Coffee market jolted as prices and margins soar reuters market futures

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NEW YORK (Reuters) – A potentially devastating storm is brewing in the world’s physical coffee market, where the firms who get beans from the farm gate to the cafe table are being hit with a double whammy.

Soaring prices and higher margins have squeezed exporters and importers, forcing them either to take on more risk by abandoning hedges or to pony up hefty financing costs.

Benchmark ICE arabica futures have more than doubled in the past nine months to 34-year highs pound dollar exchange rate today. Coffee handlers also have been slammed by soaring margins — the sum they must pay to maintain an open position on the exchange.

Margins surged by 150 percent in the six months to October, 2010, massively increasing the cost of hedging coffee purchases in the futures market.

On Wednesday the financial squeeze became unbearable in Guatemala, producer of high-quality arabica beans.


Trade came to a standstill as exporters said they couldn’t afford to hedge their purchases, the usual practice to avoid losses when shipments are made.

“Exporters said they cannot do it, they cannot pay the margins,” said Ricardo Villanueva, head of Anacafe, the country’s coffee growers association.

The sentiment was echoed by major exporters across the region equity meaning in business. Exporters in Colombia, the top grower of washed arabica, may sell at fixed prices and avoid the futures market exchange rate ksh to usd. Traders in Brazil, the world’s biggest supplier of coffee overall, are lifting hedges to avoid paying increasing margins as open losses mount.

While that has worked out well for now as prices continue rising, it leaves firms that have not hedged their positions exposed to heavy losses if the rally — which has already defied most expectations — stumbles.

“Everyone is looking for a way to cover themselves without having to pay margin calls – one way is to buy options, or to buy puts — you need to have some kind of protection,” said a market expert for a large exporter in Mexico.

The financial pain of a margin squeeze is nothing new to commodity traders gender roles in society today. The surge in oil and grain prices in 2008 brought a number of firms to the brink of collapse.

But it is being felt more acutely now in the small, clubby physical coffee market, which until last year had been largely left out of the commodities boom.

For the smaller, local exporters who often buy from tiny farmers and sell to big names like Folgers’ owner J.M convert cad to usd. Smucker Co SNM.N, or Starbucks ( SBUX.O), the extra tens of thousands of dollars to maintain open positions can be an unbearable burden.

“We’re worried about the market continuing to go higher and having to maintain those positions on the exchange,” said Ray Keane, a dealer with importers Balzak Bros and Co in South Carolina. “We’re a lot more cognizant of what our positions might be.”

On Wednesday, the benchmark May arabica futures contract soared 2.7 percent to close at $2.9485 per lb, the highest since 1977 for the second position 300 usd. The session peak was $2.9665.

Using the futures market to hedge is a widespread practice across the coffee market, where deals are often concluded months before the beans are delivered.

For the middlemen who buy the coffee only to sell it on, it’s a safeguard in the event the futures market declines by the time the beans come to market.

The exchange most recently raised the margin requirements for coffee futures in October, bringing the increase to 150 percent over six months to $4,500 (2,782 pounds) per hedge contract.

Anyone holding a short position on the May contract in this time span, however, would have had to pay more than $24,000 in both margin requirements and open losses.

For instance Alexcafe, a Pereira-based large exporter that plans to export 220,000 bags of coffee this year, was paying $1,800 to hedge a lot of 250 sacks of 70-kg bags six months ago, according to Carlos Ariel Ciro, the firm’s financial adviser gender inequality research paper. Today the same lot is hedged at a cost of $4,800.

Some physical dealers have been able to offset their losses by taking long positions on the futures market dollar exchange rate to euro. Some are opting to hedge less and take on more risk, liquidating short positions as the rally gathers steam.

“It got to a point to where they could either buy coffee or send money for margining, so they have lifted hedges all the way up and it has worked fairly well for them,” a coffee trader for a large multinational exporting company in Brazil told Reuters.

The net short position on ICE of producers, merchants, processors and users fell to less than 60,000 lots in the week ending March 1, down 17 percent from the end of 2010, recent Commodity Futures Trading Commission data showed.

Record domestic coffee prices have spooked exporters struggling to secure supply as farmers fail to honour contracts, although there are hopes the high price could eventually trigger some sales.

Coffee prices in Vietnam have jumped 32 percent so far this year after surging 56 percent in 2010, but exporters have reduced their exposure this year by hedging on the futures market to avoid losses and to focus on physical trading.

For large roasters in the United States or Europe, however, the risk of lifting hedges may be too big what is futures in stock market with examples. Instead, some are simply holding off buying anything but their most immediate needs, dealers said.

Ciro as well as another coffee exporter, who asked not to be named, said high margins are discouraging international brokers from buying Colombian coffee usd nzd exchange rate. They said international brokers are buying what is “strictly necessary.”

Flavio Ribeiro, director at the Rio de Janeiro brokerage house Flavour Coffee, said he sees a lot of offers to sell physical coffee for later this year, but not many buyers.

“You can’t simply say, I’ve decided to lift the hedge when you’ve got hundreds of thousands of bags of coffee on the line. So you have to pay these margins,” he said.

In Guatemala, Gerardo de Leon the marketing director at Guatemala’s cooperatives umbrella organization Fedecocagua said, the problem hindering sales in his country is more about tax credits rather than exporters not wanting to buy.

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