Insights

Price Risk Management Revisited: Reality Check And Back To Basics

by | Jun 20, 2016

Key Insight

The bottom line is that there are a lot of cooperatives who lack even the most basic tools to be profitable businesses and who are commercializing their coffee at a fraction of the FOB price.  These are the cooperatives and farmers that need our attention and need who investment in their capacities in order to become the market links we need them to be.

If you have been following the Coffeelands blog, you’ll know that Price Risk Management is a topic that if increasing importance to us. I’ve been writing about this topic for the last 9 months and talking about it for even longer.  Finally, this last week, I got to walk the walk.

With the help of the amazing Sara Morrocchi, formerly of Sustainable Harvest, we put together our own course on PRM, that starts at the very beginning and moves through increasing levels of complexity. First, we need to understand what risk is and where and how each cooperative faces it, with a special focus on price risk. Then we explore how you can mitigate price risk through physical strategies (collecting most of your coffee before you sell it), then through the use of more sophisticated financial tools, like futures contracts and options.  Much of the prior work and emphasis in this area has been on the use of options.

That’s how we drew up the course, but reality is always a bit different.  This training showed us what areas our cooperatives are struggling with. For every PRM success story – for every financially sophisticated cooperative such as SOPPEXCCA, COOPETARRAZU, COOPERANDES, Chirinos, who understands and uses advanced PRM tools there must be 10 (or 20!) cooperatives out there who aren’t ready to buy options or to set up variable sales contracts. These cooperatives might still be commercializing their coffee in parchment; they don’t even know what their fixed or variable costs are! Let me repeat that.  They sell their coffee without truly knowing what their operating costs are! Many of the success stories that do exist have had the benefit of years of public support and funding invested in developing organizational capacities of these cooperatives, while others continue to operate as best they can, on their own. Don’t even get me started about all of the unorganized farmers who sell to intermediaries at prices that are half of what the NYC price is ($1.35 at the time of this article), which is the greatest coffee pricing tragedy of all…