Sushil Mohan

Market-Based Price-Risk Management for Coffee Producers

Coffee is characterised by high levels of price fluctuation, which exposes coffee producers to price risk. Coffee is widely traded in international commodity futures markets. This offers scope for producers to mange their price risk by hedging on these markets. The hedging mechanism proposed is based on the use of put options. The paper uses historical data of actual coffee put options contracts to estimate the costs of the mechanism; the benefits are inferred from field evidence. It emerges that the costs are relatively low, the benefits outweighing the costs for most producers. The paper then looks at the operational feasibility of the mechanism for producers and compares it with other hedging mechanisms. The mechanisms differ in their strengths and weaknesses; their choice largely depending on their viability in individual coffee producing countries.

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 of many risks faced by commodity producers in developing countries. Coffee is widely traded in the international commodity derivative markets. This offers scope for coffee producers to manage their price risk by hedging on these markets. The hedging mechanism recommended is based on the use of coffee futures and options. The mechanism involves costs, so the benefits of hedging need to be evaluated in order to assess its usefulness for producers. It emerges that the main benefit lies in producers being able to allocate resources more efficiently in the production of coffee. An analysis of theoretical and field evidence shows that this benefit can potentially be quite high, especially for risk-averse producers. This underlines the need to provide producers with access to suitable price-risk hedging mechanisms.

FAIR TRADE AND CORPORATE SOCIAL RESPONSIBILITY

This paper examines how the expansion of mainstreaming of Fair Trade over the last decade and the increasing corporate attention to social responsibility during the same period is resulting in Fair Trade evolving as a form of corporate social responsibility. We further examine the challenges this poses for the Fair Trade movement.

Reforming agricultural trade among developing countries

It is commonly perceived that much of the initiative for removal of distortions in trade in agriculture has to come from the developed world. This generalization is not valid across all agricultural products, in particular for tropical products that are predominantly produced in developing countries and constitute a large share of their exports. It emerges that export of most of these products suffers not because of barriers in advanced countries, but from those in the developing world. This implies reciprocal benefits from growth in counter-trade if developing countries agree on more stringent trade liberalization measures for them. Cotton, sugar and bananas are important exceptions; they face trade barriers in some developed economies, so they deserve specific attention of trade negotiators.

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

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.

Why Developing Countries Have Failed to Increase Their Exports of Agricultural Processed Products

The article uses the case study of coffee, tea and cocoa to analyse whether tariff escalation constitutes a barrier to market access that thwarts diversification efforts of developing countries into exports of value‐added agricultural processed products. It also examines the extent to which non‐tariff barriers act as market access barriers that constrain developing countries from developing their exports of agricultural processed products. Our analysis shows that tariff escalation is not the main barrier; rather it is the prevalence of non‐tariff barriers (including domestic non‐tariff barriers) that limits the ability of developing countries to increase their agricultural processed exports. This has important policy implications in terms of the emphasis that trade negotiators and policy planners should place on addressing non‐tariff barriers.

The welfare effects of coffee price volatility for Ethiopian coffee producers

Purpose - This paper aims to estimate the welfare effects for Ethiopian coffee producers from eliminating coffee price volatility. Design/methodology/approach - To estimate volatility, the generalised autoregressive conditional heteroskedasticity technique is applied to monthly coffee prices in Ethiopia for the period 1976-2012. To distinguish between the unpredictable and predictable components of volatility, we obtain separate estimates of the conditional and unconditional variance of the residual. This is combined with estimates of the coefficient of relative risk aversion to measure the welfare effects from eliminating the unpredictable component of price volatility. Findings - A key finding is that the welfare gain from eliminating coffee price volatility is small; the gain per producer comes to a meagre US

Determinants of public education expenditure: Evidence from Indian states

0.76 in a year. Originality/value - This has important policy implications for the efficacy of price stabilisation mechanisms for coffee producers, i.e. any attempt to eliminate coffee price volatility at a cost may not be a preferred outcome for Ethiopian producers. The contribution of the paper lies in using the unconditional variance, as it more truly reflects price risk faced by coffee producers without overestimating it.

Crossfire: ‘Does Fairtrade have more impact than conventional trade or trade certified by other sustainability standards?’

Public education expenditure varies significantly across Indian states. Using data on sixteen Indian states from 2001-2010, the paper tries to identify the determinants of per capita education expenditure of state governments in India. The econometric findings indicate that richer states spend more on education compared to the poorer states. A lower share of child population (0-14 years) is found to significantly enhance education expenditure at the state level. We do not find any evidence that political factors such as political ideology of the ruling party and level of corruption affect education expenditure of state governments.

Coffee futures: role in reducing coffee producers' price risk

In this issues Crossfire, Matthew Anderson discusses with Philip Booth and Sushil Mohan the impact of Fairtrade compared with other sustainability certified and conventional trade.