production.grow.from.15%.in.the.period.of.1960/65.to.45%.in.2013/14,.according.to.

International.Cocoa.Organisation.(ICCO).figures..Nearly.38%.of.the.world’s.cocoa.beans.are.

ground.in.Europe,.according.to.ICCO.data,.whilst.the.major.European.processors.have.also.

increased.the.amount.of.cocoa.they.grind.at.origin..

Participants.in.both.regions.might.expect.to.see.some.alleviation.of.currency.risk.with.a.

Euro-based.contract..CME.Europe.will.not.offer.a.Sterling.denominated.cocoa.contract.

which.would.only.divide.liquidity.in.the.European-based.market..

On.the.subject.of.currency,.CME.Europe.will.list.a.cash-settled.US.Dollar.cocoa.contract,.

regulated.and.cleared.in.London..This.will.afford.those.who.wish.to.trade.the.arbitrage.

between.London.and.New.York.cocoa,.(which.accounts.for.a.significant.amount.of.

business,).a.cheaper.alternative,.as.there.will.be.margin.offsets.between.the.two.CME.

Europe.cocoa.contracts.both.of.which.will.be.cleared.by.CME.Clearing.Europe.in.London..

This.is.a.good.example.of.how.CME.Europe.will.offer.the.market.a.relevant.and.cost.efficient.

alternative.method.of.trading..

Physical Market Terms Over.the.past.few.years,.complaints.over.excessive.speculation,.different.sampling.and.

grading.procedures.compared.with.the.physical.market,.disincentives.to.deliver.bulk.

cocoa.and.with.regard.to.practices.in.some.registered.warehouses.have.numbered.among.

the.grievances.of.those.participants.trying.to.hedge.their.physical.cocoa.positions..In.

response,.CME.Europe.made.use.of.the.physical.contract.terms.in.drafting.the.delivery.

requirements.in.the.futures.contract,.the.most.relevant.of.which.are.those.published.

by.The.Federation.of.Cocoa.Commerce.Ltd..(FCC),.of.which.CME.Group.is.a.member..

The.intention.is.to.offer.physical.market.participants.the.ability.to.hedge.their.physical.

positions.on.an.exchange.where.the.delivery.terms.are.based.on.those.used.in.the.

physical.contracts.and.there.is.therefore.likely.to.be.price.convergence.between.futures.

and.physical.at.the.time.of.delivery.

5CME EUROPE COCOA FUTURES

Overview of the contractWhile.currency.and.compatibility.with.the.physical.market.terms.are.important,.there.are.

other.deep.underlying.issues.faced.by.the.cocoa.community.over.the.hedging.medium..

CME.Europe.has.had.the.opportunity.to.draft.a.contract.and.procedures.from.the.ground.

up.and.without.the.legacy.of.an.existing.contract..

In.designing.the.contract,.CME.Europe’s.approach.put.those.who.need.the.contract.for.

hedging.at.the.centre.of.the.whole.process.and.in.particular.with.regards.to.the.delivery.

requirements,.in.other.words,.the.needs.of.the.receiver..

These.differences.will.be.explored.in.more.depth.in.the.forthcoming.series.of.articles,.a.

brief.summary.of.which.is.made.here..

Price ConvergenceTo.start.with,.good.price.convergence.relies.in.part.on.an.efficient.delivery.system;.the.

location.of.the.cocoa;.and.the.origin,.age.and.grading.allowances..Without.these.the.

futures.offer.little.relevance.to.the.physical.market..

As.such,.CME.Europe.has.set.the.basis.of.delivery.of.warehoused.cocoa.to.a.‘delivered.

out’.contract,.whereby.the.party.storing.the.cocoa,.not.the.receiver,.pre-pays.the.delivery.

out.charges.to.the.warehousekeeper..On.expiration.the.receiver.has.no.choice.in.what.

he.is.allocated;.he.has.to.accept.the.cocoa.irrespective.of.origin,.age,.where.and.with.

whom.it.is.stored,.which.naturally.includes.the.rates.that.the.warehousekeeper.storing.

the.cocoa.will.charge..Over.the.past.few.years.there.have.been.long.queues.for.loading.

out.and.high.storage.charges.(even.for.beans.scheduled.to.be.moved).at.some.registered.

European.coffee.and.cocoa.warehouses,.which.impeded.a.receiver’s.ability.to.access.

beans.and.increased.his.costs..

Conflicts of InterestBy.making.the.basis.of.the.delivery.process.‘delivered.out,’.CME.Europe.anticipates.the.

market.will.organise.loading.out.rates.and.storage.costs.in.a.market-led.way,.avoiding.

the.need.for.the.Exchange.to.set.minimum.load.rates.and.maximum.rental.rates.at.its.

registered.warehouses..This,.and.other.measures.to.be.explored.in.another.article,.should.

reduce.conflicts.of.interest.between.parties.involved.in.the.current.delivery.process..

DepositoryThe.CME.Europe.cocoa.futures.contract.includes.a.novel.process.for.electronically.

lodging.physical.warehouse.warrants.in.”in-house”.depository,.which.will.result.in.

significant.savings.for.the.market.participants.


Sampling and Grading ProceduresImproved.sampling.procedures.that.reduce.both.costs.to.the.owner.and.damage.to.

the.cocoa.and.bags,.together.with.the.more.relevant.grading.process,.overseen.by.the.

Exchange,.will.help.align.the.futures.prices.with.those.in.the.physicals..

Flexible use of cocoa stored in bulkThe.FCC.physical.contract.calls.for.shipment.of.cocoa.in.new.jute.bags.or.in.bulk..The.

amount.of.cocoa.shipped.in.bulk.has.grown.since.the.first.cargo.of.bulk.in.the.hold.

docked.in.Europe.in.1995..Shipment.this.way.reduces.handling.costs.and.can.be.up.to.

one.third.cheaper.than.conventional.bagged.shipments..It.is.especially.increasingly.

popular.from.Côte.d’Ivoire,.the.world’s.biggest.cocoa.producer,.and.amongst.the.large.

processors.in.Europe..

Discounts.for.bulk.shipments.are.a.disincentive.to.tender.bulk.cocoa.leading.to.a.

disconnect.with.the.physical.market.and.instead,.CME.Europe’s.contract.includes.flexible.

use.of.bulk.deliveries.to.help.the.deliverer.prepare.bulk.cocoa.whilst.also.incorporating.

appropriate.safeguards.for.those.receiving.cocoa.

Certification and traceabilityThe.specifications.of.the.CME.Europe.cocoa.contract.recognise.the.need.by.end-users.

of.beans.to.value.certified.cocoa.and.the.associated.requirement.of.traceability.of.all.

stock..Some.of.the.biggest.traders.and.processors,.supported.by.the.World.Bank.via.its.

