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Market-based Price-risk Management for Coffee Producers

  • Sushil Mohan

Coffee is characterised by high levels of price fluctuation, which exposes producers to price risk. Its wide trading in international commodity futures markets offers scope for producers to manage the risk by hedging on these markets, the mechanism for which is based on the use of put options. This article uses historical data of actual put-options contracts to estimate the costs of the mechanism, the benefits being inferred from field evidence. It emerges that the costs are relatively low and outweighed by the benefits for most producers. The article then looks at the operational feasibility of the mechanism for producers and compares it with other hedging mechanisms. Copyright 2007 Blackwell Publishing Ltd.

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Article provided by Overseas Development Institute in its journal Development Policy Review.

Volume (Year): 25 (2007)
Issue (Month): 3 (05)
Pages: 333-354

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Handle: RePEc:bla:devpol:v:25:y:2007:i:3:p:333-354
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  1. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
  2. Varangis, Panos & Larson, Donald & Anderson, Jack R., 2002. "Agricultural markets and risks - management of the latter, not the former," Policy Research Working Paper Series 2793, The World Bank.
  3. Maizels, Alfred & Bacon, Robert & Mavrotas, George, 1997. "Commodity Supply Management by Producing Countries: A Case-Study of the Tropical Beverage Crops," OUP Catalogue, Oxford University Press, number 9780198233381.
  4. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  5. Krivonos, Ekaterina, 2005. "The impact of coffee market reforms on producer prices and price transmission," 2005 Annual meeting, July 24-27, Providence, RI 19315, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Scott H. Irwin & Carl R. Zulauf & Thomas E. Jackson, 1996. "Monte Carlo Analysis of Mean Reversion in Commodity Futures Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 387-399.
  7. Tomek, William G., 1987. "Effects of Futures and Options Trading on Farm Incomes," Staff Papers 186718, Cornell University, Department of Applied Economics and Management.
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