Brazil’s local coffee futures and option contracts, offered on the Bolsa de Mercadorias & Futuros (BM&F), are to some extent used directly by the country’s producers, and in particular many of the large plantations. But mostly, coffee producers make use of price risk management tools incorporated into physical trade transactions, and to a lesser extent, the OTC market for at times complex risk management products (floor prices, price participation contracts, and so on).
Of all the coffee-producing countries, Brazil is probably the one where farmers use market- based risk management instruments most. This has been made possible by two factors. First, medium-sized farms and large plantations account for a large share of production—the average farm size in Brazil is nine hectares. Second, Brazil’s government has promoted the development of so-called Cédulas de Produto Rural (CPRs), bonds issued by producers (farmers and cooperatives) which confer title on future production. CPRs can then be used to raise finance, and this is often used to make forward contracts and risk management possible. In a survey among coffee farmers in 1999, it was found that 48 per cent of farmers issued CPRs with as their main objective the obtaining of crop finance, and 28 per cent had as their main objective the obtaining of a price guarantee; and for 22 per cent, the CPR was used to obtain both objectives. 22
Colombia’s coffee growers are organized in the National Coffee Growers Federation of Colombia (Federacafé). Federacafé buys from producers, processes the coffee, sells it to the domestic market, and acts as an exporter (in competition with private traders). Among its major objectives is to protect coffee producers’ incomes through guaranteeing the price paid to producers. It protects domestic price levels through a stabilization fund, the National Coffee Fund, a public fund which, under a regularly renewed contract, is administrated by Federacafé. The fund operates at the level of exports, covering both Federacafé and private sector exporters. Financial resources accumulated during times of high world prices are used to support domestic prices when world prices are low.
During the period of sustained low coffee prices starting in the late 1990s, when domestic prices had to be revised downwards every few weeks in order to keep the FNC afloat, Federacafé considered the possibility of using futures and options contracts to ensure that FNC funds would not be depleted. But an upturn of coffee prices has led to such discussions being put on the backburner for the time being.
Costa Rica has a rather particular marketing system for coffee. Growers do not sell their coffee, but rather, deliver it to millers who are to process and sell it on their behalf; the revenue is shared. As part of the system, growers receive pre-financing, already months before delivery of their coffee to the mills. Millers pay another part on delivery, and the remainder (traditionally as much as 40 per cent) after exports. Most of the millers are privately-owned, but the second largest milling group is in the hands of the Federation of Cooperatives of Coffee Growers.
22 Bernardo Celso Gonzales and Pedro Valentim Marques, The CPR of coffee as an instrument of financing and hedging,” paper presented at the IAMA 1999 Agribusiness Forum, Florence, Italy.