Victims of exchanging currencies – who should take on this risk?

Imagine that you are a small-scale coffee farmer. You would constantly have to deal with many factors that can affect your production, your price and, ultimately, your profitability. Part of your job would be to find ways to manage and if possible mitigate the risks that your business faces. However, as a small farmer, what tools would you have to manage your market and currency exposure?

Victims of Exchanging Currencies – Who Should Take on this Risk?

Imagine that you are a small-scale coffee farmer. You would constantly have to deal with many factors that can affect your production, your price and, ultimately, your profitability. Part of your job would be to find ways to manage and if possible mitigate the risks that your business faces. However, as a small farmer, what tools would you have to manage your market and currency exposure?

   2 Minutes Read

By Giancarlo Ghiretti
Co-founder and CFO
  • We all know that growing coffee is a risky proposition. Imagine that you are a small-scale coffee farmer. You would constantly have to deal with many factors that can affect your production, your price and, ultimately, your profitability:
  • - Unpredictable weather
    - Pests and diseases
    - Availability of labor
    - Currency changes
    - Access to market
    - Access to finance
  • Part of your job would be to find ways to manage and if possible mitigate the risks that your business faces. To this end, you would plan for worst case scenario weather patterns, you would make sure that you eliminate weeds, and that you fertilize and spray your trees so they are healthy and productive. However, as a small farmer, what tools would you have to manage your market and currency exposure?

    The US Dollar is the de-facto currency for buyers and sellers of green coffee. The large majority of coffee transactions are denominated in this currency. However, most coffee producing countries do not use the US dollar as their local currency. In Latin America (where we operate) we have the Mexican Peso, the Guatemalan Quetzal, the Nicaraguan Cordoba, the Colombian Peso and the Peruvian Sol. In each of these countries the internal market for coffee operates in the local currency, farmers sell and are paid for their coffee in their local currency, depending on the value of the USD at that moment in time. Ultimately, farmers need to sell their coffee in the local currency to then pay their workers, purchase inputs and spend locally.

    This creates a daily risk for coffee farmers, as the amount of money that they will be paid for their coffee depends not only on the volatile C market, but also on the volatility of their local currency. How can a farmer be certain as to how much their coffee will be worth in local terms?

    Let’s summarize some of the ideas to tackle this issue:

  • 1. If coffee farmers were to price their coffee in USD and then be paid the converted USD amount at the time of sale, farmers would have certainty of their price in USD but no certainty of their local price. In this case, all the currency risk is taken on by the farmer.

    2. Coffee farmers could sell their coffee in local currency, therefore transferring the risk of foreign exchange to coffee roasters. This could potentially work, BUT:

    • It would leave the roaster with a large risk for which he or she probably has limited understanding with no hedging tools to manage it.
    • There would also be issues as to how the roaster would pay the farmer in their local currency in a cost-efficient and timely manner.
    3. Farmers could hedge their foreign currency exposure, either via a coffee exporter or directly with a bank or other FX operator. This is the ideal scenario, as the farmer would have control of how much FX exposure he or she is willing to take on.

  • Typically, small coffee farmers have no other option but to opt for option 1, which carries the highest degree of risk and uncertainty. Option No. 3, while clearly the best, is generally not always available to small scale farmers, who often have little or no knowledge of this option, are unlikely to have the appropriate technology or would face very high transaction costs to carry it out.

    Part of our work at Caravela is to help build bridges between roasters and farmers, while adding value in the supply chain. We help farmers minimize their currency risk by guaranteeing prices in local currencies in many of our origins, managing the FX exposure on behalf of farmers and roasters. This work creates stronger and more transparent partnerships between farmers, exporters, importers and roasters.

