One of the most important agricultural activities in the Ecuadorian economy is coffee production. It is based upon two varieties: Robusta and Arabica. Coffee production chain involves growers, intermediaries and (manufactured and exporting) firms.
Coffee is considered as one of the main agricultural export products, only behind of banana and cacao. In fact, coffee exports have been increasing since 2003. On the other hand, coffee production has followed a decreasing trend since 2002 as a result of more coffee growers taking exit decisions than those that entering the sector, especially during the decade of 2002-2012. Therefore, manufacturing firms import coffee beans from Asian countries due to lack of coffee production in the domestic market.
This declining trend has raised the attention of the Ecuadorian Government, policy makers and economic agents. The Government launched a renewal coffee program to improve coffee production in the domestic market which started towards the end of 2011. With the previously described situation, this thesis evaluates the coffee market situation from an economic perspective, focusing mainly on the coffee growers’ profitability and economic risks. To evaluate the sector’s conditions, the thesis is focused on three separate but closely related topics: first, chapter 2 quantifies the volatility of Robusta and Arabica coffee prices in the domestic market. The chapter tests the existence of asymmetric price transmission from world to domestic market. Secondly, chapter 3 asks whether coffee growers took exit decisions out of the sector during the decade 2002-2012 because of the effects of prices volatility. Finally, the chapter 4 values the use of risk management tools as a mechanism to stabilize the revenues and benefits of coffee growers.
The volatility price level of both coffee varieties (Robusta and Arabica) is quantified with the Autoregressive Conditional Heteroscedasticity (ARCH) model. Price volatility is an important source of risk for the sector which was confirmed in chapter 3. High periods of volatility are found for both coffee varieties. However, Robusta coffee prices have shown a reduction of volatility since 2006, compared with the Arabica variety prices which maintained a high volatile behavior.
The existence of asymmetric price transmission in the coffee market has been tested with a Threshold Vector Error Correction Model (TVECM) for both coffee varieties. The results showed the existence of different adjustment speeds in the two regimes to converge to the equilibrium between domestic and world coffee prices. Additionally, the results showed faster adjustment speed of Arabica prices than with Robusta prices.
To test the Volatility price effects in the exit decisions of the coffee growers, a Real Option Analysis is performed for Robusta and Arabica activity. Results confirm the hypothesis that price volatility drives growers out of the sector in both coffee varieties (Robusta and Arabica). Moreover, simulation results revealed that coffee growers have a high cost of production, compared to the price of the raw product. These high production costs along with volatile and uncertain environments increase the incentives to growers to abandon the activity.
The Ecuadorian coffee grower sector has been on a downturn tendency, as a result of the effects of volatility prices and growing costs; resulting in an uncertain and asymmetry environment. These facts arouse concerns and resulted in the support of the government with the implementation of policies to improve the coffee growers’ revenues and benefits. Also, alternative risk management tools are analyzed due to the limited access to future market in Ecuador. For example, one of the tools the Ecuadorian government launched is the crop insurance to mitigate the production risk.
Chapter 4 proposes a revenue insurance policy as a tool to mitigate the price risk. The study models the benefits of coffee growers with the use of risk management tools and evaluates the efficiency of public expenditure in the use of tools. The result shows that the use of revenue insurance allows growers to obtain greater benefits. From the perspective of the efficiency of public expenditure, the best risk management tool is the revenue insurance. This improves the growers’ benefit and reduces the benefit variability. Therefore, Revenue insurance affords the best private profit returns per unit of government expenditure (subsidy of premium).
The thesis focused on the evaluation of the economic factors underlying the significant downturn tendency of the coffee sector in Ecuador. Its main goal was to contribute to the literature by addressing the effects of price instability and transmission since the world market, and to analyze alternative policies that might help to revert to the declining trend of the sector. In short, the effects of price volatility are the main topic in this thesis. The results of this economic fact confirm the damage to the sector. The Revenue insurance would aim growers to reduce the volatility, so this tool has a more relevance in low price periods and permits growers to get a profitable activity in the long-run.
© 2001-2025 Fundación Dialnet · