Coffee group aims to launch 3 origin-specific futures contracts

Tue Mar 26, 2013 10:54am EDT

* Input from physical market needed to create index

* Potential contracts will be for 20,000 lbs

March 26 (Reuters) - The coffee industry said it is aiming to launch new futures contracts for higher quality beans grown in Brazil, Colombia and Vietnam, which could be active by as early as 2014.

The "C" contract that trades on ICE Futures U.S. provides a benchmark price for global arabica coffee, while the Liffe exchange provides the benchmark for the lower costing robusta coffee, but the National Coffee Association (NCA) Coffee Working Group is looking to create contracts that will be specific to three main origins.

The working group is seeking input from the coffee industry to determine if there is merit to developing additional country of origin derivative contracts as a way to manage differential risk. While details are still being worked out, the group said the contract would be cash-settled and for 20,000 lbs, which is nearly half the size of the ICE contract at 37,500 lbs, in order to appeal to smaller dealers.

Differentials are either a premium or discount to the benchmark contract, and they fluctuate depending on the specific country of origin's fundamentals.

These potential country-of-origin contracts could enable more accurate price discovery for the specific origin.

"Transparency is going to be radically improved," said Oscar Schaps, managing director for INTL FCStone's global soft commodities in Miami, speaking at the NCA convention in San Francisco late last week.

"It's got a few challenges."

The current challenge for the working group is collecting data on differentials of Brazil 2/3 natural arabicas, Colombia usual good quality arabicas and Vietnam Grade 1 robustas. The group asked those in the physical market to participate in submitting their differential data on these specific beans in order to help create an index for each bean.

"It won't work at all if we, as an industry, don't participate," Schaps said.

"Once this index works, then people can begin to use it and trust it."

After enough data has been compiled, the working group hopes that an exchange, such as ICE Futures U.S. or the CME Group , will provide a trading platform for the contracts.

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