Calcutta: The Coffee Futures Exchange of India Ltd (Cofei), one of the most important links in the coffee marketing system has just completed a year of operation and at present there is an urgent need to step up an awareness campaign which could be done by collaborative efforts of the Coffee Board, Indian Institute of Plantation Management (IIPM) and Cofei.Speaking to The Financial Express, M Panduranga Vithal, professor IIPM said that the ultimate success of Cofei would depend on the synergistic efforts of the constituents of Indian coffee industry. It may be recalled that the Indian coffee industry entered the free market era in September 1996, with the gradual deregulation of the age-old coffee pool marketing system. Indian coffee was no exception to the volatility in prices.
Thus, as part of the development of an alternative marketing order, the setting up of domestic coffee futures exchange was recommended in December 1996. The Domestic Coffee Futures Contract Committee gave shape to the coffeefutures exchange by June 19, 1998.
Charting out the road ahead for Cofei, Vithal said that a lack of awareness regarding the technicalities of participating in a futures exchange should be corrected.
Explaining his concept of a value chain in the coffee industry, Vithal said, that the important constituents of the Indian coffee industry were growers, domestic traders and roasters, curing works, warehouses and exporters.
A study of the industry value chain indicates that if an economic entity has a curing house, a warehouse and participates in domestic trade as well as in exports, he is subject to different risks but the overall risk is minimised as his investments are distributed in different economic activities.
A typical grower on the contrary is restricted only to the production of coffee. "It is not economically possible for all growers to invest in processing and marketing infrastructure. Therefore there is a greater need for them to hedge and cover their risk. But, due to lack of awarenessregarding the technicalities of participating in a futures exchange, the participation by the growers is relatively less. This could be one of the reasons for the low volumes," he said. "On the contrary, when there is participation from non-growers, it may also send a signal that other constituents of the value chain dominate the trade at the exchange. Such a signal needs a correction and all the constituents should try to take the advantage of the hedging and arbitrage opportunities at Cofei," he added. According to Vithal, four possible routes to hedging are evident:
Route A -- To ensure new crop price for old crop for sellers (primarily growers), Route B -- To sell coffee before picking by growers, Route C -- To hedge stocks bought in spot (primarily roasters, domestic traders and exporters) and o Route D -- to cover short sales (primarily roasters, domestic traders and exporters).The cost of trading is an important factor, which will positively influence participation in Cofei,said Vithal. The cost of trading which constitutes the trading fee, clearing fee and opportunity cost for the trading margin and variation margin is minimal at present.
"There cannot be a reason for complacency considering the fact that the concept of coffee futures is new for the coffee industry and hence volumes are low in the first year of operations," said the professor.
It is expected that in the current year, the entry of institutional clearing members may participate more actively. Some commercial banks have evinced interest to this effect. Cofei, it may be noted has four trading-cum-clearing members (TCMs), 65 trading members (TMs) and 301 ordinary members (OMs).
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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