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How Coffee Farmers Can Hedge Against Prices Risks

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By Nelson Mandela Muhoozi

As a coffee trader, knowing when to sell, and going above or below a certain price in the market determines how long you can survive in the business according to Wilber Kayonga, Business Advisor at Agriculture Development Center.

Kayonga says the latter is the reason Uganda’s coffee industry is dominated by majorly foreign-owned subsidiary companies, as these have experience when it comes to price risks.

According to him, subsidiary coffee businesses make up almost 80% of coffee traders leaving just 20% market share for the local Ugandan organisations and cooperatives participating in the international trade.

For Ugandan-owned coffee businesses to thrive, Kayonga says there is a need to train them in various market aspects including; better bargaining skills, price hedging, and how to secure contracts to their advantage.

If well trained, Kayonga says local coffee players can increase their market share on the international Market, and even get better prices.

In addition, Kayonga said at a training of coffee farmers and exporters that coffee traders need organisational skills. 

“There are about 80 enlisted coffee exporters in Uganda. However, only 30 to 40 are active in the market. Where are the rest?” Kayonga lamented.

Even more worrying, Kayonga adds that of the 30 or 40 active market players in Uganda, only about 10 companies are locally owned.

Nevertheless, to scale coffee organisations and cooperatives to be able to increase their market share, he said there is a need to familiarize them with knowledge of how the international coffee business works.

Kayonga says coffee organisations need to acquire skills in monitoring tools, understanding different markets, and how niche markets work.

“Most of the organisations in coffee work the conventional way, but there are other differentiated markets that they can take advantage of to secure more premiums above the conventional prices. Niche markets where coffee exporters can leverage include fair trade, UTZ, and Rainforest Alliance, among others,” he said.

Kayonga said, “For instance, to succeed in value addition, there is a need for financing and many of our institutions don’t know what is required by financial institutions when considering who to finance.”

“Therefore, how you best prepare your business or cooperative and how you get into certification schemes so that you are prepared to penetrate the speciality market and how you prepare speciality contracts determines your success in the market,” added Kayonga.

According to Dr. Fred Kawuma, a coffee trader, coffee farmers need to also learn the trend of the coffee business and what the global coffee players are doing differently so that they can learn from them.

“Following the trends means you have to care as a coffee producer, what is happening on the international price in terms of what affects local prices so that you can hedge against loss with global foresight,” he said.

Kawuma says this goes as far as how you prepare your local contracts, both for export deals and financing. 

Even more important, he adds, is understanding the different financing products that you can leverage as an institution and which kind of contracts you should avoid because if you need pre-financing, sometimes the clauses in the contracts may not favour.

“Additionally, quality is one of the areas that you can master so that you get over and above what the market can offer. It is very important to therefore understand quality not only from the exporter’s perspective but also producers’ perspective,” said Kawuma.

Kawuma added, “Quality has to begin from the farmer. Understanding the process that leads to quality, and avoiding quality claims in your cooperative puts you in a better place to ask for better prices.”

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