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

Author

Listed:
  • 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.

Suggested Citation

  • Firdu Gemech & Sushil Mohan & Alan Reeves & John Struthers, 2011. "Market-Based Price-Risk Management: Welfare Gains for Coffee Producers from Efficient Allocation of Resources," Oxford Development Studies, Taylor & Francis Journals, vol. 39(1), pages 49-68.
  • Handle: RePEc:taf:oxdevs:v:39:y:2011:i:1:p:49-68
    DOI: 10.1080/13600818.2010.550399
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    References listed on IDEAS

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    1. McIntire, John & Varangis, Panos, 1999. "Reforming Cote d'Ivoire's cocoa marketing and pricing system," Policy Research Working Paper Series 2081, The World Bank.
    2. 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.
    3. 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.
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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.
    2. repec:jfr:rwe111:v:7:y:2016:i:1:p:59-79 is not listed on IDEAS

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