Free Economics Dissertations - 0 Current Trends In The Industry. The Business Line Reported (22/03/2005) Is
0 Current trends in the Industry.
The Business Line reported (22/03/2005) is coffee on a bull run or leading to a bull trap to depict a distress in the coffee market. It is logical to state that at times of shortage prices tend to go up due to higher demand and which in turn puts pressure on sellers to sell their product at a lower price. We know from our analysis before that a buyer will resort to futures contract if he expects the prices to go up in future. However considering that the production too has been low the chances of producing the required amount to meet the demand is less which adds to speculation in the market.
The report also suggests one source as saying that it is better to pay penalty and cancel a contract rather than to loose significant amount of money by fulfilling it. Note that sometimes the whole idea of futures contract is not meet the obligation in terms of delivering the commodity but to profit from the speculation that these uncertainties give rise to.
The world coffee production in 2003/2004 was estimated to be around 105.3 million 60 kilogram bags down nearly 2 percent from forecast made in June and down 15 percent from the 2002/03 season. Factors such as lower production contribute to great extent the price determination. For the year 2004/2005 it was widely believed that Brazilian coffee production to be around 33-35 million bags but due to substandard weather and low level of investment the production is likely to be below 30 million bags. This drop in production is likely to cut the supply level and Brazil being the world largest producers, any drop in its output will affect the world supply and thereby raise the price.
These uncertainties lead to prices going up in the futures markets. It has long been felt that some traders hold stocks to push the prices up and then sell it to make supernatural profits.
Let’s look at the graphical representation of prices of Robusta class of coffee as determined at the International Coffee Organisation (ICO) to assess the trends in the market. The graph below shows that since November 2004 Robusta coffee prices have increased at a slow and steady pace. However, a report that appeared on the Economic Times suggests that volatility in the world prices over the last few days have affected trading in coffee in the markets. The ICO in its Coffee Market Report seems to suggest that the downturn in mid-April caused a slight fall of 3.19 percent in the monthly average of the ICO Composite Indicator Price which dropped from 101.44 cents/lb in March to 98.20 cents/lb in April. It also suggests that this has been due to high level of activity from various investment funds.
Comparing the results put forward by the ICO to the recent reports in the Economic Times newspaper (24/05/2005) the volatility in the world prices have triggered a bullish trend in the Indian markets which explains why trading in the coffee auctions markets have suffered.
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