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An exploration of commodity income stabilization options for coffee farmers - page 30 / 47





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2.2.6 Mexico

Mexico has a government organization, Aserca, which among its activities has the function of acting as intermediary between Mexican smallholders and processors and the U.S. futures markets, in particular for the purchase of options. In the initial years, it also subsidized part of the option costs.

In the beginning (Aserca was set up in 1994 as a tool to facilitate liberalization of the agricultural sector), the program was targeted at the cotton and maize sectors, but in 1999, coffee was added (but without any subsidies for option premiums). So far, uptake by coffee producers has been small. One important reason for this has been that while there are many producers, they tend to be poorly organized, and overall levels of education are low.

2.2.7 Nicaragua

Coffee is Nicaragua’s major cash crop, most of it produced by some 30,000 smallholders. The country was one of the coffee producers targeted by the International Task Force on Commodity Risk Management, and one where a pilot transaction was successfully implemented. The initial transaction, signed in October 2002, involved the direct purchase of put options by a group of some 250 farmers just before the harvest to cover their price exposure during the sales period later in the crop year. This made it possible for farmers to avoid having to sell immediately following harvest time. Instead, they were able to time their sales better throughout the crop year. The options were over-the-counter, provided by a Swiss coffee trading company.

2.2.8 Tanzania

Early efforts to bring price risk management to coffee producers in Tanzania and Uganda had little sustained success. A regional bank, the Eastern and Southern African Trade and Development Bank (PTA Bank) started a “Price Guarantee Contract Facility” in 1994, under which it built price risk management into its coffee and cotton trade finance operations (which mostly focused on the post-harvest phase and were structured around warehouse receipts). Many seminars were held in eight of its member countries, and a number of exporters and processors signed up, as did one or two farmers’ cooperatives. But the price guarantee program faded away in the second half of the 1990s.

As one of the pilot projects initiated by the International Task Force on Commodity Risk Management, the country’s largest cooperative, the Kilimanjaro Native Cooperative Union (KNCU), with several thousand members, was assisted in 2000-2002 in developing a price risk management program. As a result, in 2002 it bought put options for 700 tons of coffee. These were average price options, provided by a Dutch bank through a local bank, the Cooperative Rural Development Bank (CRDB). This allowed the cooperative to maintain its practice of guaranteeing a minimum price to its farmers and make subsequent payments if prices turned out to be higher after harvest. The minimum price guaranteed by the cooperative to its members turned out to be higher than the price the cooperative realized when it sold all its coffee. This led to the decision of the cooperative to hedge for the following crop year. In addition, the local bank that was financing the cooperative strongly encouraged the cooperative to seek price protection for its 2002–2003 crop.

But KNCU did not hedge its exposure in all the following years. Changes in the management of the cooperative did play a role, as did an opportunistic approach—cooperative


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