IFC.investment.arm,.are.lobbyists.for.certification.to.ensure.the.identity.of.a.product.from.

a.particular.origin,.to.convey.an.assurance.of.quality.and.distinctiveness.and.to.enable.

farmers.to.receive.a.better.price.

Some.of.these.items.are.interconnected,.for.example.having.the.ability.to.offer.a.

premium.for.certified.cocoa.is.meaningless.if.traceability.is.not.placed.at.the.heart.of.the.

process.of.identification.of.the.cocoa..Likewise,.the.identification.has.to.be.clear.to.the.

owner.and.the.specific.details.will.be.included.on.the.warehouse.warrant.to.ensure.clarity.

of.ownership..Similarly.the.basis.of.the.contract.could.not.be.meaningfully.changed.

without.the.CME.Europe.having.reached.an.agreement.with.the.warehousekeepers.over.

the.delivery.out.of.the.cocoa,.which.in.turn.has.meant.the.necessary.removal.of.conflicts.

of.interest.between.parties..

Where.possible.the.CME.Europe.deliverable.cocoa.contract.has.been.designed.to.

correlate.with.the.current.physical.market.and.to.address.the.issues.in.a.market-led.

way,.by.reducing.conflicts.of.interest.while.retaining.the.integrity.of.the.process.via.the.

appropriate.regulatory.control.and.exchange.oversight..The.following.series.of.articles.will.

explore.the.choices.CME.Europe.made.in.drafting.the.contract.and.demonstrate.why.it.

best.suits.the.current.environment.


CME Europe’s Cocoa Improving Prospects for Cocoa Price ConvergenceCME EUROPE’S COCOA FUTURES IMPROVE PROSPECTS FOR PRICE

CONVERGENCE WITH THE UNDERLYING MARKET.

Cocoa.futures.are.not.primarily.used.to.secure.a.supply.of.cocoa.beans,.but.rather.to.

offset.the.risk.of.adverse.price.movements.for.those.with.exposure.to.cocoa.beans.

The.gain.or.loss.from.the.futures.hedge.should.offset.the.gain.or.loss.from.the.physical.

transaction,.providing.the.environment.is.such.that.the.futures.price.converges.with.

the.cash.price.on.expiration..Convergence.of.futures.prices.with.those.of.the.underlying.

physicals.shows.the.relevance.of.the.futures.to.the.physical.

In.recent.years,.a.number.of.factors.have.led.to.complaints.over.convergence.between.

cocoa.futures.and.the.cash.price.so.in.drafting.the.new.cocoa.futures.contract,.CME.

Europe.set.out.to.create.the.conditions.wherein.the.likelihood.of.price.convergence.is.

improved..CME.Europe’s.cocoa.futures.contract.is.designed.to.track.the.underlying.cocoa.

cash.market.more.closely.than.any.other.futures.alternative.

Price.convergence.is.subject.to.many.factors,.some.of.which.are:

•. The.location.of.the.goods.and.the.relevance.of.the.location.to.the.trade

•. The.true.availability.of.the.goods

•. The.quality.of.the.goods.and.how.that.is.determined,.together.with.the..

associated.allowances

•. The.age.of.the.goods

In.essence,.good.convergence.relies.on.the.delivery.mechanism.mirroring.that.used.in.the.

physical.market;.from.location.of.the.goods,.their.sampling.and.grading,.through.to.their.

movement.out.of.the.warehouse..The.CME.cocoa.futures’.enhanced.delivery.systems.is.

designed.to.improve.the.conditions.for.convergence.between.the.futures.contract.and.

the.cash.market.offering.participants.a.more.effective.risk.management.vehicle.

The.key.points.of.the.CME.Europe.cocoa.futures.contract,.where.it.relates.to.price.

convergence,.are.detailed.below..

Location of the goodsThe.specified.delivery.locations.are.concentrated.in.northern.Europe,.at.just.three.of.

the.main.trade-relevant.ports.to.provide.a.clear.pricing.basis.for.the.contract..Physical.

delivery.will.be.made.at.exchange.registered.warehouses.in.or.nearby.to.Antwerp,.

Amsterdam.and.Hamburg.


True availability of the goodsStocks.registered.and.complying.with.Exchange.specifications.back.the.futures.contract..

There.can.be.a.disconnect.between.the.futures.and.physical.markets.when.only.a.

small.amount.of.commercially.traded.cocoa.is.truly.available.for.sale.or.delivery.at.the.

exchange,.which.may.cause.significant.price.swings..

The.CME.contract.addresses.this.in.two.ways:

Bulk deliveriesCurrently.70%.of.the.cocoa.beans.shipped.into.Europe.are.shipped.in.bulk..The.existing.

futures.contract.allows.for.delivery.of.just.one.size.of.bulk.cocoa,.1,000.tonnes,.at.a.

£20.per.tonne.discount.in.price..This,.together.with.difficulties.in.re-grading,.is.a.strong.

disincentive.to.deliver.bulk.cocoa.against.exchange.traded.positions,.which.means.that.

bulk.Exchange-registered.cocoa.currently.represents.less.than.20%.of.the.total.

The.CME.Europe.cocoa.futures.contract.provides.for.bulk.deliveries.in.five.sizes.without.

a.financial.disincentive.and.the.Exchange.has.taken.measures.to.ensure.bulk.cocoa.is.

prepared,.stored.and.sampled.in.a.sympathetic.manner.for.long.term.storage.

Delivered outUnder.the.CME.Europe.Cocoa.Futures.contract,.delivery.out.of.goods.is.free,.subject.

to.certain.conditions,.and.if.required,.will.occur.within.21.business.days.from.request.

thereby.ensuring.true.availability.

What does this mean?First,.CME.Europe.believes.that.an.improvement.of.the.environment.for.futures.price.

convergence.with.the.underlying.is.likely.by.changing.the.basis.of.delivery.of.warehoused.

cocoa.from.an.‘in.store’.system,.where.the.receiver.pays.the.delivery.out.charges,.

to.a.delivered.out.contract,.whereby.the.party.storing.the.cocoa.(so.choosing.the.

warehousekeeper).pre-pays.the.delivery.out.charges.to.the.warehousekeeper.

Second,.a.21.business.day.delivery.out.period.will.help.to.resolve.any.issues.of.long.

queues.for.delivered.beans.at.exchange.warehouses.without.recourse.to.an.exchange.led.

load.out.rate.in.terms.of.tonnage.per.day.or.per.week.

