This effectively gives growers a minimum price. It also makes it very attractive for millers to use options in order to lock in their minimum sales price: they can use this in order to offer a higher minimum price to producers and thus attract their patronage (the milling sector in Costa Rica is highly competitive)—and to avoid the risk that if prices collapse, they are left with large losses. Options have thus been used quite widely since the early 1990s.
Guatemala has relatively high levels of producer hedging because of a long-standing training and capacity-building program by the country’s National Coffee Growers’ Federation (Anacafé), a private non-profit organization. In 1994, it introduced a coffee credit system aiming to improve the access of coffee producers to commercial bank financing. Use of risk management instruments is a prerequisite for participation in the credit program. It considerably reduces the risk to the banks, allowing them to provide credit to coffee farmers at lower interest rates (according to Anacafé’s estimates, this led to interest rate savings for farmers of over 10 per cent of the loan value—some US$2 million per year). Farmers normally hedge their price risk through an exporter with whom they negotiate a pricing formula. In interviews in the early years of this decade, when coffee prices had reached historic lows, farmers stated that their hedging policy has been crucial for their survival. 23
In the early 1990s, Guatemala had also used a commodity price-linked loan. Anacafé had issued a bond in the United States capital market, the revenue of which was lent to the country’s coffee exporters who had been hard hit by the collapse of the coffee market in the late 1980s. Reimbursement by the exporters was made a direct function of world coffee prices.
Coffee (Arabica as well as Robusta) is produced in India’s southern states, by smallholders as well as medium-sized plantations. A few of the plantations have used both the London and New York futures markets, mostly indirectly through PTBF contracts. This possibility has not been available for smallholders. Nevertheless, many of these smallholders (especially those in Kerala, India’s most literate state) have a good understanding of futures markets as they traditionally grow coffee in conjunction with pepper, and India has had a vibrant pepper futures market for a long time.
On this basis, there have been a number of efforts to set up a local coffee futures market in the past 10 years. These efforts have so far not been fully successful (the currently largest contract, for Robusta coffee at the Multi Commodity Exchange of India, has had a total turnover of 145,000 contracts from its inception in late January 2007 to the end of April). Among the difficulties encountered are that it is difficult to move those using the international markets to a local platform; there has been active resistance from some, but not all, of the larger traders (commodity exchanges provide transparency and make it easier for smaller players to be competitive, neither of which suits the interests of some of the traditional trading houses); it has been difficult to set appropriate grading standards; and local speculative interest has not been attracted to these markets because, at least in the period that the large national exchanges have been initiating these contracts, coffee prices have been relatively stable. Nevertheless, efforts continue.
23 See for more details UNCTAD, Farmers and farmers’ associations in developing countries and their use of modern financial instruments, 2002.