• QA 117
    Why are US and European stocks certified for delivery against the futures markets of New York (NYBOT) and London (LIFFE)?
    In QA 115 you mention that roasters seldom take delivery of physical coffee from the futures markets of New York and London. But if this is so why then is so much of the stocks held in the US and Europe certified for delivery against these futures markets?
    Asked by:
    Exporter - Vietnam

    Physical delivery to or from a futures market ensures a solid relationship with the commodity that allows buyers or sellers the option to make or take delivery of physical coffee, rather than always having to liquidate or offset the futures contract they have entered into. However, the main reasons for what are today substantial certified stocks in consuming countries are financial… 

    For example, by August 17th 2006 NYBOT certified stocks totalled some 3,4 million bags of 60 kilos. At the then ruling ex dock price on NYBOT for September delivery this represented a total value of approximately 468 million US Dollars…

    • Banks financing those stocks need to make sure the quality is acceptable, and that there is a guaranteed market for that coffee. Passing the certification test confirms that the quality is acceptable and that, as a last resort, the coffee can always be tendered to the futures market. *
    • Also, banks nearly always insist that the price risk on unsold stocks be hedged through offsetting sales on the futures market. Certifying those stocks provides the certainty that the coffee can be tendered, for example if a bank has to foreclose on a borrower and has to find a way to dispose of the coffee it has financed.
    • Finally, for mainstream or commercial grade coffee certification certainly improves trade liquidity because both quality and the current price ex dock are easily established.

    One of the reasons roasters do not normally use the futures market as a supply channel is that they do not know in advance what origin they will receive, or where that coffee may be stored. As explained in Chapter 08 of the Guide, futures markets represent a basket of more or less comparable coffees, from different producing countries that can be delivered to a number of physical locations. By buying from importers or the trade a roaster can specify exactly what he wants, where he wants it, and when he wants it…
    * Certification also helps to establish that the insured value is a reasonable match with the quality.

    NB: In January 2007 The New York Board of Trade (NYBOT) merged with  InterContinental Exchange (ICE) - see ICE Futures US at www.theice.com

    Posted 14 October 2006

    Related chapter(s):
    Related Q & A:
    QA 016, QA 017, QA 042, QA 115