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An exploration of commodity income stabilization options for coffee farmers - page 14 / 47

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between white and raw sugar; now it is like that between soybean oil and palm oil— two connected markets which nevertheless have their own separate price determinants.

5.

The particular graph used shows spot prices. Had futures prices been used instead, the graph would have looked largely the same. Futures prices tend to follow spot prices closely, only rarely and for relatively limited periods of time (days rather than weeks) are futures prices pushed away from the underlying supply/demand conditions by the position-taking of large investment funds and other speculators on the futures exchanges. Incidentally, this implies that using futures markets is not a way to reduce volatility of earnings. Those who use futures or options will find their revenues much more predictable, but in the long run, they will hardly become more stable.

Year

Arabica

Robusta

(US¢/lb)

(US¢/lb)

2004

68.00

38.00

2005

72.00

40.00

2006

74.43

41.40

2007

76.94

42.85

2008

79.54

44.34

2009

82.22

45.89

2010

85.00

47.50

2011

86.91

49.21

2012

88.87

50.98

2013

90.87

52.83

2014

92.91

54.73

2015

95.00

56.70

There is another possible way to make revenues more predictable: forecasting them, using one or more of a series of models. Table 2 shows the forecasts made by the World Bank in late 2003.

Table 2: World Bank forecasts of Arabica and Robusta prices, 2004–2015

Source: World Bank, Global Economic Prospects and the Developing Countries: Realizing the Development Prospects of the Doha Round, Washington, D.C., 2004

World Bank price forecasts have been no better or worse than those made by other forecasting agencies, and unfortunately, reality generally fails to meet the expectations of forecasters. Chart 2 compares forecasts with real price developments from January 2004 to February 2007—as can be seen, even in the first year the forecasts were rather inaccurate. It should be clear that trying to forecast price developments and making decisions on the basis of such forecasts is of little use for managing price risk exposure.

World market prices tend to be passed on at the local level. By and large, farmers are now well aware of international prices (in many countries, they listen to the BBC’s World Service’s coverage of coffee futures prices and equivalent price information services), and will use these as a benchmark for their own sales decisions. There are, however, an important number of exceptions. In no particular order of priority, the following can be mentioned:

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