Jun 06

A drizzle in Brazil sends thousands of farmers weeping

That is how the prices seem to be moving in Arabica coffee. Picture this: there is small rain in Brazil and the crop consultants’ talk about a good coffee crop, world’s coffee supply seemingly increase and consequently global coffee prices fall in New York’s future market. Across the world, coffee traders release new reduced coffee prices and finally the farmers in the coffee growing countries wonder what just happened!?. The coffee farmer is left wondering how come the price changed so rapidly for the same coffee bean that he has been safely guarding in his house. Apart from daily fluctuations, long term fluctuations are a big decision making criteria for farmers. A sample price data for India is shown below to indicate the huge fluctuations in coffee prices in the country:

Table 1 Arabica coffee price trend

Month, Year INR for 50kg bag of coffee
Nov, 2013 6,500
Nov, 2014 11,000
Nov, 2015 7,500
Nov, 2016 8,000

An Agri-commodity price fluctuation, like the above example, is commonplace in almost every crop and every farmer’s worry is the price that she/he will secure at the end of the harvest. Price fluctuation in commodities is a complex subject with many factors feeding into the seemingly simple supply and demand logic. It is beyond the scope of this blog to discuss that. However, one of the ways in which farmers can give themselves a better chance of tackling this price risk is through a warehouse receipt system. In this system, the farmer deposits his produce in a warehouse and uses the warehouse receipt as a collateral to access finance from banks and other financial institutions. This ensures that the farmer can access funds while retaining ownership of the produce and at the same time keep tracking the price in the market and decide to sell the produce when the price seems favourable. This system provides the farmer an extended time period to weigh the price risk and possibly access a better price during that time period. It is not a 100% solution as the farmer will definitely have to sell the crop before its quality is compromised with and given the uncertainty of pricing, while the crop is being stored.

While the warehouse receipt concept has been implemented in India for many years, there is plenty of scope for introduction of the same in other countries with emerging economies. Even in India, while the systems and institutions are in place, it is mainly being used by traders for accessing working capital. In recent years, Indian farmers seem to be catching up with new companies like Origo coming into the picture. The farmer has to weigh the costs and benefits of going for such a sale. The costs include transportation to the warehouse, the storage, interest on the funds, quality deterioration and other sundry. The benefit is only a potential opportunity to tap into higher prices if and when the market prices pick up. The hassles of going through this mechanism for an illiterate or semi-literate farmer are very high.

The recent government initiative of digitizing all the agricultural markets is a step in the right direction for farmers to access wide market information more easily. The hope is to have seamless digital systems and information platforms through which our farmers can tackle the price risk effectively.

Vignesh V. J.

Vignesh V. J. (Vignesh) is a Manager with International Development team with expertise in grant writing, project conceptualization and implementing large projects in the international development space. He is very active in creating linkages with global funding bodies and creating large consortiums for project implementation. Vignesh has over 7.5 years of experience working across geographies such as – Zambia, Mozambique and Ghana in Africa and Papua New Guinea in the pacific islands. Vignesh brings his academic excellence in MBA from IIM Indore and a graduate degree in Mechanical Engineering from IIT Madras.

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