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It has become an ongoing debate whether Indian commodity futures markets can accommodate farmers. The purpose of this paper is to examine whether Indian commodity futures markets help rationalize farmers’ price expectation. The study starts with questions on the efficiency and other roles of commodity futures markets.

From a sectoral standpoint and economic importance, the study considers pepper, coffee, and natural rubber (NR) futures and spot markets. The efficiency of futures markets, divergence/convergence and causality between futures and spot markets have been studied by employing co-integrations, error correction and causality models. The sample period of the data are taken from the inception of futures trading. These three commodities are also compared on the basis of trading at the futures markets vs spot markets.

Analysis shows that though pepper futures market is informationally efficient in price discovery, while coffee and NR spot markets do the process faster. Pepper and coffee futures and spot prices exhibit the convergence; NR shows a sign of divergence. Unidirectional causality from pepper futures to spot market is observed wherein the former was weakly exogenous to the latter and while, bidirectional causality is observed in coffee and rubber. Coffee spot appears weakly exogenous while this remains inconclusive in the case of NR.

The authors analyzed the futures markets in rationalizing the spot market price in three plantation crops in India. In order to make the study more generalizable, further research is warranted in other commodities including those prices of which are government regulated.

The paper is unique in terms of understanding the interaction or interrelationship between futures markets and spot markets and drawing inferences about the role of futures markets in price formation in plantation commodities like pepper, coffee and NR.

Coffee producers typically sell raw coffee beans as the first step in a global value chain. Recently, groups of producers have formed coffee cooperatives that attempt to regain market power by integrating the other steps of the value chain. This study uses matching to estimate the effect of membership in one such cooperative on the household economy of indigenous coffee producers in the state of Chiapas, Mexico. It contributes to the literature by considering new determinants of participation and outcomes of interest. First, social capital at the individual and village level is correlated with cooperative membership more than other demographic factors. Second, cooperative members report an increase in the share of coffee sold and income from coffee sales but not in per-kilo price or total income. These two results reflect particular features of the Chiapas reality and the desires of the indigenous people the cooperative serves. Thus, they reiterate the importance for economic development projects to consider the context of their interventions.

This study aims to examine the transmission mechanism of factors on the characteristic fluctuation of Vietnamese coffee bean export price (PVN).

Applying Markov switching–vector autoregressive model.

Significantly, the empirical results showed that the transmission of independent variables on PVN is non-linear, and the fluctuation of PVN is affected by many factors, especially PVN in the previous period. In addition, the effect of Robusta coffee price was the greatest with coefficient is 0.28785, and the correlation between PVN and it was also the highest in both regimes with coefficients are 0.5317 and 0.3959, respectively.

These obtained results are in accordance with reality, as Vietnam is the largest exporter of Robusta coffee in the world.

Since fairtrade labels are upcoming market instruments, the purpose of this paper is to identify and quantify consumers’ willingness to pay for fairtrade coffee products and tea. Thereby, this paper contributes to the discussion in favour of a non-private regulation of ethical food labels (FLs). Moreover, the paper provides information about the consumer behaviour of the German buying public.

The empirical analysis is based on homescan panel data of 13,000 representative German households, which includes actual purchase data of ground coffee, single-serve coffee, espresso, and tea for a five-year sample period from 2004 to 2008. As a methodological approach, the hedonic technique is used to model coffee and tea prices as a function of time, store, and product characteristics.

Regarding the variables of interest branding a product leads to an average price premium of 22.1 per cent, while the organic FL achieves an average price premium of 34.3 per cent. The highest average price premium of 43.1 per cent is ceteris paribus paid for fairtrade labels. In the case of fairtrade labels, tea products earn the highest implicit prices with 74.0 per cent, followed by ground coffee (54.9 per cent), espresso (24.7 per cent), and single-serve coffee (18.9 per cent).

The present analysis supplements the discussions around the willingness to pay for fairtrade certified products by the German buying public, a product differentiation between coffee products and the introduction of labelled tea. As the data set includes daily purchases, it allows analysis of consumer behaviour on a disaggregated level, given detailed information on prices, stores, origins, FLs, and so on.

An important characteristic of Fair Trade products is that a fair price is paid to the producer. At the same time the Fair Trade system is accused of being inefficient with respect to the distribution of the price premium paid by consumers along the supply chain. This study aims to focus in particular on consumers' perceptions of fair pricing. Besides, the paper seeks to assess the extent to which consumers' expectations are somehow anchored in or in accordance with reality in Germany in 2007.

To get insights into German consumers' perception of Fair Trade a consumer survey based on face-to-face interviews with n=484 participants was conducted in 2008. To approach the profit distribution along the Fair Trade coffee chain a web-based market investigation was performed.

One important result is that most of the consumers actually narrow Fair Trade down to the issue of paying fair prices to farmers. The comparison of the efficiency of the Fair Trade system that is requested by the study participants (measured as the share of an additional euro paid for a Fair Trade product) and the point of sale calculations (revealing the percentage of the retail price going to the producer) indicates that for 60 percent of the respondents a calculated share of 50 percent reaching the producer would not be high enough. Results reveal that 10 percent of the respondents require a minimum share of 90 percent of the retail price to reach the producer. A total of 23 percent are satisfied with 80 percent; 60 percent of the respondents want that more than 50 percent of an additional euro spent reaches the producer. Only 4 percent of the participants are willing to accept an efficiency of less than 20 percent.

