The importance of protecting their coffee sank in with the Peruvian co-op managers when Albert Scalla posed this series of questions:
How much is a car worth in Peru? (Around $7,000). Do you insure your cars? (Of course). Now how much is a container of coffee worth? ($130,000). Buying a container of coffee is like buying a Ferrari. Would you let your Ferrari sit around uninsured, exposed to any type of accident? Just as you buy car insurance to protect your car from being hit, you should buy insurance for your coffee price in case the market takes a hit.
Cooperative managers learn how to transfer their risk to the C market
Insurance in this case takes the form of tools that protect producers and roasters from changes in the price of coffee. Sustainable Harvest® asked Albert Scalla, Senior Vice President of Hencorp Futures L.C., to come to the office in Lima this week to give a course on risk management. The students are 20 trusted managers from cooperatives that supply Sustainable Harvest® with their specialty coffee. Albert opened the first day of the course explaining that what we’re doing here is unprecedented – he has never experienced such transparency and willingness of coffee cooperatives to learn how to use market tools to protect themselves.
The keyword this week is volatility. In the current volatile C market, the risks are great on both the roaster and producer side. Everyone knows that the futures market can be harnessed to protect oneself from large movements in the C market, but understanding the theory is not enough. Albert’s risk management seminar teaches the co-op managers practical skills like how to read market reports, understand how global events (such as a riot in the middle east or the lowering of US interest rates) affect the market, become experts in terminology for placing orders, and decide which market tool is appropriate for which situation.
The course, which began on Monday, started with a detailed background on how futures markets came about (did you know the first futures markets in the US formed in Chicago because it was the major train hub in the country?). The group of managers was especially attentive during Albert’s explanation of market variables. There is a long list of factors that directly affect the coffee market – some positively and some negatively. For example, tightening US regulations regarding index funds and speculators has a tendency to drive the market down. On the other hand, the rush to invest in commodities drives the market sharply up.
Because coffee has become an investment product, we are subject a new market reality. Sustainable Harvest’s® risk management course aims to understand this new market and learn how to manage it to reduce risk. We can use the market to transfer risk from coffee roasters and producers directly onto the C market, and as the week develops, we will see producers adopt the market tools to tailor the best risk management strategy for their cooperatives.