The Climate Effect on Colombian Coffee Prices and Quantities Based on Risk Analysis and the Hedging Strategy in Discrete Setting Approach

Abstract

This paper provides a risk-hedging strategy for coffee markets including climate impact in the context of Colombian Coffee producers, companies, regulators, and policymakers. From the intermediaries' perspective, we present a hedging price and quantity risks using financial instruments based on price and weather variables (El Niño and La Niña phenomena). The coffee price and quantities produced are mitigated by the inclusion of climatic variables in two ways: first, through analysing the changes observed in the forward curve against spot price measuring the deterministic effect, known in this market as the forward risk premium. Second, including the weather index in the hedge structure on price and quantity in the coffee market improves the agent's result; this latter aims to improve the hedging claim's performance due to the link between demanded volume and weather-linked index. An experiment shows the strategy profit over the best-performing claim price derived only and without hedging.