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Humboldt-Universität zu Berlin - Lebenswissenschaftliche Fakultät - Quarterly Journal of International Agriculture

Quarterly Journal of International Agriculture No. 2/09


From auction market to Commodity Exchange:
managing coffee price risk in Ethiopia

Kindie Getnet
Ambo University College, Ethiopia


Abstract

Prices of export commodities are subject to extreme volatility with considerable impact on the level of uncertainty and risk that producers and traders face. Market based instruments are generally recommended as better risk management strategies under such circumstances. As Ethiopia plans to move from the current spot auction system of coffee marketing to a commodity exchange system, it becomes necessary to understand the pattern of coffee price volatility in order to know whether the commodity exchange system would be more feasible as a better risk management strategy. Investigation of the volatility pattern of auction prices of export coffee using Autoregressive Conditional Heteroscedasticity (ARCH) modeling techniques provides evidence of time-varying volatility in the prices of washed coffee though volatility pattern seems stable in the case of unwashed coffee. Thus, the potential advantage of the commodity exchange system in terms of better information arrival, availability, and dissemination, together with a better price discovery mechanism, all necessary to trade different market derivatives in a situation of time-varying volatility, makes it advisable to trade coffee under a commodity exchange system.

Keywords: coffee, spot auction, ARCH, Commodity Exchange, Ethiopia

JEL: Q13, Q18

Vol. 48 (2009), No. 2: 113-134