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

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  • 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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    Cited by:

    1. Dinh Xuan Cuong & Nguyen Quoc Toan, 2016. "Derivatives as the Price Fluctuation Risk Management for Vietnamese Coffee Exporters," Research in World Economy, Research in World Economy, Sciedu Press, vol. 7(1), pages 59-79, June.
    2. Atanu Ghoshray & Sushil Mohan, 2021. "Coffee price dynamics: an analysis of the retail-international price margin [Commodity dependence and development: suggestions to tackle the commodities problem]," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 48(4), pages 983-1006.
    3. Mukherjee, Sanchita, 2010. "Crop diversification and risk: an empirical analysis of Indian states," MPRA Paper 35947, University Library of Munich, Germany.

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