October 17, 2012
Colombian Coffee Growers Federation introduces Price Protection Contract for growers
The Colombian Coffee Growers Federation (FNC) announced on 8 October that it will set up a new Price Protection Contract (CPP) to help farmers hedge risks against currency and price fluctuations. The Colombian peso is currently one of the most appreciated currencies in South America. Coupled with the depreciation of the American dollar – the currency against which international coffee prices are set – Colombian farmers have seen the payments they receive for their coffee steadily decline, while costs have increased. The new financial instrument will allow the country’s coffee growers to buy contracts to set a load price for the second, third and fourth month after the date they purchase the instrument. One load equals 125 kilograms of parchment coffee, and farmers will be able to purchase up to 50 loads per month to protect their income when they decide to sell their harvest. “This way, we hope producers can not only optimise their productivity and costs through ongoing and successful plantation renovation programs, but take advantage of volatility and favourable price situations,” says Luis G. Munoz, CEO of FNC. “[This] can guarantee them a minimum income to be chosen individually by every coffee grower.” The proposal for the new financial instrument was approved by the National Committee of Coffee Growers on 5 October. The new tool will set a minimum income according to the market price of the day the farmer buys the contract, or to prices 10 per cent lower or higher. The cost of every option will be published on a daily basis, the FNC said in a statement. Producers will be able to purchase the instruments from their farms, via their mobile phones and deducting costs from their intelligent Coffee Grower ID Card. As the CPP is designed to support the FNC’s goal in guaranteeing a minimum price, if the domestic price rises at the moment the producer sells the harvest, than the option is not exercised. When the domestic price falls, the producer will have the guaranteed minimum price as purchased. “The best scenario for a producer is that prices climb and he [or she] can sell [for example] in January better than in November,” says Julian Medina, the FNC’s Chief Financial Officer. “It is worth a reminder that, as with every protection instrument, the ideal would be not to have to exercise it. But we buy it to have a guarantee and avoid the risks. With current volatility of markets, the risk of having unfavourable price situations at the moment of selling the harvest is not minor.” In a telephone interview with Global Coffee Review, FNC’s Chief Communications and Marketing Officer Luis Fernando Samper said that the financial risk of the new instrument will be unloaded on market players, such as private finance companies and exchange operators.