ABBREVIATIONS BEC Board Economic Categories BM&F Brazilian Mercantile & Futures Exchange BCEC Buon Ma Thuat Coffee and Commodity Exchange CL Commercial Law CME Chicago Mercantile Exc
BACKGROUND OF COFFEE EXCHANGE
Definitions
Regulations governing the trading of commodity derivatives are outlined in the Commercial Law (CL) and Decree No 158/2006/ND-CP, issued by the Government on December 28, 2006 The CL specifically defines the processes involved in the sale and purchase of commodities on an exchange.
A commercial transaction involves an agreement between parties to buy and sell a specific quantity of a commodity on a commodities exchange, adhering to the exchange's established standards The price is determined at the time the sale and purchase contract is executed, with delivery scheduled for a future date.
A commodities exchange is a legal entity that establishes and enforces the rules for trading standardized commodity contracts and related investment products It also serves as the physical location where these trading activities occur.
A commodity exchange is a market where multiple buyers and sellers trade commodity-linked contracts based on established rules and procedures In developed countries, these exchanges primarily facilitate trade in futures contracts for future delivery Conversely, in developing nations, commodity exchanges play a broader role by stimulating trade through various instruments, such as cash or spot trades for immediate delivery, forward contracts based on warehouse receipts, and farmers' repurchase agreements Additionally, some exchanges focus on facilitative activities, exemplified by Turkey, where they serve as centers for registering transactions for tax purposes.
Coffee is classified as a soft commodity, which allows us to define coffee exchange as a marketplace where various buyers and sellers engage in trading coffee-linked contracts, adhering to the established rules and procedures of the exchange.
Have you wondered how coffee exchange formed in the world?
Established in the 1870s and 1880s, the New York Coffee, Cotton, and Produce exchanges marked the beginning of commodity trading in the US Today, there are ten commodity exchanges, with the Chicago Board of Trade (CBOT) being the largest Other notable exchanges include the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), New York Commodity Exchange, and New York Coffee, Sugar and Cocoa Exchange Currently, the CME Group and NYMEX, which is part of CME, are the two primary commodity exchanges in the US, with CME Group recognized as the world's leading and most diverse derivatives marketplace, processing approximately 3 billion contracts annually.
The Coffee, Sugar and Cocoa Exchange (CSCE) was established in 1882 in New York as the Coffee Exchange In 1914, sugar futures were introduced, and on September 28, 1979, the New York Coffee and Sugar Exchange merged with the New York Cocoa Exchange, founded in 1925, to create CSCE In 1998, CSCE further merged with the New York Cotton Exchange, becoming a subsidiary of the New York Board of Trade (NYBOT).
The Features of Coffee Exchange
1.2.1 Necessity for Performing Coffee Exchange
Numerous studies have explored the factors that contribute to price volatility in the coffee market, highlighting the integration of energy and agricultural markets, macroeconomic variables impacting demand and supply, and the role of intermediaries in the coffee sector Key research by Apergis & Rezitis (2012), Hernandez & Torero (2010), and Ul-Haq et al (2008) emphasizes the significance of these elements To fully grasp the importance of utilizing coffee derivative instruments, it is essential to consider these three main factors as outlined by Melissa Nakumugisha.
High crude oil prices significantly impact the coffee sector by increasing the costs of essential inputs for processing coffee products Research by Von Braum et al (2008) highlights that from 2005 to 2011, fertilizer costs rose by 46%, reflecting the broader influence of crude oil price volatility on coffee pricing Studies by Jones and Kwiecinski (2010) and IFAD (2009) confirm a positive correlation between crude oil prices and coffee prices, indicating that a 1% increase in crude oil prices typically leads to a 27% rise in coffee prices on global commodity markets This price surge is largely due to the reliance of coffee farming on machinery powered by oil for harvesting, processing, and packaging (Ghosh, 2008).
The seasonality of coffee significantly impacts price volatility, as highlighted by the International Coffee Organization's surveys from 2014, which indicated that prices fell below 90 US cents per pound during challenging seasons Between 2008 and 2012, prices rose above 100 US cents per pound due to stable coffee seasons and harvesting, unaffected by climatic disasters However, the past decade has seen increased price volatility in commodity coffee markets, especially in developing countries, as noted by the World Bank in 2010 Economic instability in one country can trigger a domino effect globally, exposing farmers and consumers to fluctuating prices Tothova (2011) emphasizes that agricultural commodities like coffee are heavily influenced by seasonal production and growing conditions, leading to price hikes during adverse climatic events Geyser and Cutts (2007) further assert the connection between climatic conditions and coffee price volatility, with favorable conditions resulting in stable prices, while unfavorable seasons lead to reduced supply and increased volatility in the market.
Market concentration refers to a situation where a small number of firms dominate the total production of a commodity within a market economy, leading to pricing decisions being controlled by these larger players (World Bank, 2010) This concentration can result in increased price volatility, particularly in the coffee market, where major traders may restrict liquidity or manipulate prices to maximize profits (Tangermann, 2011) Investors tend to factor these constraints into pricing, with risk-averse investors demanding higher premiums for bearing additional risks associated with less informative trades (Byrne, Fazio, and Fiess, 2013) Furthermore, coffee supply is significantly influenced by seasonal variations and climatic conditions, with farmers' market offerings peaking during the summer harvest However, price volatility often escalates in spring due to lower supply and heightened demand in the international coffee market (Gilbert, 2010; Byrne, Fazio, and Fiess, 2013).
