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An exploration of commodity income stabilization options for coffee farmers - page 9 / 47

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the coffee sector4), the issue should be of crucial importance for governments of coffee- producing countries as well as the international development community. Up to the late 1980s, governments often protected farmers from world market price risks—or at least, claimed to do so—but after a flurry of liberalization programs and the abolition of government marketing boards and stabilization agencies, farmers in most countries are now left to the vagaries of the marketplace.

The first chapter sets the scene. It looks at price volatility in the coffee sector, and the impact of this volatility on coffee farmers and their seasonal workers.5 It looks at the way that coffee prices move and at differences in price behaviour of Robusta and Arabica coffee. It discusses how prices are passed on from the world market to farmers, the role of intermediaries, and the evolution of schemes and programs that aim to provide a safety net for farmers. It also describes how price volatility plays itself out within the dynamics of the coffee sector, and how this affects livelihoods.

The second chapter reviews the practicalities of price risk management for coffee farmers, looking at strengths and weaknesses of the various instruments, past experiences and lessons learned. It does not discuss at any great length the generalities of risk and uncertainty, or of agricultural futures markets, on which much literature is readily available. It describes the coffee futures markets—the global price discovery centres in London (for Robusta) and New York (for Arabica), as well as the new markets in developing countries. It also looks at the various modalities through which farmers can get access to these risk management markets—from direct use of futures and options to price risk management built into physical marketing contracts, and various instruments offered on the over-the-counter market. It then, in a series of case studies, describes the experiences with price risk management by farmers in a representative group of countries. The various experiences are compared, and the lessons that one may draw from them examined.

The third chapter evaluates the experiences so far, juxtaposing the realities of risk exposure by farmers (not just in terms of price, but also in terms of weather and other risk factors) with the benefits that can be and, in practice, have been delivered through use of price risk management instruments. It formulates “best practices” and assesses the obstacles that hinder these best practices from being more widely followed. It looks at the possible roles of governments, trading companies, final off-takers (buyers such as supermarkets and retail chains), the international community and the farming movement itself in improving access and use of risk management instruments, and discusses possible ways to move forward— including some new and innovative ideas that may merit further exploration. This chapter is followed by a set of recommendations for farmers, the private sector, governments and development agencies.

4 For example, in Brazil there are some 221,000 coffee farms, many of whom have an extensive work force. In total, more than four million people depend on the sector. In Colombia, over 500,000 coffee farmers provide more than a third of the country’s total rural employment. In Indonesia there are more than a million smallholders producing coffee. In Mexico there are over 280,000 coffee farmers employing more than 700,000 seasonal workers. In Cameroon, two million people depend on coffee for at least part of their income. In Papua New Guinea, the number is similar, accounting for almost half of the country’s population. In Ethiopia, there are an estimated 1.2 million coffee growers, and a quarter of the country’s population of over 65 million people is estimated to be directly or indirectly dependent on the coffee sector (numbers from a series of sources, including ICO, The impact of the coffee crisis on poverty in producing countries, 2003).

5 Farmers will be referred to as “he” in the remainder of this report, although it should be noted that there are many coffee-producing households headed by women.

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