BANKING ACADEMY FACULTY OF INTERNATIONAL BUSINESS THESIS COFFEE EXCHANGE IN VIETNAM THE SITUATION AND SOLUTIONS Student’s Full Name: Nguyen Thi Hoa Class: K19KDQTC Course: 2016-2020 Student’s ID: 19A4050095 Supervisor’s Full Name: Dr. Nguyen Thi Hong Hai Hanoi, June 2020 TABLE OF CONTENTS ACKNOWLEDGEMENT. iii LIST OF TABLES. iv LIST OF FIGURES .1 CHAPTER 1: BACKGROUND OF COFFEE EXCHANGE.
Definitions of Commodity Exchange. Definition of Coffee Exchange. The Features of Coffee Exchange. Necessity for Performing Coffee Exchange.
Standardized Features of The Contract. Trading Places and Rules. Parties to Coffee Exchange. The Functions of Coffee Exchange.
Activities of Coffee Exchange. The Types of Transactions. The Service of Exchange .21 CONCLUSION OF CHAPTER 1 .22 CHAPTER 2: THE SITUATIONS OF COFFEE EXCHANGE IN VIETNAM. The Overview of Coffee Exchange in Vietnam.
The Origin of Coffee Exchange. The Structure of Coffee Exchange. Coffee Contract Specification. Real Situation of Coffee Exchange in Vietnam.
Activities of Coffee Exchange. Government’s New Regulations for expanding Vietnam commodity exchange. Evaluate Achievement and Limitation of Coffee Exchange in Vietnam .1 The Achievement of Coffee Exchange. The Limitation of Coffee Exchange.38 CONCLUSION OF CHAPTER 2 .39 CHAPTER 3: CONCLUSIONS AND SOLUTIONS.
The Causes make Vietnam coffee exchanges undeveloped. Climate change affects coffee sector in Vietnam .52 CONCLUSION OF CHAPTER 3 .55 ACKNOWLEDGEMENT At the beginning of this paper, I would like to express my sincere appreciation to my thesis advisor, Dr. Nguyen Thi Hong Hai, who has the substance of a genius, for her endless help and enlightenment. She convincingly guided and encouraged me to be professional and do the right thing even when the road got tough.
Without her persistent and strong support, the goal of this thesis would not have been realized. Hanoi, June 2020 i DECLARATION I hereby declare that this thesis represents my own work which has been done at Banking Academy of Vietnam, and has not been previously included in a thesis or dissertation submitted to this or any other institution for a degree, diploma or other qualifications. I have read the Banking Academy’s current research ethics guidelines, and accept responsibility for the conduct of the procedures in accordance with the Academy’s Committee. I have attempted to identify all the risks related to this research that may arise in conducting this research.
I assure the seriousness and truthfulness of the data, and the information in the thesis, citing it fully and in accordance with thesis’ regulations. ii ABBREVIATIONS BEC Board Economic Categories BM&F Brazilian Mercantile & Futures Exchange BCEC Buon Ma Thuat Coffee and Commodity Exchange CL Commercial Law CME Chicago Mercantile Exchange CBOT Chicago Board of Trade EU European Union FMCPI Free- market Commodity Price Index IPCC Intergovernmental Panel on Climate Change MARD Ministry of Agriculture and Rural Development MXV Mercantile Exchange of Vietnam MoIT Ministry of Industry and Trade OTC Over- the- Counter SCA Specialty Coffee Association USDA United States Department of Agriculture UNCTAD United Nations Conference on Trade and Development VNX Vietnam Commodity Exchange iii LIST OF TABLES Table Name of Table Page Table 2.1 Robusta Contract Specification on BCEC 25 Table 2.2 Arabica Contract Specification on BCEC 26 Table 2.3 Robusta Contract Specification on MXV 27 Table 2.4 Transaction Fee 32 Table 2.5 Levels of margin for commodity futures traded through 33 MXV iv LIST OF FIGURES Figures Name of Table Page Figure 1.1 Futures market timeline 11 Figure 1.2 Exchange functions and hypotheses about high 17 level benefits Figure 1.3 The highest trading volume commodities in the 18 financial market Figure 1.4 Number of commodity options and futures 20 Figure 2.1 Transaction process on Buon Ma Thuat Coffee 23 and Commodity Exchange Figure 2.2 The structure of Mercantile Exchange of Vietnam 24 Figure 2.3 The volume of value of coffee futures contract on 28 Buon Ma Thuat Coffee and Commodity Exchange Figure 2.4 MXV in the network of international commodity 34 exchange v INTRODUCTION 1. Research Motivation In the process of formation, survival and development, the world economy has undergone inevitable stages of evolution from barter system to spot market to derivatives market. Each step of innovation is an important turning point in the economy, marking a gradual change and perfecting people's behavior and awareness.
In this day and age, when science and technology have developed, commodity trading has tendency to carry out on commodity derivative market and use specific financial instrument. As world economies grow, especially the emerging economies in Asia, South America and Africa, there will be more people using coffee to maintain alertness during working hours. Additionally, studies are showing some health benefits of drinking coffee, which can make people consume more coffee. Only five countries account for more than 65 percent of the world’s coffee bean supply.
Proudly, Vietnam is the world’s second- largest producer and exporter of coffee with an average annual output that currently exceeds 25 million 60-kg bags, after Brazil. Coffee has formed a complete industry chain in Vietnam and become an important part of the Vietnamese economy, providing jobs for over 500,000 farmers with income growth. Only 10% of the coffee produced in Vietnam is consumed domestically, the rest 90% is intended for exports as raw coffee. The coffee industry is now looking to further increase the output of instant and roasted coffee by 2020.
