Commodity Trading – A few thoughts about Pepper

I have recently been inundated with e-mails offering various commodities for sale – sugar, soybeans, gold!! and I have to admit that it is rather seductive.  I mean, anyone can sell sugar and gold.  The markets for both at the moment are very profitable.

However, I would caution anyone thinking of trading in commodities to be wary.  If it were as simple as it appears then everyone would be doing it.  In fact, there is nothing to stop anyone purchasing a commodity in one country and selling it in another (as long as the local laws in those countries allow) but making a success of, and profit in, the transaction is another matter altogether.  There is also the matter of fraud.  Commodity trading, by its very nature, attracts a rather large percentage of fraudulent deals.

Some of these deals can be very convincing, but the way to avoid being cheated is to know your market.  For example, a group in Kenya recently advised one of my clients that they were able to supply 20 kgs of gold on a monthly basis.  My client immediately got suspicious because there are no gold mines in Kenya, so the question was raised, where is this gold coming from and who actually owns it?  Unfortunately, someone else, who was less savvy about gold mining decided to investigate further and travelled to Kenya to see the gold.  They were taken to an Assay office in Nairobi where it was proved that the gold was real and that it weighed 20 kgs.  For anyone in the know, this should have rung another alarm bell, since all the official Assay offices in Nairobi are actually based at Jomo Kenyatta Airport (well outside Nairobi City limits).  The agreement was that the gold would be paid for on arrival by Documentary Credit, but that because of the nature of the product, the sellers wanted to be responsible for the freight and goods in transit insurance.  There is nothing wrong with this, except that they wanted this to be paid upfront, direct into their account (not that of a shipping company and/or insurance company) and at a cost of USD 100,000.  At which point the potential buyer decided to call it a day and retreated home without any gold, having spent about USD 10,000 on flight and hotel costs, not to mention their time.

Even without the added problem of fraud, getting involved in commodity trading can be risky.  Not only does the commodity trader need to have extensive knowledge of their chosen commodity from supply to delivery, but excellent (and trusted) contacts in the industry, the ability to extensively check their whole supply chain on a continuous basis, and access to the necessary funding.  Getting all these different factors right is quite complicated and getting it wrong can cost a fortune.

I should mention there is a big difference between actually physically trading commodities and getting involved in, for example, Commodity Futures Trading.  A Futures Contract is an agreement/contract to buy or sell a specific commodity today, through a commodity/futures exchange/broker, at a specific price, for delivery on/by a specific date in the future.  The profit is achieved either by “going long” (buying low and selling higher) or by “going short” (selling high and buying back lower).  The business of Commodity Futures Trading is speculating and making a profit on the price, not by taking delivery of the product.  It is complicated, requires specialised knowledge and can lose the practitioner life-changing amounts of money.

So what is commodity trading and how does it vary from other international trade transactions?  The definition of commodities can be applied to raw or primary products, such as oil, gold and other precious metals and agricultural items, such as wheat, sugar, rice and the subject of this article – pepper. The objective of this article to to provide basic information about pepper trading and shipping, but also to give an indication of some of the problems that anyone dealing in an agricultural commodity such as pepper might face.  Please note that this is not designed to be a complete or comprehensive guide to pepper trading and should be treated as a general information source only.

Introduction
Pepper (also known as black gold) originated in India and has been exported for over 3000 years.  Traces of black pepper have been found in Ancient Egyptian New Dynasty graves.  Today pepper comprises over 25% of the world trade in spices.  However, it is only grown in certain countries, mainly because the plant requires a wet tropical climate situated preferably within 15 degrees on either side of the Equator.  One of the largest providers is Brazil, who are part of the International Pepper Commodity, an intergovernmental organisation of pepper producing countries.  The other full members are India, Indonesia, Malaysia, Sri Lanka and Vietnam.  The associate members are the Hainan Province of the Peoples Republic of China and Papua New Guinea.  Pepper is also grown in Thailand, Madagascar and Cameroon as well as other parts of China.  In some of these countries the pepper trade is vitally important.  For example, pepper accounts for 91% of Vietnam’s spice exports to the USA.

The Characteristics of the Pepper Plant
The pepper plant (Piper Nigrum belonging to the Piperoceae family) is a tropical climbing vine, usually supported by a tree or other support, which fruits by producing berries that grow in grape-like clumps of up to 150 florets and hang down in a spike.  It starts to bear fruit after 3-4 years from implantation.  Technically the pepper fruit is a drupe (fruit consisting of outer skin, pulpy middle layer, hard and woody inner shell enclosing a single seed), measuring about 5mm in diameter.

The bite and pungency of pepper is primarily due to the nonvolatile alkaloid piperine, the element that creates the heat felt in the mouth rather than the nose and sinuses.  The level of piperine in the peppercorn is directly linked to where it is grown and how mature the berries are when harvested.  Generally the piperine content of peppercorns lies within the range of 3-8g/100g.  Pepper also has an essential oil content, which (with black pepper) is typically 1% – 2.5%, with some reaching as high as 5%.  The higher the levels of piperine and essential oils, the more prized the peppercorn.  However, judging when to harvest  can be difficult because the maximum essential oil content is reached very early in the maturity of the berries and declines with age, whereas the piperine content continues to increase as the berries mature.

