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2.6 The Effect of Policy Reforms in Producer Countries
Fair Trade:Overview, Impact, Challenges
Annex 3: Case Study - Coffee in Tanzania
The liberalisation policies adopted in some coffee producers (most of them in Africa)
have had an impact on producer prices. It can be argued that the increased
competition through liberalisation has led to a reduction in taxation and marketing
costs and to a higher proportion of the export price being received by growers. In
addition, producers now receive prompt payment for their crop in cash, whereas in
many producing countries before liberalisation, farmers had to wait many weeks, if
not years in certain cases, to receive full payment. Following liberalisation, producer
prices are much more flexible in their response to international price movements. This
suggests that producers can benefit in times of rising prices but will face a reduction
in their income as international prices fall 6 .
2.7 Mechanisms to Manage Price Risk
In general, exporters and local traders in the coffee market face three types of risk:
♦ Price risk - that the price of coffee may fall between the time of buying it and
selling it;
♦ Performance risk - that a supplier will renege on a contract, will deliver late, or
deliver sub-standard quality; and
♦ Differential risk - that the price difference between the futures market and the
specific coffee being sold by the exporter changes between the time of buying the
coffee and selling it.
Farmers face four main risks:
♦ Price risk - that the price which they realise for their coffee differs significantly
from the price signals prevailing when the farmer takes decisions to invest time
and money in coffee production;
♦ Disease risk - that crops may fail because of blight, fungi, insect attack, tree die
back etc.;
♦ Quality risk - that the value of the crop may fall due to reduced quality; and
♦ Weather risk - that crops may fail because of frost, drought.
Regarding the management of price risk, exporters who are either subsidiaries of
international coffee traders or clearly linked to them use the New York or London
futures markets to hedge their risk. However, small local exporters tend not to hedge
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However, the distinction between countries which are small and large producers is important. In the
case of countries which are small coffee producers, falling international prices can be particularly
hazardous as traders may decide not to export and concentrate on the marketing of other crops. A good
example of the above situation is the Ghanaian coffee sector in 1996 when exporters, in the light of
falling coffee prices, resorted to purchasing cocoa for sale on the domestic market and did not consider
trading coffee.
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