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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.

Suggested Citation

  • Sushil Mohan, 2007. "Market-based Price-risk Management for Coffee Producers," Development Policy Review, Overseas Development Institute, vol. 25(3), pages 333-354, May.
  • Handle: RePEc:bla:devpol:v:25:y:2007:i:3:p:333-354

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    References listed on IDEAS

    1. 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.
    2. 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.
    3. Tomek, William G., 1987. "Effects of Futures and Options Trading on Farm Incomes," Staff Papers 186718, Cornell University, Department of Applied Economics and Management.
    4. Krivonos, Ekaterina, 2004. "The impact of coffee market reforms on producer prices and price transmission," Policy Research Working Paper Series 3358, The World Bank.
    5. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
    6. 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, June.
    7. 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.
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    Cited by:

    1. Sushil Mohan & Bill Russell, 2008. "Modelling Thirty Five Years Of Coffee Prices In Brazil, Guatemala And India," Dundee Discussion Papers in Economics 221, Economic Studies, University of Dundee.
    2. John M. Fry & Baoying Lai, 2011. "The interdependence of Coffee spot and futures markets," Working Papers 2011.1, International Network for Economic Research - INFER.
    3. Alessandro BANTERLE & Daniela VANDONE, 2013. "Price volatility and risk management: the case of rice," Departmental Working Papers 2013-08, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    4. Rashid, Shahidur & Winter-Nelson, Alex & Garcia, Philip, 2010. "Purpose and potential for commodity exchanges in African economies:," IFPRI discussion papers 1035, International Food Policy Research Institute (IFPRI).
    5. Benedicto Lukanima & Raymond Swaray, 2014. "Market Reforms and Commodity Price Volatility: The Case of East African Coffee Market," The World Economy, Wiley Blackwell, vol. 37(8), pages 1152-1185, August.

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