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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 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.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_199.pdf
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Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 199.

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Length: 31 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:dun:dpaper:199
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  1. 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, March.
  2. Larson, Donald F. & Varangis, Panos & Yabuki, Nanae, 1998. "Commodity risk management and development," Policy Research Working Paper Series 1963, The World Bank.
  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. 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.
  5. 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.
  6. Krivonos, Ekaterina, 2004. "The impact of coffee market reforms on producer prices and price transmission," Policy Research Working Paper Series 3358, The World Bank.
  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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