To minimize disruptions in coffee markets, it is essential to develop a precise measure of volatility that considers the unique characteristics of each commodity and enables accurate predictions of future price trends.
1.2.2 Standardized Features of The Contract
There are four main characteristics of each contract below:
Coffee traded on exchanges primarily consists of two types of beans: Arabica and Robusta, with Arabica accounting for about 60% of global coffee consumption Each exchange has its own quality standards, requiring that all coffee must be homogeneous and perfectly identical to ensure consistency in trading This standardization means that inferior coffees are not accepted, and higher-quality beans do not command premiums, as the focus is on meeting the specific expectations of roasters Every shipment must maintain uniform quality, with no tolerance for variations, as discrepancies can lead to rejection Ultimately, consistency across all deliveries, from bag to bag and container to container, is essential for successful coffee trading.
Quantity refers to the specific attributes that define the commodity involved in a trading contract, such as its origin from a designated region or particular physical characteristics.
Exchanges set minimum price increments for commodity trading, but they do not dictate the actual prices Instead, it is the traders and member firms who establish prices through price discovery, a process where buyers and sellers find the equilibrium price that balances supply and demand.
Delivery: Exchanges stipulate the delivery date for each contract and the method and place of delivery Some commodity contracts are settled through financial payments rather than physical delivery
Trading occurs consistently at specific locations, with the two primary futures market centers for coffee being the Intercontinental Exchange (ICE) in New York, which focuses on Arabica coffee, and the London International Financial Futures and Options Exchange (NYSE Liffe), dedicated to Robusta coffee Coffee futures have a rich trading history in New York, dating back to 1882.
In 1998, the New York Board of Trade (NYBOT) was formed as the parent company of the Coffee, Sugar and Cocoa Exchange (CSCE) and the New York Cotton Exchange (NYCE) In January 2007, NYBOT merged with the Intercontinental Exchange (ICE), which facilitated the launch of electronic trading for six commodities, including coffee.
Individuals involved in transactions governed by the Exchange, whether directly or through intermediaries, consent to the Exchange's jurisdiction and agree to adhere to its Rules, which encompass cooperation in investigatory and disciplinary processes Additionally, any futures commission merchant, introducing broker, or associated person charging a fee for transactions under the Exchange's Rules also explicitly consents to the jurisdiction of the Exchange.
Providing false information or failing to provide requested information to the Board or any committee, subcommittee, officer, or employee of the Exchange during the performance of their duties is a violation of the Rules.
Violating or failing to comply with the terms of any agreement with the Exchange, as well as any orders, decisions, or suspensions imposed by the Exchange, its Board, or any committee or subcommittee, including Hearing, Arbitration, or Appeals Panels, constitutes a breach of the Rules.
Players of coffee exchange are generally classified into three groups:
Hedgers are investors who face current or expected exposure to an underlying asset that carries price risks They utilize the derivatives markets primarily for managing these price risks associated with their assets and portfolios Essentially, "hedging" refers to risk reduction by securing a position against adverse market influences Investors focused on minimizing risk are termed hedgers, who aim to lessen their exposure to price volatility In the derivatives market, hedgers typically take positions that counterbalance their existing risks By employing various derivative strategies, they effectively reduce or eliminate price risk.
Speculators are individuals who actively seek to predict price movements and take positions in the market to maximize their profits, demonstrating a higher tolerance for risk compared to risk-averse investors Their primary goal is to profit from derivative markets, which requires them to accurately forecast future trends However, this speculative behavior does not ensure the safety of their invested funds or guarantee returns.
Arbitrageurs: Arbitrageurs are investors who earn from discrepancy in prices between the two exchanges or between different maturities of the same commodity.
The Functions of Coffee Exchange
Coffee exchanges, like securities exchanges, play a crucial role in global market economies by stabilizing the coffee market and regulating supply and demand Their primary objective is to establish a genuine market price for commodities traded on the exchange Additionally, commodity exchanges are valuable for their ability to reduce high transaction costs often faced by participants in commodity supply chains, particularly in developing countries.
Coffee exchanges perform the following important functions:
From figures above, we can deduce coffee exchange’s functions that are price discovery, price risk management, investment venture, facilitation of physical trade, facilitation of financing and market development
The Exchange has achieved a significant milestone by integrating the production and circulation of goods into the global economic framework, establishing a new trading method in Vietnam that aligns with international trends.
Efforts to bridge the gap between producers and the market have effectively reduced speculation and stabilized farmers' prices, addressing the issue of bumper crop devaluation of Vietnamese coffee These initiatives have also played a significant role in the standardization of Vietnamese coffee quality, enhancing its reputation in the global market.
The Coffee Exchange serves as a vital platform for capital generation in production, linking the domestic market with the international arena This connection plays a crucial role in advancing the economic growth of the coffee industry and facilitating the integration of Vietnamese coffee products into the global market.
