Weather-related yield risk
Disease-related yield risk
The order of importance of these risks varies from country to country and from household to household; in reality, other than from an academic perspective, it is not really that relevant whether price risk ranks first, second or third among a farmer’s concerns—what matters is that it is important, and that in many cases there are markets to which these risks can be shifted. The relevance of price risk management is not diminished by an inability to provide tools to manage weather- or health-related risks.
Yield risk in other crops
Loss of employment
This report focuses on price risk, although this is of course only one of the major risks to which farmers are exposed. The three major risk categories, as reported by farmers, are price risk, quantity risk and personal health-related risk (see for example Table 3).
Lack of credit
Source: International Task Force on Commodity Risk Management in Developing Countries (ITF), Dominican Republic: Price Risk Management for Coffee and Cocoa, World Bank, 2002
Table 3: Risks faced by coffee-producing households in the Dominican Republic (per cent reporting risk as “very important”)
< 5 ha
Holding size 5–10 ha
It is worth noting that while quantity risk is in some coffee-producing countries primarily a weather-related risk, in others, it is primarily a result of potential exposure to crop pests and diseases—the latter, in turn, is correlated to the level of maintenance of the coffee trees, which is influenced by coffee price levels. Health-related risk can be covered through insurance, which is made increasingly available to farmers (in particular through the efforts of banks which recognize that an ill farmer is unlikely to reimburse his debts)—but still, only a minority of farmers currently has access. Quantity-related risk coverage is largely unavailable to coffee farmers, but the future may bring more over-the-counter products that provide cover for weather risk. Price risk can in many cases be covered on existing markets, but these markets are so far hardly used by farmers, directly or indirectly—instead, farmers rely on a range of costly traditional risk management tools.
A first way for coffee farmers to manage their price risk exposure is diversification. Most small coffee growers produce much of their own staple food; coffee is their cash crop, paying for crucial expenses such as school fees, medical costs and social obligations. Given average coffee price levels as compared to the prices of food crops, they would often have been better off using more of their land for coffee and less for food crops, but such a decision would have exposed them to major risks. Similarly, many farming households will use family labour for off-farm revenue-generating activities, even sending their youngest and strongest hands to the cities—at the cost of productivity on the farm. In other words, the first impact of price risk on coffee farmers is that it leads to inefficient diversification, cutting
of investment are tested with data on Ugandan coffee farmers. Models of investment which allow for irreversibility, uncertainty, fixed costs and liquidity constraints are found to perform well in explaining the abandonment and investment patterns observed.”