The Coffee Futures Exchange India Ltd (COFEI), located at Bangalore, is India's domestic futures exchange for Coffee. It has been in operation since 1997 under the supervision of the Forwards Market Commission (FMC). COFEI commenced trading from June 19, 1998. Coffee is the second largest traded commodity in the world and the exchange provides domestic players an important mechanism for hedging and price discovery, especially in these turbulent times for the industry.

Ashwin Shah of the Madhu Jayanti Group is the moving force behind Cofei. The Madhu Jayanti Group has a sizable presence in the coffee industry apart from the tea and spices segments.  Ashwin Shah piloted the launch of the exchange and continues to wield the baton even today, as the chairman. indiamarkets spoke to Shah on a wide range of issues pertaining to the coffee industry.

indiamarkets: Give us a brief account of the activities of Cofei.
Shah: Cofei is in the third year of trading, having started on June 19, 1998, with only two contracts each of Plantation A and Robusta Cherry AB trading initially for one hour only. Since then we have covered a long distance.

Amongst the various achievements unique to Cofei, probably the greatest are the successful trading in raw coffee, which began on June 22, 2000 and online trading on September 16, 2000 at the 'Coffee Futures Symposium'. The symposium was a very prestigious event organised at Bangalore to mark the third year of its existence and was well attended by eminent personalities in various disciplines as well as Government dignitaries, apart from those engaged in the coffee industry.

The online trading facility is being extended to other centres closer to coffee-growing regions beginning with Hassan where the online coffee futures trading centre was inaugurated on January 15, 2001.

Cofei already has its own web site “cofei.com”. Daily futures trading reports are being updated on the Web site for information of visitors to the site.

Cofei has ushered in an era of methodical thinking and calculated risk management by facilitating better understanding of the future trend. Cofei has successfully conducted mock trading sessions and road shows in most of the coffee-growing regions in Karnataka, Kerala and Tamil Nadu for the benefit of growers. The response to its promotional drive through pamphlets in regional languages has also been encouraging.

As they say, the proof of the pudding is how many people want to have a bite of it. So far, Cofei has 327 ordinary Members, 64 trading Members and six Trading-Cum-Clearing Members.

indiamarkets: How significant are the volumes traded and how good is the liquidity at Cofei?

Shah: Beginning with a modest presence in 1998, Cofei has made distinguished strides in its journey over the years and grown from strength to strength. The volumes have improved form 11,391 tonnes in 1998 to 77,030 tonnes in 2000.

The fortunes of the coffee industry in India are dependent on international prices as almost 75-80 per cent of coffee produced is exported. The range-bound prices in both London and New York exchanges during the past few months have failed to provide desired momentum to prices and volumes at Cofei.

indiamarkets: How far has the exchange helped in price discovery and price stability for the coffee trade?
Shah: Trading at Cofei is permitted up to 18 ½ months forward in nine contracts viz., January, March, May, July, September, November, January, March, May, July.  One can buy and / or sell for any of these months at prices he thinks right on any given day, thus establishing the price for coffee for that distant delivery month, on a daily basis.

The futures exchange for trading is not a solution to shortage or oversupply, but a mechanism for determining what would be the situation in the future. Following the glut in world production, Cofei has been giving warning signals and those who took the cue, evacuated before the volcano erupted while others were in for a rude shock as prices touched historical lows. It provides the industry a mechanism to hedge against future shocks due to price fluctuations.

indiamarkets: Why have coffee prices been so low for the last few years?
Shah: World coffee production in 2000/01 is estimated to be around 112 mln bags, slightly lower than 1999/2000, but still significantly in excess of expected demand. Production has been growing more than twice as fast as consumption and this is reflected in the continued low prices, which are currently below the cost of production of even the most efficient producers.

Coffee production in Vietnam has advanced in leaps and bounds in recent years with the country becoming the world's largest robusta producer and the world's second largest overall producer by 2001. Partly as a result of Vietnam's export policy in the second half of 2000, world coffee prices reached 30-year lows with robusta's falling 44 per cent and arabica's 41 per cent between January 2000 and March 2001.

Overall, the situation looks grim, especially for robustas, which are crushing under their own weight. However, some consistency can be expected in the prices of arabicas in near future.

indiamarkets: What will be the impact of removal of QRs on the Indian coffee trade? Is import of coffee a real threat to the domestic industry?
Shah: The removal of quantitative restrictions on imports is not going to have an immediate impact on Indian coffee - on either the domestic or the export market. However, in certain years, it may so happen that due to more quantity being exported during the first half of the year when the crop is harvested, we may not have enough for the second half to cater to the domestic needs or to fulfill the commitments in the international market where roasters need a particular quality of coffee from India. In such conditions, we may have to import some quantity of coffee, and I see this as a perfect situation. This will ultimately lead to more value addition for Indian coffee as the world over, roasters will then buy Indian coffee with confidence, as they are sure of the contracts being fulfilled.

indiamarkets: There have been reports of quality problems with Indian coffee exports. How far are they true and what has been the impact?
Shah: A few rare instances of malpractice cannot undermine either our quality or our commitment.

indiamarkets: Which are the emerging markets for Indian Coffee and what is being done to tap them? How successful have we been in developing speciality coffees?
Shah: Expanding the concept of the global village, we are striving hard to share our rustic delights all over the world - in Italy, Japan, Russia and USA. Italy is the traditional market and Japan is one of the fastest emerging Asian markets. Even companies like Starbucks see a bigger pot in Asia and the Middle East. USA is also a potential market for consistent quality coffee. The concept of speciality coffee is not new. It has been in the US for the past few decades and recent surveys illustrate that coffee consumption in the US has picked up due to premium coffees and the market has been boosted for higher-priced gourmet coffees.

