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An exploration of commodity income stabilization options for coffee farmers - page 23 / 47





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  • 2.

    Price Risk Management in Practice

    • 2.1

      Price risk management markets and instruments

Coffee price risk management markets consist of organized futures and options exchanges, and the over-the-counter (OTC) market (for a description of the main market-based risk management instruments available, see the annex to this paper).19 The major organized exchanges are in New York and London. In New York, the world’s Arabica futures prices are determined on the New York Board of Trade (NYBOT). NYBOT is, since early 2007, part of the Intercontinental Exchange (ICE), an electronic upstart which was set up in the late 1990s by a number of oil companies and banks as an OTC exchange for energy products. Robusta futures and options are traded on the London International Futures Exchange (LIFFE), currently known as Euronext.liffe, after its takeover by Euronext in January 2002. 20

There are also coffee futures markets in Indonesia, Brazil and India. In Indonesia, a Robusta contract introduced at the country’s exchange in the early 2000s has not seen any volumes. In Brazil, the local exchange (Bolsa de Mercadorias & Futuros, BM&F) offers Arabica futures and options, denominated in U.S. dollars. Trade in these coffee futures is quite active: in 2005, futures and options for some 50 million bags were traded, double the volume of production. In India, there have been efforts by four exchanges to build an active market for coffee futures trading. The first initiative was an independent coffee exchange, the Coffee Futures Exchange of India (COFEI), set up in 1999 and supported by some of the country’s large plantation companies and traders. The initiative failed and COFEI was disbanded in 2004. Then, the three multi-commodity exchanges which resulted from the country’s liberalization of futures trading each made an attempt. The first was the National Multi- Commodity Exchange (NMCE), followed by the National Commodity & Derivatives Exchange (NCDEX) and then, in February 2007, the Multi Commodity Exchange (MCX). So far, success has been elusive. One factor has been resistance from part of the trading community, which is not too keen on the level of transparency that a modern exchange can bring and which has tried to use weaknesses in the country’s physical infrastructure for coffee grading and warehouses to disrupt futures trading.

In the past there were also Robusta coffee futures contracts in Singapore (which never took off) and in China (where the Robusta contract at the Hainan exchange for some time was the world’s most traded commodity futures contract, until the exchange was closed down in 1997 as part of efforts of the Chinese government to streamline the country’s futures industry).

Price behaviour on the futures markets closely reflects that on the physical market—futures exchanges merely “discover” prices, providing an indication of expected developments of supply and demand. Use of futures markets for price risk management purposes (also called “hedging,” as opposed to “speculation”), then, is not a tool to realize better prices, but a way to obtain more certainty about the prices one can expect to realize. Greater predictability, in turn, makes it possible to make better decisions and to obtain credit at better terms—these

19 20 For an extensive discussion, see for example UNCTAD, A survey of commodity risk management instruments, 1998. LIFFE was created in 1982, to take advantage of the removal of currency controls in the UK in 1979. The exchange modelled itself after the Chicago Board of Trade and the Chicago Mercantile Exchange and in the mid-1990s absorbed the city’s much older commodity futures market.


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