India
Coffee (both Robusta and Arabica) is produced in the northern states of India, by small-scale farmers as well as medium-sized plantations. A few plantations use the London and New York futures markets, while others use the PTBF contracts indirectly. Small-scale farmers are generally unable to access these contracts. However, many small farmers, particularly in Kerala, one of the most literate states in India, are familiar with the futures markets because they grow coffee in combination with black pepper, and India has a long-standing, active pepper futures market.
Based on this foundation, there have been many efforts to establish a domestic coffee futures market in India over the past 10 years. These efforts have not been entirely successful so far (the largest contract currently traded for Robusta coffee is at the Multi Commodity Exchange of India, with a total of 145,000 contracts since the exchange began operations in late January 2007 until the end of April). The challenges include: transitioning users of international markets to domestic markets; opposition from some large trading companies (commodity exchanges provide transparency and help small participants compete, which does not benefit some of these companies); difficulty in establishing suitable standards; and a lack of many trades due to, at least initially, relatively stable coffee prices. Nonetheless, efforts continue.
Nicaragua
Coffee is the main cash crop in Nicaragua, with around 30,000 small farmers producing it. Nicaragua is one of the countries participating in the International Task Force on Commodity Risk Management, and it was the first country to successfully execute a transaction under this program. The first transaction, signed in October 2002, involved a group of about 250 farmers buying put options before the harvest to hedge price risks during the selling period throughout the season. This allowed farmers to avoid immediate sales during the harvest and better manage the timing of their sales. The options were traded through the over-the-counter (OTC) market, facilitated by a Swiss coffee trading company.
Tanzania
Initial efforts to bring price risk management to coffee farmers in Tanzania and Uganda had some limited, sustainable success. A local bank – the Eastern and Southern African Trade and Development Bank (PTA Bank) – started a “Price Guarantee Contract Facility” in 1994, where PTA Bank built a price risk management program and provided trade credit for coffee and cotton (mostly focusing on post-harvest periods and based on warehouse receipts). Numerous workshops were held in 8 member countries, with many exporters and processors participating, along with one or two agricultural cooperatives. However, this price guarantee program gradually faded away in the latter half of the 1990s.
As one of the first projects implemented by the International Task Force on Commodity Risk Management, Tanzania’s largest cooperative – the Kilimanjaro Native Cooperative Union (KNCU), with thousands of members, was supported in 2000-2002 to develop a price risk management program. As a result, in 2002, they bought put options for 700 tons of coffee. A Dutch bank, through the local Cooperative Rural Development Bank (CRDB), provided a contract for an average price option. This allowed the cooperative to maintain a minimum price guarantee for its members and pay the difference if prices were higher after the harvest. The minimum price for members was higher than the price the cooperative received when selling coffee, so the cooperative decided to hedge for the next crop year. Additionally, the local bank’s financial support encouraged the cooperative to seek price protection for the 2002-2003 crop year.
However, KNCU did not hedge for all the following years. Changes in the cooperative’s management were one of the reasons – the cooperative management did not believe that prices would drop, so they questioned the need to pay for options. Nonetheless, CRDB continued to manage price risk for part of its activities.