The dice have no dots
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CTA. 2002. The dice have no dots. Spore 98. CTA, Wageningen, The Netherlands.
Permanent link to this item: http://hdl.handle.net/10568/46481
Internet URL: http://spore.cta.int/images/stories/pdf/old/spore98.pdf
Never genteel, making a living from commodities has now become a hopeless, hurting game. There are three ways out: horizontally,jump, or sit on a hedge.December 2001. The cocoa market of Mbanga, north-west of Douala, Cameroon s major port, is being...
Never genteel, making a living from commodities has now become a hopeless, hurting game. There are three ways out: horizontally,jump, or sit on a hedge. December 2001. The cocoa market of Mbanga, north-west of Douala, Cameroon s major port, is being visited by participants from a CTA seminar on farmers federal organisations. Half a dozen farmers are handing their sacks to the trader s hefty hired hands loading his lorry. 'Quite soon, you won t need to come back at all,' the farmers berate the trader. 'We re getting out of cocoa, losing too much money on it, we got families to feed. We re getting into coffee, much safer.' An argument develops, loading halts, tension mounts, to be broken by two seminar participants who, not unhefty themselves, and uncaring of tearing their painted nails and dresses, heave another sack onto the trader s doubting scales. Hilarity all around. Loading resumes, and the farmers resume their futile attempts to wangle a better price. The switch to coffee is confirmed later by some younger farmers, their tongues freed by the departure of elders and the seminar participants. To a man, they re going to switch to coffee, or move to the city. Later the local extension agent talks excitedly of the need for market information services to nurture price awareness and sound decisions amongst farmers, such as the wish to move to coffee. In his office, Spore 95, with an article about how 20 million coffee producers are desperate to move out of coffee because of falling prices. 'After a two-year free fall that has not yet stopped, farmers cannot afford to produce at these prices.' This sort of confusion, jumping from worse to worst, does not make for an easy analysis of the latest commodity crisis . Go to any market; open any financial newspaper; listen to any campaigning NGO; chat with any minister of finance and within minutes you will hear the words 'commodity crisis'. Has it ever been otherwise? These crises in fact come in cycles often with good years, or decades, as well as bad ones. That, though, is of little comfort when you are a farmer deep in debt, and faced only with more debt. The niceties of the 'commodity price cycle' reported by economic historians mean little when the going is rough and getting rougher. Coffee has witnessed the most dramatic fall in agricultural commodity prices of late, tumbling on average by 70% since 1997. Ah, the deadly average. The average price is based on a basket of all the world s different coffees robustas, natural arabicas, mild arabicas and others and they range greatly in price, depending on where they are grown. Similarly, no farmer is an average, as demonstrated by figures circulated by the Make Trade Fair campaign in April 2002. Quoting a family farm in Kituntu, Uganda, they describe the 83% fall from 1997 prices of 600 Ugandan shillings (about 40 dollar cents) per kilo to 100 Shillings by the end of 2001. The family s children have dropped out of school, to grow vegetables among the coffee bushes. With 5 million smallholders and households, comprising about one quarter of Uganda s population, used to earning their living from growing coffee, the dramatic nature of price fluctuations hits home hard. How will I know? To want to jump into a depressed coffee market, as did some of the cocoa farmers in Mbanga, you have to be pretty desperate. And so you would be, with world prices in 2001 almost 40% lower than in 1998, even though they were still above the record low levels of 2000. Would it help if you knew that the International Cocoa Organization expects cocoa prices to surge upwards by 25% from the 2000 level by the end of 2002, and by 56% by the end of 2003? And that by the end of 2005, they may have fallen again by about one-tenth, to be 40% higher than in 2000? Probably, but who will tell you? These price projections, confusing as they may be, are only tentative and depend on a great many factors. Similar uncertainties hold true for any other agricultural commodity prices, be they for sorghum (relatively steady for the last two years), cotton or groundnuts (steadily downwards). They all matter, in many an ACP country heavily dependent on primary products for export earnings. A change in price has a direct impact on people s lives, whether they produce cash crops or not: in many parts of West Africa, for example, between one-third and one-half of private household expenditure is on basic necessities. Hope is a decimal place These price differences a mere decimal place in an equation for some spell drastic consequences for others, individually and in terms of a nation s economy, even though, as Make Trade Fair claim, 'a Ghanaian cocoa farmer only gets 1.2% of the price paid by a consumer for a bar of chocolate'. It is a bumpy road, and the way ahead is cluttered with the normal risks familiar to a farmer, plus the price risk. Poor weather or lack of inputs may reduce one country s harvest but bumper harvests elsewhere could bring down the average price. Or commodity brokers may push the price up to reap a quick profit. Or consumers, or health regulators, may develop an aversion to a certain product West African groundnuts and the Pacific s kava roots are two such recent victims and force prices down. Or scientists may perfect artificial products and damage the chances for natural ones as seems to be happening with vanilla at present. Call your insurance agent The risks of being a commodity producer are now unacceptable, as prices dive below any person s survival line and the world s various experiments, both national and international, to stabilise prices have been largely abandoned. Which way is out? The handful of standard responses is too little, too late and too unimaginative. Schemes to withhold production and thus force up prices are pushed aside either by competing producers (such as Vietnam with coffee), or by technology which allows processors to stockpile stores longer. Others see hope in niche markets for gourmet organic chocolate from Ghana or exquisite coffees from new producers in Vanuatu, who have to compete uphill with Jamaica s and Ethiopia s specialist brands. Unfortunately, not everyone can niche. No, the missing link, as Spore has said before, is in insurance. For centuries, commodity traders have protected themselves against excessive price fluctuations with insurance schemes. Why not producers? The simplest method is to hedge , minimising losses by counterbalancing one risk with another. Translated literally to field and silo, a producer (group) strikes a deal with a buyer for a minimum price to be paid even if the market price falls further. In exchange for that, they agree on a ceiling price to be paid even if the actual market price goes higher. The deal can be enhanced with bridging credit at reasonable interest, instead from moneylenders. As a concept, it is not at all alien to the canny farmer who knows about spreading risk. In practice, it requires a willingness to pay a premium for such insurance, and financial savvy and ample, sound information. Here there is a key role, perhaps the most challenging of an overflowing portfolio of tasks, for farmers organisations. They should be, proposed the economist Olivier Combe in the mid-1990 s, the link between the farmer and the financial world. The World Bank, often criticised for fumbling self-consciously to keep up with new thinking in development, has launched a novel programme for smallholders and their organisations to have adequate access to instruments for managing their risks in a volatile market. A great many livelihoods and more depend on it. It will take time for the institutions and professions farmer, banker, actuary to get used to being partners, but that is surely a risk worth taking. [caption to illustration] The only time cacao goes up is when it s growing For more information: International Task Force for Commodity Risk Management c/o CRM Group, Rural Development Department, World Bank, 1818 H Street, N.W., Washington, DC 20433, USA Fax: +1 202 477 6391 Email: email@example.com Website: www.itf-commrisk.org