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Market-Based Price-Risk Management for Coffee Producers

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  • Sushil Mohan

Abstract

Coffee is characterised by high levels of price fluctuation, which exposes coffee producers to price risk. Coffee is widely traded in international commodity futures markets. This offers scope for producers to mange their price risk by hedging on these markets. The hedging mechanism proposed is based on the use of put options. The paper uses historical data of actual coffee put options contracts to estimate the costs of the mechanism; the benefits are inferred from field evidence. It emerges that the costs are relatively low, the benefits outweighing the costs for most producers. The paper then looks at the operational feasibility of the mechanism for producers and compares it with other hedging mechanisms. The mechanisms differ in their strengths and weaknesses; their choice largely depending on their viability in individual coffee producing countries.

Suggested Citation

  • Sushil Mohan, 2007. "Market-Based Price-Risk Management for Coffee Producers," Dundee Discussion Papers in Economics 199, Economic Studies, University of Dundee.
    • Handle: RePEc:dun:dpaper:199
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    References listed on IDEAS

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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. 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.
    3. 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).
    4. John M. Fry & Baoying Lai & Mark Rhodes, 2011. "The interdependence of Coffee spot and futures market," Working Papers 2011.1, International Network for Economic Research - INFER.

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