However, Vietnam’s export coffee price was much lower than other country. For example, in the US market, the average coffee price from Vietnam was only US$ 19 per kilogram, meanwhile the coffee from Brazil, Columbia and Guatemala was priced at US$ 2.5, US$ 4 per kilogram respectively. Moreover, in 2019, Coffee prices have dropped to the lowest level for over past 10 years. Privately run farms’ coffee output account for 95% Vietnam’s coffee production, while the remaining of 5% is managed by the state, which are also being gradually redistributed to small farmers.
As the consequence, many farmers do not have 1 capital to invest in the next season. They face not only yield risk and price risk as well. Besides, there are many factors preventing the development of coffee sector such as: climate change, lack of capital, advanced technology, old- low yielding coffee tree…Fortunately, Most challenges will be settled thanks to commodity derivatives market. The commodity derivatives market bring numerous benefits for investors, manufacturers, exporters/ importers…If you are a farmer, it is possible that the price of your product will come down drastically at the time of harvest.
By buying commodity futures contracts, you can effectively lock- in the price at which you wish to sell your product at harvest time. Therefore, farmers only concentrate on producing, no need to worry their income. The existence of warehouses for facilitating delivery provides a very strong reason to upgrade and enhance the quality of the commodity that is more likely to be accepted by the exchange. It makes sure uniform standardization of commodity traded, which includes the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.
Furthermore, the exporters can hedge their price risk and improve their competitiveness by making use of futures market. The purchases made from the physical market might expose them to price risk resulting to losses. The presence of futures market would allow the exporters and other players to hedge their proposed purchase by temporarily substituting for actual purchase until the time is mature to buy in physical market. If there is no presence of futures market, it will be time-consuming and costly physical transactions.
Besides, it is a profitable investment channel for investors. Conclusion, The commodity exchange was born not only as an indispensable consequence of the market economy but also as the diversification of forms of international free trade. Derivative market products are widely applied across the world, bringing positive prosperities, facilitating the circulation of agricultural products in particular and other goods in industrial sectors, finance in general. Commodity exchange has contributed to reducing risks, shifting risks from producers to the market, helping suppliers rest assured and concentrate their expertise to produce.
Specifically, the coffee exchange is expected to be a new 2 direction in resolving output for the coffee industry, stabilizing prices and reducing risks in trade, creating a relatively stable business environment in terms of prices, encouraging Vietnamese businesses and farmers are assured to focus on producing and efficiently exploiting the benefits of coffee trees. The research will investigate coffee exchange in Vietnam and then suggest solutions to extend and develop. Research Purpose and Research Questions Commodity derivatives exchanges serve a very important role in establishing global benchmark price for crucial commodities such as crude oil, gold, copper, and coffee, etc. a commodity exchange is a legal entity that formulates rule and regulations for trading the standardized commodity contracts and related investment products of the financial industry.
It is also known as physical market place where such trading takes place. There are some top commodity exchange in the world such as: New York Mercantile Exchange (CME group) trading: coffee, cocoa, energy, so on: New York Board of trade (ICE); Bolsa de Mercadorias& Futuros in Brazil trading: coffee, sugar,etc. However, the first commodity exchange in Vietnam has been granted the permission to operate within under the decision 4596/GP-BCT of the Ministry and trade (MoIT) in September 2010, and has been officially launched in January 2011 and has not been really exciting and commensurate with the potential of the country’s economy. Traders are mainly enterprises while farmers have no idea of the exchanges As the result, the objective of the research is: Recommend solutions to extend and develop coffee exchange in Vietnam The research will be guided by following research questions: Question 1: What are the main features of coffee exchange? Question 2: What are the challenges that constrain the development of coffee exchanges in Vietnam? 3.
Research Methodology 3 This research is based on various previous researches. Therefore, the methods mainly used are statistical, synthesized, analytical and illustrative methods. Research Scope and Objective. Research objectives: Coffee exchange Scope of place: Vietnam Scope of time: 2016-2019 5.
Literature Review There are many researches related to commodity derivatives market and coffee derivatives market in Vietnam such as: Mai Thi Minh Hang and Nguyen Duc Tri (2010) -“Rules on Participation of Vietnamese Counterparties in Trading of Commodity Derivatives”. Published in Mondaq news. Brief: This paper targets the regulatory framework controlling the commodity derivatives market. Firstly, remark on the existing domestic commodity derivatives market, then consider how Vietnam's incomplete regulatory framework affects the hedging instruments.
This study also discusses issues that a Vietnamese party encounter when trading commodity derivatives with a foreign party in a regulatory environment that just allows trading of physical commodities. After based on current legislation, exploring how Vietnamese entities can take part in the offshore commodity derivatives market. In addition, commodity derivatives can be used either to hedge or to speculate. At maturity, a commodity derivatives transaction can be settled by either cash netting or by delivery of the underlying commodity.
Types of commodity derivatives are futures/forward contracts, option contracts and swap contracts. Derivative products can be traded via exchange platforms or OTC. While in the globe, commodity derivatives are generally considered to be as an ingredient of the financial market, in Vietnam they are not. Because, in Vietnam, transactions associating commodities derivatives are simply seen as commodity trading activities that involve the physical delivery of a 4 commodity, rather than financial trading activities that just rely on transaction cash- flows.
In particular, the Ministry of Finance is in charge of the capital market and insurance market, while the SBV is in charge of the money market and the foreign exchange market. Nevertheless, it did not mention the ways to help develop financial trading activities in Vietnam. The analysis did not point out how to reinforce Vietnam commodity exchange.
