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An exploration of commodity income stabilization options for coffee farmers - page 11 / 47

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Coffee farmers’ price risk exposure: An examination

Coffee is a tree crop, and supply does not readily adapt to price fluctuations. When prices are very low for extended periods, farmers may uproot their trees, but this is a rather extreme measure. The more common response to periods of low prices is that use of inputs is reduced, and fewer seasonal workers are employed—which in turn exposes farmers to higher yield risks as poorly maintained plantations are more at risk from infestations and crop diseases.

Historically, large falls in prices are reflected in prices paid to producers, but price increases are to a significant extent absorbed in the marketing chain. According to data provided by the International Coffee Organization, in the two periods of growth—1992–1995 and 2001– 2005—producer prices rose by much less than the composite indicator price. On the other hand, when prices fell between 1997 and 2001, we see that the reduction in the producer price matched very closely that in the composite indicator.6 In other words, when prices rise, producers do not fully share in the benefits but when they fall producers take the full extent of the pain. This points to structural impediments in world commodity markets that work to the disadvantage of commodity producers.

Figure 1: Coffee price changes

2001-2005

1997-2001

1992-1995

-100% Robusta, price paid to growers (¢/lb.) A r a b i c a , p r i c e p a i d t o g r o w e r s ( ¢ / l b . ) C o f f e e , c o m p o s i t e i n d i c a t o r p r i c e 1 9 7 6 ( ¢ / l b . ) -50%

0%

50%

100%

150%

200%

Source: Calculated from price data provided by the International Coffee Organization

But coffee price risk does not only affect farmers as producers: it can also affect them as processors and traders, given the important role that cooperatives play in the coffee sector in many countries. It takes time for coffee to move down the supply chain from farmer to export market, and during this time, a cooperative is exposed to considerable price risk. These various risks and how farmers respond to them will be discussed in this chapter.

6

Calculated from price data provided by the International Coffee Organization.

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