Small coffee producers in Nicaragua access risk markets

The first international price insurance transaction for small coffee producers in Latin America was implemented last week in Nicaragua, with support from the World Bank’s Commodity Risk Management Group (CRMG), a unit of the International Task Force on Commodities Risk Management in Developing Countries (ITF), which was established in 1999 to find solutions to commodity price volatility in regional markets.

The initial small-scale pilot transaction, which involves 250 coffee producers from the Matagalpa region in Nicaragua, will help to provide income certainty for around 2,000 people through the distribution of vanilla options to the producers. Similar pilot transactions have already been implemented in East Africa.

Fondo de Desarrollo Agropecuario (FondeAgro), an autonomous entity of the Ministry of Agriculture in Nicaragua, supported the transaction, which was placed into the international risk markets by Volcafe, a Swiss coffee trading company that provided logistical and cost support.

“Now a small farmer will be able to reap the benefits of connection with the futures and options markets,” said Melinda Cuellar, executive director of FondeAgro.”

“Local small producers find themselves at a competitive disadvantage to large producers with international links that can obtain credit on good terms and hedge their price risk,” said John Nash, manager of the CRMG at the World Bank. “We hope better access to commodity risk management instruments can help level the playing field."

During the past two years, coffee prices dropped to their lowest levels in 30 years — 100-year lows if adjusted for inflation – due to worldwide oversupply.

Deteriorating economic conditions for coffee producers have been particularly precipitous in Central America, as the drop in the price of coffee also coincides with a drought. Central American countries have witnessed a drop in revenue from coffee exports of US$1 billion over the past two years. Exports for the 1999/2000 crop year were about US$1.7 billion;, last year’s (2000/01) dropped to US$950 million, and this year (2001/02) they are estimated to be US$700 million.