Brazil Exporters Seek Lower Coffee Discount on ICE Futures

Brazil coffee exporters want better treatment for their beans from one of the world’s biggest commodities exchanges.

The Council of Brazilian Coffee Exporters, known as CeCafe, said Tuesday it plans to petition IntercontinentalExchange to reduce the discount applied to Brazilian coffee beans at the ICE Futures U.S. exchange, where benchmark futures for arabica coffee trade.

“We intend in the next 60 days or 90 days to present a report on the prices of washed Brazilian coffees, in order to suggest ICE reduce the (discount),” Guilherme Braga, CeCafe’s director-general, said in an interview.

In late 2010, Brazilian growers secured the right to have their arabica beans traded on the exchange, a battle they had fought for more than a decade. But there was a catch: Brazilian beans would be delivered against the futures contract at a 9-cent discount. That means that the owner of that physical coffee would receive 9 cents less per pound than the contracted price reflected on the exchange. With one contract representing 37,500 pounds of coffee beans, that difference adds up to $3,375.

Brazilian growers’ battle for inclusion pitted them against critics, including growers groups from other Latin American nations, which argued that coffee from Brazil was of lower quality than the hand-picked, highland-grown beans from other parts of the region. Industry officials say the exchange set the 9-cent discount, the largest discount in the ICE system, in response to the concerns over quality.

Braga said he considers it to be “very high.”

Arabica coffee futures on Tuesday fell 1.8% to $1.3270 a pound, a three-year low. Coffee prices have declined 35% since December 2010 when ICE opened the door to Brazilian beans, which just became effective this year, when buyers and sellers started to make physical delivery of coffee under the March 2013 contract.

Brazilian coffee growers can get better prices selling to roasters directly, he said.

When asked about the rule, ICE said, “We review the discounts regularly and will consider all input from market participants as part of that review process.”

The selloff in coffee prices in the past two years has created little incentive for traders and growers of Brazilian beans to add to the stockpiles certified by the exchange. Coffee delivered against the contract must come from these stockpiles.

While Brazilian growers now can sell their beans on ICE, they haven’t actually taken advantage of the new rules. No Brazilian beans were brought to the exchange to fulfill the March contract nor the next, which was for May delivery, according to ICE.

That is because current coffee prices are too low, and the discount is too big, Brazilian growers and CeCafe said.

“The solution is that this (discount) is reduced,” Braga said. He said CeCafe will determine how much of a reduction it will request based on market conditions during the harvest.

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