The welfare gain from eliminating coffee price volatility: the case of Indian coffee producers

It is commonly felt that the liberalisation of commodity markets has increased the exposure ofcommodity producers to price volatility. Using a generalized autoregressive conditionalheteroskedasticity framework, we make a distinction between the predictable and unpredictablecomponents of volatility, the latter exposing producers to price risk. By using empirical estimatesof the coefficient of relative risk aversion drawn from the literature, we show that the welfare gainfrom eliminating this price risk for Indian coffee producers is on average 4.8 percent of theirrevenue from coffee sales, which for a poor producer may be more than a month’s income. This underlines the need for providing producers access to suitable price-risk management or hedgingmechanisms.