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An exploration of commodity income stabilization options for coffee farmers - page 7 / 47

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can consider how to use their contracts to pass on risk management services to their suppliers in a mutually beneficial manner.

Local banks have a major role to play: to the extent that they are already active in coffee sector finance, they can reduce their capital costs by incorporating price risk management instruments into their credits (either side-by-side, or through the denomination of the principal and/or interest rate on their loans). By virtue of their access to the international banking system, they can also provide a pass-through to the international risk management market for the cooperatives and the enterprises in the country—it may even be worthwhile for them to set up a brokerage and risk management advisory unit. All or some of these groups can come together to promote a local commodity exchange, which, apart from offering new local contracts, can trade localized versions of international contracts (combining the benefits of existing liquidity with those of the comfort of being able to manage risks at one’s own doorstep).

Governments need to review their rules, regulations, policies and practices with a view to modifying those that unduly restrict the ability of their coffee sector to manage price risk— including those that unnecessarily complicate or undermine commodity sector financing. Where a government is directly exposed to price risk (e.g., through its tax revenue, or its underwriting of a price stabilization program) it should consider how market-based instruments can help reach its objectives more effectively, at a lower cost and with a lower risk. And finally, the international community should support all these efforts and, furthermore, examine to what extent the success of its own interventions are dependent on commodity price risk, and take the necessary measures to manage this exposure ex ante, rather than after the fact.

Providing growers with access to market-based risk management instruments can do much to help them enter into a virtuous cycle of growth. Ultimately, however, it has to be kept in mind that coffee is one of the crops for which, if production increases, prices have to fall more than commensurately in order to reach a new supply/demand balance. So if it is to benefit the sector as a whole, any measure to improve an individual coffee farmer’s income—whether it is through research, extension services, input supply or risk management—has to be accompanied by programs to facilitate the move of such farmers into other crops and other activities (that is to say, efficient diversification, rather than diversification driven by a desire to reduce risk exposure).

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