Coffee Futures Exchange Goes On Stream Today

India's first futures exchange in coffee will begin trading today. The Coffee Futures Exchange India Ltd (COFEI) will be the second commodities exchange in the country, after the International Pepper Exchange at Kochi.

COFEI is housed in the Bangalore Stock Exchange (BgSE) and will use its infrastructure. The software for trading is from Innovative, which designed the software for the Pepper Exchange.

The exchange will pay service charges to BgSE per lot of coffee (600 kg) traded. BgSE is likely to benefit from the high volumes that Cofei is expecting to trade. Trading volume has been put at 2000 lots after the first month and 5000 lots in six months.

 

Four contracts, for September to November, will be traded on Friday. Two floor traders experienced with the Pepper Exchange have been appointed. The Reserve Bank of India has approved Vysya Bank and Global Trust Bank as institutional clearing members. There are six trading and clearing members, a Ramesh group company, Mysore Coffee, Jayanthi Exports, Allanasons, Karnataka Coffee Brokers and Manipal Finance.

The formal Inauguration of the exchange will be done by Union Commerce Minister Ramakrishna Hegde in the end of the month. "We want to have the exchange operating before we inaugurate it," said COFEI chairman Ashwin Shah."We do not want to repeat the pepper exchange fiasco, where inauguration happened but there was no trading." The futures exchange in coffee was called for at a workshop held in Bangalore in May 1997. The Coffee Board set up a committee on May 12 1997 to start the domestic futures contract and Cofei was incorporated in December 1997. And, in a year's time the exchange is ready to start operations.

The committee set up by the Coffee Board toured all coffee growing areas to explain futures trading to growers and local traders. The exchange will protect the growers from uncertainties in price. They need not physically trade coffee and can benefit from rise in prices. "By hedging their risk," said J H Mehta, vice president Hindustan Lever Ltd," exporters and traders can trade more and benefit from increased volumes."

The exchange will be of help to growers, curers, roasters, traders and exporters as they can hedge their investment and produce. Mr S Radhakrishna, a Coffee Board official who is on the board of COFEI, said, "Futures is a price-risk management tool which will be of use to all". A futures exchange will attract common investors in to the business and the capital in the market will increase.

COFEI hopes to bring in those investors who want to trade in commodities, but do not want to be saddled with physical exchange.

The exchange is the buyer and seller of coffee. Growers sell to the exchange at a price and traders and exporters buy from the exchange, so there is no room for defaulting on delivery. Certified warehouses collect and release the beans.

M C Appaiah, of Allanasons Ltd which is the largest exporter of green coffee (24,000 tonnes) in India, said, "It will be a useful tool for exporters as coffee is a volatile commodity in the world market. But, there will be a wait and watch attitude towards the exchange, especially among the growers."

It may take three to six months for the exchange to stabilise and trade substantial volumes, as growers and traders will have to get acquainted with the system. "But it would not take very long," says P N Narayan Bhat, business manager, COFEI," as members will be coffee people and will just have to learn the technicalities." COFEI conducted three mock trading sessions for brokers and trading members in MAy and June to familiarise them with the system.

India's coffee production for this year has been put, by the Coffee Board, at 2.3 lakh tonnes. Traders and exporters expect the production to be 2.10 lakh tonnes. India's share of the world production is 3.45 per cent and 4 per cent of world trade. And, as India's production is so low, prices in India are governed by world prices. Cofei, therefore, sets the price for the forward contracts (maximum of 18 months) based on the New York Coffee, Sugar and Cocoa Exchange (CSCE) and London International Financial Futures Exchange (LIFFE).

Though there is some scepticism about the success of the exchange among the big corporates, because of the failure of the international pepper futures exchange in Kochi, COFEI, Coffee Board and BgSE are upbeat.

There have also been feelers from other commodity traders and growers to set up futures exchange in their commodity. Sugar, cardamom and other spices have approached COFEI, but Mr Shah wants to concentrate on making coffee futures a success, before diversifying.