Trade and Future Markets

Transcription

1 Trade and Future Markets Coffee as a Commodity

2 Structure Trade and Future Markets 1. Trade Routes and Participants 2. Coffee Trade as a Physical Business 3. Trading Future Markets 4. Coffee Trade as a Commodity Future Business 5. Combination of Physical Business and Commodity Future Business

3 The Flow of Green Coffee is very complex and not stardardized Small Grower Medium sized grower Small Cooperative Internal Coffee Buyer CLarge Cooperative Processor Auction Large Grower / Plantation Internal Trader / Agent er / Agent Exporterr Importer Agent Decaffeination Plant Roaster / producer of Soluble Coffee

4 Participants of the Coffee Trade Importer Agent Tasks: Tasks: Purchasing of coffee in the Origin and selling to roasters Import Processing Occasionally carrying the risk in respect of transportaion and quality Occasionally: Financing Mediation of a business Monitoring of all export-/import processes and timings - Sampling - Timely shipment - Control of documents - Handling of price-fixorders

5 Structure Trade and Future Markets 1. Trade Routes and Participants 2. Coffee Trade as a Physical Business 3. Trading Future Markets 4. Coffee Trade as a Commodity Future Business 5. Combination of Physical Business and Commodity Future Business

6 Coffee Trade a Physical Business: Types of Contracts and Elements ECF-Standardverträge: European Contracts for Coffee (E.C.C.) European Free Carrier Contract for Coffee = Regulation between exporter and importer European Contract for Spot Coffee European Delivery Contract for Coffee = Regulation between importer and roaster Die most important elements of the contract: 1. Quality and Quantity 2. Delivery- and conditions of shipment 3. Conditions of payment 4. Jurisdiction 5. Price

7 Coffee Trade as a Physical Business: Quality and Quantity Coffee is a natural product. It cannot be classified and rated in a standardized manner. A precise judgement of the quality is only possible via sampling and liquoring. There are different parameters of classification of coffee qualities. Dicription of quality = origin + process (dry/wet) + classification + region + plantatiom Classification according to: Beansize Screensize (e.g. Scr. 17/18) AA, AB, C Large, extra large, medium.. Hardness & Density HB = Hard Bean, SHB = Strictly Hard Bean Number of Defects Grade 1 Grade 5 Altitude HG- Hight Grown, SHG = Strictly High Grown Way of Roasting: fine roast, good to fine roast, good roast Bag: Accoding to the origin different units:: 60 kg / 69 kg / 70 kg

8 Coffee Trade as a Physical Business: Delivery and shipment Conditions Which contract partner will bear the tranport costs and who carries the risk is agrred upon in the contract. The contract refers to the Incoterms. For the sipment of coffee the follwing codes are applicable: FOB = Free On Board CIF = Cost Insurance Freight CFR = Cost and Freight FCA = Free Carrier

9 Coffee Trade as a Physical Business: Delivery and shipment conditions FOB = Free On Board Seller: Organizes the transport into the the port of shipment and carries the risk uoto the ship's railing. Buyer: Books the space on the ship of his choice, carries the freight and insurance charges Contractes sales price = Value of the goods at the time of crossing the ship's railing. Seller Buyer Risk Freight- and insurance charges Port of shipment Port of Discharge

10 Coffee Trade as a Physical Business: Delivery and shipment conditions CIF = Cost Insurance Freight Seller: Organizes the transport in the country of origin and carries the responsibility upto the loading of the goods onto the ship. CIF-Price: Value of the good at the time of the import inclusive of the costs, insurance and freight. Buyer Seller Freight and insurance costs. Risk. Port of shipment Port of discharge

11 Coffee Trade as a Physical Business: Conditions of payment Two different conditions of payment are common and are fixed in the contract: 1. Cash against documents (CAD) 2. Letter of credit (L/C) CAD L/C Usual Payment Condition of the coffee trade Transfer of documents first to the Bank or agent (payment transaction), then to the buyer Instant Payment by bank transaction Payment by letter of credit (= irrevocable guarantee of the bank of the buyer) Term of payment if the trade relationship is new (first business) Time- and cost intensive

12 Coffee Trade as a Physical Business: Jurisdiction If the contract partners have a dispute a court of arbitration is called. The responsible court of arbitration is mutually agreed upon in the sales contract. Court of arbitrations: Europe: Hamburg oder London USA: New York Reasons for arbitration Disputes about the quality of the contracted coffee Techincal disputes regardless of the coffee quality (breach of contract)

13 Coffee Trade as a Physical Businesss: Pricing A substantial part of the contract is the price. The price is negotiated between the contract partners. In order to agree on a price the contract partners find orientation at the terminal market. Terminal market:actual day value of a standard quality + defined delivery date For physically traded coffee one rarely pays exactly the price of the terminal market.

