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Market-Based Price-Risk Management: Welfare Gains for Coffee Producers from Efficient Allocation of Resources

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Author Info

  • Firdu Gemech
  • Sushil Mohan
  • Alan Reeves
  • John Struthers

Abstract

The volatility of coffee prices exposes coffee producers to price risk. Price risk is one of many risks faced by commodity producers in developing countries. Coffee is widely traded in the international commodity derivative markets. This offers scope for coffee producers to manage their price risk by hedging on these markets. The hedging mechanism recommended is based on the use of coffee futures and options. The mechanism involves costs, so the benefits of hedging need to be evaluated in order to assess its usefulness for producers. It emerges that the main benefit lies in producers being able to allocate resources more efficiently in the production of coffee. An analysis of theoretical and field evidence shows that this benefit can potentially be quite high, especially for risk-averse producers. This underlines the need to provide producers with access to suitable price-risk hedging mechanisms.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13600818.2010.550399
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Oxford Development Studies.

Volume (Year): 39 (2011)
Issue (Month): 1 ()
Pages: 49-68

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Handle: RePEc:taf:oxdevs:v:39:y:2011:i:1:p:49-68

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Cited by:
  1. Mukherjee, Sanchita, 2010. "Crop diversification and risk: an empirical analysis of Indian states," MPRA Paper 35947, University Library of Munich, Germany.

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