Market-Based Price-Risk Management: Welfare Gains for Coffee Producers from Efficient Allocation of Resources

The volatility of coffee prices exposes coffee producers to price risk. Price risk is one of
many risks faced by commodity producers in developing countries. Coffee is widely traded in the
international commodity derivative markets. This offers scope for coffee producers to manage their
price risk by hedging on these markets. The hedging mechanism recommended is based on the use of
coffee futures and options. The mechanism involves costs, so the benefits of hedging need to be
evaluated in order to assess its usefulness for producers. It emerges that the main benefit lies in
producers being able to allocate resources more efficiently in the production of coffee. An analysis of
theoretical and field evidence shows that this benefit can potentially be quite high, especially for riskaverse
producers. This underlines the need to provide producers with access to suitable price-risk
hedging mechanisms