Colombian Coffee Growers Federation to set up new version of Price Protection Contract, a financial instrument aimed at allowing country's producers to protect their income at a specified level
October 9, 2012
– The Colombian Coffee Growers Federation, or FNC, will set up next week a new version of the Price Protection Contract, or CPP, a financial instrument which will allow the country’s producers to protect their income at a specified level, as they will be able to reduce risk against incertitude and take advantage of peaks and volatility of international prices.
At its October 5 session, the National Committee of Coffee Growers approved the Federation’s proposal to update and modernize the CPP, implementing mechanisms which are efficient and articulated to the market reality and creating a completely new and permanent instrument for coffee growers.
With this tool coffee growers will be able to set a minimum income according to the market price of the day they buy the contract, or to prices 10% lower or higher. The cost of every option will be published on a daily basis.
Furthermore, thanks to the Federation’s technological platforms, producers will be able to make this decision from their farms, by using their mobile phones and deducting the instrument cost from their Intelligent Coffee Grower ID Card.
The changes to the current version of the CPP will provide Colombian coffee producers with a mechanism to which they can access in an easy way and which gives them a greater opportunity to insure their farms’ profitability according to their productive and cost structure.
With this financial instrument, producer will be able to buy the option to set a minimum price, as of a 125-kilogram load (1 load = 125kg of parchment coffee), for up to 100% of the estimated harvest value for the second, third and forth month after the date he/she takes the instrument, with a maximum limit of 50 loads per month.
“This way we hope producers can not only optimize their productivity and costs through ongoing and successful plantations renovation programs, but to take advantage of volatility and favorable price situations, which can guarantee them a minimum income to be chosen individually by every coffee grower”, said Luis G. Muñoz, the FNC’s CEO.
By a simple phone call, producers will be able to set the minimum price at which they can sell their coffee
The CPP is designed as a flexible instrument, conceived for over 423,000 of the country’s coffee growers who have an Intelligent Coffee Grower ID Card or Card, and may see in this financial tool an opportunity to protect their income in view of eventual drops of international price or negative variations of Colombia’s peso to the dollar exchange rate.
When making the call from their mobile phones, producers will be able to buy three options of guaranteed price: the current market price the day he/she makes the call, a price 10% higher or a price 10% lower. Each of these guaranteed minimum prices has a different cost or premium, which will be immediately deducted from the Intelligent Coffee Grower ID Card, making this process a transaction that can be concluded without the need to move from their farm. During the call producers will also confirm the price and volume of loads he wants to protect.
As it is about guaranteeing a minimum price through a protection contract, if domestic prices rise at the moment the producer sells his harvest, the option is not exercised. On the contrary, if domestic prices fall, the producer will have a guaranteed minimum price.
“Producers have been carrying out a transformation of their farm’s productive structure through restructuring programs, which will make them more efficient. With this new instrument they will complement initiatives of farm productivity with a sales strategy and the taking advantage of prices that are remunerative at a given point in time, which will allow them to guarantee profitability of their farms,” Muñoz added.
The FNC´s CEO appealed coffee growers to take advantage of using this instrument as a real mechanism to defend their income, and not to turn to coffee retention in their farms or cooperatives, waiting for higher prices.
How the new price protection instrument works?
As an example, if a producer expects to sell his harvest in January 2013 and sees a favorable domestic price situation in November 2012, he can buy the Price Protection Contract, or CPP, in November, thus guaranteeing the minimum price he expects to obtain for his harvest in January.
The producer will be able to buy the CPP from his own mobile phone, deducting the instrument’s premium value directly from his current balance at his Intelligent Coffee Grower ID Card.
If the producer decides to protect the price of his harvest for January with November prices, he will only be able to protect a top limit of 50 loads of dry parchment coffee per available month, an information which will be confirmed via the Coffee Growing Information System, or Sica.
If at the moment the producer sells his harvest in January domestic prices have evolved favorably, he may take advantage of higher prices and not exercise his put option. On the contrary, if prices fall in January the producer will be able to obtain the CPP compensation and effectively sell his coffee at the contract prices chosen in November.
“For this example, the best scenario for a producer is that prices climb and he can sell in January better than in November. It is worth to remind 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 risks. With current volatility of markets, the risk of having unfavorable price situations at the moment of selling the harvest is not minor,” said Julián Medina, the FNC’s Chief Financial Officer.
To get his protection contract paid, producer will have to show, through an invoice or an equivalent legal document issued by a formal buyer that he sold his coffee in January at a price effectively lower than the protected price. The producer will be recognized the difference between the chosen protection price and that of the sale invoice. This amount should not be higher than the difference between the protection price and the monthly average current Price Index published by the Federation at the moment of issuing the invoice.
“We continue to promote instruments which allow producers to sell their harvest at a price that each one estimates is favorable, according to his particular production costs; and this way we give him the opportunity to take advantage of high-price situations,” Medina concluded.