Figure 1.2: Exchange functions and hypotheses about high level benefits
A coffee exchange serves as a vital hub for members to convene at designated times, facilitating transactions of coffee beans under established rules and regulations This essential facility supports the thriving coffee trade, which encompasses a broad range of activities due to the abundant production of coffee.
A coffee exchange presents a compelling investment opportunity for those looking to diversify beyond traditional assets like stocks and real estate As one of the most sought-after commodities globally, coffee offers a unique channel for investors seeking stable returns in an appealing market.
Figure1.3: The highest trading volume commodities in the financial market
Activities of Coffee Exchange
Currently, the primary derivatives contracts traded in global coffee exchanges are futures and options, while forward contracts are typically traded over the counter Forward contracts represent private agreements between parties, exposing them to counterparty risk, and can be tailored to specific commodities, amounts, and delivery dates In these contracts, both parties agree on a fixed exchange rate or commodity price, which prevents users from benefiting from favorable changes in asset values.
A futures contract differs from a forward contract primarily in two ways: it is a legally binding agreement to buy or sell a standardized asset on a specific date or within a designated month, and it is facilitated through an exchange that guarantees contract fulfillment, thereby eliminating counterparty risk Each exchange-traded futures contract outlines the product's quality, quantity, and delivery details The central clearing process means that the exchange acts as the buyer for every seller and the seller for every buyer, significantly reducing credit risk from potential defaults By connecting buyers and sellers on a unified trading platform, exchanges enhance market liquidity and facilitate effective price discovery in futures markets.
Coffee exchanges provide options contracts that convert into underlying futures contracts upon exercise, opening at the strike price of the exercised options These coffee options serve as effective risk management tools, especially for small stakeholders, as buyers typically do not need to maintain margins They function like price insurance for hedgers, requiring only a one-time premium payment For options buyers, the maximum loss is capped at the premium paid, while potential profits can be significant Conversely, options sellers face limited profits, restricted to the premium received, but their losses can be potentially unlimited without a stop loss in place.
Futures and options are essential tools for managing commodity price risk, each with unique functionalities, usage requirements, and cost implications The choice between these instruments depends on the user's profile and specific circumstances Coffee futures dominate the trading landscape in commodity derivatives, while coffee options represent a smaller fraction of the market Overall, commodity futures continue to be the most actively traded derivative products.
Figure 1.4: Number of Commodity Options and futures traded worldwide
Source: The World Federation of Exchange
The Exchange features a dedicated in-house clearing department responsible for overseeing all aspects of delivery, fund settlement, margining, and managing settlement guarantee funds It adheres to a strict settlement cycle to prevent any deviations or delays The clearing house collects margins from members, facilitates pay-ins and pay-outs, and monitors the delivery and settlement processes Upon the expiry of a commodity futures contract, settlements are typically conducted financially, although physical delivery of goods may also occur The settlement functions and procedures are managed by the clearing house.
Futures contracts feature two settlement types: Mark-to-Market (MTM) settlement, which occurs daily at the end of each trading day, and final settlement, which takes place on the last trading day of the contract.
Chapter 1 provides definitions of commodity exchange and coffee exchange as well In addition to, how coffee exchange in the world was set up It is useful for anyone who want to know why people gather together in an exchange to trade That triggers our curiosity about the characteristics of coffee exchange This paper listed three aspects: standardized contracts, trading places and rules, lastly parties of the exchange It is hard to deny the vital functions of coffee exchange that bring numerous benefits to all parties Chapter 2 will deepen on coffee exchange in Vietnam Afterwards, we can have a practical knowledge.
THE SITUATIONS OF COFFEE EXCHANGE IN
The Overview of Coffee Exchange in Vietnam
2.1.1 The Origin of Coffee Exchange
The Buon Ma Thuot Coffee and Commodity Exchange (BCCE), established in 2003 and operational since 2008, was created not solely as a futures exchange but as a center for facilitating spot coffee transactions in Buon Ma Thuot.
Ma Thuot City, located in the Central Highlands Province of Dak Lak, is home to the Buon Ma Thuot Coffee and Commodity Exchange (BCCE), which has a charter capital of VND 75.5 billion (approximately US$3.5 million) The Dak Lak People's Committee owns 42% of the exchange, with additional contributions from Viet Nam Gold Business Corp, Simexco Daklak, and Long Yen Construction, Trade and Service Co BCCE facilitates trading of commodities through spot and future contracts, initially focusing on Robusta coffee and later expanding to include black pepper and rubber latex After three years of operation and the introduction of a futures contract in 2011, the exchange temporarily closed in 2013 for infrastructure improvements It reopened in March 2015 under its new name, BCCE, with updated trading contracts.
2011 contract were extended trading hours and a change of contract size (from 2 to
The Buon Ma Thuoc coffee and commodity trading floor, established a decade ago, was originally overseen by State agencies before transitioning to a joint stock company However, due to operational inefficiencies, it ultimately had to suspend its activities.
