Yesterday ICE Futures U.S. Coffee “C”®, the benchmark contract for Arabica coffee announced that beginning with the March 2013 contract Brazil Arabicas will be deliverable against the contract. In earlier requests for commentary ICE described Brazil Arabicas as washed and semi washed Arabica coffees, as distinguished from Brazil Naturals.
The SCAA filed an opposition to the proposed contract change in June with ICE and met with the management team there in July. For the complete document, click here. The SCAA remains opposed to the rules change for all of the reasons included in our earlier filing. In the near term it is not clear that there will be any effect on the market, either in terms of market functions, certified stocks or prices. In the longer term it seems unlikely that this change will do anything to address the continued uncertainty in the marketplace as actors in the coffee supply chain struggle with issues of both quantity and quality.
This rule change may well have the effect of creating a new supply of washed and semi-washed Brazil Arabica coffees regardless of demand. This scenario has the potential to significantly alter the market in the future as more coffee may be tendered against the contract than the market wants to absorb, resulting in significantly lower basis prices and increasing differential premiums for other washed Arabicas. Alternatively, the market may demonstrate a healthy appetite for washed and semi-washed Brazils and the proposed discount structure will act as a barrier to delivery.
In any event we remain hopeful that coffee pricing will overcome its current volatility and that everyone involved in the coffee supply chain can once again benefit from a fully functioning market.