'Cofei Will Provide Exact Price For Traders'
Coffee Futures Exchange of India Ltd (Cofei), India's first futures exchange in coffee, began trading in Bangalore on June 19. The bourse has come into operation in a year since a special committee set up by the Coffee Board floated the idea. The exchange will be a hedging tool for traders and insurance for growers. It has ambitious plans for the future and may attract other commodities in the near future. Cofei president Ashwin Shah in an interview with V R Chandramouli spoke about the trade and future of the exchange.
What were the issues that prompted the coffee trade to set up a futures exchange?
Coffee is a Rs 2,000-crore industry in India and a futures exchange is needed for a commodity like it. Production of coffee in the country is restricted to the first quarter (January-May), while consumption and trade is through out the year. So people need to know the value of the stock they hold at any given time.
But, the problem was how to get the right price. The price would tell growers and traders when to sell and when to buy. The price in the future would be the incentive to hold or not hold for the grower.
Growers were in a dilemma and did not have the information to make a decision and they went by perceptions and rumours. The coffee trade, internationally, is a very volatile market. Therefore, traders and exporters needed to be able to hedge their margins. A futures exchange will be a hedging tool for exporters and insurance for growers.
What does the exchange mean for the coffee trade in India?
With the exchange, the unknown factor of price is taken away. The bourse is the price-discovery system. So, growers will know what the price is for any month of the year.
There will be incentive to hold and to not hold which will help traders to calculate the value of their produce exactly. Value by perception will disappear and with it volatility in the Indian market, in terms of price.
The exchange will bring in the much needed capital to the industry. Investors, who would not put money in coffee because they do not understand the dynamics closely, can now invest safely, as the system is transparent and simple
What are the challenges for the exchange, both from within the trade and outside?
The bourse is already a success. We trade at an average of 100 lots a day, and this is within a month and in a hour's trading a day.
The biggest challenge for the exchange will be to convince every section of the trade _ growers, roasters, traders and exporters _ that it is for their benefit. But, this is like convincing a child to go to school as it is for his benefit. We do not want to force any one. People will come to the exchange if they realise that it makes sense.
Before 1994 there were just 20 exporters in coffee, now there are 120. The exchange is an opportunity for players to hedge their investments and insure corp. So people will automatically come.
Will Cofei compete with the Indian Coffee Trade Association (ICTA) auction?
Coefi will actually help ICTA auction players decide whether to sell or buy at the auction price. The price at the two places will also indicate the nature of the market and stock available. We are negotiating with the Karnataka Coffee Brokers Pvt Ltd to introduce a differential contract at ICTA by which the price for a contract transacted at the auction can be fixed at a later date by the seller as well as the buyer based on the price prevailing at Cofei.
Are there any lessons to be learnt for Cofei from the International Pepper Exchange's troubles?
Cofei is based on the International Pepper Exchange's structure and operations. It has also the software for trading from the pepper exchanges. The software, developed by Kochi-based Innovation Systems, uses Oracle and Developer/2000.
But, while the International Pepper Exchange was started to lure foreign traders who could not trade at the domestic futures exchange at Kochi, Cofei is a domestic exchange that tries to conform Indian market to international prices and trends. Cofei has funds to take care of itself.
It has a reserve/guarantee fund of Rs 2 crore. The bourse's trading fee is a negligible 0.02 per cent. So, it will not lose even if there is no trading.
Theoretically, the exchange could face a crisis if prices fall or rise beyond imaginable limits or there is a flood of defaults by players.
But players who want to stay in the trade will not default. The domestic exchange in Kochi has not had a default in its 40-year history.
But what exactly is the problem with the international exchange if the domestic exchange is a success?
Forward Markets Commission chairman Aggarwal is at present in Kochi to study the situation. A domestic contract exists in pepper, so there is no reason for people to trade in the international contract.
But, there are two specific reasons for troubles ailing the international exchange.
The finance ministry did not allow dollar trade at the exchange even though players at the bourse would be from all over the world. The Income Tax Department imposed a tax on profits made at the exchange.
Obviously, international traders would not like to trade in rupee and can not be expected to pay tax on profits made in India, while they may be losing on physical stock in Europe. The exchange can be a success when forex regulations are relaxed in the country.
What about other commodities? Sugar industry was said to be interested in setting up a futures exchange under Cofei?
Other commodities are welcome. We have the infrastructure and a registered company. Traders of spices, potato, sugar and other commodities have approached us.
It will take just four months to set up a futures exchange provided the industry brings in the money. Cofei is a non-profit making body and so can not invest its funds.
What are the plans for the exchange in the coming months before the arrival of the next season's crop?
First on the agenda is to familiarise the trade with the workings of the exchange. After this all 18 contracts will have to be activated and delivery systems will have to be debugged. We are now trading for September and November which is the lean period for coffee.
Trading during this period will give us an idea of the problems that we will encounter. By January 1999 we will be ready.
We want to move to on-line trading from the existing outcry system. Once we are on-line major coffee producing areas like Chikmangalaur, Coorg, Hassan, Sakleshpur will be uplinked. Cofei can then be connected to Liffe, London, CSCE and New York. So, one can buy in Coorg and sell in London within seconds.