Before the launch of futures trading on the BCEC, the Vietnam Commodity Exchange (VNX) was established in Ho Chi Minh City, receiving approval in September 2010 and commencing trading in January 2011 with a registered capital of $7.5 million Operating under the Ministry of Industry and Trade's decision 4596/GB-BCT, VNX became the first commodity exchange in Vietnam governed by national laws, initially trading in coffee, rubber, and steel However, VNX ceased operations in August 2012, just a year and a half after its inception.
On June 8th, 2018, Ministry of Industry & Trade officially signed the license
The establishment of the Commodity Exchange in Vietnam is formalized by No 486/GP-BCT, which designates the domestic trading name as “Sở Giao dịch Hàng hóa Việt Nam” and the international name as “Mercantile Exchange of Vietnam” (MXV) Commencing operations on August 17, 2018, MXV features 40 key items that reflect strong products with significant investment demand in the Vietnamese market, including agricultural goods, light and heavy industry materials, energy, and metals On June 18, 2018, MXV submitted a request for commodities to be approved for interconnected transactions, which was sanctioned by the Ministry of Industry & Trade in accordance with Decree No 51/2018/ND-CP Additionally, the structure of the Coffee Exchange includes the Buon Ma Thuat Coffee and Commodity Exchange.
Figures 2.1: Transaction Process on BCEC
Source: The sience magazine of Vietnam National University
BCEC operates two key trust organizations: Trust Bank, represented by Techcombank, which serves as a payment and compensation center, and the Organization of Product Quality Inspection (Cafécontrol), responsible for quality assessment during contract execution Additionally, BCEC is associated with the Vietnam Commodity Exchange.
As a leading centralized trading market organization, MXV has established global partnerships with commodity exchanges following its authorization With advanced technology transfer from a top-tier commodity trading system, the Vietnam Commodity Exchange efficiently manages all market operations, including transactions, clearing, and payment transfers, ensuring seamless integration and preventing any disconnection between trading and clearing activities.
Figures 2.2: The structure of MXV
Source: Mercantile Exchange of Vietnam
The Vietnam Commodity Exchange serves as a vital intermediary for transactions while also providing a platform for product listings It offers regularly updated information on key investment opportunities in the Vietnamese market, focusing on agricultural products, raw materials, energy, and metals.
MXV boasts advanced transfer technology that supports leading global commodity exchanges, including CME, CBOT, ICE, and TOCOM The platform offers essential services such as clearing and settlement, physical delivery, software solutions, and investor assistance, making it a top choice for commodity trading.
2.1.3.1 Buon Ma Thuat Coffee and Commodity Exchange
The BCEC is situated in the heart of Vietnam's coffee production region, primarily focusing on Robusta coffee In 2017, the Central Highlands accounted for 88% of the country's coffee cultivation, covering an area of 583,000 hectares As a result, only Robusta coffee is traded on the BCEC, highlighting its significance in the Vietnamese coffee market.
Table 2.1: Robusta contract Specification of BCEC
Trading Product Name Robusta Coffee
Trading Hours Monday to Friday, except holiday days 14:00 – 17:00 Minimum Price Fluctuation 10 VNĐ/kg ( 20.000 VND/lot)
Contract Series Six continuous months
Delivery Registration Date From first Notice day to 9h of Last Notice day
The First Notice Day marks the initial working day within the last five working days of the month preceding the Delivery month, while the Last Trading Day is defined as the final business day of that same month before the Delivery month.
Deposit 15 percent of contract value
As MXV has connected international commodity exchange, MXV complies with the regulations of Robusta and Arabica coffee traded on the ICE EU and ICE US exchange a Arabica Contract Specification
Arabica coffee derivative contracts are traded at ICE Futures US (New York)
Table 2.2: Arabica Contract Specification on MXV
Trading Product Name Arabica Coffee ICE US (Coffee C)
Contract Size 37 500 pounds / Lot ( 17010 kg)
Trading Hours Monday to Friday
15:15 - 0:30 (the next day) Minimum Price Fluctuation 0.05 cent / pound
Contract Series March, May, July, September, December Delivery Registration Date 5 days before first Notice Day
The First Notice Day occurs seven business days before the first business day of the delivery month, while the Last Notice Day is eight business days prior to the last business day of the delivery month.
Robusta coffee available for export can originate from any source, with Class 1 Robusta coffee deliverable at the contract price Other quality grades are subject to specific premiums and discounts, as outlined in the Robusta coffee contract specifications.
Table 2.3: Robusta Contract Specification on MXV
Trading Product Name Robusta Coffee ICE (EU)
Trading Hours Monday to Friday
15:00 - 23:30 Minimum Price Fluctuation 1 USD/ton
Contract Series January, March, May, July, September,
November, such that ten delivery months are available for trading
Delivery Registration Date 5 days before first Notice Day
First Notice Day Fourth business day preceding the first business day of the delivery month
Last Notice Day Fourth business day preceding the last business day of the delivery month at 19h30
There are five classes of coffee:
Class 3 Exchange Grade – 9-23 defects This is the grade traded on the NYCE Class 1 and 2 demand premiums to this price, whereas Class 4 and 5 coffees demand discounts
Class 4 Below Standard Grade – 24-86 defects
Class 5 Off Grade – More than 86 defects.
