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  • QA 223
    Question:
    How are futures trading positions chosen for price fixing?
    Background:
    Which trading position should one use for the price fixing of contracts done on 10th June 2009? July or September? *
    Asked by:
    Exporter - Peru
    Answer:

    Futures positions used as the basis for price fixing are usually linked to the shipping period. **

    The basic background to hedging is that importers/roasters wish to protect themselves against price falls in the period between the purchase and the actual availability (the arrival) of the goods. They will therefore choose a futures position that best matches the estimated availability of the goods. The New York Futures Market (www.theice.com) lists five delivery months: March, May, July, September and December. Totally ten positions are always quoted, thereby covering a two-year period. When trading on a differential basis buyers and sellers have to agree against which position a particular contract for the shipment of green coffee is to be priced.

    If a contract dated June 10th calls for July shipment then July arrival from Peru at destination could be uncertain. After all, shipment could be made as early as July 1st or as late as July 31st. Bear in mind also that, usually, few operators are interested to enter into price fixation when a particular futures position is close to expiry.*** Consequently September would have been the most logical futures position to use for price fixing.

    However, on June 10th 2009 the September position was trading at a premium to the July position and this may have caused the buyer to choose July instead, something the seller might have disagreed with for fairly obvious reasons.

    Usual practice is however that sellers/buyers indicate the futures position against which any differential deal is to be priced at the start of negotiations. Offers on differential basis should always indicate the futures position to be linked, i.e. U09 for the September 2009 position. In this case the buyer might have accepted the offer but basis July (N09), leaving the seller to decide whether to accept what in fact was a lower price.

    Because of a lack of details on this particular transaction it is not possible to be more precise, also because there are no rules that determine these linkages. Sellers and buyers have to agree them on a case-by-case basis and our advice is to be very clear and precise when formulating offers…

    *  For a full review of differential trading and  'Selling Price to be Fixed or PTBF' see Chapter 9, section 09.02 of the Guide. Chapter 8 deals with Futures Markets generally.

    ** The questioner did not provide details of the actual shipping period so this question is only answered in very general terms, based on the assumption the contract was for July shipment.

    *** The last day the near or spot month, i.e. July in this case, can be traded is eight business days prior to the last business day of the delivery month.

    Posted 15 June 1009

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