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  • Underlying principles


    The extreme volatility of the price of coffee brings drastic price changes over months, weeks or days, or even within the same trading day. Crop prospects vary widely due to unforeseen events, for example drought, frost or disease. High coffee prices encourage production growth while low prices result in falling output. The balance of supply and demand is subject to many uncertainties that affect price trends and therefore represent price risk. All levels of the coffee industry are exposed to risk from sudden price changes.

    Futures markets (also known as terminal markets, from the French marché à terme) exist because of price risk in the cash market for the underlying industry. No price risk means no role for a futures market. This basic fact is crucial to any understanding of the purpose and function of futures markets.

    Coffee futures represent coffee that will become available at some point in the future, based on standard contracts to deliver or accept a pre-determined quantity and quality of coffee at one of a known range of delivery ports. The only points to be agreed when concluding a futures contract are the delivery period and the price. The delivery period is chosen from a pre-set range of calendar months, called the trading positions. Market forces determine the price at the time of dealing.

    There are two main futures market centres, New York and London, serving the global coffee industry:

    • In New York, the Intercontinental Exchange, since early 2007 the parent company of the New York Board of Trade, for arabica (the New York C Contract - market symbol KC) - see www.theice.com.
    • In London, The London International Financial Futures and Options Exchange (LIFFE), since early 2002 part of the Euronext group, for robusta (market symbol RC) - see www.euronext.com

    For ease of reference these markets will from now on mostly be referred to in this Guide as New York arabica or New York C Contract and London robusta.

    Smaller futures markets trading in coffee are found in Braziland Japan.

    See 08.06 Japan and 08.07 Brazil.

    Internet access

    The growth of the Internet has made access to the main markets easier than ever. The exchanges have their own websites, and all the major commodity news services (Reuters, CRB, etc.) supply price quotes for the major coffee futures markets. There are also Internet sites relating specifically to the coffee business that provide market quotes. Most sites are easy to navigate and usually include a page with the latest futures price quotations.

    To locate market information on the Internet, it is helpful to understand the market coding systems. Using the symbols mentioned above, LKDX10 would refer to a quote on the London robusta market for the November 2010 delivery period. In the same way, KCZ10 would symbolize a quote on the New York arabica contract for the December 2010 delivery period. Some Internet sites are easier to navigate and read using these official market symbols; other sites spell everything out in plain English.

    Free access price quotations are subject to a 20- to 30-minute delay. Anyone requiring up-to-the-minute quotations must register with a subscription service, which means paying monthly fees for real-time quotes. There are numerous such subscription services with fees ranging anywhere from US$ 200 to US$ 1,000 per month, depending on what other news and trading services the subscription package includes.