Futures markets and coffee prices

Newman, Susan

Abstract

This thesis constitutes an empirical critique of neoclassical economic theory as applied to the study of commodity markets. It is argued that the liberalisation of coffee marketing systems in producing countries, the collapse of the International Coffee Agreements, and the consequent restructuring of international coffee markets has had profound effects on the relationship between futures and physical markets for commodities in the context of liberalised capital flows and a world economy increasingly shaped by finance.
Using evidence from the New York Coffee Exchange on trading activities and futures prices, together with a study of price formation and price risk management practices along coffee chains in Tanzania and Uganda, this thesis refutes the neoclassical assertions that futures markets facilitate efficient price discovery, that futures markets reduce price risks by providing effective hedging instruments and by stabilising prices, and that liberalisation enhances market integration and efficient price transmission along the chain.
It is shown that the liberalisation of coffee markets and an emphasis on the wide spread use of hedging instruments for price risk management has facilitated their financialisation rather than enhancing their efficiency. Prices have increasingly been formed on the basis of supply and demand for coffee derivatives that has become in many ways divorced from the supply and demand for physical coffee. The ability for certain large coffee traders to derive enormous incomes from their engagement in derivatives trading to the exclusion of the majority of coffee chain actors in producing countries from engaging in such activities has serious implications in terms of the exacerbation of international inequalities along international supply chains.

• Thesis Type: Thesis
• Public URL: https://uwe-repository.worktribe.com/output/990178
• Award Date: Dec 1, 2009