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An exploration of commodity income stabilization options for coffee farmers - page 19 / 47

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long-term income in exchange for reduced risk exposure. Another traditional risk management tool is consumption smoothing: investing in assets that can be sold again when the need arises—again, the result is a lower than expected average income as money is saved, not invested.

Once a coffee tree has started bearing fruit (three years after planting), farmers have to make decisions with respect to maintenance: how many inputs should be used, how much labour for pruning, etc. These are decisions that have to be made each year about six months before harvesting starts—a long period in terms of what can happen with coffee prices. While there are important differences between Arabica and Robusta (the former is much more vulnerable to poor maintenance and requires many more inputs), in both cases farmers’ decisions are once again guided by an effort to optimize risk and reward within the constraints posed by their ability to finance maintenance activities. Consequently, they tend to spend less on maintenance than would be needed to maximize their revenue; and in a year following low coffee prices, they tend to spend less on maintenance than they would have liked to.14 Large plantations and well-organized producers may already be able to remove part of their risks at this stage by entering into forward contracts with traders, but this is not a possibility open to the vast majority of growers.

A related factor is that even if farmers wish to maintain their trees properly, they may not have access to the cash flow required to do so. Like most developing country farmers, coffee farmers tend not to lack cash and have poor access to credit. Credit constraints are largely due to the overall inefficiencies in agricultural lending in developing countries, but price risk does play a role too. Too often, banks lending to coffee farmers have found themselves in the role of unofficial stabilization funds, seeing reimbursements on their loans to coffee farmers dry up in times of low prices and, if they are fortunate, the arrears paid off when prices pick up again.

The next decision-making point comes at harvest time. The coffee harvest is labour- intensive, and even small farmers tend to recruit seasonal workers. Harvesting coffee berries is subject to the law of diminishing returns (the berries that are easiest to pick get picked first). While higher prices lead to higher yields per tree, once again, price expectations influence the farmers’ decisions; a risk-averse farmer will give up part of his return in order to keep risks at acceptable levels. But the costs of risk exposure at this stage are low. The period of price exposure is small. Once the berries have been harvested farmers will normally dry them (only cash-desperate farmers sell their berries wet), but this only takes one week or so. Furthermore, in quite a few countries, to secure supply itinerant traders are willing to enter into one-week forward contracts at a fixed price, even advancing the farmer’s harvesting expenses.

Until now, risk exposure and the responses to this applied more or less uniformly to all farmers. But paths diverge once the berries have been harvested and dried: there are large differences from country to country and even within countries in the way that coffee processing and marketing are organized, and hence, in the nature and scale of farmers’ risk

14 Thus, farmers pass on part of their price risk to seasonal workers. Indications are that low prices affect both the number of seasonal workers employed and the salaries (in cash and in kind) that they are paid (see for example ICO, op. cit., 2003, and P. Varangis et.al., Dealing with the coffee crisis in Central America, impact and strategies, World Bank Policy Research Working Paper, March 2003. As an example, in five Central American countries, a total of some 42 million labour days were lost in the coffee sector in 2001). Given the large importance of the coffee sector for seasonal workers in Central and Latin America and the dearth of alternative sources of employment, the welfare costs of this indirect exposure to coffee price risk are large.

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