Why Sign Purchase Agreements?

Why Sign Purchase Agreements?

In 2019 we tried out a new model of working with chocolate makers. We established annual purchase agreements, with a goal of ensuring long-term stability for your partners at origins and cacao availability at fixed annual prices for chocolate makers. This experiment was largely a success, and something we would like to make accessible to all of our customers!

 For those of you who are starting to ramp up your orders, or for those of you who have questions about Uncommon’s cacao pricing options, we’d like to share. There are three ways to buy beans from us: spot purchases, reservations, and purchase agreements. 

These purchasing options work as a tiered system in terms of level of commitment and partnership. When you buy beans at the spot price, we refer to our monthly price list. Our prices change monthly to reflect the dynamics of harvest schedules, shipping schedules, and existing warehouse inventory. For instance, beans are cheaper when they first arrive and over time they accrue warehousing and financing costs. Since harvest seasons don’t align with the calendar year and vary across origins, it can be difficult to predict when the bean price will be the cheapest. Reservations and purchase agreements help you as a maker by fixing the bean price for the whole year. If you don’t know, or aren’t able to predict how much you will need of a bean yet or when, then you are in the perfect scenario for a spot purchase. 

Reservations are an intermediate level of commitment. This model is useful when you know you will need 4 or 5 bags of an origin that is in limited stock and you know that you don’t need it now (or can’t store it), but you will in 3 months. We retain a 6 month window for reservations and ask for a 15% non-refundable deposit to secure the order. Reservations are set up based on the price of the beans reflected in the current month’s price sheet when you pay your deposit. It can still be tricky to achieve volume based discounts in these prices, since they are limited to short term orders, but if your storage space is limited and you want to get the best deal possible on cacao, it is better to reserve the total amount you’ll need and have it shipped to you over several months. Reservations are a good way to secure short term volume that you know you will need. 

For any chocolate maker, both spot pricing and reservations come in handy for last minute needs, when plans change or if you unexpectedly run out of something. However, purchase agreements work better for regular inventory management by lowering the dollar per kilogram cost of your beans to a set price. If you know your general cacao needs, then signing a purchase agreement at the beginning of the calendar year is definitely the most economical option. And, it benefits your partners at origin too.

 Purchase agreements are an agreed upon volume of specific cacaos that a maker will buy within one calendar year. Plain and simple. What’s the catch? Well, you have to buy the beans. You can’t commit to a volume that you won’t actually buy, and the agreement stipulates that you are responsible to pay for the full volume of the reservation on the day after the time period of the purchase agreement expires. For us, there is a lot of risk to keep adding more volume to our stock, and we want to have the cacao you need when you need it. Purchase agreements are a way to share the financial risk by lowering the price to chocolate makers for stock that is pre-committed. So why commit to an annual purchase agreement? 

1 - It ensures your volume is available on your timeline. This allows us to work with you in greater alignment. You can rest assured that the volume you need is either already in the warehouse or on the water. Annual purchase agreements help us stick to and accurately predict the amount of cacao from each origin that we need to bring in for you, our chocolate making partners. This stability deepens the trust and ability to work cohesively from origin all the way to the chocolate factory. We take on the responsibility of planning when more beans need to come in to ensure you have the freshest product, and it supports consistency in our buying from producers who rely on this stability for their own businesses.

2 - It allows us to fix an annual price with you that does not change until a new cycle in the new year. Outside of purchase agreements and reservations, our pricing changes monthly to respond to the dynamics of an international agricultural trade. At any given time we may have cacao in process, on the water, or stocking up in the warehouse. Cacao does not grow on a fiscal cycle, which is why fluctuations in bean price also do not line up with the calendar year. Purchase agreements set the price for all orders at the lowest price, taking into consideration the total volume across various origins that you commit to drawing down over the full year. Economies of scale continue to prove to be a key factor in proving an impact-first business model, and purchase agreements are a key building block of that.

3 - It helps your origin partners grow and gives producers the necessary insight they need to increase their output. If farmers can see the demand ahead, then they can plan for it and meet it sustainability without over- or under-producing. This is where the impact really starts to happen. Cohesive supply chain planning enables us to deepen our investment and partnerships throughout the supply chain on your behalf. We can better account for growth in volume, which brings specialty cacao exporters necessary long-term stability. However, this means it is very important for the volume needs in the purchase agreements to be accurate. If chocolate makers over-project the volume they will need in order to gain access to cheaper prices but then don’t end up buying at this volume, the producers and farmers may get shorted in ways that negatively impact their growth potential, and even threaten their businesses for the following year. This can cause a delayed supply shock that disrupts the trust and longevity of the relationships that we are trying to strengthen.

Great, I’m in! How do I know if the volume in the purchase agreement is realistic?

The conversation starts off by reviewing your previous year’s purchase history from Uncommon. If you feel there were significant changes in 2019 that may affect this year or may not, then we can look back even further in your purchase history to get a realistic growth projection for your 2020 needs. We then work with you through planning out your production cycle to find your total volume needs per bean and a rough delivery schedule. Once those pieces are agreed upon, we will send you the purchase agreement. After signing it, you can consider the stocks listed in your purchase agreement as reserved for you. It is useful to have this rough delivery schedule in place so we can factor in what harvest your beans will come from. For instance, if you need 8 tons of Maya Mountain this year, but only need 2 tons in Q1 and Q2 and then a full 6 tons in Q3, then we can plan for the first half of the year to draw from the 2019 harvest, with the final 6 tons coming from the 2020 harvest as soon as that cacao lands. 

Are you always going to increase your price year after year? 

No, we do not strictly always increase our prices. In 2019, we closely examined our margins and saw clearly that the prices we had been charging did not truly capture all of the production, shipping, managing, impact reporting, and planning work we do. We increased prices over the course of 2019 to reach stable pricing for 2020. Prices may go down if we have a sale going on. Please remember, reservations are eligible for sale pricing, so if you see a sale come up for beans that you know you’ll need, please reach out to us during the sale period and we can set the inventory aside for delivery when you are ready. 

Thank you all for reading through this information! We take our work very seriously and negotiating the needs of small business, scaling craft chocolate makers and fledgling specialty cacao origins is no small feat. It’s hard work that is critical to decommoditizing this industry, which is why we value long term partnership across our entire supply chain. 

The people are the key component to making meaningful systems change take hold. By extending the opportunity for you, chocolate makers, to commit more meaningfully to the origins you work with through reservations and purchase agreements, we seek to strengthen these bonds between makers and origins and form a united front. By aligning in our planning for the year, we each do our part in setting a strong foundation for the specialty market in the year ahead. I hope that sharing in greater detail how our pricing structure works, and what options are available to you as resources, this can be useful to you as you plan out the year. If you’d like to have a follow up conversation about your beans and needs for the year, let’s set that up! Please reach out to me over email at anjuli@uncommoncacao.com.


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