Real Situation of Coffee Exchange in Vietnam
2.2.1.1 Buon Ma Thuat Coffee and Commodity Exchange a Volume of Contracts
As BCEC started operation in 2008, but until 2011 it listed forwards contract on exchange Because Vietnam is the largest Robusta coffee producer in the world
In 2016, Vietnam produced 25.6 million bags of Robusta coffee, surpassing Brazil's output by double By 2019, Vietnam's Robusta production rose to 31.1 million bags, showcasing a significant growth trend BCEC has strategically concentrated its efforts on Robusta coffee contracts.
Figures 2.3: The volume of value of coffee futures contract on BCEC from 2011-
Source: The sience magazine of Vietnam National University
From 2011 to 2012, the volume of coffee contracts experienced a significant decline, dropping to 4,848 lots in 2012 compared to 14,772 lots in 2011, marking the latter as the most successful year for the BCEC exchange During the first 45 sessions of 2012, an average of only 56.5 tons of coffee was traded per session.
According to the statistics of the Department of Industry and Trade In Dak Lak province, there are only about 1,000 tons of coffee traded on BCEC season 2011-
In 2012, the total coffee output of the province exceeded 200,000 tons, prompting the closure of the BCEC in 2013 for infrastructure improvements The market reopened in March 2015 with a revised contract size ranging from 2 to 10 tonnes However, due to financial constraints and inadequate operational mechanisms, existing regulations on derivative products, trading volumes, and warehouse locations proved ineffective in attracting investors Consequently, the People's Committee of Dak Lak province, in collaboration with investors, decided to terminate BCCE activities in October 2017.
BCEC handles coffee on a consignment basis, with new transactions exceeding 10,000 tons annually, which is a small fraction of the region's total output of approximately 1 million tons per year The transaction value remains low, primarily involving members who act as brokers and facilitate order matching.
BCEC boasts a spacious warehouse system spanning over 8,000m2, capable of storing approximately 15,000 tons of green coffee Additionally, it features a processing workshop covering around 5,000m2, with an impressive total capacity of 150,000 tons per year This infrastructure is well-equipped to fulfill the purchasing needs of coffee producers and traders both within the province and throughout the Central Highlands region.
As of 2012, the BCEC comprised 90 members, including 23 business members, 4 broker members, and 63 seller members, with a notably small number of investor members Farmers' familiarity with traditional trading methods has hindered their understanding of the center's operational model, resulting in many coffee producers and traders remaining merely observant due to low liquidity In Dak Lak, out of over 140 active businesses, only a few have registered as members The reluctance of households to engage with BCEC stems from their preference to sell coffee directly to local traders or agents for immediate cash, rather than participating in the center's trading platform.
2.2.1.2 Vietnam Commodity Exchange a Volume of Contract
VNX introduced four futures contracts for coffee, encompassing both Robusta and Arabica varieties, with local (VNX norm) and international (international norm) strategies The contracts were designated as VRC (local Robusta), VLRC (international Robusta), VIAC (local Arabica), and VKC (international Arabica), all aligned with ICE contracts Local contracts were sized at 1,000 kg, while international contracts matched Western market standards: 10,000 kg for Robusta and 37,500 pounds for Arabica, all denominated in Vietnamese Dong VNX faced challenges in choosing between two strategies to attract liquidity: catering to small market participants or creating contracts that could be offset in Western markets due to identical specifications Ultimately, they did not select one approach In the first half of 2012, VNX reported a total transaction value of VND 1,057,000,000, with VND 482 billion attributed to coffee, yielding a trading volume of 22,276 lots, including 10,641 lots of coffee In 2011, the value and trading volume were VND 7,419,000,000 and 93,765 lots, respectively VNX ceased operations in August 2012, officially citing temporary closure due to informatics system issues.
On June 8, 2018, the Ministry of Industry and Trade issued license No 486/GP-BCT, officially establishing the Vietnam Commodity Exchange for domestic transactions and the Mercantile Exchange of Vietnam (MXV) for international transactions.
The Intercontinental Exchange (ICE) in the United States is a leading global platform for coffee commodity trading In 2018, the U.S ranked as the second largest importer of Vietnamese coffee, with imports valued at $321,017 thousand, representing 11.1% of Vietnam's total coffee exports.
Table: Contract Volume of Robusta Coffee on ICE US
In the World, Arabica production is always higher than Robusta Production In
2016, Arabica production was almost 102 million bags, and but declined down to
95 million bags in 2019 For Robusta production, 2016 was 60 million bags and increased up to 73 million bags in 2019 b Members of the Exchange
As of June 2012, VNX had 20 members, primarily brokers, with around 2,000 accounts, mainly opened by businesses and investors exploring a new transaction system The Mercantile Exchange of Vietnam (MXV) officially launched the national commodity trading market on August 17, 2018, currently comprising 17 members, including 16 businesses and one broker New MXV members face a fee of 150 million VNĐ for businesses and 50 million VNĐ for brokers, with annual fees set at 50 million VNĐ for businesses and 20 million VNĐ for brokers These costs contribute to the relatively low membership numbers, alongside the implementation of data connection fees for business members, aligning with global commodity exchange regulations.
