The Welfare Gain from Eliminating Coffee Price Volatility: The Case of Indian Coffee Producers

Abstract

It is commonly felt that the liberalisation of commodity markets has increased the exposure of commodity producers to price volatility. Using a generalized autoregressive conditional heteroskedasticity framework, we make a distinction between the predictable and unpredictable components of volatility, the latter exposing producers to price risk. By using empirical estimates of the coefficient of relative risk aversion drawn from the literature, we show that the welfare gain from eliminating this price risk for Indian coffee producers is on average 4.8 percent of their revenue from coffee sales, which for a poor producer may be more than a month's income. This underlines the need for providing producers access to suitable price-risk management or hedging mechanisms.JEL Classifications: D13, D81, Q13, Q12

A Real Option Analysis applied to the production of Arabica and Robusta Coffee in Ecuador

“…Lukanima & Swaray (2014) used a GARCH model to evaluate the volatility of coffee prices in five different East African Countries after domestic market reforms (loosening government control and market liberalization). Mohan et al (2014) used a GARCH model to evaluate volatility in coffee prices in India since the market liberalization, and estimated welfare gains if the Indian coffee growers' exposure to volatility was reduced. In conclusion, it is very important to consider volatility in the evaluation of coffee investment decisions.…”

Coffee prices volatility and transmission : developing risk management instruments for coffee growers in Ecuador

“…Risk management tools and part stabilization model are developed to guarantee a reduction of volatility (Mohan, 2007;Malan, 2013). Reducing the volatility brings better prices for growers and welfare gains for coffee growers (Mohan, 2007: Mohan et al, 2014. The success of these tools depends on the confidence of the markets participants, and of governments and agencies.…”

“…Studies with ARCH and GARCH methodology have demonstrated the existence of volatility. These studies found different levels in the domestic market of each analyzed country (Worako et al, 2011;Lukanima and Swaray, 2014;Mohan et al, 2014). Volatility levels differ between coffee-producing countries (Worako et al, 2011), which means that some markets are more volatile than others.…”

“…Volatility levels differ between coffee-producing countries (Worako et al, 2011), which means that some markets are more volatile than others. The outcomes of volatility studies have showed that growers are the most affected agents in the value chain production (Lukanima and Swaray, 2014;Malan, 2013;Mohan et al, 2014;Worako et al, 2011;Rueda and Lambin, 2013).…”

“…Any movement (increasing/ decreasing) of coffee prices in the world market affect the domestic prices in the physical markets around the world. Coffee prices in domestic markets of coffee-producing countries have been shown to be volatile (Worako et al, 2011;Lukanima et al, 2014;Mohan et al, 2014). This translates as uncertainty in the growers' benefits.…”