Insights

Conversations In PRM, Part 3: Jorge Cuevas – A Shared Cost Approach To Price Insurance

by | Nov 23, 2015

Key Insight

We have done analysis that have shown that the risk of default and subsequent replacement costs for the roaster are much higher than adding the cost for the insurance.

“Price Risk Management is one of the most misunderstood topics of the coffee crop cycle.” This is how my conversation on PRM with Jorge Cuevas, the Chief Coffee Officer for Sustainable Harvest, began.

Sustainable Harvest has been training cooperatives and incorporating the use of price insurance for many of their client cooperatives.  It’s part of a larger training and effort on their behalf to help the cooperatives manage their exposure to risk. I had the opportunity to talk to Jorge about how this works and what makes the Sustainable Harvest model different.  This is a condensed and edited version of our conversation.

K: So Jorge, let’s dive right into this.  How does Sustainable Harvest help foster a PRM strategy within cooperatives?

JC: First of all, you have to understand what your risk exposure is.  For every cooperative it will be different.  There is no universal strategy.  It starts with a misguided thinking that equates the cooperative to a large or medium farmer that can engage directly with the market to sell its coffee.  That’s not really the case.  The cooperative is a necessary intermediary that does not own the coffee it sells.  If the price of coffee goes down, the value of the coffee as an asset on the farm goes down.  It is the cooperative that has the contract to ship coffee in March, yet doesn’t own the coffee who faces the risk of not being able to meet this contract.