Vietnam Technological & Commercial Joint-Stock Bank, Vietnam's seventh-biggest bank, joined with the Dak Lak People's Committee and Thai Hoa Joint Stock Co., a trader, to open the exchange today in Buon Ma Thuot, capital of the highlands province of Dak Lak, the nation's main coffee-growing region.

The venture may help Vietnam to cut pricing discrepancies for the crop within the country, boosting farmers' confidence in the market and ensuring a steadier supply for exports. prime minister Nguyen Tan Dung is trying to boost overseas shipments to counteract the slowest economic expansion since 1999.

"The exchange is definitely good for farmers because their profit margin will increase as they don't have to go through a middleman," said Nguyen Tuan Ha, director of the exchange.

The price of robusta, which is used in instant coffee by Nestle SA, has lost 24% since the end of June. Vietnam is the world's biggest exporter of that variety, which closed yesterday on London's Liffe exchange at US$1,887 a metric tonne.

At present, Vietnam's coffee farmers deposit crops with local middlemen, who have storage facilities and sell the beans to domestic and overseas trading companies, speculators and domestic processors. The exchange, which has its own warehouse and will trade from 9 a.m. on weekdays for two hours, will compete with the middlemen if farmers opt to truck their crops to the new venture, shunning traditional purchasers.

Market target

"The difficulty is persuading farmers to change their habits," Ha, the exchange director, said in an interview after today's opening. "We have to convince them the cost of transporting the beans can be well covered by improved profit margins when selling coffee to the exchange."

The new venture may cut trading costs and offer better prices, according to Le Van Ke, general director of An Giang Joint-Stock Co., a trading company based in Dong Nai province. "It reduces the risk of farmers defaulting," Ke said.

About 40% of the 1 million tonnes of coffee that Vietnam sells annually to world markets is expected to trade on the exchange, according to Nguyen Duc Vinh, chief executive officer of Hanoi-based Vietnam Technological & Commercial, which is 20% owned by HSBC Holdings Plc.

Futures Contracts

"The exchange will start with physical contracts first and we aim to handle futures contracts in 6 to 12 months," Vinh said by telephone yesterday. Techcombank, as the lender is known, has spent about 10 billion dong (US$592,000) on equipment for the exchange, Vinh said.

"Brazil has had success with their exchange that helps farmers price their product more efficiently," said Pamela Thornton, a portfolio manager at Armajaro (USA) Inc., which runs a coffee and cocoa fund of more than US$400 million.

"Farmers may not know the final price of beans shipped to New York but they know what price to ship within their country," Thornton said in a December 9 interview. "This creates a kind of transparency and price efficiency."

The difference between prices in local exchanges in Brazil and Vietnam, and the global benchmarks in New York and London will also help arbitrage opportunities, Thornton added.

'Good opportunity'

"It's a good opportunity to maximise returns" for farmers and funds, said Robin Dand, product manager for commodity derivatives at NYSE Euronext in London. Farmers can see "what price their produce is and what they're able to obtain in the open market rather than at the farm gates."

Vietnam's coffee shipments totalled 853,000 tonnes and were worth US$1.8 billion in the first 11 months of the year, a 6.6% increase in value from a year earlier while the volume fell 21%, according to data from the general Statistical Office. Commodities account for about a third of Vietnam's exports, and coffee is the most valuable crop after rice.

Vo Sy Gia, a 52-year-old farmer who lives 70 kilometres (44 miles) from the new exchange, said he was debating whether to switch his business away from the middlemen, and holding talks with other local growers about sharing transport costs.

"I believe we would get a better price and that it's less risky to do business with the exchange than with a middleman," Gia, 52 said. "But I'm not sure if the profit margins will improve enough to cover the extra costs."

Bloomberg - December 13, 2008