14 Coffee Trade as a Physical Business: Price setting Alternatives of the price setting of physical coffee trading: Outright - Business Fixed invoice price between buyers and sellers Orientation by means of the terminal market Apart from the price the following conditons are fixed: quality, delivery time, transport quantity conditons of payment Price to be fixed - business Surcharge or discount on the terminal market price (differential) Invoice price is not known at the time of closing the contract Invoice price = future terminal market price +/- differential agreed upon (e.g. +10)

15 Coffee Trade as a Physical Business: Completion of the physical business In case the coffee was delivered in time and adheres to the contracted quality and quantity, the contract is deemed to be treated as being fulfilled and the physical business between the contract partners is completed.

16 Structure Trade and Future Markets 1. Trade Routes and Participants 2. Coffee Trade as a Physical Business 3. Trading Future Markets 4. Coffee Trade as a Commodity Future Business 5. Combination of Physical Business and Commodity Future Business

17 Trading Future Markets Future Trades = Purchase or sale of contracts at the terminal markets The fulfillment and delivery of a future trade is done at a fixed date in the future and at a fixed price. Futures = Future contracts (date) Obligation to deliver goods at a specific date (Short Position) or to take delivery (Long Position) Short Hedge Sale of contracts Long Hedge Purchase of contracts

18 Structure Trade and Future Markets 1. Trade Routes and Participants 2. Coffee Trade as a Physical Business 3. Trading Future Markets 4. Coffee Trade as a Commodity Future Business 5. Combination of Physical Business and Commodity Future Business

19 Coffee Trade as a Commodity Futrue Business Long Hedge => Futures are bought once green coffee has been sold. Short Hedge => Futures are sold once green coffee has been bought.

20 Terminal Market New York Arabica coffee trades at the New York terminal market (ICE Futures US international exchange). Trading unit = US-Cents per lb 1 lb = 453,6 g Coffee Futures Contract C-Kontrakt Basis Delivery Contract: Qualities, exchange delivery months, units Smallest unit/contract: 1 lot = lb = kg = 17,01t Delivery months: March (H), May (K), July(N), September (U), December (Z) Example: KCZ18 = Price for the C-Contract for the delivery month December in 2018

21 Terminal market London Robusta-coffee trades in London at the terminal market NYSE Euronext Liffe. Trading unit = US-Dollar per ton Robusta Coffee Contract, No 409. R0Contact Basis Delivery Contract: Qualities, delivery months, units Smallest unit/contract: 1 lot = kg = 10t Delivery months: January (F), March (H), May (K), July (N), September (U), November (X) Beispiel: RCDX15 = Price for Robusta-Contract for the delivery month November

22 Conversions Coffee 1 Lot in New York = lbs x 0,4536 kg = kg 1 Lot in London = 10 tons x kg = kg Units for a container shipment: 20 foot Container = bags à 60 kg (ca.18-19,2 t) bags à 69 kg bzw. 70 kg ( ca.17,25-19,9 t) Bulk: appr. 18,0 t to 21,6 t

23 Structure Trade and Future Markets 1. Trade Routes and Participants 2. Coffee Trade as a Physical Business 3. Trading Future Markets 4. Coffee Trade as a Commodity Future Business 5. Combination of Physical Business and Commodity Future Business

24 Comnination of phys. business and commodity future business A potential buyer shows interest in a specific quality and quantity for a specific delivery- or shipping date Seller offers on a basis of a sample or discription Conclusion of business at mutually agreed price (outright) Conclusion of vusiness on the basis of a differential. Price to be fixed - business Surcharge or discount on the terminal market price (differential) Final price is not known at the time of contract conclusion Final price = future terminal market price +/- contracted differential (e.g.. +10) Establish the terminal market level at a later date ( = fixing)

25 Combination of physical business and terminal market business Normally, a business consists of the following transactions: Physical business Terminal market business The real, existing coffee (physical) Green coffee traded in bags, big bags or bulk Mutually agreed prices between the trading partners Trading of contracts at the terminal market Hedging of a real business (purchase or sale) at the terminal market in New York or London Adjustment of fluctuations of the terminal markets because there is a time-lag on importer's side between the purchase and the sale of the green coffee

