Efficiency of Premature Coffee Futures Market in Indonesia

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