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Potential washed Arabica contract in London.

Potential Washed Arabica contract in London

London Fox, the administration of the London Exchange, is examining the prospects of a European Washed Arabica contract in London.

In the past, various attempts to establish such a contract in London or Hamburg, proved to be failures. The limping interest of in- and outside speculation turned out to be the major handicap. Have things changed nowadays?

Europe may become the center of international flow of green coffee. The market will possibly reach a potential of almost 60,000,000 bags (60 kg) in Europe in the year 2000; only 10 years ahead. The U.S. had a central position in the early days due to its importance in green coffee trade, economic power and extreme dependance of world trade on the dollar. Today, Europe has outspaced the U.S. viewing its importance in the green coffee trade. Other strong financial powers like Japan compete with the U.S. and a single Europe with a common currency will at least be a place of great interest.

While the European Community in 1958 imported only 11,500,000 bags, the total climbed up to 29,000,000. Another 5,000,000 bags can be added for the other western European states. With the changes in the East and no advantages for non-members of the ICA to buy directly in the countries of origin, an increasing consumption and increase in trade will also add to the importance of Europe as trade center of green coffee. Today 5,000,000 bags are imported, but for the year 2000 a potential of 10,000,000 bags has been estimated by the big trade house Neumann Gruppe AG. Adding another 48,000,000 bags for western Europe, nearly 60,000,000 bags will be dealth with in the whole of Europe. In the European Community alone 42,000,000 bags will be consumed.

The U.S. still has to struggle with heavy drops experienced in the past. The imports of 1958, the year when the EC was founded, were never reached again.

The importance of Arabica coffees in Europe will grow in correspondance. Today, nearly 23,000 bags of Arabica coffees are traded. Milds holds a percentage of 42% and Unwashed Arabicas, 24%. The single market will continue to level out quality differences. A stable increase of quality took place in the past. Therefore, it can be expected that Washed Arabicas will reach 50% while Unwashed Arabicas will settle around 25%.

In 1989, West Germany traded already a volume of Arabica coffees equal to 43.5% of the U.S. Arabica market. Some of the biggest potential clients of a European Arabica contract will come from West Germany, the Netherlands and France.

What makes a European contract attractive? It offers a chance to establish a contract reflecting the high quality standard in Europe. That is a chance to attract the large roasting companies besides the trade necessary for reaching a sufficient volume of inside speculation. If it is assured that only coffee of a high quality passes the grading procedure, it gets interesting to buy at the exchange if the price is cheaper, as for physical green coffee. When discussing the proposal with those involved in Germany, it soon became clear as to how important the quality matter is taken.

Another point is the common European currency to come. Nearly 60,000,000 bags will be traded in ECU. Even if national currencies will exist parallel, trade will be one of the first using a common currency. The possibility to hedge in the same currency gives a bigger freedom from movements of the dollar. There are good reasons to believe that green coffee will no longer be a unique dollar commodity in the next century. For the producing countries, many of them developing countries, the use of such a common European currency should be a much safer means of calculation in their trading with Europe.

However, it is not aimed at creating a new contract in the air. The European contract will be tradable against a New York "C". It has been experienced that such a contract attracted too little outside speculation. Except for investment funds, insurance companies, etc. It was, and still is, not such a common means to invest in future markets. That is changing rapidly. Recently, the "Terminborse" has been introduced in Germany. Soon, futures will be tradable in that market. It will get more and more customary to a wider public.

Computer trading opens new markets. Today it is no problem to link two places at the other ends of the world. Presence on the floor is no condition for involvement anymore. London Fox e.g. is considering linking the Corn Exchange of Tokyo computerwise with London. That would include white sugar, rubber and MGMI metals. Later, it would be possible to include further contracts. It also intends to open the trade so early that it will overlap with late trade hours in Japan. With all its experience and good connections, London seems a good place for establishing the contract. In a single market and with electronic data exchange everybody have easy access.

London Fox offers access through FAST (Fast Automated Screen Trading). This system is already in use for the commodities mentioned above. The FAST system has the ability to incorporate trading both spreads and arbitrage. As clearing house `ICCH' the International Commodities Clearing House, London, will function.

At the same time London Fox introduced a contract for Unwashed Brazilian Arabica. However, in Germany it did not meet much interest. It was suggested to first watch the development in Brazil and the performance of the European Washed Arabica contract before taking up the subject again.
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Author:Kurht, Cornel
Publication:Tea & Coffee Trade Journal
Date:Nov 1, 1990
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