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An exploration of commodity income stabilization options for coffee farmers - page 45 / 47





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Some of the instruments available on the over-the-counter market are perfect for governments that desire to insure their country’s price risk exposure, either on their own account (e.g., to protect against the risk of declining tax revenue when export prices fall), or in order to pass on price insurance to their country’s producers or consumers (e.g., as a back- up for a price stabilization fund, to ensure that such a fund will continue operating even in times of prolonged unfavourable prices).

Quite a few government entities in developed countries do indeed use market-based price risk management for these purposes. For example, in the United States, this is the case for some of the states that rely heavily on taxes on oil production; for many public transport companies; and even for many city-level programs that provide fuel subsidies to low-income households. But similar use in developing countries is rare—and in the case of coffee, limited to an experience in Guatemala, discussed in the main text. Governments of other coffee- producing countries, e.g., in East Africa, have been offered risk management products, either to lock in minimum export prices in return for giving up part of the potential of price increases; or to fix the number of pounds of coffee necessary to pay for one barrel of oil imports but this has not led to any transactions.

This lack of use is largely due to lack of awareness within these governments on the potential use of market-based risk management instruments, coupled with fear about a possible political backlash if a hedging decision were, with hindsight, turn out to be “wrong” (a not unrealistic fear: for example, in Ecuador, when the Central Bank had bought put options to protect the national budget against the risk of oil price falls, and oil prices did not fall, there were calls in the country’s Parliament for an investigation of the Central Bank’s “waste” of government funds). Even if some parts of the government machinery are aware, the critical mass necessary to make hedging decisions has not been reached. There are no access problems at this level. Many countries can probably directly access the market, and in any case, any country that borrows from the World Bank can incorporate price risk management tools within its loans (irrespective of the purpose of a loan); officially, this facility is now available only for IBRD countries (that is, the richer World Bank members), but indications are that if an IDA country is interested, this service will be made available by the Bank’s Treasury Department.


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