Celebrating International Coffee Day by reducing price risks for coffee farmers

Celebrating International Coffee Day by reducing price risks for coffee farmers

October 1, 2016 - by Frank Rubio - 2 comments

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On 1 October, people across the globe will join together at various events to celebrate the 2nd annual International Coffee Day where they can indulge in delectable roasts from all regions.

International Coffee Day is a global celebration of coffee from farm to shop and an opportunity to honour all the players who participate in this value chain worldwide. Twenty-five million small producers rely on coffee for a living worldwide. Coffee is a major export commodity and is year to year in the top 10 of largest agricultural exports by value worldwide.  Coffee is a critical commodity for Oikocredit and makes up a significant amount of the total agricultural portfolio. Oikocredit’s current coffee portfolio is valued at nearly US$ 40 million. We have 47 partners that we finance in coffee, mainly in Latin America. Our continual challenge is to develop products that suit the ever-changing needs of our partners in order to ensure their long-term prosperity and assist them in mitigating risks.

The single most significant risk that smallholder coffee farmers face is price risk exposure. Even small variations in coffee prices can have huge consequences for smallholder farmers who mostly rely on income generated from coffee sales to cover their annual basic needs. Farmers who sell fair trade are offered a premium and a minimal price which helps to mitigate some of this risk, but even this minimal price offered pales many times to the amount a farmer could receive if he was better able to hedge his stocks in tandem with daily price fluctuations.

 Case studies developed by Fair Trade USA and others demonstrate that cooperatives have been able to increase farmer incomes by over 20% over a one-year period when adequate hedging strategies are put into place. Likewise, farmers in cooperatives have the ability to earn a dividend at the end of the harvest after their cooperative sells its coffee to the exporter/importer.  Dividends or “second payments” from the cooperative can be significant, and can range from 5-30% of the total price received per pound of coffee. However, if cooperatives end up with a loss at the end of the harvest, second payments will be reduced or absorbed to cover the organization’s losses, resulting in less income for farming families.

For these reasons, it is critical that smallholder farmers have an understanding of price risk and that farmer cooperatives have the capacity to directly implement strategies in price risk management.  This is why we are currently working with partners on setting up a project to address price risk management, which will improve smallholder incomes across 16 cooperatives in Latin America. Look for more on this project soon, and in the meantime – Happy International Coffee Day!

Comments

  1. Martin StowMartin Stow Wrote on October 11, 2016 at 2:30:14 PM

    An excellent piece of work. Without doubt a fair trading principle is probably the only way forward. However without contracts firmly in place and a climate that we cannot rely on... (everything has a relationship).

    I'd love to know, your deployment using technology to create 'green havens'. It's there... but how to fund and maintain?

    Thank you, Martin

  2. Frank RubioFrank Rubio Wrote on October 13, 2016 at 5:40:58 PM

    Hi Martin,

    Thanks for your comment. As you know, our core business is finance but in agriculture we understand that finance is only one service that small holders need to ensure increases in income and sustainable production. That’s why we are also fundraising with donors and other entities to implement programs either directly or in partnership to ensure that small holders receive the appropriate mix of financial services, technical assistance, training and technology transfer. We call this blended finance- a mix of lending from us, subsidies from others plus risk sharing in equity/lending with our friendly competitors. One such program is the price risk management project mentioned in the blog. There are others as well in the process including climate smart agriculture. I think probably the green havens you refer to would fall under this category.

    All the best, Frank

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