Just like other agricultural industries, every day the global coffee sector confronts risks that could curb production, diminish potential markets, reduce margins, and even ruin the whole supply chain of growers, roasters, marketers, traders, and exporters. Existence of these risks play a major part in reducing the incentives and willingness of further investment.
The risks can be categorized into:
Developments in weather (droughts, floods, hurricane, cyclone, sudden drop or increase of temperature, frost etc.) pest attacks and disease outbreaks can pose serious risks that can lead to production volatility.
Conducive Business Environmental Risks: Changes in governmental or business regulations, macro-economic environment, political risks, and trade restrictions are some of the important conducive business environmental risks
These risks arise on the market level. This include commodity and input price volatility, and co-contractor default risk. Usually these risks have ripple effects on to the farm gate and thereby affecting all stakeholders.
Although all these risks effect across the supply chain, some actors bear the major brunt. Production risks majorly impacts small coffee growers.
Agriculture, the leading sector of Ethiopian economy, is chiefly characterized by small land holding system and traditional farming techniques. Poor agricultural performance have been the cumulative result of decreased soil fertility, climatic variations, poor infrastructure, environmental degradation and land scarcity. Rural households in Ethiopia exist in a precarious environments. Plagued by various natural and man-made troubles that exposes them to some serious challenges.
For example, high price volatility, low demand and inadequate access to resources leads to market failure for certain products and factors of production. This have a major influence on resource allocation decisions of rural households.
In addition to the risks discussed earlier, there are some other sources of risk for coffee production and marketing. These are changes in climatic conditions and price fluctuations for coffee, both of which have an unpredictable impact on the final output.
Price risks are the most common type of risk, which occurs due to the delay in deciding which plant to crop and the time to harvest it. Obviously, market prices at the point of sale are unpredictable at the time of production decisions. In the coffee producing areas of Ethiopia, coffee production and marketing factors may curtail the rate of coffee production and yield quality.
Such risks are more critical for poor coffee farmers where there is a serious lack of information and restrictions in the market with a time delay between planting and harvesting. This can have serious implications on the life of coffee farmers in many ways such as on their health, their children education, access to food, sanitation, clean water, livelihood insecurity and income.
Due to these frequent economic shocks, many households are often either forced to sell assets or to borrow from local money lenders at very high interest rate. As income hits rock bottom, consumption also takes a hit as the farmers cannot pay for the ever-escalating food prices and medical expenses.
Among other risk factors, drought is major threat to coffee production. Additionally there are other threats like pests and diseases that limit coffee production such as Coffee Berry Disease (CBD), Coffee Wilt Disease (CWD), Coffee Leaf Rust (CLR), and Coffee Insect Pests (CIP).
A major aspect many tend to ignore is the lack of proper infrastructure support for the farmer. To achieve the desired coffee production goal farmers it requires a collective effort on the part of all stakeholders. This include providing marketing, extensions services, credit facilities and training for coffee farmers.
Finally, yet importantly the availability of credit or the lack of it is a serious concern for the coffee sector. Especially during difficult financial times, coffee sector just like any other has experienced tightened credit conditions. Often misguided perceptions of increased risk have led lenders to reduce the number of loans and the value of loans made, to raise interest rates, reduce exposure, and tighten lending criteria and terms and conditions. This credit crunch has severely hit small landholding farmers for whom formal credit is still out of bounds.
During such times of difficulty farmers use up their savings they have accumulated in cash or kind they obtained during good times. If the income shock is of serious nature, then live stocks or other fixed assets are sold to meet expenses. If the shock is too unbearable to absorb by asset liquidation, the next option would be to borrow from rich landlords and merchants with roof top interest rates. Often households are seen reducing consumption rather than selling of their productive assets.
Risk Management Strategies in Coffee Production Areas
Some of the strategies used to manage the above listed risks by coffee farmers include intercropping, shifting or modifying the environment, selling assets, sharecropping, borrowing money from various institutions, uprooting the more risky coffee trees and replacing them by other less risky trees.
Uprooting is often practiced by coffee farmers when income earned from one crop reduces it is often replaced by less risky crops. But this is practiced less in areas of Jimma and Limmu.
Another often employed strategy by farmers to manage market and production shocks are intercropping, a traditional cropping systems used to diversify and increase crop production per unit area of land. Now more and more households in coffee growing areas have begun to plant other crops along with coffee to minimize their exposure to risks that accompany volatilities in the international market price and natural calamities. The rationale behind intercropping is that if one crop fails the other would keep the household running at least partially.
For instance, in Hararge zones coffee is often planted along with cereals, fruit trees and vegetables as a source of food. This is because the climatic conditions of coffee growing regions are also compatible to growing of cereals, fruit trees and vegetable crops.
Co-operative societies are often cited as the best way to improve the small land holder profitability. They provide farmers with improved market access, better input as well as extension services, and a route to achieve sustainable standards. Also, they play an effective role in supporting coffee farmers by providing accurate price information, inputs and capital infusion and transportation services that many small coffee farmers lack. The member farmers are also paid a fair price for their produce.
Kerchanshe Trading PLC as a company see the value behind providing assistance to the producers in managing risk at each and every stage which would ultimately reflect on the quality of coffee that we provide. The assistance are provided through our NGO, the Buna Qela Charity Organisation under the outreach program the ‘Out Grower Scheme’.
Occurrences of risk is often dynamic and hence its management should be an ongoing process. Rather than focusing on one specific risk it would be advisable to focus on a holistic risk management strategy. There are no ready-made solutions available rather solutions should be tailor made, unique and reflective of the existing market and other conditions.
Success in raising farmer incomes and bringing in investment into the coffee sector, is significantly dependent not merely existing environment in the coffee sector but also on the availability of alternatives in opportunities that may be more inviting and this requires a collective effort from all stakeholders.