Relationship between coffee prices in physical and futures markets - PowerPoint PPT Presentation


 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

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)

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

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: 1990 - 2016

BEHAVIOUR OF CASH AND FUTURES COFFEE PRICES

Graph 2 - ICO Composite indicator & London Futures contract prices 220.00 165.00 US cents/lb 110.00 55.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 ICO Composite LN Futures

Graph 3 - Colombian Milds Indicator & New York Futures price 300.00 225.00 US cents/lb 150.00 75.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 CM NY Futrures

Graph 4 - Other Milds & New York Futures Contract price 300.00 225.00 US cents/lb 150.00 75.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 OM NY Futrures

Graph 5 -Brazilian Naturals & New York Futures contract price 300.00 225.00 US cents/lb 150.00 75.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 BAN NY Futrures

London Futures market (annual averages) 300.00 225.00 US cents/lb 150.00 75.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 BAN LN Futures

Graph 1 - ICO Composite Indicator & New York Futures contract prices 300.00 225.00 US cents/lb 150.00 75.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 ICO Composite NY Futrures

Graph 7 - Robusta indicator price & London Futures contract price 140.00 105.00 US cents/lb 70.00 35.00 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 ROB LN Futures

Graph 3b - Colombian Milds and New York Futures (monthly averages) 400.00 300.00 US cents/lb 200.00 100.00 0.00 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

Graph 5b - Brazilian Naturals & New York Futures contract price (monthly averages) 300.00 225.00 US cents/lb 150.00 75.00 0.00 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

Graph 6b - Brazilian naturals & London Futures contract price (Monthly averages) 300.00 225.00 US cents/lb 150.00 75.00 0.00 Jan-94Apr-96 Jul-98 Oct-00Jan-03 Apr-05 Jul-07 Oct-09Jan-12Apr-14 Jul-16 Oct-18 BAN LN Futures

Graph 7b - Robusta indicator price & London Futures price (Monthly averages) 200.00 150.00 US cents/lb 100.00 50.00 0.00 Jan-94 Apr-96 Jul-98 Oct-00Jan-03 Apr-05 Jul-07 Oct-09Jan-12 Apr-14 Jul-16 Oct-18 Robusta LN Futures

CORRELATION ANALYSIS Table 1: Correlation coefficients (Annual averages) ICO NY LN Composite CM OM BAN ROB Futrures Futures ICO Composite 1 CM 0.9682 1 OM 0.9836 0.9862 1 BAN 0.9875 0.9692 0.9871 1 0.8806 0.7642 0.7933 0.8351 1 ROB NY Futrures 0.9849 0.9752 0.9879 0.9924 0.8105 1 LN Futures 0.8739 0.7602 0.7870 0.8317 0.9980 0.8073 1

CORRELATION ANALYSIS Table 2: Correlation coefficients (Monthly averages) ICO NY LN Composite CM OM BAN ROB Futrures Futures ICO Composite 1 CM 0.9650 1 OM 0.9825 0.9839 1 BAN 0.9831 0.9625 0.9828 1 ROB 0.8791 0.7576 0.7880 0.8254 1 NY Futrures 0.9834 0.9697 0.9858 0.9887 0.8099 1 LN Futures 0.8723 0.7536 0.7822 0.8213 0.9971 0.8084 1

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

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 0.9697 0.9858 0.9776 0.8213 0.9971 r 2 0.9404 0.9718 0.9775 0.6745 0.9943 a 1.1598 1.1222 1.0271 1.4355 1.0548 b -4.9021 -7.584 -11.209 17.2798 2.4099

Graph 8: Regression chart for Colombian Milds indicator price and New York Futures prices 400.00 y = 1.1598x - 4.9021 R ² = 0.9404 300.00 200.00 100.00 0.00 0.00 75.00 150.00 225.00 300.00 Colombian Milds Colombian Milds = 1.1598 xNew York Futures - 4.9021 R ² = 0.9404

Graph 9: Regression chart for Other Milds and New York Futures 400.00 y = 1.1222x - 7.584 R ² = 0.9718 300.00 200.00 100.00 0.00 0.00 75.00 150.00 225.00 300.00 Other Milds Other Milds = 1.1222xNY Futures - 7.584 R ² = 0.9718

R ² = 0.9776 225.00 150.00 75.00 0.00 0.00 75.00 150.00 225.00 300.00 BAN

Graph 11: Regression chart for Brazilian Naturals and London Futures 300.00 y = 1.4355x + 17.28 R ² = 0.6745 225.00 150.00 75.00 0.00 0.00 45.00 90.00 135.00 180.00 BAN BAN = 1.4355 x LN Futures + 17.28 R ² = 0.6745

Graph 12: Regresion chart for Robusta and London Futures 200.00 y = 1.0548x + 2.4099 R ² = 0.9943 150.00 100.00 50.00 0.00 0.00 45.00 90.00 135.00 180.00 Robusta ROB = 1.0548 x LN Futures + 2.4099 R ² = 0.9943

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

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.

Thank you