NEWS ITEM

THE MINI "C"
Embracing This New Coffee Contract

EVERY DAY the world’s coffee industry looks to the New York Board of Trade (NYBOT), a commodities exchange where coffee futures are bought and sold, to price arabica coffees. The coffee “C” contract, a financial instrument representing 37,500 pounds of coffee, is at the heart of the coffee trade—its prices determine the cost of arabica coffees around the world.
     Despite its popularity, however, the large size of the “C” contract and the fact that the contract is settled with actual coffee beans make it unusable for many smaller players. In an effort to make the coffee futures market more practical for smaller producers, retailers and roasters, the NYBOT instituted the Mini “C” in March, 2005. The Mini C is just what it sounds like—a miniature version of the NYBOT’s coffee “C” contract. Its smaller size is designed to make the coffee futures market accessible to a broader group of coffee industry participants for whom the regular “C” is impractical.
     There are two main differences between regular “C” contracts and Mini Cs. The first is size. While a single “C” contract amounts to 37,500 pounds of washed arabica beans, the Mini C amounts to just 12,500 pounds, or one-third of a “C.” The smaller size of the Mini C makes it convenient for smaller producers, traders, roasters, retailers, speculators and anyone else interested in participating in the market on a reduced scale.
     The second key difference between the “C” and Mini C is the manner in which the two contracts are settled when they expire. Buying or selling a “C” implies a commitment to receive (if you bought a “C”) or deliver (if you sold one) 37,500 pounds of arabica beans of certain minimum quality at a pre-determined future date and location. If you hold on to your contract until it expires, you are then required to receive or deliver the physical coffee. But if you do not want to do this, you can buy back your “C” (if you initially sold) or sell your “C” (if you initially bought) before it expires.
     The Mini C, on the other hand, is only settled in cash. Buying or selling a Mini C means you trade the cash equivalent of the coffee. You are buying or selling the obligation to receive or deliver the cash price of the 12,500 pounds of coffee (of the same characteristics of the coffee represented by a “C”) at the date and settlement price when the contract is due. As with the “C,” you can buy or sell back the Mini C before it expires if you don’t want to wait until then to receive or deliver its corresponding cash amount.
     The smaller size and cash-settlement traits of the Mini C are designed to make it attractive to a new group of coffee industry participants and to those currently using the “C” who want to add more precision to their hedging or speculating.
     However, the Mini C has failed to gain acceptance, resulting in a catch-22 of sorts. Without a larger number of users, the Mini C lacks the liquidity that makes it so practical. And without that liquidity, it’s not likely to find a larger number of users.
     This is unfortunate for smaller industry players because the Mini C has the potential to become a key tool for them in the same way the “C” is crucial to larger participants. For anyone dealing with coffee in amounts below 37,500 pounds, the Mini C could be very useful in managing risk. If extensively used, it would hedge “small” amounts of coffee (around 80 to 90 bags), thus helping smaller industry participants efficiently manage the risks derived from coffee’s price volatility.  
     For example, a roaster needing 12,500 pounds of coffee in three months could fix the price for those beans today instead of waiting to see what coffee prices will be then. By buying a Mini C, with a settlement date in or around three months, the roaster would be fixing the future price. The cost of that Mini C is what the future coffee will cost. If coffee prices are higher in three months, the Mini C is worth more but that gain is offset by having to pay more for the coffee in the physical market (a loss.) Numerically, the roaster buys a Mini C at a current market price of say $1/lb. If, in three months the price of coffee is $1.20, the Mini C will be worth $0.20/lb. more, but the physical coffee will also cost $0.20/lb. more. That is, the 12,500 pounds of coffee will cost $15,000 ($2,500 more than three months before), but the Mini C will also be worth $15,000. The higher cost of physical coffee when the roaster needs it is offset by the increased value in the Mini C the roaster had bought. In the end, the price of the physical coffee is what the original price of the Mini C was.
     As things stand today, with the Mini C virtually out of the picture because of its lack of liquidity, this hedging can only be practiced by those dealing in increments of close to 37,500 pounds. The Mini C could be an ideal tool for small and medium producers, traders and roasters, as well as for larger players wanting to add accuracy to their hedging and/or speculation. But for the Mini C to stand a chance, industry members must be aware of its existence and use it. If enough interest is created, the resulting liquidity could someday help the Mini C rise to the ranks of the C.
     For additional information on the NYBOT, the “C” and the Mini C, visit www.nybot.com.

PABLO VELOSA works with Colombian Coffee exporter, Café Colsuaves.