Abstract
In the Indonesia coffee premature market, it is important to confirm whether the futures market has interdependence with the spot market. Moreover, as the world’s largest coffee producers after Brazil, Vietnam, and Colombia, it is also important to examine the interdependence between Indonesia markets with the offshore futures market whose prices are used uses for local price determination. This study examined the granger causality relationship between Indonesia’s futures and spot market, and granger relationship between Indonesia and the offshore futures market using data of daily Arabica and Robusta coffee prices starting from January 2014 to June 2018. The test indicated that the futures market has a stronger ability to predict the spot market; therefore, price discovery in the futures market. Bidirectional causality relationship between Arabica offshore futures and spot market indicates market demand on Arabica coffee. In general, it’s identified unidirectional granger causality relationship between local and offshore futures market with information flows from the local futures market reflects the offshore market high expectation toward crop information during harvesting period both Arabica and Robusta. This is due to the importance of Indonesia’s coffee crop report to world aggregate coffee production.
Highlights
Coffee is one agricultural commodity which considered as a risky financial activity in which farmers are significantly affected by yield risk and output price risk (Walker and Ryan, 1990; Kurosaki, 1998)
Spot prices refer to certain spot market in Indonesia and include the offshore futures market price as reference for price determination with the same period referring to price reference issued by Bappebti
This study reflects Indonesia's production information especially during and nearly the end of harvesting period which confirms that the Indonesia firm's position is the 4th world biggest coffee producer
Summary
Coffee is one agricultural commodity which considered as a risky financial activity in which farmers are significantly affected by yield risk and output price risk (Walker and Ryan, 1990; Kurosaki, 1998). The volatility of Robusta coffee was high by the end of 2014 to mid-2015 due to the impact of the decreasing of world coffee prices It was impacted by the natural factor (heavy rainy season) in main coffee producing countries (Brazil, Vietnam and Indonesia). Considering the seasonality impacted by the weather, Indonesia experienced the decreasing amount of Lampung Robusta export by 30% in 2015 while the demands captured with a higher trend This is applied for Arabica coffee which used ICE Futures Coffee New York as reference. This study investigated the relationship between markets by examining information flow of futures and spot markets and their role in price discovery and hedging instruments to coffee producers. According to the aforementioned facts, we have to examine the relationship between coffee futures market and spot market and the relationship between local coffee futures market and spot market with offshore futures market considered to be developed futures market to confirm the interdependence between those markets
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