markets have been accessed through the price clauses in physical contracts—in particular, through the price-to-be-fixed (PTBF) contracts that have become standard in international coffee trade.
In a PTBF contract, the trader (generally, a large exporter or international trading house) acts as a pass-through from the producer to the international futures market (no such use of national futures markets has been reported so far). Concretely, the seller is given the time between the signing of the contract and the delivery to fix the prices of his product (sometimes, the seller can convince the buyer to extend the period of price fixation until after delivery, but as this has in the past given rise to major losses by traders this has become somewhat unpopular). For example, the contract is signed in March for delivery in June. The contract’s pricing clause will read something like “the price is July New York Arabica futures minus five cents per pound”. The seller will now make a point of observing the prices of the July delivery futures contract in New York, and at opportune moments, call or e-mail the trader to fix the price for part of his delivery. Used judiciously, PTBF contracts can allow sellers to obtain the average price over a period rather than being exposed to day-to-day price fluctuations; and they can allow a cooperative to manage its price risk on a back-to- back basis.
In practice, however, the vast majority of producers do not have access to PTBF contracts. They are too small, or traders do not have sufficient confidence in them to offer such price clauses. While PTBF contracts are common at the level of traders, as far as producers go, they are limited to large plantations and cooperatives, mostly in Latin America and to a lesser extent, Indonesia and Vietnam. They are often linked to more extensive arrangements between producers and traders, e.g., with the latter providing inputs on credit. There is little incentive for traders to offer much wider access to PTBF contracts to small producers, and indeed, much to discourage them from doing so (the credit risk inherent in PTBF contracts is too high compared to the easier option of buying for immediate delivery at fixed prices).
Given the extent and importance of price risk for all coffee farmers, this is clearly not a desirable situation from a development perspective. So several attempts have been made to create alternative gateways to intermediate between the small farmers and risk management markets (“Local Transmission Mechanisms,” in the language of the World Bank’s International Task Force on Commodity Risk Management in Developing Countries). Many obstacles complicate use of these markets by small farmers (lack of skills and institutional capacity, lack of creditworthiness, poor connectivity, contract specifications that do not meet small farmers’ needs, etc.), and these attempts had to deal with all these obstacles.
The following sections describe some of country experiences in dealing with coffee price risk.
(later formalized as a company, PanCafé S.A.) which had as an explicit objective the intervention in the London and New York futures markets—price defence in the eyes of some; market manipulation in the eyes of others. PanCafé took large futures positions in 1979, which initially gave it large paper profits (over US$200 million), but which ultimately led to more than 2 million bags of physical deliveries in early 1980. But while PanCafé did continue trying to keep up prices through further purchases of futures, prices started falling. PanCafé was unable to raise the funds necessary to pay its margin calls other than through liquidation of part of its stocks, which created a further downward pressure on prices. PanCafé was liquidated in 1981, having lost a bit more than half of its estimated US$600 million working capital. Later efforts of groups of Brazilian and Colombian exporters (in these cases, mostly private companies), in cahoots with one or two major international trading houses, to defend/manipulate coffee prices were similarly unsuccessful.