The accelerating pace of trades and a desire for greater transparency, efficiency, and quicker settlement on delivery of robusta coffee futures contracts has prompted a number of changes in rules for trades on the Intercontinental Exchange (ICE).
Toby Brandon, ICE director of soft commodity operations, explains that consideration of these fundamental changes in pricing structure has been closely coordinated with coffee traders and warehouse keepers. He said the rules changes apply to robusta and London-traded cocoa and became effective in October 2016 for the July 2018 contract month.
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Brandon noted that futures contracts, by definition, require long lead times but coffee to fulfill those contracts is now growing on the world’s farms, he said.
Brandon traveled to Austin, Tex., to brief attendees at the National Coffee Association’s annual convention as part of an educational program to avoid a jarring transition.
In 2014 ICE amended the maximum rent and load-out rate requirements for warehouse keepers and introduced a 60-day limit to complete load-out requests.
Under the new rules “the future reference point shifts upward to include free on truck,” he said.
Brandon said that the exchange cannot predict with certainty the value for pre-paid load-out until after July. “The market will decide,” he said.
Nothing prevents warehouse keepers from increasing rent, he said, “we are not sure how warehouse keepers will react,” but the rules are structured to encourage efficiency in warehousing by rewarding pricing incentives to coffee deliverers who select less costly in store, he explained.
Brandon illustrated the price components in the diagram above.
In summary, futures prices will now include pre-paid loading out charges in the price of the futures contract, along with an adjustment on delivery invoices to align with rent paid in the two-month period immediately following delivery.
ICE publishes a global average rate for warehousing robusta. The rules also shorten from 14 days to 4 days the period between notice and settlement to streamline the delivery process.
Brandon reassured those attending the presentation that the changes “are designed to provide the coffee industry with the most effective tools for price discovery and to manage risk.”
ICE operates a global network of futures, equity, and equity options exchanges, as well as global clearing and data services. In addition to enabling trades on a modern digital platform the exchange provides hedging tools for coffee traders and producers to help them to manage their price risk associated with crop production, weather patterns, and changes in supply and demand.