Like wine grapes, the flavour and aroma of peppercorns is determined by the local terroir – the set of special conditions that the geography, geology and climate of a certain place, interacting with the plant’s genetics, determine the quality of a crop.  Top-ranked peppercorns are named after the regions they are grown in, or the ports from which they are shipped.  The most valued peppercorns (and highest grades) come from the Indian regions of Tellicherry and Malabor.  Tellicherry peppercorns normally have a piperine content of 6.6 and a volatile oil content of 4.7, while Malabor’s piperine content is about 7 with a volatile oil content of about 4.5.  Lampong pepper grown on Sumatra is the most sought after Indonesian pepper.  Indonesia also produces a white pepper known as Muntok, named for the port it is exported from.

Black pepper varieties obtained from other countries are usually less valued, partially because they vary in heat and are less pungent, but mainly because they lack the complex aroma found in Tellicherry and Malabor peppercorns.  Generally speaking, Brazilian peppercorns are less hot than the Asian varieties.

Pepper berries on a single spike don’t mature at the same time, so when harvested will usually have a variety of colours.  Whether the final pepper product is black, pink/red, green or white depends on its ripeness when harvested and the way it was processed.  These processing methods can further affect the taste and fragrance of the peppercorn and there are different international quality standards.  For example, peppercorns which have undergone Irradiation Sterilisation can be consumed in the USA, but not the EC (European Community).  The EC will, however, accept pepper that has undergone steam sterilisation.  It is interesting to note from their website that Vietnamese pepper growers don’t appear to offer steam sterilisation at the moment – this might be an interesting business opportunity for someone.

All peppercorns start out as green, unripe fruit on the vine.  Some are harvested before maturity, treated and preserved while still green to retain the colour, and sold as green peppercorns.  Most of the early harvested green fruit, however, is dried (which is when they turn black) and sold as black peppercorns. Fruit which is allowed to mature on the vine turns a deep red colour.  Some are sold as red/pink peppercorns, but usually only in local markets, mainly because apparently pink peppercorns are toxic in large quantities.  The majority of the mature fruit is harvested, dried (they turn black) and then processed (a process known as ratting) to remove the dark outer coat and reveal the light beige colour which is then sold as white peppercorns.  Consequently, white pepper has a higher content of piperine and a hotter taste than black pepper whilst fresh peppers contain approximately 5%-9% of piperine.

Various types of pepper will have different characteristics.  For example,
White peppercorns are yellow to dirty yellow in appearance
Tellicherry and Malabor are dark brown to black, netted, spherical, hard and heavy
Lampong, Sarawak (Malaysia) and Cambodia are brownish to black, uneven, not markedly netted and spherical.

Different areas have different harvest periods.  In Brazil this runs between July and September: in Vietnam between January and May.  Provided that recommended storage facilities are maintained, black and white pepper may generally be stored for a period of up to 24 months.  Ground pepper can only last a few months in storage.

General Export/Import Information
The main HS Commodity Code for pepper is 0910.99.  However, the full codes vary from country to country – some examples are detailed below.  (Please note that these codes can change at short notice, so should always be double checked prior to shipment).

EC, Russia and Hong Kong – 0910.99.9900
USA – 0910.99.6000
Canada – 0910.99.9000
Australia – 0910.99.0015
China and South America (generally) – 0910.99.00
Japan –  0910.99.9191
India and the Far East – 0910.99.90
Nigeria – 0910.99.0000.

Import taxes also vary from 30% in India and Turkey to 12.5% in the EC, 3% in Canada, 1.9% in the USA and 0% in Norway, Macao and Malaysia.  However, there are other taxes, such as VAT, which also needs to be taken into consideration.  Another cost to be calculated are any export taxes from the country of export.  However, please note that as of May 2013, in order to promote their Peppercorn exports, both the Brazilian and Vietnamese Governments are waiving export taxes on Pepper exports.

Export Documentation
As well as the normal export documentation (invoice, packing list, Bills of Lading and in some cases Certificates of Origin), special documentation relating to agricultural commodities are also required.  This includes, but is not limited to, the following.  Please note that some of these documents are automatically included in the price of supply.  Others may be supplied at extra cost.  Always check with the import authorities what documentation they require and then check with the supplier to ensure that these are supplied (either as part of the normal price or at additional cost):

Analysis of Salmonella Certificate
Other Micro biotic certificates (if required by the importing country regulations)
SGS Certificate
Phytosanitary Certificate
Fumigation Certificate (usually 72 hours with Aluminium Phosphate)
Quality and Weight Certificates.

Compliance
Food imports, whatever they are, are strictly regulated in most countries.  In the UK, for example, the relevant department is the Food Standards Agency.  Anyone importing food stuffs must know about the regulations that apply to a specific product and the more general rules concerning labelling and additives.  The latter is not normally a problem with pepper, but some of the chemicals used in the processing stages may be problematic.  Failure to comply with such regulations could cause serious delays to the customs clearance of the shipment (and for pepper this can have dire consequences as will be seen under shipping conditions) and may require action by enforcement agencies.

