size is only the smallest of the problems. If a developing country exchange introduces contracts, they of course should be adapted to the conditions of the country, and then it may make sense to tailor the contract size to the needs of the local coffee sector.
Another option that looks attractive on paper is organizing farmers so that they can reach a cumulative volume that is sufficiently large to be hedged efficiently on a risk management market. Unfortunately, it has proven very difficult to organize farmers through outside intervention. When farmers are organized, whether in a formal cooperative or in a seasonal marketing group, offering them access to risk management markets can add value to their organization and act as an added incentive towards cooperation. Adding price risk management as a service can effectively be an attractive point for an NGO or other agency, or indeed, for a commercial buyer that is trying to help farmers to organize themselves. But when farmers are not organized, just offering access to a risk management market will not be enough of a catalyst to get them to do so. In effect, any program aiming to improve access to risk management markets through farmers’ organizations becomes primarily a program to organize farmers—tantamount to drilling a small well by building a huge road infrastructure to reach the intended well site.
Ultimately, it has to be kept in mind that demand elasticity for coffee is low. Price risk management will help increase an individual farmer’s income by allowing him to move up the efficiency curve in his production of coffee. But if the majority of farmers do the same thing, the result will be higher production which in turn will depress market prices. This can of course be said for any scheme that allows farmers to improve their coffee production: agricultural research, extension, some Fair Trade schemes, etc. Indeed, just on the basis of the econometrics of price elasticity alone, the most effective way to improve farmers’ revenue is to systematically destroy part of their crop (while such schemes resurface time and again in the discussions of governments and NGOs, it has in effect been tried already,27 and experience has abundantly demonstrated that trying to get producing countries to act collectively towards this purpose is a futile exercise—there are too many incentives and loopholes for free-riders). Should one conclude then that while it is in the interest of individual farmers to manage price risk, for their collective good it is better to deprive them of such instruments? And for good measure, stop agronomical research? While this is a point that can be argued, it does underline the need for coffee producers (and the producers of many other crops with similarly low elasticities) to diversify out of the coffee sector. To some extent, allowing coffee farmers access to risk management markets will help them to diversify: the cash flow thus secured is often used to send their children to school, and improved access to finance can help to start new activities. But clearly, a stand-alone program to promote access to risk management will have only limited benefits; it would have much more of a multiplier effect if it comes as part of a wider program for rural development.
27 Many of these efforts were far from timid. For example, between 1931 and 1944, Brazil destroyed some 78 million bags of coffee, more than a year’s worth of world production. In the 1960s, Brazil reduced its coffee acreage by half.