Market-based price-risk management for coffee producers

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.