Relationship between coffee prices in physical and futures markets. AFCA 15 th Conference & Exhibition Addis 16 February 2017

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1 Relationship between coffee prices in physical and futures markets AFCA 15 th Conference & Exhibition Addis 16 February 2017 Dr Denis Seudieu Chief Economist International Coffee Organization

2 INTRODUCTION Physical market prices Spot or physical prices will be represented by ICO composite indicator price, ICO group indicator prices, Including Colombian Milds (CM); Other Milds (OM); Brazilian & Other Arabica Natural (BAN); Robustas (ROB)

3 INTRODUCTION The share of each market in the four groups EU USA Colombian Milds (CM) 46% 54% Other Milds (OM) 59% 41% Brazilian Naturals (BAN) 74% 26% Robustas (ROB) 83% 17% ICO Composite indicator price Colombian Milds (CM) 10% Other Milds (OM) 23% Brazilian Naturals (BAN) 30% Robustas (ROB) 37%

4 INTRODUCTION Futures markets prices New York C Contract (Washed Arabicas) Average of the 2 nd and 3 rd positions London Futures Market for Robustas Average of the 2 nd and 3 rd positions Period of observations:

5 BEHAVIOUR OF CASH AND FUTURES COFFEE PRICES

6 22 Graph 2 - ICO Composite indicator & London Futures contract prices US cents/lb ICO Composite LN Futures

7 30 Graph 3 - Colombian Milds Indicator & New York Futures price US cents/lb CM NY Futrures

8 30 Graph 4 - Other Milds & New York Futures Contract price US cents/lb OM NY Futrures

9 30 Graph 5 -Brazilian Naturals & New York Futures contract price US cents/lb BAN NY Futrures

10 30 London Futures market (annual averages) US cents/lb BAN LN Futures

11 30 Graph 1 - ICO Composite Indicator & New York Futures contract prices US cents/lb ICO Composite NY Futrures

12 14 Graph 7 - Robusta indicator price & London Futures contract price US cents/lb ROB LN Futures

13 40 Graph 3b - Colombian Milds and New York Futures (monthly averages) 30 US cents/lb Jan-94 Apr-96 Jul-98 Oct-00 Jan-03 Apr-05 Jul-07 Oct-09 Jan-12 Apr-14 Jul-16 Oct-18 Colombian Milds NY Futrures

14 30 Graph 5b - Brazilian Naturals & New York Futures contract price (monthly averages) US cents/lb Jan-94 Apr-96 Jul-98 Oct-00 Jan-03 Apr-05 Jul-07 Oct-09 Jan-12 Apr-14 Jul-16 Oct-18 BAN NY Futrures

15 30 Graph 6b - Brazilian naturals & London Futures contract price (Monthly averages) US cents/lb Jan-94Apr-96 Jul-98 Oct-00Jan-03 Apr-05 Jul-07 Oct-09 Jan-12Apr-14 Jul-16 Oct-18 BAN LN Futures

16 20 Graph 7b - Robusta indicator price & London Futures price (Monthly averages) 15 US cents/lb 10 5 Jan-94 Apr-96 Jul-98 Oct-00 Jan-03 Apr-05 Jul-07 Oct-09 Jan-12 Apr-14 Jul-16 Oct-18 Robusta LN Futures

17 CORRELATION ANALYSIS Table 1: Correlation coefficients (Annual averages) ICO Composite CM OM BAN ROB NY Futrures LN Futures ICO Composite 1 CM OM BAN ROB NY Futrures LN Futures

18 CORRELATION ANALYSIS Table 2: Correlation coefficients (Monthly averages) ICO Composite 1 ICO Composite CM OM BAN ROB CM OM BAN ROB NY Futrures NY Futrures LN Futures LN Futures

19 REGRESSION ANALYSIS Extent to which Futures prices are good estimators of spot prices Simple regression analysis Y = ax + b Y is the dependent variable and represents the spot price (CM, OM, BAN or ROB); X is the explanatory variable and represents the futures price ( C contract or London) a is the slope of the regression line, indicating the strength of the relationship between the spot and the futures prices b is a random or residual variable

20 REGRESSION ANALYSIS Table 3: Results of regressions for spot and futures prices Y = ax + b Y = Spot price X = Futures price Comlombian Others Brasilian Brasilian Robusta Milds (CM) Milds (OM) Naturals (BAN) Naturals (BAN) (ROB) & New York & New York & New York & London & London r r a b

21 40 Graph 8: Regression chart for Colombian Milds indicator price and New York Futures prices y = x R² = Colombian Milds Colombian Milds = xnew York Futures R² =

22 40 Graph 9: Regression chart for Other Milds and New York Futures y = x R² = Other Milds Other Milds = xNY Futures R² =

23 R² = BAN

24 30 Graph 11: Regression chart for Brazilian Naturals and London Futures y = x R² = BAN BAN = x LN Futures R² =

25 20 Graph 12: Regresion chart for Robusta and London Futures y = x R² = Robusta ROB = x LN Futures R² =

26 CONCLUSION Strong relationship between spot and Futures prices C contract has a very strong relationship with Brazilian & Other Naturals Reduced link between BAN and London Futures (Vietnam factor) London Futures market is a very good estimator of Robusta price

27 CONCLUSION Main conclusion: C contract does reflect Brazilian fundamentals although it doesn t cover Brazilian origin Impact of Brazilian fundamentals on London Futures has been reduced due to Vietnamese fundamentals New York Futures and London Futures are driven by fundamentals of Brazil and Vietnam.

28 Thank you

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