As far as India is concerned, speciality coffee is a new concept. India’s washed robusta known as 'Robusta Parchment' are world-famous for its unique taste and body and some even compare it to Mild Coffee.

indiamarkets: What is being done to ward off threats from countries like Vietnam which compete with us in the international market?
Shah: In this post-liberalisation era, the aim should be to join with countries like Vietnam in the common interest of developing a healthy international coffee market. Restricting imports or denying permits for re-exports cannot avert the crisis. Globalisation means harmonising the national economy with the international economy and that cannot be achieved by demanding artificial protection or level playing fields for the Indian industry.

With the world’s supply and demand position remaining in a significant surplus and too many countries chasing too little export business, the fight for increased market share is intense. The only way to pull out and benefit from the existing scenario would be: “Not to look at Vietnam as competitors but as fellow producers and exporters with similar objectives and work together rather than cut each other’s throats.”

The growth of coffee production in Vietnam has been too fast and it lacks the requisite processing facilities. Whether we import coffee for re-exports or not, the competition from this origin is inevitable. The question now is what do we want to do? Will it not be in our own interest to capitalise on our cheap labour and manpower resources?  While we are ideally placed, why should we allow third parties to enjoy the benefits, which we deserve?  It will be helpful for India in the long run to import for re-exports by its EOUs in the off-season period. By processing Vietnamese coffee and exporting it, we will in turn be building up competition for our rivals.

The other long-term viable solution could be that India should send its delegation to Vietnam to show the farmers and roasters how to improve their processing facilities. Right now, the benefit is going to European traders, who by showing discounts of Vietnamese coffee want Indian quality coffee also at the same price.

indiamarkets: Is enough being done to promote the internal consumption of coffee?
Shah: The domestic consumption has seen an improving trend. The younger generation in Chennai is patronising coffee pubs serving espresso and cappuccino. If the younger generation can be lured to coffee through such 'exotic' coffees, we can hook them to our coffee. There is no better promotion for Indian Coffee in the internal market than this! I foresee these youngsters, later switching to Indian Coffee as a regular drink with the 'exotic' becoming an occasional luxury.  We hope to ultimately wean them away from alien charms and hook them on to rich Indian Coffee.

Domestic consumption being very small in India, there lies a huge opportunity to expand the market with the help of intensive coffee promotion. Developing better advertising and marketing that speaks directly to consumer groups with lower-than-average coffee consumption, such as young adults, should also yield benefits. Also expanding the distribution network by setting up of vending machines for both packed and liquid brews in competition to soft drink outlets with special emphasis on Northern and Eastern parts of the country will help boost domestic consumption.

The Indian coffee board has already prepared a Rs 300-million domestic marketing promotion to boost domestic coffee demand. It plans to popularise coffee drinking and hopes to secure partial funding from the Amsterdam-based Common Fund of Commodities.

indiamarkets: Your thoughts on the government’s decision, not to join the coffee retention plan. In the same vein, do you think that voluntary reduction in production by planters will help bolster prices?

Shah: Right now, retention is a non-issue. Most of the countries have withdrawn with Brazil, the anchor, trying to offload its burden of retention by saying that it is not the exporters but growers who should be responsible for retention. It is always the demand vs. supply – economic theory that determines prices. Retention will work only if supplies are marginally higher, but not in the case of burgeoning production. There is a need for a strong organisation as in the oil sector, which can regulate production and control prices.

indiamarkets: Will a new auction centre at Kochi make any difference to the trade?
Shah: The quantity of coffee sold through auctions is insignificant. Even at the weekly ICTA auctions, hardly 5 per cent of the total produce finds an outlet. A new auction centre at Kochi will not have any impact; except that some small quantity of coffee from Kerala will find its way to some local exporter’s warehouse.

indiamarkets: As a company that is involved in other commodities also apart from coffee, what is your opinion about the long time prospects in the business? Coffee, tea, pepper… we see a downward trend in prices everywhere.

Shah: As Ray Bradbury once said – “If we listened to our intellect, we'd never go into business, because we'd be cynical. You've got to jump off cliffs all the time and build your wings on the way down."  An astute trader has to be prepared to face success and calamities in the same breath as changing seasons of life. He has to perceive the challenges that lay ahead, he has to search for opportunities in every calamity and strive to build a better tomorrow. The downward trend in prices is just a passing phase.

indiamarkets: What is the scope for e-commerce in your business and what have been your initiatives in this regard?
Shah: The Internet has revolutionised the concept of trade but at the end of the day, sound business practices still win. Bricks and mortar still make sense, but coupled with net-savviness, it creates an explosive mix. Whether it is coffee, beef or poultry, the food industry is just moving online.

Cofei was the first commodity exchange in India to go online. Its volumes increased considerably after that. Jayanti Group is in the process of launching a B2B customer designed site, which will offer round the clock service.