This is the first paper not only investigating how much of the price premium paid by consumers reaches the Fair Trade producers but also delivering insights regarding how much of the price premium paid in the retail store for Fair Trade coffee consumers do request to reach the Fair Trade producer.

The purpose of this paper is to assess the informational efficiency of Arabica (other milds) and Robusta coffee futures markets in terms of predicting future coffee spot prices.

Futures market efficiency is associated with the existence of a long-run equilibrium relationship between spot and future prices such that coffee futures prices are unbiased predictors of future spot prices. This study applies unit root testing to daily data for futures-spot price differentials. A range of maturities for futures contracts are considered, and the study also uses a recursive approach to consider time variation in futures market efficiency.

The other milds and Robusta futures prices tend to be unbiased predictors for their own respective spot prices. The paper further finds that other milds and Robusta futures prices are unbiased predictors of the respective Robusta and other milds spot prices. Recursive estimation suggests that the futures market efficiency associated with these cross cases has increased, though with no clear link to the implementation of the 2007 International Coffee Agreement.

The paper draws new insights into futures market efficiency by examining the two key types of coffee and analyses the potential interactions between them. Hitherto, no attention has been paid to futures contracts of the Robusta variety. The employment of unit root testing of spot futures coffee price differentials can be viewed as more stringent than an approach based on non-cointegration testing.

The main pedagogical objectives of the case are: illustrate how Latin American companies dedicated to the production and harvesting of commodities can be vertically integrated to gain a larger share of the value created throughout the production chain. Understand how futures and options contracts in commodities can be used to hedge price risk on long and short positions in the underlying products. Understand how option contracts add value by hedging risk in those contexts where the counterparty has optionality. Discuss the implications of Fair Trade for commodity traders and producers.

In the case, Hernan Arosamena, CFO of The Specialty Coffee Trading Co. (TSCT), faces the challenge of designing an effective strategy to hedge the price risk caused by the increasing demand of the so-called Fair Trade coffee. Hernan Arosamena decides to review how the company has typically managed the price risk in its business transactions using future contracts to then incorporate the additional elements that trading Fair Trade coffee may entail. The typical price risk hedging strategy involves the use of coffee future contracts in long and short positions to ensure that the company obtains the desired margin in its coffee trading negotiations. To hedge the exposure to the risk of fluctuations in the price of coffee when the company sells Fair Trade coffee requires the additional use of put options.

The case is appropriate for students enrolled in courses or specialization programs at both the undergraduate and graduate levels.

Teaching notes are available for educators only.

CSS 5: International Business.

This paper aims to estimate the welfare effects for Ethiopian coffee producers from eliminating coffee price volatility.

To estimate volatility, the generalised autoregressive conditional heteroskedasticity technique is applied to monthly coffee prices in Ethiopia for the period 1976-2012. To distinguish between the unpredictable and predictable components of volatility, we obtain separate estimates of the conditional and unconditional variance of the residual. This is combined with estimates of the coefficient of relative risk aversion to measure the welfare effects from eliminating the unpredictable component of price volatility.

A key finding is that the welfare gain from eliminating coffee price volatility is small; the gain per producer comes to a meagre US$0.76 in a year.

This has important policy implications for the efficacy of price stabilisation mechanisms for coffee producers, i.e. any attempt to eliminate coffee price volatility at a cost may not be a preferred outcome for Ethiopian producers. The contribution of the paper lies in using the unconditional variance, as it more truly reflects price risk faced by coffee producers without overestimating it.

This study aims to investigate the impact of the Fair Trade label on the market for coffee in Sweden, a country with high public awareness regarding environmental and social matters.

A revealed preference approach is adopted, using weekly scanner sales panel data made available by Nielsen and the Swedish Retail Institute (HUI). The pricing of labelled coffee is studied over the 2005‐2008 period. Hedonic estimates are obtained for what consumers pay for different product characteristics.

Results point to a considerable premium of 38 percent to be paid for Fair Trade labelled coffee in Sweden, underlining high public awareness reflected in the retailers' pricing policy. This estimate is clearly higher than numbers obtained in earlier studies focusing on Italy and the UK.

The study provides information on the existing price differences between labelled and conventional coffee. Its main contribution is the analysis of previously unavailable data material. Based on the obtained estimates, it is possible to identify the relative impact on the market price of the different coffee attributes. The calculations provide a tool for further policy‐relevant analysis of the market in Sweden, but are also useful from an EU‐wide point of view. In the current situation with considerable lack of comparable data‐based results, this study thus adds to enriching the ongoing analysis and debate.

This study investigates the pricing and inventory control decisions of a company that owns a coffeehouse chain providing drip coffee and a coffee manufacturing factory producing ready-to-drink (RTD) coffee. To determine a way to maximize profit, optimal pricing and inventory control strategies are studied for both the RTD coffee as well as the coffeehouse chain network.

It is assumed that the company sells only drip coffee through its coffeehouse chain and would like to launch RTD coffee via other channels such as convenience stores, supermarkets and so on to maximize its total profit. A mathematical model–based optimization is adopted to address the decision-making for the given problem situation, where the demand for both drip and RTD coffee are dependent on the values of decision variables. To solve the proposed mathematical model, particle swarm optimization (PSO) is applied due to nonlinearity of the developed model.

It is confirmed that a company can earn more profit by launching RTD coffee, even though the profit from drip coffee would reduce. In addition, the scenario analysis shows that by launching RTD coffee under various conditions, the total profits would also improve.

The value of this study is the proposed basic framework for the industry. In addition to the modeling framework and cost structure, realistic cost figures and technical details can be considered when applying the model to a practical setting.