Coffee Traders' Forum - A Discussion about Coffee Futures Trading
Coffee Traders Discussion Forum
Certified stocks are used for collateral with banks and for substitutes or blends for/with other higher quality origins. On their own certified stocks, whether they are raising or dropping, have no impact on futures but may have an impact on futures spreads. However, we have experienced throughout the years that, if they are depleted say together with other stocks, then prices will be affected. A couple of years ago the forum had a discussion about certified at a time when certified stocks were dropping every day. We interviewed someone that understood the significance of certified stocks. This was the discussion:
(Last posted April of 2016. The interview took place approximately a year before that.)
I had correspondence with someone at FCStone yesterday who has very close ties to South America. For compliance reasons he asked to remain nameless. I apologize for this. I would like to share our correspondence in order to provide some insight into the relationship of the certified stocks to the price of futures. Many of you probably know much of what the gentleman points out and some of you may want to post a conflicting view. Please feel free to do so. The first part is my email to him.
Sorry that I missed your call. I am always very interested in your comments about coffee. In fact, your comments are often posted in the Coffee Traders Forum, and are well received. In case you are not familiar with forum, it is a group of professionals in the coffee market from all around the world. Participants are producers from South and Central America, roasters and distributors from all over the world. We also have folks contributing at times that are from China and Viet Nam. And, of course, there are former floor traders like myself.
Anyway, I wanted to discuss with you the certified stocks situation. They are being depleted every day as you have recently commented about. I am puzzled about the stocks because, although ICE spreads are reacting, the futures as you can see are very sluggish even on a steady day like today. In addition, from observing the export numbers, it appears that there is a virtual unlimited supply on hand, and it seems, that this coming Arabica crop will provide abundance as well. I understand that Brazilians, Colombians and other entities that possess other origins will not deliver on ICE because of the disagreeable premiums/discounts imposed. However, I am surprised that these origins are not converted into warrants for the purpose of financing. Some Colombians are stored in ICE warehouses and are possibly used for collateral, for example, if not for delivery.
I was wondering if you would possibly enlighten me on this certified stocks puzzle. To me coffee is coffee whether in the form of a warrants or not. As we know, deliveries on ICE usually run between 1,500 and 2,000 lots and are mostly Central American and some Africans. This tells me that the depletion of the stocks may be insignificant and irrelevant. It would be very helpful to me to get some insight into what I see as an enigma.
Thank you for reaching out, I called the number you phoned in from but was unable to reach you. We very much appreciate that you follow our comments and updates...our group has been working alongside the industry for nearly three decades; with decades more of combined experience managing the price risk for commercial customers in coffee (I don't want that to sound like a plug for our services, but it does put things in perspective).
Your question regarding the certs drawdown is an issue that savvy participants of the market are tracking very closely. You already alluded to the fact that origins see no need (or economic incentive) to bring their product to the board, as local quality premiums remain well above exchange parity at this time.
That said, large commercial roasters continue to rely on certs for readily available stocks that despite their rising average age are still "certified" and appropriate for blends; particularly as a substitute for Brazil or low grade Central American Coffees.
If we see continued drawdowns say below the "magical" 1 million bag mark it would be the first time since 2000, and would likely disrupt the forward curve even further. So, although overall inventories in the US, Europe and Japan (record high stocks) are plentiful...it boils down to a pricing factor. If commercial roasters still have access to some "cheap" coffee, and prices begin moving higher to in effect "call coffees to the board" by motivating origins to drop diffs...then you have a self-fulfilling prophecy on your hands. The forward curve may invert, and futures prices will rise; until at some point prices begin reflecting equilibrium economics and give impetus to more fresh coffees coming to the ICE.
There are plenty of other factors at play here. Among them:
· Interest rates
· Macro complications
But, this is presently the state of affairs with regards to certs.
Feel free to reach out.