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