Together.these.measures.address.complaints.over.steep.charges.for.withdrawal.of.

certified.cocoa.beans.from.registered.warehouses,.high.rents.and.long.delays.for.removal.

of.beans,.which.all.translate.into.extra.costs.for.traders.and.end.users.

Long.waiting.times.at.official.commodity.exchange.warehouses,.especially.acute.and.

controversial.in.the.metals.industry.for.some.time,.have.been.highlighted.as.an.issue.in.

some.European.coffee.and.cocoa.warehouses.over.the.past.few.years.and.therefore.are.

not.considered.as.providing.true.free.availability.of.goods.


Such.a.system,.whereby.the.party.storing.the.cocoa.in.the.first.place.also.pre-pays.the.

delivery.out.charge,.means.that.there.is.no.need.for.the.Exchange.to.publish.movement.out.

or.rent.rates..Unless.specific.delivery.out.methods.are.asked.for,.charges.to.the.receiver.

are.zero.and,.because.of.that,.excessive.rents.cannot.be.applied,.otherwise.the.owner.has.

the.option.to.remove.the.stock.at.no.cost..The.market.will.regulate.the.prices.to.be.charged.

without.Exchange.intervention.

THE QUALITY OF THE GOODS, HOW THAT IS DETERMINED AND

ASSOCIATED ALLOWANCES

SamplingSampling.and.grading.go.hand.in.hand;.the.grader.can.only.grade.what.has.been.drawn.

so.if.a.sample.has.not.been.drawn.well.it.will.not.be.a.true.representation.of.the.cocoa.

parcel..CME.Europe.has.introduced.a.cocoa.bean.sampling.process.which.is.in.line.with.

physical.market.procedures.and.which.is.always.overseen.by.an.independent.supervisor.

appointed.by.the.exchange.to.ensure.contract.integrity.

The.new.CME.Europe.procedure.for.sampling.bagged.and.bulk.lots.will.be.explained.in.

another.article..For.the.purposes.of.price.convergence,.the.market.needs.to.be.certain.

that.a.sample.truly.reflects.the.cocoa.it.represents.

GradingUnder.the.CME.Europe.cocoa.futures.contract,.grading.of.cocoa.beans.is.based.on.

physical.market.practices,.as.specified.by.the.Federation.of.Cocoa.Commerce.Ltd.(FCC),.

to.be.conducted.by.independent.analysts.under.exchange.supervision..Grading.may.only.

occur.with.a.CME.Europe.representative.in.the.room.so.CME.Europe.remains.responsible.

By.following.the.physical.market.specifications,.grading.in.the.CME.Europe.contract.

adheres.more.closely.to.the.arbitration.process.specified.in.the.physical.market..This.

starts.from.the.use.of.5mm.round-holed.screens.to.sieve.the.sample,.as.specified.in.the.

FCC.Quality.Rules,.through.to.employing.the.chocolate.manufacturers’.specified.method.

of.assessing.homogeneity.on.bean.size,.used.only.if.graders.think.a.sample.is.mixed...It.

should.be.mentioned.that.the.period.of.validity.of.grading.results.is.equally.pragmatic.

and.reflects.the.change.expected.in.the.deterioration.of.quality.over.time.

An.explanation.of.the.grading.procedure.for.the.CME.Europe.cocoa.futures.contract.and.

its.increased.relevance.to.the.physical.market.will.be.made.in.another.article.but.overall,.

with.grading.practices.based.upon.the.standards.established.by.the.FCC,.CME.Europe.

expects.the.value.from.grading.results.will.be.brought.closer.to.that.of.the.underlying.

physical.market.


The age of the goodsFinally,.another.barrier.to.price.convergence.is.the.old.age.of.current.stocks.in.exchange.

registered.warehouses,.with.some.cocoa.dating.back.to.the.1980s..The.age.allowances.

built.into.the.CME.Europe.cocoa.futures.contract.are.intended.to.promote.the.

replacement.of.older.cocoa.with.fresher.material,.helping.to.ensure.convergence.of.price.

with.the.underlying..

CME.Europe.believes.the.new.contract.will.respond.to.demand.from.the.cocoa.market.for.

an.improved.hedging.mechanism.that.better.reflects.the.underlying.physical.markets..

Some.of.the.improvements.outlined.here.will.be.developed.further.in.future.articles,.the.

next.of.which.will.detail.how.the.specifications.of.the.CME.Europe.cocoa.futures.contract.

will.reduce.conflicts.of.interest.


CME Europe Cocoa Contract Reduces Potential Conflicts of InterestQueues.for.delivery.at.exchange-registered.commodity.warehouses,.allegations.of.slow.

loading-out.rates.and.high.movement-out.charges.are.symptoms.of.the.existence.of.

conflicts.of.interest.between.warehousekeepers,.their.customers,.supervisors.and.the.

interests.of.futures.exchanges.offering.deliverable.futures.contracts..These.conflicts.pose.a.

threat.to.the.integrity.of.the.relevant.contracts.

CME.Europe.aims.to.address.such.issues.in.a.market-led.way.to.ensure.the.integrity.of.

the.contract.by.making.the.basis.of.its.new.deliverable.cocoa.futures.contract:

•. ‘delivered.out’;

•. introducing.mandatory.independent.supervision.of.. . . .

sampling.and.grading;.and

•. defining.the.roles.of.parties.involved.

Like.the.issues,.the.solution.is.three-fold..The.first.involves.the.basis.of.the.contract;.CME.

Europe.cocoa.futures.contract.terms.require.the.owner.delivering.the.cocoa.against.an.

exchange.position.also.pre-pays.the.delivery-out.charge..This.is.because.the.party.storing.

the.cocoa.in.the.first.place.is.able.to.choose.the.warehousekeeper.–.the.party.taking.up.

the.cocoa.does.not.have.that.choice.so.it.is.equitable.that.the.party.storing.the.cocoa.

pays.for.the.goods.to.be.removed.from.the.warehouse..With.this.understanding,.the.ability.

of.the.warehousekeeper.to.charge.the.party.taking.up.the.cocoa.to.move.the.cocoa.out.

is.removed..It.is.what.occurs.in.the.physical.market.when.a.potential.buyer.wishes.to.

purchase.goods.stored.with.a.warehousekeeper.unknown.to.him,.the.seller.will.arrange.to.

pay.for.those.charges..The.CME.Europe.cocoa.futures.contract.is.reflecting.common.and.

natural.practice.in.the.underlying.cash.market.

This.also.has.the.benefit.of.market-control.of.warehouse.rents.as.parties.know.that.as.

the.owner.may.remove.his.stock.for.no.charge,.the.potential.for.the.stock.to.be.removed.

helps.to.keep.the.warehouse.rents.broadly.in.line.and.related.to.the.costs.of.storage..CME.

