• Producers, exporters and PTBF


    Exporters who enter into PTBF contracts must have a similar view of the contract as the end-user. The exporter of arabica is making a commitment to deliver a type of coffee at a differential from the 'C' contract, or robusta at a differential against the London LIFFE price. There is commitment to a delivery and a differential but, until the contract is fixed, there is no firm price commitment. In theory this means that at this stage neither party is overly concerned about the 'price of coffee' as such: their risk now lies in the development of the differentials. But it is very different for producers to whom the actual price of coffee is of overriding importance.

    The volume of trade on the futures markets is huge, far exceeding the trade in physical coffee. The average daily turnover in New York futures is between 1.5 million and 2 million bags and it is estimated that on some days close to three-quarters of the total volume may consist of speculative trading by brokers, trade houses, commodity funds and outright speculators.

    (Note though that speculators are generally responding to hedgers and will take positions partly based on perceived trends in hedging activity. They move the price to adjust their positions during the day, but overall that can benefit the hedger who has placed an order and is seeking a particular price range. The price movement during the day can increase the chances of getting a 'good fill' on the floor during a trading session.)

    Price movements can represent factors far removed from the actual physical market at origin, especially for small producing countries. It would be unwise for producers to feel comfortable with their crops committed only on a PTBF basis because in fact they have committed themselves to deliver their coffee at no matter what price.

    Producers selling PTBF without any form of price protection must accept that they are losing all control over the final sales price.

    When prices are very low in any case, as in 2001/02, this is probably not an issue, but when prices have ample room to fall, as in the late 1990s, then entirely open PTBF sales expose the producer to huge risk.

    The apparent advantage of PTBF to the producer is that, for example, by selling part of their expected crop in July for shipment in October to be fixed against the New York December position, they have gained the time to fix the price at their option until the first notice day (the day when notice of intended delivery against the futures spot position can first be given) in late November. They will sell PTBF if at the time of selling they believe that the current price is too low and they expect to benefit from the higher prices later in the year. PTBF 'seller's call' (see 09.02.03) does not require the producer to operate on the futures market as such and there are therefore neither margin payments nor commissions involved.

    The producer should realize they have only secured the market differential and that they remain exposed on the actual sales price until an instruction is given to fix. But they have secured a home for their physical coffee, enabling them to plan ahead and to make arrangements for quality control, delivery and shipment. Producers and exporters generally should have a well-balanced mix of PTBF and outright priced contracts in order to spread their price exposure while ensuring they market their crops to coincide with harvest or arrival schedules.

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