Coffee Board nixes options pricing strategy

The Gleaner – Jamaica - Friday | October 18, 2013

Risk-management training delivered by the World Bank has assisted in sensitising the group to the need for diversified markets given the price volatility of coffee, says the Coffee Industry Board (CIB).

Coffee producers were advised that they could hedge against falling coffee price by taking up positions in the coffee futures market. They can also sell coffee contracts in the futures market to cover the quantity of coffee to be produced.

However, Dave Gordon, senior information officer at the CIB, said the commodity board has no cause to apply such price-management strategies because it deals in a niche market product - Jamaica Blue Mountain coffee (BMC) - that is not traded on commodity exchanges.

CIB operates both as a regulator of the coffee market and marketer of the product.

The exposure to options trading was good information, "but BMC does not relate to futures and hedging. It's a premium product and scarce. Even when Japan is taking less it is still low in supply," Gordon said.

The World Bank seminars were delivered under a three-year project for improving agriculture risk management in the Caribbean, which ended in 2012.

The information officer said that local farmers had learned to spread their risk by organising groupings of family-run farms to sell to several buyers.

"When they are out there in the field transacting at the depot, they are not selling all their coffee to one man. They select a number of processors and coffee traders, so that if one develops cash flow problems they will have some income," he said.

World Bank training was conducted in five modules: understanding price risk and its impact on operations; risk assessment and break-even analyses; physical coffee contracts to manage price risk; hedging and options contracts; and integrating a price risk-management programme into business operations.