Europe.does.not.intend.to.publish.maximum.warehouse.rent.rates.and,.as.they.are.zero,.

has.no.need.to.publish.the.movement.out.charges.

The.second.point.is.that.since.cocoa.which.passes.grading.is.worth.more.to.the.owner.and.

warehousekeeper,.there.is.room.for.concern.over.the.potential.incentive.to.draw.biased.

samples,.one.which.is.more.likely.to.pass.grading..CME.Europe,.in.its.Procedures,.stipulates.

‘All.sampling.shall.be.supervised.by.a.Licenced.Supervisor.or.by.the.Registrar..The.Licenced.

Supervisor.is.responsible.for.the.sampling.being.conducted.in.accordance.with.these.

Cocoa.Procedures.’


The.presence.of.an.independent.Licenced.Supervisor.appointed.by.the.exchange.

minimises.the.scope.to.draw.an.unrepresentative.sample,.the.consequences.of.which.

are.not.only.may.the.warehousekeeper.benefit.from.a.potential.increase.in.rental.and.

movement.out.charges,.but.also.of.subsequent.owners.taking.delivery.of.stock.which.is.

not.correctly.valued.

The.third.point.is.that.there.are.three.roles.of.activity.in.a.warehoused.deliverable.futures.

contract.which.are.best.separated,.namely:

•. Owner.and.Warehousekeeper;

•. Warehousekeeper.and.Supervisor.&.Grader;.and

•. Supervisor.and.Grader.

The.pressures.of.conflict.of.interest.are.increased.when.a.warehousekeeper.has.a.close.

relationship.with.the.owner.of.the.goods..This.may.be.divided.into.two:

a. when.there.is.a.commercial.contract.between.the.. . . .

warehousekeeper.and.owner;.and

b. when.the.warehousekeeper.is.owned.by,.or.there.is.a.. . . .

formal.corporate.relationship.with.a.company.with.a.. . . .

trading.arm.of.the.potential.owner.

Under.a..above,.providing.the.terms.of.the.relationship.reflect.commercial.practice.there.

is.less.concern,.even.if.these.relationships.are.deep.and.longstanding,.as.ensuring.that.

the.delivery.out.charge.is.pre-paid.and.that.the.sampling.is.conducted.under.independent.

supervision.ensures.objectivity.in.the.storage.and.delivery.process..

The.second.b.,.poses.an.unfair.situation.as.the.warehousekeeping/trading.entity.may.

know.the.intentions.of.a.competitor.with.stock.stored.with.his.subsidiary.or.corporate.

sister.company..At.delivery,.stock.is.distributed.at.random.to.buyers.by.the.allocation.

algorithm.of.the.Exchange.delivery.system,.so.a.receiver.may.be.allocated.stock.lying.

with.any.Registered.Warehousekeeper..Being.allocated.stock.effectively.stored.with.a.

warehousekeeping/trading.competitor.provides.a.source.of.potential.private.information.

to.the.competitor.and.needs.to.be.addressed..As.these.companies.are.not.subject.to.

regulated.market.conditions.and.pose.an.unfair.advantage.that.cannot.be.resolved.by.

commercial.means.it.therefore.means.it.should.not.be.allowed..The.CME.Procedures.will.

not.allow.warehousekeepers.to.become.approved.if.they.have.a.corporate.relationship.

with.a.potential.owner..


As.mention.earlier,.there.is.a.potential.conflict.of.interest.between.warehousing.the.goods.

and.the.assessment.of.their.quality..As.sampling.the.goods.is.inextricably.linked.to.the.

results.from.subsequent.analysis.of.its.quality,.prudent.independent.assessment.should.

ensure.that.no.warehousekeeper.may.be.allied.or.affiliated.with.the.supervision.of.the.

drawing.of.the.sample,.nor.to.an.entity.analysing.its.quality..

Under.the.CME.Europe.Cocoa.futures.contract.Procedures,.Registered.

Warehousekeepers.cannot.act.as.approved.Supervisors,.nor.may.they.grade.the.cocoa.

samples..All.sampling.in.the.Warehouse.is.supervised.(the.Supervisors.appointed.by.the.

Exchange).and.by.the.nature.of.the.process.for.bulk.cocoa,.also.includes.the.supervision.

of.the.weighing..Once.drawn,.the.Warehousekeeper.will.not.have.access.to.the.grading.

sample.as.it.remains.in.the.hands.of.the.Supervisor..Again,.contract.integrity.is.the.basis.

of.this.separation.of.roles.

In.similar.spirit,.while.the.approved.Supervisor.may.be.involved.in.both.the.sampling.and.

grading.process,.no.individual.as.an.employee.of.the.approved.Supervisor,.i.e..Licensed.

Individual,.may.undertake.both.the.sampling.and.grading.of.any.individual.sample..An.

individual.may.do.one.but.not.the.other..In.addition,.note.that.any.grading.may.only.occur.

in.the.presence.of.a.CME.appointed.representative.

By.addressing.directly.the.issues.facing.the.delivery.of.cocoa,.CME.Europe.consider.that.

changing.the.basis.of.the.contract.to.‘delivered.out’;.mandatory.supervision.of.sampling.

and.the.separation.of.the.roles.of.those.involved.in.the.delivery.process.are.essential.in.

maintaining.the.integrity.of.the.contract.


How CME Europe’s Unique In-house Depository Can Save You Money and TimeWith.the.launch.of.new.physically.delivered,.euro-denominated.cocoa.futures.on.30.March,.

CME.Europe.will.introduce.a.first-of-its.kind,.in-house.depository.for.material.warehouse.

warrants.that.uses.electronic.lodging..

This.unique.system.significantly.reduces.the.cost.and.time.previously.required.to.lodge.

warrants.for.deliverable.commodities.on.an.exchange-held.position,.whilst.ensuring.the.

legal.integrity.of.the.contract..

What is a warehouse warrant?Traditionally,.a.material.(i.e.,.physical).document.called.the.warehouse.warrant.has.been.

used.as.proof.of.ownership.of.goods.in.a.warehouse..Warehouse.warrants.(or.warehouse.

receipts).are.bearer.documents.that.provide.the.owner.title.to.the.goods.they.represent.(as.

in.the.form.required.by.CME.Europe)..

With.warehouse.warrants,.ownership.of.cocoa.lying.in.a.warehouse.can.by.transferred.

by.the.seller.providing.the.applicable.warrants.to.the.buyer.in.exchange.for.payment.

