Risks Hedging at DAKMAN – A COFFEE EXORTER

Foreign Trade University

Group members

Nguyen Phuong Anh – 1113140060

Vu Ngoc Hoa – 1111140078

Pham Thi Khanh Linh – 1117140014

Nguyen T.Phuong Nga – 1114140058

Le Vu Thuy Trang –1111140131

Risks Hedging at DAKMAN – A

COFFEE EXORTER

Financial Risk Management

Instructor: Dr. Mai Thu Hien (Mrs)

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Table of Contents

I. Overview of DAKMAN Company …………………………………………………………………………………………………………. 2

II. Current Situation of coffee production and consumption …………………………………………………………….. 3

1. Current situation of coffee production and consumption …………………………………………………… 3

a. The world ……………………………………………………………………………………………………………………. 3

b. Vietnam ………………………………………………………………………………………………………………………. 4

2. Fluctuations in coffee prices in the current period ……………………………………………………………. 5

3. Price fluctuation risks (Current fluctuation in the coffee price) …………………………………………….. 7

a. Hedging risks using Future Contracts ……………………………………………………………………………….. 7

b. Trading Robusta Coffee on LIFFE ……………………………………………………………………………………… 9

c. The process of coffee price risk’s hedging using futures contracts via TECHCOMBANK ……… 11

III. The process of hedging foreign exchange rate risks using forward contracts of DAKMAN

HCM via TECHCOMBANK ………………………………………………………………………………………………………………………………… 17

1. Source and impacts of foreign exchange risks on businesses……………………………………………. 17

2. Historical Exchange Rate and Future Forecast ………………………………………………………………… 18

Data on historical exchange rate from Nov 4, 2013 to Aug 31, 2014 …………………………………….. 18

Forecast for the last quarter of 2014 ………………………………………………………………………………….. 20

3. The process of carrying out forward contracts to hedge foreign exchange risks ……………….. 20

IV. Conclusion ……………………………………………………………………………………………………………………………………………… 21

1. Predictions on coffee demand and supply of Vietnam ………………………………………………….. 21

2. Challenges for DAKMAN when using coffee futures contracts ………………………………………. 22

3. Recommendations for DAKMAN …………………………………………………………………………………. 22

References ………………………………………………………………………………………………………………………………………………………….. 24

References

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I. Overview of DAKMAN Company

 Trade Name: DAKMAN COFFEE J.V, Processing & Export Factoory Buon Ma Thuot – Dak Lak

 Address: KM 7, National Road 26, Buon Ma Thuot, Dak LAk, Vietnam

 Telephone number: +84 500 3823 201

 Fax: +84 500 3823 384

 Registered No.: 4116000944

 Type of Company: Foreign invested Joint venture company licensed by Vietnamese

government

 Objects:

– Generating profits

– Stabilizing the circulation of goods in the market

– Creating jobs and improving working condition as well as living standards for employees

– Retrieving foreign currency through export-import activities

 Business field:

– Main activities: Select and purchase Robusta coffee Directly from local farmers through to

the shipping container; process and export Robusta coffee from Vietnam

– Export-Import activities: exporting Robusta coffee

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II. Current Situation of coffee production and consumption

Coffee is one of the key agricultural export products of Vietnam. In 2013, exporting coffee reached

$ 1.2 billion (decreased 13.7% in volume and 15.6% in value compared to 2012). The volatility of

coffee prices in 2013 was due to the oversupply of coffee. Rising coffee price encouraged producers

to invest and increase coffee production.

Although the drought led to lower productivity yields, it is not the disadvantage for farmers. It can

help the coffee price increase. In contrast, the suitable climate can help to increase yields; farmers

can fail because the market price may be reduced. It is the sensitivity and difficulty to predict the

coffee market. Not only farmers but also the coffee exporters in Vietnam are affected by the price

reducing. Especially, Vietnamese coffee prices in the world market depend largely on coffee

production in Brazil.

The factors affect the volatility of prices including climatic condition, production of the major

exporting countries such as Brazil, Vietnam, Indonesia, Colombia; consumption in some major

markets; fluctuations in currency exchange rate; speculative, donors, non-commercial state on the

commodity market, and the politic field.

