2. The role of farmers’ associations in commodity price risk management and commodity collateralized finance in developing countries. UNCTAD, Commodities Branch Olivier Combe, Lamon Rutten

3. What is price risk? For a producer it is the eventuality that prices will decrease at the date of sale For a buyer it is the eventuality that prices will increase at the date of purchase Lower incomes

4. Less protection against price risk Higher domestic price fluctuation The reasons which explain that agriculture in developing countries is facing price risk. Liberalization trend Structural adjustment plans GATT agreements Borders more permissive Lower budgets for agriculture Disappearance of marketing boards Higher price risk

5. Farmers ’ problems Urgent need of cash-flow Difficulties of warehousing Immediate sale after harvest Lower price due to : -counterparty risk is high -information non available -bad quality of products -supply in excess -weak competitiveness for purchase too few warehouses expensiveness social pressure unusual former loans taxes incomes 1 or 2 times a year next campain social constraints & High price risk

6. To guarantee sale price before harvest even before tilling Price risk management tools At delivery payment up to 80% of the final value To fix a profitable price before the sale Price risk management may solve some farmers’ financial problems Solutions: To fix a profitable sale price Urgent need of cash-flow allows Producer Association Future sale Producer Association Instantaneous delivery

7. Solutions : Easier access to credit for the borrower and less risky for the lender thanks to warehouse receipts. Delivery of harvest Issue of a receipt which indicates: -quantity -quality Production of the receipt as collateral Agreement, harvests stocked will be realized after loan repayment Commodity collateralized finance may solve some farmers’ financial problems 12345 Urgent need of cash-flow Loan to farmers Bank Borrower producers’ group seller miller Warehouses insured accountable for stocks private or public

8. Delivery of harvest Issue of a receipt Receipt as collateral Mandate to release the stocks for the buyer Buyer Sale of the stocked harvest in accordance with the receipt Payment to the lender bank Payment of the rest after reimbursement of the loan Solutions : Warehouse receipts are negotiable 123 Urgent need of cash-flow Loan to farmers Bank Commodity collateralized finance may solve some farmers’ financial problems 4 Borrower producers’ group seller miller Warehouses insured accountable for stocks private or public

9. Price risk management with a farmers’ association and a bank involved AssociationBank Farmer Delivery of harvest Payment up to 80% at delivery National or foreigner futures markets Over the counter market Hedging of price riskHigher payment at delivery Forward delivery contract Hedging on the future market: -purchase of puts -futures contracts Sale of a ‘price insurance’ OR Price insurance or forward delivery contract Allow

10. Public Example of a futures market and its components Brokers Clear brokers’ accounts Clearing house Market floor Trade according to their client’s mandate Control trades and prices Give mandates of purchases and sales Convey orders from the clearing house Public is: -speculators -bodies which hedge -arbitrager Roles of equal significance Counterparty risk is absent from futures market

11. Public Brokers Clear brokers’ accounts Clearing house Market floor Control trades and prices give mandates of purchases and sales Convey orders from the clearing house Requirements to use the market: Example of a futures market and his components - have a broker - have the legal right to deal in futures market - have sufficient cash-flow ? Bank Trader Association Farmer Governmental or para- governmental body Trade according to their client’s mandate

12. Benchmark place for prices Necessary environment for a sound use of such tools Futures market Spot marketAssociations Government Banks Competitive Numerous actors Liquidity thus Information available universally and on a minute to minute basis Democratic Aware of their members (standard of living, production..) Dynamic Uncorrupted Sufficient training Reliability between actors (to limit counterparty risk) Interested in financing agricultural sector Efficient Correlated Appropriate infrastructures for trade Have to promote above points by adapting laws,... Ready to invest in terms of training, involvement in markets,etc. Essential:

13. How may farmers’ associations do to improve systems Training farmersLimiting counterparty risk Acting as an intermediary in warehouse receipt’s system Providing price risk management opportunities How to trade Importance of quality What are loan contracts How to hedge By applying social punishment to unreliable farmers Indicating dishonest traders Acting as a trader or a seller what improves reliability in trades Associations with an adequate size can hedge their risk by themselves (enough cash-flow, reliability, volume to trade, etc) Local banks are needed for smaller associations. In that case the role of the association is limited to strategic choices (which type of hedging, what volume will be hedge, etc) and not to technical choices. By supplying an appropriate framework: : - negotiating contracts with the lender - selecting participants - managing formalities in order to incite banks to lend -borrowing itself on behalf of all its members Association

14. To improve agricultural area means: Knowing how to face the risksEasing finance Building efficient market’s infrastructures Stressing reliability between actorsTraining actors Informing decision makers about the real opportunities of these solutions Adapting institutional framework

15. Sponsorisé par la CNUCED

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