(instead.of.physically.transferring.the.goods)..As.negotiable.financial.instruments,.

warrants.also.are.commonly.used.as.collateral.for.loans.and,.in.soft.commodity.trading,.

for.the.financing.of.cocoa..

These.documents.are.essential.in.the.sale.of.goods.lying.in.a.warehouse..It’s.also.important.

to.note.that.warehouse.warrants.are.subject.to.aspects.of.the.legal.jurisdiction.in.which.the.

goods.are.stored,.not.only.to.the.law.governing.the.sale.contract.itself.

Why not have electronic warrants?In.the.past,.delivery.of.cocoa.against.a.futures.contract.was.made.by.the.physical.delivery.

of.material.warrants.from.seller.to.buyer..With.increased.volumes.of.business,.this.step.has.

become.an.administrative.nightmare.for.all.parties.involved,.requiring.both.seller.and.buyer.

to.physically.check.the.details.on.each.document.at.the.time.of.contract.performance..

In.today’s.electronic.age,.the.opportunity.arose.to.automate.the.administration.of.these.

documents.by.making.them.electronic.and.removing.the.need.for.material.warrants...

Upon.further.scrutiny,.however,.CME.Europe.recognised.that.we’re.not.yet.at.the.

administrative.nirvana.where.material.warrants.are.not.required.at.all,.as.not.all.legal.

jurisdictions.recognise.warrants.in.an.electronic.form,.which.would.have.two.key.

consequences.for.a.the.futures.contract:

1.. Transfer.of.title.of.the.goods.from.seller.to.buyer.at.time.of.delivery..If.this.transfer.of.

ownership.is.not.considered.legally.binding.it.questions.the.basis.of.the.contract.. .

.itself,.an.untenable.situation.


2..Should.a.warehousekeeper.go.into.liquidation,.the.administrator.should.have.no.doubt.

about.ownership.of.the.goods.lying.in.the.warehouses..As.legal.recognition.of.electronic.

warrants.has.yet.to.be.accepted.in.some.legal.jurisdictions,.this.situation.is.too.

untenable.for.prudent.parties..

It.is.therefore.essential.that.the.transfer.of.title.is.considered.legally.binding,.and.that.any.

potential.administrator.recognises.the.owner.of.the.goods.through.the.warrants.

Exchanges.have.worked.round.the.issues.by.having.the.transfer.of.ownership.effectively.

conducted.under.the.terms.of.the.law.of.England.and.Wales..This.means.that.electronic.

transfer.of.ownership.is.considered.legal.when.the.material.warrant.(still.required).is.

located.in.England.or.Wales.

Until.now,.exchange.systems.have.required.the.material.warrant.to.be:

a).printed.at.the.port.or.location.where.the.goods.are.stored;

b).physically.sent.by.secure.courier.to.the.appointed.broker.(FCM);.

c). lodged.in.the.appointed.Depository.(in.England.or.Wales).by.the.appointed.broker.for.

safekeeping.and.to.enable.the.transfer.of.ownership.under.English.law..

Such.a.process.is.not.only.expensive,.requiring:

a).courier.costs.from.the.port.to.London;

b).courier.costs.from.the.broker.to.the.Depository;.and.

c).costs.to.lodge.the.warrants.in.the.Depository;

….it.also.requires.considerable.administration.and.coordination.by.the.warehousekeeper,.

broker.and.Depository..

Can we have the benefit of electronic warrants and the safety of material ones?The.short.answer.is.yes..CME.Europe.has.developed.a.method.of.warrant-handling.whereby.

the.security.and.integrity.of.the.process.is.maintained.and.the.benefits.of.an.electronic.

system.are.added.

Through.the.CME.electronic.administration.system,.Deliveries.Plus,.the.warehousekeeper.

creates.the.warrant.as.usual,.but.instead.of.being.printed.locally,.it.is.printed.directly.at.

the.CME.Europe.Depository.in.London..Each.warrant.is.printed.on.secure.paper.in.the.

Depository,.each.sheet.of.which.has.a.unique.number.pre-printed.on.it..

The.warehousekeeper.alone.is.advised.of.that.number.by.the.Depository.staff.in.order.

to.maintain.the.integrity.of.the.warrant,.i.e.,.a.CME.Europe.warrant.presented.to.a.

warehousekeeper.must.have.the.correct.security.number.in.order.for.the.warehousekeeper.

to.recognise.it.as.valid..The.only.way.a.warrant.may.be.generated.at.the.Depository.is.

through.the.Deliveries.Plus.system.


Such.a.system.provides:

a).the.quick.lodgement.of.warrants;

b).a.reduced.cost.to.the.participants;.and

c). reduced.administration.by.the.parties.involved.

The.process.of.printing.the.“warehouse.warrant”.directly.at.the.secure.Depository.in.

London.is.unique.to.CME.Europe.

By.ensuring.that.CME.Europe.warrants.are.generated.only.through.Deliveries.Plus,.not.only.

do.the.documents.generated.have.conformity,.but.the.security.of.the.system.is.reinforced.

When.the.cocoa.is.needed.for.use.and.taken.off-warrant,.the.warrant.will.be.sent.to.the.

warehousekeeper.or.his.agent.by.CME.Europe,.with.instructions.that.the.goods.be.held.to.

the.order.of.the.owner,.as.evidenced.by.Deliveries.Plus,.providing.secure.handling.over.the.

whole.process.

Alternatively,.Members.holding.a.net.short.position.on.expiry.must.make.cocoa,.via.

warrants,.available.to.the.exchange.via.Deliveries.Plus..Members.with.a.net.long.position.

will.receive.the.notification.of.the.warrants.held.to.their.order.via.Deliveries.Plus.

Advantages of a CME cocoa futures warrant The.advantages.of.owning.cocoa.under.a.CME.Europe.warrant.include:

1). a.seller.will.require.a.CME.Europe.warrant.in.the.. . . .

Depository.to.deliver.against.a.short.position.on.. . . .

the.exchange.(note.that.for.delivery.this.has.to.be.. . . .

accompanied.by.a.valid.grading.result.for.the.cocoa);

2).security.of.warrants.in.the.Depository;

3).ability.to.obtain.finance.of.deliverable.warrants;

4).reduced.administration,.time.and.cost.in.the.lodgement.of.a.CME.Europe.warrant;

5).reassurance.that.cocoa.stored.under.CME.Europe.warrants.lodged.in.the.Depository.is:

. a). freely.available.(subject.to.the.CME.Europe.Procedures).. . .

within.21.business.days.and.delivery.can.be.taken.. . . .

without.charge;

. b). subject.to.CME.Europe.storage.conditions,.including,.at.the.discretion.of.the.

