Abstract
Coffee price risk emphasize the importance of futures markets existence as price risk management. This study examines whether the futures price may predict the spot price as the indicator of market efficiency using data of daily Arabica and Robusta coffee prices from 1172 trading days starting from January 2014 to June 2018. Analysis using Engel-Granger Cointegration and Error Correction Model (ECM) indicates the cointegration between coffee futures market and its spot market both in long term and also short term. Significant coefficient in futures and spot market respond to restore the equilibrium whenever there is some price discrepancy. Arabica spot price coefficient is lower than Arabica futures price which indicates that Arabica futures price have faster adjustment toward the disequilibrium and transmit information to spot market therefore price discovery in futures market. Analysis toward Robusta futures and spot market are also indicates the same phenomenon. Indonesia premature coffee market shows unique condition in which there is an arbitrage potential however the two market exhibits cointegration indicates the efficient market. Integrated market will perform risk transfer function and may however beneficial to hedgers, speculators and arbitrageurs in connecting the two markets. Further, the analysis result between onshore and offshore market with the same period of price information exhibits long term relationship. This confirms strong position of Indonesia coffee production information among other coffee producers for aggregate world coffee production. Keywords: Coffee, commodity futures, cointegration, efficiency, spot market. DOI : 10.7176/EJBM/11-3-07
Highlights
Indonesia is an agricultural country with agricultural activity which reached 7.6 million hectare of land used for commodity crop in 2016
4.3 Relationship between Futures and Spot Market Analysis result indicates the cointegration between spot and futures prices which shows the efficiency and reflect the long term equilibrium between the two series
The results suggest that each price series is non-stationary in levels but stationary in first difference. This indicates that coffee spot and future prices are integrated of order one
Summary
Indonesia is an agricultural country with agricultural activity which reached 7.6 million hectare of land used for commodity crop in 2016. Considering the seasonality which impacted by the weather, Indonesia was experiencing decreasing number of Lampung Robusta export by 30 percent in 2015 while the demands captured with higher trend This is applied for Arabica coffee which using ICE Futures Coffee New York as reference. 3.1 Unit root test for stationarity test Futures and spot prices of coffee Arabica and Robusta are first examined for stationary with Augmented Dickey Fuller (ADF) unit root test (Dickey and Fuller 1979). 3.2 Cointegration between futures and spot market Long term relationship is discovered if the two variables are stationary. 3.2.1 Estimate the long-term equilibrium Stationary test shall be performed using the Augmented Dickey-Fuller (ADF) test upon the ordinary least square (OLS) regression This what being called as a two-step procedure for cointegration analysis. This is determined by ADF tests on the residuals, with the MacKinnon (1991) critical values adjusted for the number of variables
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