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Protecting growers against an unpredictable market

Posted by Jorge Cuevas on March 26, 2014 at 11:29 AM

The C-market has seen extreme volatility of late: After finishing around $1.14 per pound on Jan. 27, the Arabica price took off. The market hit its highest price in two years at $2.07 earlier this month, and it finished last week around $1.70.

C MarketThe erratic market threw a curveball to everyone in the coffee supply chain, and many farmers have suffered as a result: Contracts they signed last fall—at the start of the current harvest season—reflected the low prices of that market, and they’re being paid well below market value for the coffees they’re delivering in today’s higher market.

In keeping with the principles of its Relationship Coffee Model, Sustainable Harvest® has been helping farmers survive—and even thrive—in this volatile market. The company invests in coffee growers and coffee-producing organizations to ensure a stable coffee supply, and an essential piece of that investment is risk-management training. Sustainable Harvest® institutes extensive trainings at origin to help growers understand the C-market so that they can make better decisions to benefit themselves. One key concept introduced in risk-management training is price insurance.

Understanding price insurance

20070202-_CME6687-14Typically, coffee growers and coffee roasters sign contracts in November and December for coffee that will be harvested in the ensuing months. The pricing in the contracts reflects the state of the C-market at that time, but the market price can change significantly between November and March.

Price insurance protects stakeholders against the unpredictable market. There are two types—one that covers against a drop in price, and one that protects against the price rising. The first type of price insurance can be taken out by roasters to cover a scenario in which the market drops and they’re contracted to pay their suppliers a higher price than market.

Conversely, growers take out price insurance to protect against the second occurrence—rising prices—and that is exactly what we’ve seen in recent weeks. A grower’s price insurance guarantees that when the market rises above an agreed upon level, the difference is paid back to the grower. For example, if the contract price was $1.15 and the market price is $1.90, the grower receives an insurance payout for the 75-cent difference.

Using it for the benefit of producers 

Sorting ParchmentWhen Sustainable Harvest began instituting origin-based risk-management training five years ago, the goal was to increase growers’ understanding of the complicated C-market. One lesson covered in the risk-management trainings was the value of price insurance, but the concept took some time for growers to latch onto—in a tight market where every dollar counts, some growers were hesitant to take on extra costs to pay for price insurance.

Sustainable Harvest® works with its growers to help them understand the benefit of the protection, but deciding to take on the premium is not just up to those two parties—the roaster buying the coffee also has to agree to price insurance, as the grower, importer and roaster all share its cost. While roasters have their own price insurance that protects them when the market goes down, they also have reason to support price insurance for their growers—once they agree to a set price in the contract, they can set their margins and rest assured that their growers won’t default on the coffee because the price insurance covers them.

Producer w:bagsThe vast majority of cooperatives and other producer organizations that Sustainable Harvest® works with agreed to take out price insurance on their contracts for this harvest, and the decision has been paying off dramatically. As the C-market price has swung upward, many producers have redeemed their insurance payout for tens of thousands of dollars. In the first six months of 2014, Sustainable Harvest® expects its growers will collectively receive more than $1.5 million from price insurance.

A wise investment 

While price insurance is not a new concept, using it to the advantage of growers is a novel approach. By allowing coffee producers to participate in the futures market, Sustainable Harvest® is helping them increase their ownership of the product. And the payouts that farmers receive through price insurance will allow them to reinvest in their crops, in turn ensuring a sustainable supply for years to come.

Topics: Coffee, Market Conditions, News