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  • QA 017
    Question:
    What are the advantages of an origin being 'tenderable' against the New York C Contract?
    Background:
    Your QA 016 gives interesting insight into the manner in which differentials for tenderable origins are determined or changed. But, what in fact are the advantages of being a 'tenderable origin', and how would one go about achieving that status?
    Asked by:
    Exporter - Bolivia
     
    Answer:

    Physical trading in 'tenderable' coffees enjoys greater liquidity in that they are easily priced against the main futures markets, New York (arabica) and London (robusta). It is generally easier to raise credit against coffees whose pricing is transparent, i.e. coffees whose prices are easily linked to the futures markets. And, the greater the physical or green coffee differential for non-tenderable coffees vis-à-vis the futures market, the more difficult it is for bankers and others, including the trade, to determine if the price for such a coffee is realistic.

    Price volatility is another factor. Most banks insist that price risk always be hedged. Tenderable status simplifies hedging against the futures markets in that the coffee can be delivered, provided of course that the coffee is certified, graded, as tenderable. The existence of a guaranteed outlet obviously makes it easier for importers and traders to hold stocks of tenderable, certified, coffees.

    Generally though it is not the function of the futures markets to take delivery of physical coffee. Where substantial deliveries are nevertheless made it is sometimes a case of particular origins having pricing difficulties, for example due to slack demand in the face of a large harvest. Low FOB prices may then make it worthwhile for traders to buy such coffees and tender them to "the Board", i.e. the futures market.

    The process leading to inclusion as a tenderable origin is lengthy and more difficult than applying for a change in an already existing differential. Nevertheless, aspiring candidate countries can present their case by writing to Formal representations for differential reviews or applications for inclusion in the list of tenderable origins, by a country's coffee authorities, should be addressed to: The Chairman of The ICE Futures US Coffee Committee, care of the Vice President - Product Development, One North Avenue, New York, NY  10282.

    Posted 12 May 2005
     

    Related chapter(s):
    Related Q & A:
    QA 016