1. Current situation of coffee production and consumption

a. The world

Nowadays, there are 86 countries exporting coffee, focusing on four main areas: South America,

Central America, Africa and Asia. The world total output was 145,194,000 bags in 2013. In

particular, South America produced 47%, Africa 17%, North and Central America 16%, Asia 17% of

the world coffee production.

Brazil is the largest coffee producing countries in the world with over 1.7 million tons of production

annually, achieved approximately 25% of the international market. The other major exporting

countries are Vietnam, Colombia, Indonesia, Ivory Coast, Mexico, India, Guatemala, Ethiopia,

Uganda, Costa Rica, Peru and El Salvador.

In 2013, the export of the world coffee in the period 2012/2013 still rose 2.3%, which exports

mainly to the United States. Besides that, Japan, Italy, France and Germany are the countries import

large amount of coffee (over $ 1 billion).

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b. Vietnam

Vietnam has exported coffee to 74 countries and territories all over the world. And after 25 years of

development in the early 21st century Vietnam has occupied the No. 2 spot in the world in volume

of coffee exports, and the first of Robusta output.

– In 2013: The area of 616,000 hectares (nearly 1.49 million tons), (1 in 5 export items with the

value over $ 1 billion)

– Gravity interpretation of 6 coffee growing regions: Northeast and South Central Coast 0%, North

West 1%, North Central 2%, South East 8%, West Central 89%.

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– The percentage of area under tree age: over 25 years : 5%, 20-25 years: 17%, 12-20 years: 28%

less than 12 years: 50%.

– Production capacity: 21.9 tons / ha, yield of 1167.9 thousand tons, exports reached 2.69 billion

dollars.

– Status of tree: the proportion of Arabica coffee production is still modest compared with Robusta

coffee (respectively 2.56% and 97.44%).

Coffee exports from Vietnam in 2013 reached 1.3 million tons with an export turnover reached 2.72

billion, reduced 24.8% in volume and 25.9% in turnover. Compared with the previous year, 2013

was the year that the coffee industry has been a significant decline in export volume and export

value. Reviewed within the past five years, exports of Vietnam coffee increased the growth in the

first 4 years (from 2009 to 2012) with an average growth rate of about 17.7% / year. This suggests

that the main markets of importing Vietnamese coffee are increasingly interested in Vietnamese

coffee and the number of export markets in coffee has been expanded (in 2008, Vietnam’s coffee is

exported to 74 market, by the end of 2013 had reached 86 markets). However, the world economic

situation faced many difficulties; demand for commodities in the export market is significantly

reduced due to the economic downturn, natural disasters disease (such as rain ice, water shortages,

rust). That made a serious impact on productivity and quality of coffee products …, which lead to

the decline in the country’s coffee exports both in volume and value in 2013.

2. Fluctuations in coffee prices in the current period

The global market for coffee has experienced the price instability for the recent 5 years. Because

International Coffee Organization (ICO) cannot maintain the import-export quotas and impacts

form Financial Crisis, there have been periods that the coffee price went down unprecedentedly

compared with past decades.

The crisis in coffee market not only pulled the coffee price down but also caused negative

consequences: farmers with low income could not afford the expenditure for daily life and

investment for reproduction; coffee fields were left fallow or being utilized for other crops.

Due to impacts from Financial Crisis, the price of agricultural products in general and coffee in

specific fell significantly. The FOB price of coffee in HCM City decreased from USD 2,520 per ton in

February 2008 to USD 2000 in September 2008. The price dropped continuously and reached USD

1,480 per ton in November that year.

Besides, pressure from USD currency recovery and simultaneous capital withdrawal of investors’

contribute to the decrease in demand in futures market, which reduces the coffee price

unexpectedly.

Since the early of 2010, the global market for

coffee has witnessed recovery with the price

outburst happened at the end of 2011: the

Robusta price in December 2011reached

almost USD 2,600 per ton, a little bit higher

than before Financial Crisis. However, after 2–

year of recovery, the world market for coffee

faces the trend of gradual decrease in both

price and production output.

The Robusta price on LIFFE, London on 20 December 2013 equals USD 1,690 per ton, which is 0.89%