Since the end of June 2016, coffee prices have fluctuated, mostly trending upwards. Prices have increased from $1,650 per ton to $1,877 per ton by September 5, 2016, an increase of more than $200 per ton. This has led many buyers to consider lowering their “discount prices” by increasing the price gap to secure cheaper coffee for export, suggesting that the local coffee market can still handle these adjustments.
However, the term “discounted prices” in coffee trading is commonly used by Vietnamese coffee exporters. Historically, when dealing with intermediaries, Vietnamese coffee was never sold at “premium prices.”
Understanding the Correct Terminology
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To clarify, this refers to coffee sold FOB (Free on Board) at a price differential between the agreed price for delivery over the standard futures market price. This method of trading is known as forward contracts. It’s worth noting that many individuals, including some researchers, mistakenly refer to forward contracts as futures contracts. These terms were incorrectly applied in the past, as the market dynamics were not fully understood by those using them.
In reality, when trading based on price differentials, if both parties agree to a price below the listed price, it is called a “discount price,” while a price above the listed price is known as a “premium price.” If the price matches the listed price, it is referred to as the “level price.”
Spot Transactions and Price Variations
In the coffee market, both methods are used simultaneously. Spot transactions, meaning immediate purchases, involve an immediate price agreement, while the price based on differential agreements, typically known as “price-to-be-fixed” (ptbf), is agreed upon later.
A key advantage of forward contracts with a fixed price (ptbf) is that they involve less risk compared to spot prices. For example, during a price surge of $200 per ton in spot prices, the price fluctuation in ptbf might only vary by around $20 to $65, which is far less volatile and doesn’t change as frequently.
Financial Implications for Buyers
The buyers often stretch the price gap (discount) when prices increase on the futures market to save money on purchases, thus reducing their financial risk. By not immediately locking in the price, buyers can minimize their expenses and even use the capital to earn interest. They typically pay only 60-70% of the price upfront, with the remaining balance delayed. This allows them to manage their cash flow while waiting for market conditions to improve.
However, this strategy puts the seller in a disadvantaged position as they face the risk of falling prices while still being obligated to deliver the coffee at the agreed price. This tactic of delaying the price agreement can sometimes lead to financial hardship for the seller, especially if the market price drops significantly.
Managing Discounted Pricing Effectively
While the strategy of discount pricing might seem advantageous for the buyer, it poses challenges for the seller. The deeper the discount, the harder it is to close the sale at the desired price. Sellers may be forced to accept unfavorable prices just to secure a deal.
Sellers should consider closing the deal early, even if it means a small loss or breakeven, if market conditions become unfavorable. Utilizing futures or options contracts through authorized brokers can be a good way to hedge against price risks and avoid further financial exposure.
The goal of this discussion is not to offer direct advice on current market conditions but to emphasize the importance of finding a long-term, effective trading strategy to protect both buyers and sellers from market volatility.