Registrar,.disinfestation.at.the.expense.of.the.warehousekeeper.

As.a.result,.the.security.of.the.material.warrant.is.maintained.with.the.added.benefits.of.an.

electronic.system,.all.without.compromising.the.legal.status.of.the.process..And.it’s.more.

economical,.too.

Our.next.two.articles.in.our.cocoa.trading.series.will.concentrate.on.how.CME.Europe.deals.

with.the.sampling.and.grading.procedures.to.ensure.its.new.physically.delivered.cocoa.

futures.contract.better.reflects.the.practices.of.the.physical.market.


CME Europe’s Cocoa Quality AnalysisHow independent sampling and grading aligned to the underlying physical market

provide a better hedging medium.

PART 1 – SAMPLING

The.quality.of.cocoa.beans.gets.a.great.deal.of.attention,.and.with.good.reason:.apart.

from.providing.food-stuff.suitable.for.consumption,.the.quality.significantly.impacts.the.

value.of.cocoa.deliverable.under.the.CME.Europe.cocoa.futures.contract..If.better.than.

average.in.quality,.the.cocoa.may.be.eligible.for.a.premium;.conversely,.if.lower.than.

average.in.quality,.discounts.may.be.applied.

The.quality.of.cocoa.is.determined.by.analysing.a.sample.of.beans.drawn.at.random.from.

a.parcel..The.determination,.therefore,.is.equally.dependent.on.the.sample.provided.as.

on.the.analysis.itself..An.accurate.analysis.of.a.poorly.drawn.sample.will.provide.just.as.

imprecise.results.as.poor.analysis.of.an.appropriately.drawn.sample.

Ensuring Quality of SamplingProper.recognition.of.each.stage.of.sampling,.plus.an.understanding.of.the.relationships.

between.the.parties.involved.(see.our.previous.article.on.Conflicts.of.Interest),.were.key.

factors.in.the.design.of.CME.Europe.Cocoa.Futures.

Consequently,.the.contracts:

1).apply.the.trade.rules.for.sampling.in.terms.of:

•.methods.of.sampling

•.amount.to.be.drawn

•.sample.amount

2).require.independent.supervision.of.the.process.of:

•.drawing.the.sample

•.handling.of.the.sample.material

While.these.features.help.ensure.the.integrity.of.the.process,.CME.Europe.also.has.taken.

steps.to.keep.costs.as.low.as.possible.for.those.in.the.supply.chain.

Aligning Sampling to FCC TermsThe.Federation.of.Cocoa.Commerce.(FCC).issues.contract.terms.for.cocoa.traded.in.

Europe..Market.participants.use.these.terms.in.their.physical.contracts.and.optimally,.

require.a.hedging.tool.that.is.closely.aligned.to.their.physical.needs.


FCC.terms.recognise.that.a.2-kg.sample.may.be.used.to.represent.a.parcel.of.cocoa.

from.one.Bill.of.Lading.(B/L).weighing.up.to.250.tonnes..CME.Europe.Cocoa.Futures.

adopt.this.term.by.allowing.one.2.kg.grading.sample.to.represent.one.lot.of.10-tonnes,.

to.up.to.25.lots.each.weighing.10-tonnes,.provided.that.all.lots.have.the.same.origin,.

crop.year.and.B/L.

When.a.sample.of.cocoa.is.drawn,.small.amounts.of.beans.are.extracted.consistently.but.

at.random.–.called.Primary.samples.for.bags,.or.Incremental.samples.for.bulk..

The.process.of.drawing.Primary.or.Incremental.samples.is.very.labour.intensive.and.time.

consuming..For.bagged.cocoa,.a.minimum.of.30.percent.of.the.bags.must.be.stabbed.

to.provide.the.Primary.samples;.for.bulk.cocoa,.the.parcel.typically.must.be.physically.

moved.from.one.location.to.another.in.order.to.expose.all.of.the.cocoa.for.sampling.from.

the.moving.stream.

The.process.of.collecting.these.samples.results.in.a.significant.amount.of.extracted.

beans,.which.as.a.whole.are.called.the.Composite.sample.

Once.complete,.the.Composite.sample.then.is.carefully.divided.(‘quartered’).to.provide.

the.2-kg.grading.sample.for.analysis.

Greater Efficiency in SamplingThe.sampling.process.is.common.to.many.commodities.and.usually.must.be.repeated.

when.a.fresh.sample.is.needed..CME.Europe.has.introduced.a.sampling.process.that.

utilises.the.remaining.Composite.sample.from.the.original.extraction.for.future.samples,.

helping.to.minimize.costs.of.ongoing.sampling.

Once.the.initial.grading.sample.is.removed.for.analysis,.the.independent.supervisor.bags.

and.seals.the.remaining.Composite.sample.material,.which.is.then.stored.with.the.parcel.

from.which.it.came.

Provided.the.parcel.represented.by.the.Composite.sample.has.not.changed,.a.fresh.

grading.sample.may.be.obtained.by.quartering.the.remaining.Composite.Sample..In.

addition.to.being.cheaper.than.resampling,.this.practice.better.preserves.the.cocoa,.

avoiding.the.need.to.re-puncture.the.bags.or.move.the.bulk.cocoa,.which.are.expensive.

and.damaging.to.the.beans.

Use of Independent SupervisorsIn.addition.to.following.the.FCC’s.sampling.rules,.CME.Europe.Cocoa.Futures.contracts.

stipulate.that.all.sampling.must.be.conducted.with.an.independent.supervisor.in.

attendance..The.supervisor.is.appointed.by.the.Registrar.

The.warehousekeeper.will.have.no.access.to.the.grading.sample,.thereby.minimising.

potential.conflicts.of.interest.


Use of Independent SupervisorsIn.addition.to.following.the.FCC’s.sampling.rules,.CME.Europe.Cocoa.Futures.contracts.

stipulate.that.all.sampling.must.be.conducted.with.an.independent.supervisor.in.

attendance..The.supervisor.is.appointed.by.the.Registrar.

The.warehousekeeper.will.have.no.access.to.the.grading.sample,.thereby.minimising.

potential.conflicts.of.interest.

Moisture TestingIn.some.instances,.upon.arrival,.it’s.discovered.that.the.cocoa.has.not.been.prepared.

properly.and/or.has.been.inappropriately.shipped..As.a.result,.the.cocoa.beans.may.

arrive.damp.

Damp.cocoa.results.in.faster.deterioration.of.cocoa.quality,.and.can.result.in.physical.

damage.to.the.goods..It.can.also.distort.weight.results.(by.virtue.of.loss.of.water.when.

it.dries),.making.it.misrepresentative.of.the.parcel.and.unfair.for.any.prospective.owner..

