Truth be told, this is probably the easiest barrier to address. Producer organizations need to understand how price risk affects their business – from the price to purchase coffee from farmers, the rates that their lenders can offer them, to how to negotiate (or not!) the terms and prices for contracts.
If you have been following us in this space, you know that one of the topics that has been at the front of my mind has been Price Risk Management (PRM). PRM refers to a set of strategies and practices for farmer organizations that minimizes the negative impact of drastic changes in the global price of coffee. If you are new to this topic, or want a quick review, I have written several pieces on this topic previously.
A few weeks ago, Oikocredit announced the start of a new, 3-year PRM project funded by the SAFE – Platform, and to be implemented with partner organizations – FairTrade USA, Catholic Relief Services and Keurig Green Mountain. What’s different about this project from previous PRM projects? This project focuses on addressing and overcoming the barriers for producer organizations to design and implement effective price risk management strategies. Through our initial work on this topic, we’ve identified the following three principal barriers.
- Technical knowledge
Truth be told, this is probably the easiest barrier to address. Producer organizations need to understand how price risk affects their business – from the price to purchase coffee from farmers, the rates that their lenders can offer them, to how to negotiate (or not!) the terms and prices for contracts. From this basic understanding of PRM, the next step is to link the management of the organizations’ physical coffee inventory to how contracts are negotiated and fulfilled. The next level of sophistication makes the use of financial tools, basically price insurance, to ensure that if global prices move above or below a certain range, the organization will be compensated.
While everyone in the organization does not need to be fully trained on PRM, the training needs to go beyond just the commercialization officer or the president. Key members of the organization need to be able to understand WHY the organization has act in certain ways and to allow and empower their colleagues to implement PRM strategies, which are often changes to the standard operating procedures. Which brings us to the second barrier, organizational development.
- Organizational Development
The 16 coffee cooperatives that we will be working with are not new to PRM. As I mentioned, previous efforts to improve PRM for producer organizations often have focused on building the technical capacities of these organizations, yet they have often neglected strengthening the capacities of the organization to order to be able to implement PRM strategies.
What does this mean in practice? An organization that can implement PRM strategies is one that has systems and structures in place to enable the design and execution of a PRM strategy from start to finish. There needs to be close coordination between the commercialization team with other members of the management, and with sufficient budget allocated for PRM activities. Organizations that are not developmentally mature enough lack the capability to deal with the complexities inherent in PRM and/or they cannot quickly change procedures or cultures. For the project, we have identified two leading producer organizations who design and implement very sophisticated PRM strategies. These leading organizations will serve as peer mentors and coaches to the other participating organizations and can model how to structure staff and systems in order to successfully design and employ PRM strategies.
- Financial barriers
The financial tools used to mitigate price risk have a cost to the producer organizations. Sometimes these are bundled or included in the cost of coffee, but these are still often borne by the producer organization. Oikocredit is designing a loan product specifically for the purchase of options, or price insurance. I think this is a very innovative approach and addresses a gap. If a producer organization was successfully able to include the cost of the option their contract, the organization will have to carry the cost of the option until they receive the payment for the delivery of the coffee. Or, if the buyer does not agree to pay all of or part of the option (but, really, why wouldn’t you pay to reduce risk of not fulfilling the contract??) the organization assumes the entire cost, which can eat into the very slim cash flow.
By helping to make this less financially painful for the organization, Oikocredit is reducing the risk of default on any other loans that the cooperative has. In other words, by providing the financing for the purchase of options, Oikocredit reduces the risk of any trade finance by helping the organization NOT default on any contracts.
We hope that by addressing these barriers, we can move cooperatives beyond a technical understanding of PRM to the employment of PRM strategies that will help foster greater financial sustainability in producer organizations.
If you are coming to Expo, you can come learn more about this project at our lecture, moderated by Ben Corey-Moran:
Navigating Market Volatility: Price Risk Management in Practice
Saturday, April 22nd @ 10:30 am – 11:45 am
Room TCC Tahoma 4