STiR coffee and tea magazine

26 STiR coffee and tea / Issue 1, 2018 (February / March) Smooth Transition for New ICE Rules Implementation of rules that gov- ern pricing of London coffee fu- tures beginning this spring are not expected to disrupt markets. Traders shipping robusta cof- fee from producing countries to In- tercontinental 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 de- cided 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. ICE robusta coffee futures for July delivery in July 2018 are expected to widen the discount paid on cof- fee, versus futures. The market spread is starting to reflect the transi- tion 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 cof- fee 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 Organi- zation (ICO). Estimated production in Vietnam amounts to 28.5 million bags, 11.6% higher than 2016/17, ac- cording 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 Open markets Open markets are what lifted billions of Chinese, Vietnamese, and Malay- sians from poverty. The ASEAN trade block and the newly established 11-nation Trans-Pacific Partnership (sans the vocal and temperamental US) has every intention of easing trade barriers for nations growing a sizeable amount of the world's coffee. The fact that the trade pact was approved without the US is promising. The agreement was first envisioned as a tool to reduce trade friction between Asian countries and the US. The TPP signed in March 2018 will link markets that total 14% of the world's GDP. In January, during the World Economic Forum global summit, Canadian Prime Minister Justin Trudeau said the new deal shows TPP members are pushing back against protectionism. "If we are going to push back against the anti-trade tendency in globalization that will leave us all worse off, we have to put the concerns and the well-being of our ordinary citizens at the center of what we are negotiating, and that is what 11 of us have been able to do with TPP," Trudeau said during a televised panel discussion. One very eager new buyer is Dubai where the Multi Commodities Cen- ter (DMCC) is constructing a 7,500 m 2 temperature-controlled storage and warehousing facility with a capacity of 20,000 metric tons annually and offices for coffee traders. Expected annual trade value is $100 million, according to DMCC. Coffee companies pay no duty landing in Dubai which intends to be a coffee center for value addition modeled on its work in tea. DMCC accounted re-exported 53 million kilos of tea (60% of global share) last year, of which 6.33 million kilos was value-addded. Exporters pay $250 (AED950) to load or unload 40-foot containers with free storage for up to 45 days and another 21 days of warehousing at no charge for value-added products. After 66 days, the warehouse fee is 40-cents per metric ton, per day. Precarious balance The global balance of demand and supply slightly favors production, observes ICO's José Sette. Lower prices have not deterred farmers. A dramatic shift in acreage away from coffee has been offset by bigger gains in yield. Outliers continue to spring up. A surprise bumper crop in Honduras last year overtook Ethiopia as the third-largest arabica producer behind Brazil and Colom- bia. In 2017/18 Honduras predicts a record 7.3 million bags and the US Depart- ment of Agriculture forecasts an even greater 7.4 million bags. These totals are even more impressive given the severity of damage caused by coffee leaf rust. While coffee producers ably demonstrate their resilience, world consump- tion is climbing steadily toward a significant gap by 2030, according to Sette. The gap can only be closed through sustainable increases in farm productivity that includes research into improved coffee varieties; the dissemination of new varieties and modern farming techniques with public support for rehabilitation and replanting along with access to finance (including long-term loans). Ultimately success depends on farm profitability, he said and that comes down to an increased share of the retail price received by farmers. ICO Composite Indicator (daily prices)

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