CME.Europe.recognised.this.issue.and.introduced.a.moisture.test.to.address.it.

The.moisture.test.will.be.performed.by.the.independent.supervisor.in.the.warehouse,.

while.preparing.the.grading.sample..The.test.will.be.conducted.with.a.SINAR.LSA.

moisture.meter,.calibrated.according.to.CME.Europe.standards.

Three.checks.will.be.made.on.the.drawn.cocoa;.all.results.must.fall.within.0.3.percent.of.

each.other.in.order.to.be.valid..Before.the.Grading.Sample.can.progress.to.the.grading.

stage,.the.average.result.must.be.below.8.percent.

If.the.moisture.test.result.registers.at.8.percent.or.above,.the.owner.may.wish.to.

appeal.the.result..The.owner.can.appeal.at.his/her.own.cost.by.having.an.independent.

laboratory.re-run.the.test,.applying.the.International.Confectionery.Association.(ICA).

Analytical.Method.43.-.1993.oven.test,.expressed.in.%.m/m.

Failure.of.the.moisture.test.does.not.mean.that.the.cocoa.has.failed.grading;.the.owner.

can.apply.to.resample.the.parcel.when.he/she.and.the.warehousekeeper.consider.the.

cocoa.to.be.sufficiently.dry.to.pass.the.moisture.test..If.more.than.30.days.pass.since.the.

original.test,.however,.the.parcel.must.be.reweighed.

Independent.supervision.does.come.with.a.cost,.but.it.is.far.outweighed.by.the.benefits.

of.ensuring.the.integrity.of.the.sampling.process.–.and.the.significant.cost.savings.to.

owners.that.can.result.from.of.enhanced.sampling.and.grading.techniques.(enabling.a.

sample.to.represent.250-tonnes,.use.of.remaining.Composite.for.future.samples).

In.‘Part.2,.Grading’,.we’ll.explore.how.additional.savings.can.be.achieved.in.the.grading.

process.as.well.as.through.validation.of.the.result.–.all.while.adopting.the.basis.of.

the.FCC.analysis.of.cocoa.and.ensuring.a.proper.relationship.between.the.deliverable.

contract.and.the.underlying.physical.market.


PART 2 – GRADING

IntroductionThe.purpose.of.sampling.and.grading.cocoa.beans.is.twofold;.to.judge.the.yield.(the.

quantity.of.usable.material);.and.to.assess.flavour.and.wholesomeness.of.the.cocoa..With.

regard.to.cocoa.deliverable.against.a.CME.Europe.Cocoa.Futures.contract,.the.grading.

is.to.assess.whether.the.cocoa.is.valid.for.tender.on.expiry.of.a.Futures.Contract.and.at.

what.premium.or.discount.for.above.or.below.average.quality..

The.previous.article.discussed.CME.Procedures.with.regard.to.sampling,.as.important.

as.the.grading.analysis.in.the.process.of.quality.assessment..It.covered.the.introduction.

of.independent.supervision.of.sampling.to.ensure.the.integrity.of.the.process;.how.the.

use.of.a.Composite.Sample.would.save.time.and.money.whilst.preserving.bags.and.

beans.from.the.disruption.of.regular.sampling.and.how.the.required.Moisture.Test.would.

prevent.beans.with.a.moisture.content.of.over.8%.from.entering.the.grading.process.and.

identify.cocoa.at.risk.from.rapid.deterioration.

To.be.an.effective.hedge.for.physical.cocoa,.the.value.from.the.process.of.sampling.and.

grading.cocoa.must.be.in.line.with.that.of.the.underlying.market..To.ensure.this,.CME.

Procedures.incorporate.the.sampling.and.grading.practices.used.by.the.trade.in.Europe,.

specifically.the.contract.terms.issued.by.the.Federation.of.Cocoa.Commerce.Ltd.(FCC)..

The Grading Unit, Deliveries Plus and Licensed Grading StationCME.Europe.introduces.the.concept.of.the.Grading.Unit.(GU)..Each.GU.may.comprise.

of.up.to.25.Lots.(of.the.same.origin,.crop.year.and.be.from.the.same.Bill.of.Lading).and.

is.represented.by.one.2-kilogram.Grading.Sample,.as.is.permitted.under.FCC.Rules..

This.approach.provides.an.important.potential.cost.saving.to.the.owners.of.cocoa.as.

the.price.of.grading.a.sample.under.CME.Procedures.will.be.the.same.if.the.2-kilogram.

sample.represents.one.Lot.(ten.tonnes).of.cocoa.or.25.Lots.(250.tonnes),.since.the.work.

involved.in.grading.the.sample.is.the.same.irrespective.of.the.tonnage.represented..

Additional.savings.are.possible.as.fewer.gradings.for.an.equivalent.tonnage.are.required..

To.encourage.owners.to.submit.samples.representing.higher.tonnages,.GUs.of.bagged.

cocoa.which.have.failed.grading.may.be.split.and.resubmitted.for.grading.again,.and.

again,.if.necessary.down.to.one.Lot..In.the.grading.process,.as.with.sampling.and.despite.

the.costs.of.independent.supervision,.CME.Europe.has.endeavoured.to.keep.costs.as.low.

as.possible.whilst.retaining.the.independent.integrity.of.the.system..

Note.that.the.administration.of.all.aspects.of.the.storage,.grading.and.tendering.of.CME.

Europe.cocoa.is.made.through.the.CME.delivery.system.Deliveries.Plus.

Grading.analysis.will.be.conducted.by.Licensed.Graders.at.a.Licensed.Grading.Station.

and.may.only.occur.in.the.presence.of.a.recognised.CME.Europe.official..All.Licensed.

Graders.must.have.completed.a.CME.Europe.course.of.Cocoa.Bean.analysis.conducted.

by.an.FCC.Arbitrator.


AllowancesAll.origins.are.deliverable.against.CME.Europe.Physically.Delivered.Futures,.with.just.a.

handful.distinguished.by.either.a.€25.or.€50.per.tonne.discount,.but.to.pass.grading.and.

be.deemed.Valid.Cocoa,.a.sample.must.meet.the.following.standards.(with.allowances.in.

the.form.of.premiums.and.discounts):

•. The.Moisture.Content.shall.be.no.more.than.8%;

•. A.Slaty.Bean.Count.of.no.more.than.20%;

•. A.Defective.Bean.Count.of.no.more.than.15%;

•. A.Bean.Count.of.no.more.than.120.beans.per.100g;

•. .The.Residue.Content.shall.be.no.more.than.80g.per.2kg.Grading.Sample;

•. .The.Cluster.Content.shall.be.no.more.than.160g.per.2kg.sample;.where.the.combined.

