Insights

Conversations In PRM, Part 4: PRM Options For The Individual Smallholder

by | Jan 11, 2016

Category: Markets

Key Insight

The risk faced by individual farmers is very different than that faced by cooperatives and therefore calls for a different approach and different tools.

During the last months of 2015, I had posted a number of conversations regarding price risk management (Intropart 1part 2part 3) all with the goal of better understanding the topic and how we might better use these tools to protect cooperatives and other farmer associations.  Today I want to pick up the thread for the New Year by exploring how PRM might differ for individual farmers.

So how does the approach to Price Risk Management differ for individual farmers versus that of a cooperative?  As I have been (slowly!) getting a better sense of how price risk affects cooperatives in the coffee sector, the distinction is becoming clearer.

A single farmer, large or small, is the owner of all of the coffee they are selling.  The price increases, the value of their asset (coffee on the bush) increases.  The price decreases, the value decreases.  The distinctions and gradients are due to the relationship that the farmer has with the market and how this relationship is mediated. If a farmer can only sell cherry to the passing middlemen, then the spot price of the coyote is the price s/he will receive.  If the farmer has any sort of relationship with an exporter, they may be able to determine on which date/price they will commercialize their coffee, within a certain time frame.  Others still will be able to fix prices forward for future harvests.  In terms of mitigating their own exposure to price risk, understanding what their costs of production are remains the first and primordial step.

In this post, I’m talking to Emilio Baltodano and John Gardina, of the Mercon Coffee Group about how individual producers can mitigate their exposure to price risk.  In Nicaragua, the Mercon Group exports under the local name CISA Exportador.

As usual, this interview is edited and condensed for clarity.