What increased ICE differentials mean for the coffee industry

  • Effective today, the ICE will increase the price differentials for coffee deliveries from four major coffee-producing countries
  • The changes are likely to influence the quantity and quality of coffee being delivered to the exchange
  • An adjustment of this magnitude will have far-reaching effects – such as on farm-level investment and global coffee prices

THE INTERCONTINENTAL Exchange (ICE) has recently announced it will be adjusting the price differentials for coffee deliveries from Colombia, Kenya, Costa Rica, and Guatemala. The amendments are effective from today, 26 January 2024, for March 2026 contracts and onwards. 

Colombia’s premium (differential) will rise from $0.06 to $0.10 per pound, and Kenya and Costa Rica, previously at par delivery level, will now also have a $0.10 per pound premium. Guatemala’s premium, meanwhile, is increasing to $0.05 per pound from par delivery level.

“When the differential on a coffee contract changes, it means that the price difference between the contract and a benchmark (the market price) has shifted,” says Matthew Harrison, sourcing manager at Trabocca. “This change in the price gap can change for a number of reasons, factors such as supply and demand dynamics and market conditions.”

These changes represent a significant shift in the pricing structure of coffee futures. They of course have a specific impact on the origins in question, but also on the wider global coffee market.

Perceptions of increased value?

At its most obvious level, raising the differential for a specific origin indicates a perceived increase in the value of its coffee. This can be due to factors like improved quality, shifts in supply and demand, or any other factor affecting price.

“When the differential on a coffee contract increases, it means that the price difference between the contract and the market price has grown,” says Matthew. “This could be motivated by a few factors, however in this case the increase is likely a reflection of the improved quality and the change in availability.

“This change is an alignment to the cash market value of these products. Essentially, an increased differential suggests a perceived higher value.”

As such, these changes reflect a desire for the exchange to better align with the cash market. The ICE’s Commodity Futures Trading Commission filing states: “The amendments to the rules better reflect current commercial origin differentials better aligning the contract with the underlying cash market.”

However, as Matthew points out, there are also underlying market conditions at play here.

Increased ICE differentials will have a big impact on the coffee industry

ICE stock levels

One of the most relevant market conditions is the fact that ICE arabica stocks are at their lowest level since 1999. Increasing the differentials could incentivise producers and exporters to deliver coffee to the exchange, thereby driving a rise in stock levels.

“This is to encourage producers and traders to deliver to the exchange,” says Matthew. “At the moment we see historically low volumes of coffee in the certified arabica stock inventory. This is because it is cheaper for trade (buyers) to source directly from origin rather than buy from certified stocks.

“The current low levels of certified stock is creating uncertainty and more volatility in the market, which might be good for speculators but not good for the rest of the industry.”

Honduras and Brazil have the largest shares of the certified stocks. Honduras delivers coffee at par with futures prices, while Brazil has a discount of $0.06 per pound. No price changes have been announced for these two countries, likely in part because they already deliver large volumes of coffee to the exchange.

Future safeguarding

Matthew says that the impact will be most significant for Colombia, mainly because of the sheer difference in volume – it currently produces substantially more coffee than the other three origins. Equally, a high proportion of Colombian coffee is classified as Excelso, which already trades at differentials close to $0.10 per pound.

Conversely, Kenya, Costa Rica, and Guatemala all mostly produce coffee which is typically much more expensive, meaning that the desire to sell coffee to the exchange is more limited in these countries. 

Ultimately, this means that delivering large volumes to the exchange at the increased differential is more realistic for producers in Colombia than the other three origins.

“This will have a significant impact on Colombia, as this makes delivering coffee to the exchange a really viable option,” says Matthew. “As for Kenya, Guatemala, and Costa Rica, I think the impact will be less significant.”

What the increase in differentials could do, however, is make coffee farming more attractive in all of these countries. With the ability to sell their harvest to the exchange at a higher differential, farmers who are considering shifting to other, more profitable cash crops may think twice and stick with coffee. As such, by increasing these differentials, the ICE is in effect trying to secure future coffee deliveries and safeguard the long-term stability of their coffee stocks from these countries.

High-quality certified stock

While the ICE has specific standards for coffee to be certified for delivery against its futures contracts, low-quality coffee currently makes up the bulk of certified arabica stocks. A rise in differentials is likely to increase the amount of higher-quality coffee delivered to the exchange and level the balance.

“An increased differential can encourage deliveries of high-quality coffee from the origin where the differential has risen,” says Matthew. “When the price difference or premium (differential) for a specific coffee origin increases, it provides an incentive for producers in that region to supply higher-quality coffee beans.

“This mechanism works as an economic incentive for growers to focus on improving the quality of their coffee beans, investing in better cultivation and processing methods to meet the demand for premium-quality coffee associated with the higher differential. In this way, market forces can drive improvements in the quality of coffee production.”

As such, these changes not only signal pre-existing improvements in coffee quality from these origins, but they also have the potential to encourage additional improvements as higher premiums make these origins more desirable, potentially attracting further farm level investment and causing traders to adjust their strategies to account for higher-value coffee origins. On the flip side, however, increased differentials may well drive down interest for these coffees from more price-sensitive markets.

Furthermore, unlike when producers or exporters engage in direct trade with roasters or importers in consumer countries, the exchange provides immediate payment for coffee deliveries. This could contribute to increased liquidity for coffee production, and with access to finance and working capital being a continual struggle at origin, this could make selling directly to the exchange more favourable than working with previously established buyers.

And as for roasters, increasing differentials for four major coffee-producing countries will likely lead to higher coffee prices – not just for these specific origins, but across the board as the higher costs associated with these premiums are passed along the supply chain.

This comes at a time when roaster profit margins are already being squeezed after years of persistent inflation and rising operational costs. Roasters may simply pay through the nose, or pass the increased cost onto the consumer.

Coffee Intelligence

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