The coffee futures exchanges were originally created
to bring order to the process of pricing and trading coffee and to diminish the
risk associated with chaotic cash market conditions. The futures prices that
serve as benchmarks for the coffee industry are openly negotiated in the markets
of the coffee futures exchanges (primarily New York and London).
To support a futures market, a cash market must have
certain characteristics: sufficient price volatility and continuous price risk
exposure to affect all levels of the marketing chain; enough market participants
with competing price goals; and a quantifiable underlying basic commodity with
grade or common characteristics that can be standardized.
The futures exchange is an organized marketplace
that:
- Provides and operates the facilities for
trading;
- Establishes, monitors and enforces the rules for
trading; and
- Keeps and disseminates trading
data.
The exchange does
not set the price! It does not even participate in coffee price
determination. The exchange market supports five basic pricing functions:
- Price discovery;
- Price risk transfer;
- Price dissemination;
- Price quality;
- Arbitration.
The exchange establishes a visible, free market
setting for the trading of futures and options which helps the underlying
industry find a market price (price discovery)
for the product and allows the transfer of
risk associated with cash price volatility. As price discovery takes place,
the exchange provides price dissemination
worldwide.
Continuous availability of pricing information
contributes to wider market participation and to the quality of price. (More buyers and sellers in the
marketplace means better pricing opportunities.) Greater participation means
that price discovery reflects the conditions of the commodity market as a whole.
To ensure the accuracy and efficiency of the trading process, the exchange also
resolves trading disputes through arbitration.