The interdependence of coffee futures and spot markets - An econometric analysis

Coffee is an export-oriented commodity for producing countries, and it is actively traded at international commodity exchange platforms viz., Intercontinental Exchange (ICE), New York and ICE, Europe. This study examines the interdependence of futures and spot markets for coffee in the price discovery mechanism, particularly in the Indian context. The study has considered both the International Coffee Organization (ICO) indicator prices and producers’ prices in India’s spot prices. The study confirms the existence of a stable long-run relationship between ICE coffee futures and ICO spot prices, implying that both prices react to the same set of market information. While there is an indication of equilibrium or long-run relationship between ICE Coffee futures (New York) and Arabica producer prices (at farm gate level) in India, the same was not true for Robusta coffee. The absence of co-integration between ICE futures prices (London) and Robusta producer prices in India suggested only a short-run relationship between them. The findings of the study conclude with strong evidence that the farm gate prices in India have been caused by the ICE futures markets, declining the contrary.