Was this interesting? Grab a coffee and pick another from the articles below

A Tale of Two Customers: Caravela Coffee and the Rethinking of the Coffee Import Model

A Tale of Two Customers: Caravela Coffee and the Rethinking of the Coffee Import Model

Arriving at a price

Arriving at a price

Rich Farmer, Poor Farmer

Rich Farmer, Poor Farmer

Low Prices, Risky Times

Low Prices, Risky Times

Making it Work as Well as it Can

Making it Work as Well as it Can

Discovering the Source

Discovering the Source

A Mutual Evolution: Caravela Nicaragua’s William Ortiz, on helping people grow coffee, and how coffee helps people grow

A Mutual Evolution: Caravela Nicaragua’s William Ortiz, on helping people grow coffee, and how coffee helps people grow

The High Price of Getting the Best from Ecuador

The High Price of Getting the Best from Ecuador

Victims of Exchanging Currencies – Who Should Take on this Risk?

Victims of Exchanging Currencies – Who Should Take on this Risk?

A Pilgrimage to the Future

A Pilgrimage to the Future

Why We’re Investing in World Coffee Research?

Why We’re Investing in World Coffee Research?

The Making of a Champion

The Making of a Champion

Peru, an Unpolished Diamond in Coffee Production

Peru, an Unpolished Diamond in Coffee Production

Investing in Education: Investing in People

Investing in Education: Investing in People

How Roasters Can Influence the Supply Chain

How Roasters Can Influence the Supply Chain

Aromas: More than Just a Coffee Competition

Aromas: More than Just a Coffee Competition

FOB vs. EXW – Two Buying/Shipping Methods for Your Green Coffee

FOB vs. EXW – Two Buying/Shipping Methods for Your Green Coffee

Checking Your Cultural Bias at the Door

Checking Your Cultural Bias at the Door

Sample Roasting vs. Profile Roasting

Sample Roasting vs. Profile Roasting

How to Keep Records of your Costs of Production?

How to Keep Records of your Costs of Production?

¿Cómo llevar un registro de costos de producción?

¿Cómo llevar un registro de costos de producción?

Why and How to Estimate Costs of Production in a Coffee Farm?

Why and How to Estimate Costs of Production in a Coffee Farm?

¿Por qué y cómo estimar los costos de producción en una finca cafetera?

¿Por qué y cómo estimar los costos de producción en una finca cafetera?

Supply Chain Logistics – The Clockwork of Coffee

Supply Chain Logistics – The Clockwork of Coffee

1st SEMESTER HARVEST 2018 SURVEY

1st SEMESTER HARVEST 2018 SURVEY

Forecasting Green Coffee Purchasing

Forecasting Green Coffee Purchasing

From Origin, With Love

From Origin, With Love

2017 Greenhouse Gas (GHG) Emissions Report

2017 Greenhouse Gas (GHG) Emissions Report

How Joe Coffee and the Guarnizo family work together to ensure everyone wins

How Joe Coffee and the Guarnizo family work together to ensure everyone wins

2016 Belgravia Fermentation Experiments

2016 Belgravia Fermentation Experiments

Impact Report 2017

Impact Report 2017

Impact Report 2016

Impact Report 2016

Drying in Peru: the Final Step in Quality Improvement

Drying in Peru: the Final Step in Quality Improvement

Passion for Coffee: Nicaragua

Passion for Coffee: Nicaragua

Passion for Coffee: Guatemala and Salvador

Passion for Coffee: Guatemala and Salvador

“Despacito”: How Coffee Should Be Dried

“Despacito”: How Coffee Should Be Dried

Why we are a B-Corp

Why we are a B-Corp

Specialty Coffee Thought Leaders: Interview with Alejandro Cadena

Specialty Coffee Thought Leaders: Interview with Alejandro Cadena

Partner Farm Purchasing and How it Impacts Sustainability

Partner Farm Purchasing and How it Impacts Sustainability

Pedro Claros and Has Bean: The Story of a Thousand Samples

Pedro Claros and Has Bean: The Story of a Thousand Samples

How One Roaster Can Impact a Whole Community

How One Roaster Can Impact a Whole Community

When is it time to harvest?

When is it time to harvest?

Just In Time Inventory

Just In Time Inventory

Baristas Are Your Final QC Check

Baristas Are Your Final QC Check