High-Risk, High-Reward: Partnering for Innovation Launches New Partnerships to Support Coffee Producers Manage Price Risk
The COVID-19 pandemic has brought increased attention to the risk associated with the volatility and fragility of global food supply chains. Smallholder coffee farmers understand this risk and the impact it can have on sales, household income, and food security because they, like other smallholder producers of high-value commodities, grow their crop in a world of risk. Among the many threats they face is price volatility, which like adverse weather, pests, and disease, can quickly undo the promise of a successful growing season.
Located far from international coffee markets, smallholder producer organizations (SPOs) and their farmer members face significant challenges in setting prices for their coffee. As a result, they are regularly exposed to the risks associated with fluctuating coffee prices. Ill-equipped with information and approaches to effectively manage these risks, SPOs often struggle to react strategically as the market rises and falls over the course of even a single day. A slight price change in the local and futures coffee market can have a severe impact on these producer groups, resulting in lower incomes for farmers.
With support from USAID’s Bureau for Resilience and Food Security, Feed the Future Partnering for Innovation has recently partnered with two organizations – Farm Africa and Oikocredit – to provide SPOs in key coffee-producing countries with access to the knowledge, tools, and financing necessary to effectively manage these risks:
- Farm Africa and partner Root Capital will conduct a training program for 30 SPOs in Uganda, Rwanda, and the Democratic Republic of the Congo on price risk management strategies. Through these trainings, SPOs will learn how to mitigate their exposure to volatile prices in the coffee market and foster more stable incomes for smallholder coffee farmers. Trainings will be tailored to country contexts and the price risk management competencies of participating organizations. SPOs that complete the program and demonstrate improved price risk management capacities will be considered for loans from Root Capital.
- Oikocredit will train ten smallholder SPOs in Peru on managing price volatility in the coffee market and develop a customized information dashboard to help SPOs determine their price risk exposure. The dashboard will pull data from the SPOs’ existing management systems to deliver a real-time open position that can inform pricing decisions. SPOs that successfully complete the training and demonstrate improved price risk management capacity will receive consideration for options financing from Oikocredit.
Through these partnerships, SPOs and their coffee farmer will emerge better positioned to reap the benefits of this high-reward crop while also becoming better protected from its associated risks. This is particularly critical during periods of prolonged low prices, as was evident in 2019 when world coffee prices sunk to historic lows. The use of management tools and financial instruments to mitigate such risks, such as the customized information dashboard Oikocredit plans to develop, can significantly aid SPOs in meeting coffee production requirements on their contracts and avoid default, as well as deliver stable incomes for their members. It can even help unlock new opportunities by building confidence among financial institutions that investments will function effectively – regardless of whether prices are high or low.