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  • QA 068
    Question:
    Why does the International Coffee Organization (ICO) publish four different coffee prices?
    Background:
     

     
    Asked by:
    Commerce student - France
     
    Answer:

    For administrative and other reasons the ICO has divided coffee production into four groups: Colombian mild arabicas, Other mild arabicas, Brazilian and other natural arabicas, and Robustas. These four groups represent the main types of coffee available in the international market, making it therefore relatively simple to calculate a Daily Indicator Price for each, using information available from recognized market sources. This is what the ICO (www.ico.org) publishes. Go to 01.02.03 to see the groups to which individual producing countries belong but note that some 14 countries produce both arabica and robusta - see 01.02.05.

     

    The origin of this system goes back many years to the time when coffee was subject to an International Coffee Agreement (ICA) with Economic Clauses, i.e. price regulation. The Agreements relied on individual country export quotas to regulate market supply, negotiated annually. Prices falling below the agreed lower limit triggered quota reductions - prices exceeding the upper limit triggered quota increases. The four categories enabled the ICO to calculate market prices for these four broad groups and so monitor price developments for each. In addition, using an agreed formula, the ICO introduced a Composite Indicator that combined these four into a single price representing 'all coffee'. See 01.04.01 for details of the current calculation formula for each Indicator and go to 01.05.02 and 01.05.03 for a brief resume of the history of both the ICO and the ICA.

     

    The Indicators predated active futures trading in coffee [1] and at one time represented the only published means of price discovery. In recent years the futures markets have taken the lead in price discovery, also because they enable the price quote to be hedged. The ICO Indicators cannot be used for this.

     

    Although export quotas disappeared many years ago the pricing system has always been maintained to allow the ICO to continue monitoring the market, and to publish the Daily Price Indicators. The Indicators are of great value, not only to the marketplace as a whole, so including producers and consumers, but also statistically as they allow industry, economists, researchers and others to monitor long-term price trends.

    Posted 16 January 2006


    [1] New York futures market www.theice.com; London futures market www.liffe.com;

       Sao Paulo futures market www.bmf.com.br 

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