Coffee trade sources told Reuters that commodity traders are shipping arabica beans from Europe-based ICE futures exchange warehouses to the USA. Unpredictable weather patterns, driving uncertainty in the markets, prompted this change when it caused a predicted shortfall to the market of 8.45m bags.
Shipping arabica coffee from one major consuming region to another is unusual. On the other hand, various factors have battered the coffee market, causing the price of coffee to rise. Drought and frost in Brazil last year, heavy rainfalls in Colombia and recent rising fertiliser costs have all contributed to the upward price pressure and anomalous trading conditions.
Some traders can’t recall any meaningful quantity of arabica coffee ever going from European to the American market.
More than 100,000 60kg bags of arabica previously certified for delivery against ICE futures contracts left exchange-registered warehouses in Antwerp last week for the United States.
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That’s not all, as traders expect up to 250,000 more bags of certified coffee to be moved from the official Antwerp warehouses to the U.S. in the next month. There is a lack of fresh arabica, and not a lot of it is expected to arrive into the exchange; traders are earning massive premiums for fresh coffee on spot pricing (the price to buy the coffee immediately as opposed to a futures contract).
For example, Honduran coffee is currently trading at a record spot premium of 42 cents per lb above the ICE futures’ price of $2.3 per lb. Under regular conditions, the coffee spot price wouldn’t attract any premium at the exchange.
Under these conditions, coffee is being sold on the spot price and not being shipped to ICE warehouses because the futures contracts are trading at a discount. Traders are increasingly shipping via the cheaper but riskier breakbulk method, which eschews containers for loading the bags directly into cargo, often in big nets. The coffee is exposed to the weather and needs to be insured appropriately, but the cost equation is still favourable.
Most exchanges, including ICE, process large volumes of transactions via algorithmic trading programs. This means computer systems are set to execute trades when stocks hit a certain price automatically. In ICE’s case, we’re nearing the level where so-called ‘black box’ trading programs will kick in to buy coffee contracts.
