CME Europe’s Cocoa Quality Analysis – Article 6

How Independent Sampling and Grading Provides a Better Hedging Mechanism - Part 2

Introduction

The 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 Station

CME 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.

Allowances

All 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 Process

To determine these factors, CME Europe has made use of the FCC Quality Rules as the basis of the grading process.

Test Sample and Yield

The 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 Test

Three 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 Results

Further 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.

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References

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

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