Investors in securities incur a minimum cost of 0.4% of the contract value, while those in commodity derivative markets enjoy significantly lower fees, ranging from 0.07% to 0.14% Notably, these markets do not impose additional expenses such as overnight fees or interest Furthermore, MXV offers complimentary training courses for its members and investors.
Source: MXV d Deposit and liquidity
When conducting a transaction, customers need to deposit a certain percentage of the value of the contract Margin on MXV is an asset used to secure the performance of contractual obligations
The table reveals a significant disparity in margin levels between Robusta and Arabica Coffee, with Robusta Coffee requiring a margin of 21,291,160 VNĐ per contract, while Arabica Coffee demands nearly five times that amount at 103,890,600 VNĐ per contract This substantial difference presents a considerable financial barrier for anyone interested in participating in Arabica contracts.
Table 2.5: Levels of margin for commodity futures traded through
Mercantile Exchange of Vietnam (MXV) is an intermediary between investors, dealing directly to international commodity exchanges such as: CME, ICE, TOCOM, SGX
In January 2020, the Vietnam Commodity Exchange reported significant trading activity, with 31 million lots opened and over 7 million open positions, highlighting the robust market dynamics Additionally, direct transactions with major international commodity exchanges, such as CME Group with $66.06 billion, ICE Futures Europe at $41.6 billion, and TOCOM Japan reaching 2,000 billion Yen in 2018, contribute to a high level of liquidity on a global scale.
Figures 2.4: MXV in the network of international commodity exchange
Compared to traditional investment channels allowed by Vietnamese law, such as stocks and real estate, commodity derivatives offer significantly higher margin ratios, reaching up to 1:30 for certain items, while Vietnamese stocks have a margin ratio of only 1:1 Additionally, the waiting period for stock transactions is T+3, meaning investors must wait three days after purchasing before they can sell, whereas in commodity exchanges, the waiting time is T+0, allowing for immediate buying and selling.
The Clearing and Settlement Department of the MXV oversees margin deposits and manages offsetting between FCMs and MXV clients, adhering to a strict mark-to-market policy This approach ensures transparency and real-time pricing for futures exchange-traded commodities, as it eliminates any mark-up, mark-down, or market intervention As market volatility affects futures positions, the unrealized profit and loss are continuously recalculated, leading to changes in the margin account’s excess and net liquidity value.
Evaluate Achievement and Limitation of Coffee Exchange in Vietnam
2.3.1 The Achievement of Coffee Exchange
MXV has established itself as a centralized commodity trading organization in Vietnam, operating on a national scale and offering a diverse range of trading items Its interconnections with global commodity exchanges enhance its role and influence in the market.
-Mercantile Exchange of Vietnam is in the network of international commodity exchanges with: LIFFE, CME, ICE, TOCOM, SGX
MXV streamlines market operations by integrating transactions, clearing, and payment processes, which enhances synchronization and eliminates the disconnect between trading and clearing activities This efficient operating model, widely adopted in advanced global markets, ensures smooth post-transaction processing, rapid transaction speed, and accurate statistical reporting Furthermore, MXV partners with leading Vietnamese banks, including BIDV and Vietcombank, to facilitate secure payment settlements.
MXV not only facilitates transaction clearing by market but also manages member relations to report to the Ministry of Industry and Trade Additionally, it organizes training for market universalization and focuses on developing trading technologies within the scope of commodity trading.
- It offers the daily statement of all trading information to members All are automatically performed
-With MXV, it has a wide range of places for transferring across the world with 120 places
2.3.2 The Limitation of Coffee Exchange
The coffee exchange in Vietnam is relatively new and has faced significant interruptions, leading to several drawbacks Firstly, liquidity remains low, which affects trading activity Additionally, the number of participating members is still limited, hindering the exchange's growth and development.
Until now, MXV only has totally 17 members Coffee Exchange has not attracts investors The exchange has not reached many people yet c The information is limitative
Because the exchange is still new The information on the website of MXV is general and limitative The data on transaction volume only has from about mid-
2019 to date Therefore, anyone who is interested in MXV has little information to research and invest as well d The lack of experienced and professional staff
Most executives in its coffee exchanges are young Professionals who have either recently graduated from Western business schools or have previously worked as physical coffee traders
Chapter 2 provides overview of coffee exchanges in Vietnam for us, specifically Buon Ma Thuat Coffee and Commodity Exchange and Mercantile Exchange of Vietnam such as: the origin of coffee exchange, the structure of coffee exchange and coffee contract specification Afterward, we discover the situation of coffee exchange Firstly, we explore activities of coffee exchange via several aspects like: volume of contracts, members of exchange, deposit and liquidity finally clearing and settlement Afterward, we understand that the government is trying to launch new regulations to boost the development of the coffee exchanges
In Chapter 3, we will explore the achievements and limitations of coffee exchange in Vietnam, identifying the factors contributing to its underdevelopment and proposing solutions to address these challenges.
