Record-Breaking Coffee Trading Surge Exacerbates Rally – CoffeeTalk

A surge in the cost of trading Arabica coffee on the ICE exchange has exacerbated a rally that has already driven prices for raw, unroasted beans to 14 successive records over the last three weeks. ICE, which contracts are used as a benchmark to price physical coffee around the world, has raised margins by 10% to $10,410 per contract this week, nearly double levels a year ago. This means that to trade around 100 metric tons of arabica using the contract requires an initial daily payment of around $62,000. Even more would be needed if the position goes into the red to ensure there are sufficient funds to cover potential losses.

For a trader taking a short futures position of just 100 tons, in a market where prices have risen even faster than the margins – nearly doubling in the last six months – the required payments could total hundreds of thousands of dollars per trader. Many traders hold short positions – effectively bets on price falls – that are much larger than 100 tons, and demands for more payments during the price rally have forced those with tight credit lines to liquidate their positions. The main way to do this is by buying back future contracts, which in turn sustains higher prices on the ICE exchange.

A Europe-based trader at one of the world’s biggest coffee trading houses said “billions” were being demanded for margin calls and he saw no sign of the situation improving in the near term. Stung by exactly this situation, Brazil-based coffee traders Atlantica and Cafebras late last year filed for court-supervised debt restructuring, a judicial move that, if it fails, can be followed by bankruptcy. Analysts say there is a high risk other traders will find themselves lacking cash.

Traders’ credit lines are very, very stretched in a $4/lb market. It means they aren’t hedging, so every time a roaster or speculator buys (futures), there’s no-one to sell to them, so the market goes crazy,” says a coffee analyst who works for another leading global coffee trade house.

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