ALL ACP AGRICULTURAL COMMODITIES PROGRAMME. European Commission. ACP Group of States. Market-Based Solutions for Commodity Price Risk Management. +. -. Craig Baker Commodity Risk Management Group, World Bank. Agenda. What Creates Price Risk? Impacts of Price Risk;
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ALL ACP AGRICULTURAL COMMODITIES PROGRAMME
ACP Group of States
Market-Based Solutions for
Price Risk Management
Commodity Risk Management Group,
….. more time between purchases & sales = more risk
African Food Aid $800m in 2006
Burkina Faso -2005/6 - $110m in Cotton Debt
African Food Aid $900m in 2007
Senegal – 2006 - $20m Cotton Debt
What or who is Next?
El Salvador – 2001/2 - $250m Coffee Debt
Can Risk Management Tools Help?
toreplace costly, inefficient, disruptive ex post responses
with cheaper, more efficient, targeted ex ante responses
that stimulate private sector agricultural lending
“Derivatives are financial weapons of mass destruction”
It is not the plain vanilla contracts that Buffet was referring to when making these statements but rather the overall lack of understanding of exposures arising from exotic contracts that are impossible to price and bring about long terms obligations.
We need to demystify risk management and separate it from speculation!
Two main products:
A financial agreement between two parties that gives the buyer the right but not the obligation to buy or sell a futures contract within a specific period of time at a specific price level;
Has an upfront cost – Akin to insurance;
Standardised contracts that specify:
Market Intermediaries (Cooperatives / Buyers / Traders / Processors)
Banks / Financiers
“Risk comes from not knowing what you're doing”
...you (your clients) are at risk and have taken a position
Mark to Market Analysis:
“We should be managing risks instead of managing crises”
Dr. Abera Deressa
Price risk tools if carefully applied may yield: