Market-Based Price-Risk Management:Welfare Gains for Coffee Producers from Efficient Allocation of Resources

The volatility of coffee prices exposes coffee producers to price risk. Price risk is one ofmany risks faced by commodity producers in developing countries. Coffee is widely traded in theinternational commodity derivative markets. This offers scope for coffee producers to manage theirprice risk by hedging on these markets. The hedging mechanism recommended is based on the use ofcoffee futures and options. The mechanism involves costs, so the benefits of hedging need to beevaluated in order to assess its usefulness for producers. It emerges that the main benefit lies inproducers being able to allocate resources more efficiently in the production of coffee. An analysis oftheoretical and field evidence shows that this benefit can potentially be quite high, especially for riskaverseproducers. This underlines the need to provide producers with access to suitable price-riskhedging mechanism