CONCLUSIONS AND SOLUTIONS
Solutions
When we understand the causes detaining Vietnam coffee exchange Afterward, from my perspective, I will list some of solutions for these issues below:
3.2.1 Complete the legal framework for commodity trading through the commodity Exchange
To effectively promote agricultural product exchanges, strong government support is essential This includes not only branding initiatives but also the organization and operation of these exchanges A well-defined and systematic strategy for developing agricultural product exchanges is crucial for success.
To enhance the regulatory framework for goods trading, particularly in agricultural products at the Exchange, it is essential to implement effective inspection and supervision mechanisms These measures aim to minimize unhealthy trading practices while establishing clear sanctions for violations of trading regulations.
- Completing the legal provisions on contracts related to goods trading activities through the Exchange
In 2018, the government introduced new regulations governing the establishment and trading on the commodity exchange through Decree No 51/2018/ND-CP, which took effect on June 1, 2018, amending and supplementing several articles of existing legislation.
Government Decree No 158/2006/ND-CP, issued on December 28, 2006, outlines the conditions for establishing commodity exchanges in Vietnam Decree 51 broadens the range of tradable goods to include all non-prohibited commodities, conditional trading items, Vietnamese export products, and essential imports for local production It introduces various trading order formats, such as written documents and electronic communications Notably, foreign investors can contribute up to 49% of a commodity exchange's charter capital and are allowed to trade as clients or become members without ownership restrictions Furthermore, the decree facilitates the interconnection between Vietnamese and global commodity exchanges, enhancing the integration and development of Vietnam's commodity market.
Enhancing connections in agricultural commodity production is essential for regulating supply in trading exchanges By fostering collaboration between domestic and international agricultural producers and traders, we can boost both the volume and quality of goods traded This cooperation not only facilitates the growth of Vietnam's agricultural brands but also increases the added value of products, benefiting both producers and businesses alike.
Domestic exchanges should enhance collaboration with international commodity exchanges to gain insights into effective management, organizational models, and market information connectivity By utilizing a global networked computer system, they can effectively capture and analyze data from international markets.
Improve the transaction capabilities at the Exchange by offering a comprehensive range of agricultural products through the Department This includes essential services such as shipping, payment support, and information delivery to facilitate seamless transactions.
To bridge the geographical gap between rural producers and buyers, it is essential to establish an efficient delivery system and transport services tailored for agricultural goods Given that these products are often located far from customers, collaboration with a professional carrier is crucial The Exchange should actively promote transportation services in priority areas and ensure that producers are informed and ready to utilize these services when selling through the Exchange, accessible via the Department's hotline.
To enhance payment support services, the Exchange should collaborate with banks to facilitate easier transactions for farmers This partnership would streamline the process of receiving sales proceeds, eliminating the need for farmers to personally visit the Exchange to collect their earnings.
Exchanges must offer up-to-date and free market information on agricultural products, including prices and market demands, to support producers This can be achieved by establishing a customer consulting department that addresses inquiries and gathers feedback from Exchange participants.
3.2.3 The Commodity Trading through Exchange
Enhancing product quality through the implementation of modern agricultural production and processing techniques is essential for businesses and farmers This approach ensures that goods meet the increasingly stringent market demands, both domestically and in the export sector.
To enhance the global presence of Vietnam's agricultural products, it is essential to prioritize the development of strong product brands This strategic focus will enable these products to integrate more effectively into global value and supply chains, ultimately increasing their added value in the marketplace.
- Produce agricultural products in accordance with the plan, avoid spontaneous production that leads to oversupply, causing great economic losses to producers
3.2.4 Strengthen the Application of Information Technology
- Build a data center, ensure a standard operating environment for the server and ensure the security of transaction data
- Build an online trading software system to facilitate transactions via mobile devices, fit with the development trend of Industry 4.0
Creating a trading information system is essential for establishing a community of investors and enhancing the information network This system facilitates the swift and effective dissemination of market information while providing a two-way communication channel between transaction management agencies and investors, as well as among investors themselves.
Developing a software system is essential for enhancing operational support, fostering favorable conditions for market development, and facilitating investor transactions at the Exchange Simultaneously, implementing a comprehensive warehouse management system will ensure synchronized management of all related processes within the transaction chain at the Exchange.
To
Lessons
Brazil is the largest and biggest coffee producer and exporter with account for 34,3% coffee production and 27.7% of the total coffee export in the world ( in
The BM&F exchange in Brazil stands as Latin America's largest and most significant commodity exchange, specializing in agricultural commodities such as coffee, live cattle, and cotton With a skilled local workforce experienced in developing commodity futures, the exchange benefits from a long-standing familiarity with futures markets, particularly in the coffee sector, where the NYBOT contract (now ICE Arabica) serves as a market benchmark Additionally, Brazil has established a diverse pool of investors engaged in various financial products, contributing to the overall success of the coffee contract This achievement reflects the broader financialization of the economy rather than being limited to a single agricultural commodity market.
In 2002, the System for Coffee Classification and Physical Delivery was launched, enhancing security and efficiency by linking accredited warehouses and brokerage houses to BM&F This system enables all exchange-licensed warehouses to register classification and arbitration requests, input depositor details, specify bag quantities and lot numbers, and automatically generate certificate numbers.
