Smooth Transition for New ICE Rules
Implementation of rules that govern pricing of London coffee futures beginning this spring are not expected to disrupt markets.
Traders shipping robusta coffee from producing countries to Intercontinental Exchange (ICE ) warehouses must now pay for the loading out of beans as well as rent until the end of a 60-day period that begins with delivery. The changes were finalized in Oct. 2016 and effective from the July 2018 contract month expiry onwards.
“The exact amount of pre-paid load-out will be decided by the market,” according to Toby Brandon, ICE director of soft commodity operations. In July 2018 “the futures reference point shifts upward to include free on truck,” he said. Traders delivering coffee to the exchange bear this cost, one of several carrying costs.
“The impact will be most evident in May 2018 as coffee for delivery in July 2018 will be traded with the warehouse costs included,” explains Judy Ganes, president of J. Ganes Consulting. “The added cost will make coffee more expensive, but this is a one-time adjustment that will improve transparency,” she said.\
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ICE robusta coffee futures for July delivery in July 2018 are expected to widen the discount paid on coffee, versus futures.
The market spread is starting to reflect the transition but that will normalize with the additional carrying costs added, according to Ganes.
Higher costs mean that traders will earn less by carrying, a strategy where beans are purchased and stored for sale later as prices rise. Roasters benefit by locking in futures prices and postponing physical purchases until later when discounts might be more attractive.
Some traders are concerned about the risk of falling inventories in Europe which are historically low at 1.46 million 60-kg bags. In January 2017 London certified stocks were 2.73 million bags, more than a million greater than the current inventory. Green coffee stocks in European ports were at a four-year low in December.
The total output of robusta is estimated at 60.09 million bags in 2017/18, 8.2% higher than the previous crop year, according to the International Coffee Organization (ICO). Estimated production in Vietnam amounts to 28.5 million bags, 11.6% higher than 2016/17, according to ICO. Vietnam is the world’s largest robusta producer and Brazil is also expecting a good crop.
Bountiful harvests and increased costs could pressure traders to buy cheaper at origin. The rule changes also may lead to bigger discounts in the physical market for Vietnamese beans compared with exchange prices.
Leading up to May when the July 2018 contract starts trading there may be some impact, said Ganes, but afterward “it will not be significant. The adjustment is well anticipated and will soon be forgotten.”
- By Dan Bolton