Residue.and.Cluster.Content.shall.be.no.more.than.160g.per.2kg.Grading.Sample.and.

the.combined.Foreign.Matter,.Flat.Beans.and.Sievings,.shall.be.no.more.than.80g.per.

2kg.Grading.Sample.

Grading ProcessTo.determine.these.factors,.CME.Europe.has.made.use.of.the.FCC.Quality.Rules.as.the.

basis.of.the.grading.process.

Test Sample and YieldThe.Grading.Sample.is.emptied.onto.a.clean.surface.and.the.graders.visually.assess.

that.the.sample.represents.the.information.they.are.advised.of,.namely.the.origin.of.

the.cocoa..They.will.then.assure.themselves.that.it.is.not.considered.contaminated,.

in.particular.if.there.is.an.off-flavour.or.smell.unnatural.in.the.cocoa..A.Test.Sample,.

weighing.a.minimum.of.600g.is.then.obtained.either.by.using.a.flat-bottomed.scoop.or.

by.quartering,.to.ensure.that.the.Test.Sample.is.representative.of.the.Grading.Sample..

The.Test.Sample.is.passed.over.a.5-mm.round-holed.screen.and.the.sievings,.which.pass.

through.the.screen,.are.separated.and.weighed..

Residue.and.bean.clusters.are.collected.and.weighed.separately.whilst.flat.beans.and.

foreign.matter.are.collected.and.weighed.together..The.equivalent.weight.of.the.sievings,.

flats,.foreign.matter,.residue.and.clusters.are.replaced.by.single.whole.beans.taken.at.

random.from.a.scoopful.of.material.from.the.remaining.Grading.Sample..Note.that.none.

of.the.material.taken.from.the.Grading.Sample.is.put.back.into.the.Grading.Sample.

material;.to.do.so.would.compromise.the.composition.of.the.Grading.Sample.should.it.be.

subject.to.an.Appeal.


Then,.the.number.of.beans.are.counted.and.recorded,.which.together.with.the.weight.of.

the.Test.Sample.provides.the.bean.count,.an.important.factor.in.determining.the.nib-yield.

of.the.cocoa.

Should.the.graders.consider.visually.that.the.cocoa.has.been.mixed.and.is.not.

homogeneous.then.they.may.apply.the.test.on.bean.size.homogeneity.specified.in.the.

current.version.of.Chocolate.Manufacturers’.Quality.Requirements1;.whereby.12%.of.the.

beans.must.either.be.less.than.one.third.the.weight.of.the.average,.or.heavier.than.one.

and.one.third.the.average.in.order.for.the.cocoa.to.be.considered.as.having.been.mixed..

Under.the.CME.Europe.contract,.if.the.cocoa.is.found.to.be.non-homogenous.by.this.test.

it.is.deliverable.but.at.a.€100.discount..This.approach.is.pragmatic.as.it.is.measured.in.

the.manner.prescribed.by.the.industry.and.is.resolvable.by.sieving.the.cocoa.the.cost.of.

which.is.covered.by.the.discount.applied..

Cut TestThree.hundred.beans.from.the.Test.Sample.are.then.cut.to.expose.both.cotyledons.

of.the.bean.to.show.mould.or.infestation.(defectives),.which.would.affect.flavour.and.

wholesomeness,.and.any.slaty.colouring.which.measures.the.development.of.chocolate.

flavour..Separate.counts.are.made.of.defective.and.slaty.beans,.with.only.one.defect.

being.recorded.per.bean..Should.any.live.infestation.be.discovered.the.grading.will.

continue.and.the.Registrar.informed.through.the.use.of.Deliveries.Plus..

Validity of Grading ResultsFurther.savings.in.time.and.costs.are.to.be.found.in.CME.Europe’s.Procedures.for.

the.period.of.validity.of.the.grading.results,.which.reflect.the.change.expected.in.the.

deterioration.of.quality.over.time..Cocoa.beans.deteriorate.faster.during.the.first.six.to.

nine.months.of.storage.when.placed.in.warehouses.located.in.a.temperate.zone,.after.

which.the.decline.in.quality.slows.down,.providing.the.storage.and.quality.of.the.cocoa.

are.of.a.reasonable.standard..Once.the.cocoa.has.stabilised.there.is.less.need.to.check.

those.faults.which.will.not.move.any.further,.for.example.the.bean.size..

•. .The.first.grading.is.a.complete.grading.analysis,.which.if.successful.results.in.the.cocoa.

being.valid.for.three.delivery.months,.i.e..for.between.six.and.eight.calendar.months..

•. .The.second.grading.is.also.a.complete.grading.analysis,.based.on.a.Grading.Sample.

being.drawn.from.the.Composite.Sample,.and.valid.for.five.delivery.months,.so.for.up.

to.12.months..Quartering.(or.dividing).the.initial.Composite.Sample.has.the.benefit.of.

being.cheaper.than.resampling.and.of.looking.after.the.cocoa..

•. .The.third.grading.is.just.a.cut.test.from.a.Grading.Sample.taken.from.the.Composite.

Sample..If.successful.the.result.would.be.valid.for.another.five.delivery.months,.so.for.

up.to.12.months.


•. .The.fourth.grading.will.be.at.a.time.approaching.the.three-year.limit.requiring.the.

cocoa.to.be.re-weighed..The.reweighing.process.provides.an.excellent.opportunity.for.

warehousekeepers.to.check.bags.not.normally.visible,.for.a.fresh.sample.to.be.drawn.

and.a.new.Composite.sample.to.be.formed,.as.ever.under.supervision..

•. .The.fifth.grading.uses.the.Composite.Sample.used.for.the.fourth.grading.and.is.just.a.

cut.test,.as.is.the.sixth.grading..Again,.by.the.time.of.the.seventh.grading,.the.cocoa.will.

need.to.be.re-weighed.so.a.new.sample.will.be.drawn..

This.alignment.of.the.life-time.of.the.Composite.Sample.with.the.periods.of.validity.of.the.

grading.result.and.with.re-weighing.of.the.stored.cocoa.means.a.coordinated.approach.to.

the.process.with.implications.for.cost.savings.in.time,.money.and.deterioration.of.cocoa,.

especially.bulk.cocoa.which.must.be.moved.every.time.it.is.sampled..

The.next.article.will.delve.deeper.into.sampling.and.storage.of.bulk.cocoa.and.CME.

Europe’s.flexible.use.of.bulk.deliveries.

1 Page 7 of “Cocoa beans: Chocolate Manufacturers’ Quality Requirements” (1996) BCCA

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