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Hedging cotton price risk in Francophone African countries

Author

Listed:
  • Satyanarayan, Sudhakar
  • Thigpen, Elton
  • Varangis, Panos
  • DEC

Abstract

Cotton exports account for a significant share of total commodity exports in francophone African countries, suggesting that these countries have a large exposure to volatility in cotton prices. An analysis of the cotton marketing systems in these countries revealed that most of the price risk is borne by the parastatals and ultimately by the government. This has led to problems in years of low cotton prices when the government maintained high producer prices. In recent years, these countries introduced some flexibility in their pricing policies to deal with that problem. As a means of managing their cotton price risk, francophone African countries have been using forward sales. Between a quarter and a third of exported cotton has been sold forward before harvesting. Forward sales have provided only limited coverage against price risks. The use of cotton futures and options could increase this risk coverage. Futures and options contracts can also give these countries flexibility in their sales strategies. Countries planning to privatize their cotton marketing sectors should consider the use of futures and options because forward sales are likely to decline significantly in a privatized system. The authors examined the feasibility of using New York cotton futures and options contracts as hedging instruments and found that there were benefits of reduced price volatility. Simulations for 1989, 1990, and 1991 show in every case that hedging was effective in reducing price risk from 30 percent to 60 percent. For every 1 percent reduction in risk, the reduction in income ranged from 0.66 percent to 1.12 percent.

Suggested Citation

  • Satyanarayan, Sudhakar & Thigpen, Elton & Varangis, Panos & DEC, 1993. "Hedging cotton price risk in Francophone African countries," Policy Research Working Paper Series 1233, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1233
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    References listed on IDEAS

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    1. J. M. Finger, 1981. "The Industry-Country Incidence of "Less than Fair Value" Cases in US Import Trade," NBER Chapters,in: Export Diversification and the New Protectionism: The Experience of Latin America, pages 260-279 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Varangis, Panos & Thigpen, Elton & Satyanarayan, Sudhakar & DEC, 1994. "The use of New York cotton futures contracts to hedge cotton price risk in developing countries," Policy Research Working Paper Series 1328, The World Bank.
    2. Anderson, Jock R., 2003. "Risk in rural development: challenges for managers and policy makers," Agricultural Systems, Elsevier, vol. 75(2-3), pages 161-197.
    3. Satyanarayan, Sudhakar & Somensatto, Eduardo, 1997. "Tradeoffs from hedging oil pricerisk in Ecuador," Policy Research Working Paper Series 1792, The World Bank.
    4. Jamshed Y. Uppal & Syeda Rabab Mudakkar, 2014. "Mitigating Vulnerability to Oil Price Risk— Applicability of Risk Models to Pakistan’s Energy Problem," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(3), pages 293-308.

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