Market-based Price-risk Management for Coffee Producers

Coffee is characterised by high levels of price fluctuation, which exposes
producers to price risk. Its wide trading in international commodity futures
markets offers scope for producers to manage the risk by hedging on these
markets, the mechanism for which is based on the use of put options. This
article uses historical data of actual put-options contracts to estimate the
costs of the mechanism, the benefits being inferred from field evidence. It
emerges that the costs are relatively low and outweighed by the benefits for
most producers. The article then looks at the operational feasibility of the
mechanism for producers and compares it with other hedging mechanisms.