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  • QA 072
    Question:
    How are world coffee prices determined and why are there no futures markets in coffee producing countries?
    Background:
    What criteria determine world coffee prices and why are there no coffee futures markets in coffee producing countries like South America, Asia or Africa? Why only in New York, Germany and France?
    Asked by:
    Commerce student - France
     
    Answer:

    World coffee prices are set by supply and demand, and there are futures markets in some major producing countries, namely Brazil and India. 

    Price setting criteria are mostly quality (what is the quality of a given coffee or origin), and availability (how much or how little is being offered of a particular type of coffee). Of course other factors play a role, for example market expectations, speculative actions, exchange rates… Broadly speaking there are two main types of prices:

    Spot or cash prices are quoted for coffee that is available more or less immediately (or within a reasonable time-span). Prices for individual coffees are differentiated in that they reflect both quality and general availability. Monitoring is simple: follow the four ICO Indicators, published daily, that represent different types of coffee. The ICO Composite Indicator groups 'all coffee' and so provides a quick but generalized measurement of where 'coffee' as a whole is at any given working day. (See QA 068 and section 01.04.01 for more on the ICO Indicator system.)

    Futures prices on the other hand reflect the estimated future availability and demand for coffee as a whole. Futures prices are quoted for the two main quality groups, arabica and robusta, and are then further defined by way of a differential to arrive at a future price for a particular origin or quality. See 01.04.03 for more on 'differentials', basically a way of setting premiums and discounts for different coffees.

    To monitor arabica futures prices go to www.theice.com, the New York Exchange. For robusta futures prices go to www.euronext.com, the London Exchange.

    As mentioned above, other coffee futures markets are in Brazil -www.bm&f.com.br   and in India -www.nmce.com . The Brazilian market is very active and registers strongly growing turnover. The Indian market on the other hand appears to lack liquidity but is an interesting example of how also very small growers can link into futures trading. Apart from the markets in New York and London, the only other actively trading coffee futures market in a consuming country is in Tokyo - www.tge.or.jp 

    For a general overview of the structure of the international coffee market consult chapter 01 of the Guide. For more on futures markets go to chapter 08, and see chapter 09 for information on the actual trading and uses of coffee futures.

    Posted 06 February 2006

    Related chapter(s):
    Related Q & A:
    QA 016, 017, 019, 040, 042, 051, 054, 062, 068.