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  • 8.9.4-FUTURES MARKETS-FUTURES PRICES

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  • Futures prices

     
     

    Futures prices and spot prices. Futures markets provide a public forum to enable producers, consumers, dealers and speculators to exchange offers and bids until a price is reached which balances the day's supply and demand.
     
    Remember that only a negligible proportion of the physical coffee trade actually moves through exchange markets. 

    The futures price is intended to reflect current and prospective supply and demand conditions whereas the spot price in the physical market refers to the price of a coffee for immediate delivery. In the futures market the spot price normally reflects the nearest futures trading position.

    Carries and inversions. When the quotation for the forward positions stands at a premium to the spot price, the market is said to display a carry (also called forwardation or contango). The price of each successive forward position rises the further away it is from the spot position. In order to provide adequate incentives for traders to carry stocks, the premiums for forward positions must cover at least part of the carrying costs of those who accept ownership. Therefore, when stocks become excessive, the futures market enables operators to enter the market to buy the commodity on a cash basis and to sell futures, thereby carrying it. The carry will eventually rise to a level where the premium covers the full cost of financing, warehousing and insuring unused coffee stocks. This level of the forward premium is known as the full carry. The holders of surplus coffee are now covered for the full costs of holding these stocks.

    The size of the forward premium or discount between the various forward trading months quoted at any time reflects the fundamentals of the coffee market. When coffee is in short supply, the market nearly always displays an inversion (backwardation), with the forward quotation standing at a discount to the cash price.

    This inversion encourages the holder of surplus stocks to supply them to the spot market and to earn the inversion by simultaneously purchasing comparable tonnages of forward futures at a discount to the spot price.