26 Example 1: Outright business with countertrade from the standpoint of the importer Presumption: Contract between Producer (P) and Importer (I) about 1000 bags of 69 kg each at 120,00 cts/lb Date 03. May Contract between Importer and Roaster (R) about 1000 bags à 69 kg at 108,00 cts/lb Terminal market price drops from 106,00 cts/lb to 90,00 cts/lb 1 lb = 453 g, 1 lot New York terminal market = lb Physical trade / outright business I purchases from P green coffee: Sack à 69 kg from Costa Rica SHB Arabica This equals kg or lb Price (outright-business): 120,00 cts/lb Shipment:: FOB origin Price: 120,00 cts x lb = US-Cents Calculation: Terminal market business/ counterbiz. (New York terminal market) I sells lb equals 4,06 lots (of lb each) As you can only trade whole lots, 4 lots are sold 4 lots at 106,00 cts/lb (actual print of the day) 4 lots equal lb Price: 106,00 cents x lb = US-Cents USD (Profit on the terminal market I sells to R I buys business) 1000 bagsof 69 kg Costa Rica SHB 4 lots at 90,00 cts/ lb (actual print of the ,16 USD (loss on the phys. business) Arabica day) = 5.721,84 USD profit Price (outright-business): 108,00 cts/lb 20. May => 4,00 cts/lb for the importer Price: 108,00 cts x lb = US-Cents Result Loss of 12,00 cts/lb (120,00 cts/lb 108,00 cts/lb) => 0,12 US- $ x lb = ,16 US-$ in total Preis: 90,00 cts x lb = US-Cents Profit of 16,00 cts/lb (106 US-Cents per lb90,00 cts/lb) => 0,16 US- $ x lb = US-$ total

27 Example 2: Price-to-be-fixed-business (PTBF) with Counter-business from the view of the importer (1/3) Assumptions: Contract between Producer (P) and Importer (I) about 1000 bags à 69 kg, Differential +10,00 cts/lb Contract between Importer (I) and Roaster (R) about 1000 bags à 69 kg, Differential +12,00 cts/lb Terminal market advances: P fixes at 102,00 cts/lb (market price), R fixes at 111,00 cts/lb (market price) Date Physical business /outright business 23. March I buys from P coffee 1000 Sack à 69 kg from Costa Rica SHB Arabica This equalst kg or lb Price (PTBF-business): + 10,00 cts/lb (Differential vs. Terminal market) 15. April I sells to R 1000 bags à 69kg Costa Rica SHB Arabica This equals kg or lb Price: plus 12,00 cts/ lb (Differential vs. Terminal market) P fixes the prices versus Importer (I) 102 US-Cents pro lb (actual market price of the terminal market) 06. May 1 lb = 453 g, 1 lot at the New Yorker terminal market = lb Terminal market business / counter business (New Yorker terminal market) Keine Aktion Keine Aktion I sells lb equals 4,06 lots (à lb) As only whole lots are traded, 4 lots are being sold 4 lots = lb 4 lots for 102,00 cts/lb Price: 102,00 cts x lb = US-Cents

28 Example 2: Price-to-be-fixed-business (PTBF) with Counter-business from the view of the importer (2/3) Assumptions: Contract between Producer (P) and Importer (I) about 1000 bags à 69 kg, Differential +10,00 cts/lb Date Terminal market business / counter business (New Yorker terminal market) R fixes the price versus I 111,00 cts/ lb (actual price of the terminal market) I buys 4 lots at 111,00 cts/lb (actual price of the terminal market) 4 lots equal lb 15. May Contract between Importer (I) and Roaster (R) about 1000 bags à 69 kg, Differential +12,00 cts/lb Terminal market advances: P fixes at 102,00 cts/lb (market price), R fixes at 111,00 cts/lb (market price) Physical business /outright business Preis: 111,00 US-Cents x lb = US-Cents 08. July P ships the coffee and makes out the invoice to I: Price: 112,00 cts/lb (composed price of terminal market 102,00 cts and contracted differential of 10,00 cts/lb) Keine Aktion Preis: 112,00 US-Cents x lb = US-Cents 1 lb = 453 g, 1 lot an der New Yorker Börse = lb

29 Example 2: Price-to-be-fixed-business (PTBF) with Counter-business from the view of the importer (3/3) Assumptions: Contract between Producer (P) and Importer (I) about 1000 bags à 69 kg, Differential +10,00 cts/lb Date 26. July Terminal market business / counter business (New Yorker terminal market) I makes out an invoice to R Price 123,00 cts/lb (composed price of terminal market 111,00 cts/lb and differential von 12,00 cts/lb) Keine Aktion Preis: 123,00 US-Cents x lb = Calculation: US-Cents ,98 USD (profit physical business) Contract between Importer (I) and Roaster (R) about 1000 bags à 69 kg, Differential +12,00 cts/lb Terminal market advances: P fixes at 102,00 cts/lb (market price), R fixes at 111,00 cts/lb (market price) Physical business /outright business ,00 USD (loss terminal market business) =3.254,98 USD Profit Loss of 9,00 cts/lb generated by the terminal the importer market business Result Profit of 11,00 cts/lb generated by the => 2,00 cts/lb for physical business = 123,00 cts/lb 111,00 cts/lb => 12,00 US-Cents x lb = US-Cents = , 98 US-$ in total 1 lb = 453 g, 1 lot an der New Yorker Börse = lb = 102,00 cts/lb 111,00 cts/lb => 9,00 US-Cents x lb = US-Cents = ,00 US-$ in total

30 Physical busines and terminal market business Conclusions Regardless of the fluctuation of the prices of the terminal market, the macoffee market participants will always hedge their physical business by means of a counter-trade at the terminal markets.