BM&F provides bar-coded seals for coffee sample cans upon request, highlighting the importance of proper labeling in the supply chain In Vietnam, the challenge lies in a predominantly non-financialized economy, which hinders market efficiency However, some industry players in developing countries possess valuable knowledge from their experiences in other futures markets, which can be leveraged to enhance local commodity trading To address these issues, Vietnam must focus on developing its warehouse infrastructure to support a more robust futures market.
In 2004, the Dalian Commodity Exchange in China initiated the "1,000 villages, 10,000 farmers" educational program to enhance farmers' understanding of futures contracts and resource management By early 2007, over 40,000 farmers had gained insights into utilizing futures prices for optimal planting decisions A key aspect of this initiative is the role of intermediary organizations, such as cooperatives and finance institutions, which can integrate hedging features into contracts for farmers This approach allows small-scale farmers to benefit from price-risk management without the significant time and resource investment typically required for direct engagement in commodity futures markets Vietnam could similarly implement this program to support its coffee farmers.
Climate change affects coffee sector in Vietnam
Coffee trees are highly sensitive to weather conditions, requiring an optimal balance of rainfall and sunshine for maximum yield Changes in these conditions can lead to supply constraints and rising prices, particularly in the context of global warming, which may induce long-term droughts in coffee-producing regions In Vietnam, temperatures have risen by 0.4°C since the 1960s, with the most significant increases occurring during the dry season from November to April, especially in southern regions A CIAT study indicates that certain areas, particularly in Lam Dong and Dak Nong, may lose climatic suitability for Robusta coffee, while regions like Dak Lak, Gia Lai, and Dong Nai may become unsuitable for production altogether Conversely, new areas around Bi Dup-Nui Ba, Rung Thong, Da Lat, and Ka Lon Song Mao could become climatically suitable for coffee cultivation; however, these areas are primarily protected and governed by strict agricultural boundaries under the Vietnamese forest protection program By 2020, the anticipated loss of 30% in climatic suitability—primarily in Dak Lak and Gia Lai—is attributed to decreased precipitation during the driest quarter and increased rainfall during the wettest month, which will account for 78% of this loss.
According to a CIAT study conducted in 2012, by 2050, climatic suitability for coffee cultivation is projected to decline significantly due to a rise in mean temperatures during the wettest quarter by approximately 1.7°C, increased seasonality, and heightened precipitation levels between August and October by 26mm These climatic changes are expected to account for up to 50% of the loss in suitability for coffee production Alterations in precipitation patterns may disrupt coffee flowering and affect the ripening of coffee cherries, impacting harvest yields Coffee grown at altitudes between 300 and 550 meters above sea level (masl) will likely face the most severe consequences, while those cultivated at 850 masl and higher may experience minimal effects.
Further Research
This research investigates the role of derivatives contracts, specifically futures and options, in the Vietnamese coffee market, with a focus on the potential of the OTC market The availability of OTC instruments, such as the increasingly popular 'Price To Be Fixed' (PTBF) contracts, may explain the limited participation in local futures markets PTBF contracts facilitate the transfer of coffee without setting a price, allowing farmers to deliver unpriced coffee through a sell-on-consignment model This flexibility provides farmers with more trading options, yet it also diminishes the incentive for key market players, like exporters and local traders, to engage with futures markets for risk management Consequently, the prevalence of PTBF contracts contributes to a partial financialization of the market, hindering the development of a fully accessible local futures market for farmers Further research should explore the impact of OTC instruments like PTBF and OTC options on enhancing trading choices for farmers in Vietnam.
Chapter 3 highlights the challenges hindering the development of coffee exchanges in Vietnam, prompting the paper to propose solutions for each issue It also draws insights from the successful coffee exchange model in Brazil, suggesting that Vietnam can adapt these strategies Additionally, a campaign in China has successfully engaged more farmers in commodity exchange, offering a potential framework for Vietnam with slight modifications The paper emphasizes the urgent impact of climate change and global warming on coffee cultivation, which poses significant risks to coffee trees This study focuses on coffee trading through exchanges, recommending that future research explore the over-the-counter market and compare its advantages and disadvantages with exchange markets.
In conclusion, coffee exchanges are vital for economic growth, and this study focuses on the coffee exchange system in Vietnam It begins by defining commodity and coffee exchanges, highlighting their characteristics and key participants The research examines the current state of Vietnam's coffee exchange, tracing its global origins and local establishment It analyzes three main aspects: contract volume, member participation, and liquidity, providing an overview of the challenges faced by the Buon Ma Thuot Coffee and Commodity Exchange and the broader Vietnamese commodity exchange Key barriers to development include participant numbers, legal frameworks, human resources, technology, and delivery systems Despite these challenges, trading coffee through exchanges offers significant benefits, underscoring the need for their development The paper concludes with recommendations to address these issues, aiming to enhance the effectiveness of coffee trading in the future However, due to data limitations, the research does not provide a comprehensive analysis of coffee futures and options in Vietnam.
The coffee exchange in Vietnam is still in its early stages, leading to an underutilization of its potential Currently, there is limited information available regarding the Vietnam commodity exchange.
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