Brazil Closer to Joining ICE Blend

Photo: Courtesy of Reuters via WSJ

Coffee Traders Support Proposal to Add Country's Beans to Benchmark Contract

By Anna Raff

The Wall Street Journal

October 14, 2010

Coffee traders backed a controversial plan to allow Brazil into the club of grower nations whose beans underpin world prices.

The board of the IntercontinentalExchange Inc. now needs to sign off on the plan, which would bundle Brazil's arabica beans with coffee from 19 other nations, including Colombia and Kenya.

Approval would mean that whenever a buyer of a futures contract on the exchange decides to take delivery of coffee, some of those beans may be Brazilian. By expanding supply, it may lead exchange coffee prices to fall.

The proposal has been controversial, and has failed to gain traction several times over the past few years, because Brazil's beans are considered inferior to those of other growers. They don't go through the rigorous washing process that others do.

But Brazil's beans are the most commonly brewed in the U.S., and they are popular with big U.S. coffee companies like Starbucks Corp., which has increasingly turned to Brazil because of a shortage of premium coffee.

After widespread crop failures in Colombia and Central America, many say the added supply of beans from Brazil would provide welcome relief from soaring prices.

The main coffee futures contract is trading near 13-year highs, on Thursday ending 1.45 cents, or 0.8%, higher at $1.8760 a pound on ICE Futures U.S.

The coffee committee that advises ICE late Wednesday approved the plan, according to people familiar with the situation. ICE confirmed the meeting on adding Brazilian beans to the contract took place but didn't confirm the decision.

"While the issue is pending action by the board, the exchange will not provide further details on the recommendation, or additional comments on the process," ICE said in a written statement. "There has already been ample opportunity for submission of comments on this issue, but the exchange continues to welcome comments from interested market participants."

Because the supply of coffee beans from Brazil is abundant, the country's inclusion is widely expected to result in less volatility in ICE arabica coffee futures.

This is likely to be a boon to coffee drinkers who have been confronted with an onslaught of price increases over the past two months.

But roasters who buy and distribute higher-quality coffee than Brazil's say their ability to hedge their exposure to price swings will be diminished because the contract will reflect a wider range of quality.

Colombian arabicas, coveted for their mild taste, earlier this week cost $2.2474 a pound, while Brazilian beans that are dried with some of the pulp of the coffee fruit still attached were $1.6275 a pound, according to the International Coffee Organization.

The Brazilian beans that would be permitted under the proposed change would be washed, but not as thoroughly as the beans that are currently allowed in. Because of that, they would be delivered at a significant discount, according to ICE's proposal.

Questions about how Brazilian beans would be certified by exchange-licensed graders have ignited a broader debate over the quality and age of coffee in warehouse stockpiles. Some market participants say the presence of old coffee beans that are certified have distorted futures prices, because few want to take physical delivery of them, even in times of extremely tight supplies.

With Brazil officially in the mix, market expectations about the quality of beans in the so-called certified stock are likely to be lowered.
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Write to Anna Raff at anna.raff@dowjones.com