Transport Considerations
Pepper is not an easy cargo to transport.

Although the peperine in peppercorns is non-volatile, the essential oils are readily volatilised, a process primarily dictated by temperature.  However, when transporting pepper, it is vital to retain the content of essential oils to the greatest possible extent, since this (along with other constituents) determine the odour, flavour and quality of the peppercorn.

Pepper has certain other characteristics which need to be taken into consideration when planning a shipment.  Peppercorns are extremely odour-sensitive and so must never be stored or shipped together with any strong-smelling products.  Even after being processed pepper corns continue to ferment, so this can result in increased CO2 concentrations in ship’s holds.  Therefore, real care should be taken when accessing the hold to ensure that the O2 levels are adequate.  Pepper is also moisture-sensitive, so must be protected from any moisture during the packing, handling, loading and shipping process.    However, because peppercorns continue to ferment this means that they release large quantities of water vapour during shipment.  Black pepper releases more vapour than white and fresh pepper releases more vapour than dried so they should never be shipped with moisture-sensitive products i.e. itself.  Also, due to this natural process, and especially with fresh pepper, weight losses of up to 7% may occur due to evaporation of residual intrinsic moisture content.  Normal values are, however, between 1%-2% for white pepper and 2%-4% for black.  Although pepper does not cause contamination, it is sensitive to contamination by dust, dirt, oils and fats

This means that when transporting pepper it must be kept cool, protected from moisture and contaminants and very well ventilated.  It also has to be kept very secure because it is a highly valuable commodity and particularly at risk from theft.

Pepper should be packed in double layered bags or flat jute fabric bags.  During the handling and loading process it is vital that the cargo is protected from moisture which can lead to mold, spoilage and self-heating (due to the essential oils).  No hooks should be used with the bagged cargo, to prevent damage to the bags and a loss of volume.

I will probably mention this a few times, but proper and correct ventilation is very important during the whole shipping process.  Consequently, the containers used to ship the goods are not the usual general purpose (GP) containers that are normally used to ship goods.  The following types of containers are suitable.

– Open-sided with tarpaulins which can be rolled up during transport, so ensuring active ventilation
– Passively ventilated containers
– Thermally insulated refrigerated containers.

If the ventilation is inadequate, vapourisation of the essential oils may occur, which can cause moisture damage by sweating.  Therefore, stowage space should always be cool, dry and easy to ventilate and preferably below deck.  By stowing the containers below deck, this keeps them away from potential risk of high solar heating, which could cause self-heating (where the pepper becomes wet, swells and heats up so much it begins to steam and can become totally worthless) and, particularly for white pepper, a risk of post-fermentation.  Before shipping, the water content of the pepper should be analysed and should always be less than 15%.  An ideal moisture content on loading is 10-11%, which is enough to prevent moisture damage and the breeding of insect pests.

Pepper also requires a particular temperature (between 5 and 25 degrees centigrade).  If the temperature exceeds 25 degrees then essential oils may be lost through self-heating.  If it exceeds 40 degrees then the pepper will dry out by 0.5% and exposure to direct solar radiation can cause the pepper to dry out by 2% or more in weight.

Ventilation is therefore very important.  The containers in the hold must be arranged such that a ‘chimney’ effect is achieved with the air blown in from beneath and rising upwards through the layers of containers continuously removing warm, moist air.

Another important consideration to be borne in mind when shipping pepper is the difference in temperatures that usually occurs between the ports of loading and unloading.  Incoming cold air can cause sudden drops in temperature which, especially in the container interiors, may result in an increase in the relative humidity and so problems with condensation.

In order to prevent condensation, care should be taken to leave a clear gap between the cargo stack and the ship’s side or container wall.  Pepper shipments should also be covered with mats or cloths capable of briefly absorbing any condensation which may drip onto the cargo.  It is also possible to apply an ‘anti-condensation’ film or coat the inside of the container with moisture-absorbing paint (which provides protection for only a limited period).

It is also very important to unload containers quickly on arrival at the port of destination or at least ensure the containers are placed in protected storage from temperature and humidity changes immediately on arrival.  This can be difficult if there is a problem with the import customs clearance due to incorrect paperwork or disallowed trace elements.

Most agricultural commodities are challenging items to ship globally and this brief description about pepper and some of its particular idiosyncrasies may illustrate why.  Trading in commodities is big business, and in various countries some types of commodity are limited to government trading only.  The complications of commodity trading is linked to the extraordinary amount of information required by the trader to ensure that the commodity they are purchasing is worthwhile in the market place and can be shipped in a manner that guarantees the cargo arrives in good condition.  There is also the small matter of proper due diligence.  All these different elements might help everyone understand why I think commodity trading should come with big warning notices.

 

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other international trade articles on the Point to Point Export Services website at www.point-point.com

Comments are closed.