In previous articles on Y5Cafe, a reader asked how countries like Brazil and Indonesia manage coffee price risk. Currently, I am working on my thesis titled “Using Market Tools to Manage Price Risks and Provide Credit for the Coffee Industry in Vietnam” and have translated some content summarizing the price risk management experiences from countries like Colombia, Costa Rica, and Brazil. I would like to share this with the Y5Cafe community for further insights and feedback. Any questions or thoughts are welcome to help me better understand the subject since I have no prior experience in coffee business. Thank you sincerely.
Colombia
Coffee growers in Colombia are organized under the National Coffee Growers Federation of Colombia (Federacafé). Federacafé buys coffee from producers, processes it, sells it domestically, and operates as an export company, competing with private companies. One of the primary goals of Federacafé is to protect farmers’ incomes by ensuring them a stable price. This price stabilization is carried out through the National Coffee Fund, a public fund managed by Federacafé, which operates based on annually renewed contracts. The fund functions at the export level, covering both Federacafé and private export companies. The financial resources accumulated during periods of high global prices are used to support local prices when global prices drop.
During the period of sustained low coffee prices that started in the late 1990s, when local prices were adjusted downward every few weeks to prevent the FNC from going into debt, Federacafé considered using futures and options contracts to ensure that the FNC fund would not be depleted. However, when prices rose again, those discussions were postponed.
Costa Rica
Costa Rica has a distinct coffee system. Farmers do not sell their coffee directly; instead, they transport it to processing companies, which process and sell the coffee on behalf of the farmers, with profits shared. As part of this system, farmers receive an advance payment a few months before delivering coffee to the processing plant. A second payment is made when the coffee is delivered, and the remaining amount (usually about 40%) is paid after export.
Most processing companies are private, but the second-largest processing group in Costa Rica is held by the Federation of Coffee Growers’ Cooperatives. This system effectively provides farmers with a minimum price. It also encourages processors to use options contracts to secure a higher minimum price for farmers, increasing competitiveness with other processing companies (as the processing sector in Costa Rica is highly competitive) and mitigating the risk of losses if prices fall. Options contracts have been widely used since the early 1990s.
Guatemala
Coffee farmers in Guatemala have a relatively high level of hedging, due to the long-term capacity building program by the National Coffee Growers Federation (Anacafé). Anacafé is a non-profit private organization that facilitates access to commercial bank credit for farmers, introduced in 1994. Using risk management tools is a prerequisite to participate in this credit program, significantly reducing risks for banks and enabling them to offer farmers loans at lower interest rates (Anacafé estimates that this has saved farmers over 10% of loan costs—about 2 million USD annually). In interviews conducted in the early 2000s, when coffee prices hit historic lows, farmers considered the hedging policy as a critical factor in maintaining their livelihoods.
Anacafé organizes training in various areas for farmers: helping them understand and calculate production costs, explaining the mechanics of agricultural credit, and educating them on how global markets set coffee prices and how risk is managed. Anacafé also maintains real-time market information for farmers through text messaging systems that deliver futures prices.
Anacafé provides farmers with a list of banks with which it has agreements, allowing farmers to choose their preferred bank. Loan applications and required documents are submitted by Anacafé to the bank. Typically, banks accept the loans, provided that farmers engage in a hedging strategy (such as using fixed-price futures contracts, selling futures, buying put options, or using a collar strategy).
Farmers usually hedge price risks through an export company with whom they trade, using the same volume of coffee they intend to deliver. The export company manages risk by selling futures contracts or buying/selling options on the NYBOT. The export company often finances the hedging strategies by paying option premiums upfront, which are then deducted from the coffee price when the farmer delivers the coffee, along with margin calls.
Anacafé also supports the export companies in managing risks but does not provide guarantees or financial support. Notably, Anacafé does not help exporters secure funding to finance these hedging transactions, which is a weak point in the system. Exporters often do not have enough funds to manage price risks for a large number of farmers.
All farmers in Guatemala, according to law, are linked with Anacafé and can participate in this program. Small farmers (many of whom produce less than 2,000-3,000 lbs of coffee, compared to the standard 37,500 lbs futures contract on NYBOT) can also use risk management tools by joining together with other small farmers. Cooperatives can also participate—one such cooperative with 400 members, including many illiterate farmers, collectively hedged on the New York market. The percentage of farmers participating in hedging grew from 0% to about 20% by the late 1990s, as a result of Anacafé’s efforts. In interviews, many participating farmers said that the hedging policy was key to maintaining their livelihoods.
In the early 1990s, Guatemala also used commodity price-linked loans. Anacafé issued bonds on the US capital markets, and the proceeds were lent to the country’s coffee exporters, who had gone through the collapse of the coffee market in the late 1980s. Anacafé charges a 1% fee based on the credit amount borrowed by farmers.
The fact that banks are unwilling to pre-finance hedging costs has been a significant barrier to expanding hedging activities for farmers. This is a crucial reason why export companies often recommend that farmers use a collar strategy, also known as a “zero-cost option contract”—where the cost of buying put options is offset by the sale of call options. This strategy protects farmers from the risk of falling prices but requires them to give up some or all potential profits if prices rise.
Implemented in 2000, as part of a study by the International Task Force on Commodity Risk Management in Developing Countries, World Bank, the experience of Guatemala was highlighted as one of the key case studies in a documentary on the suitability of price risk management for developing countries.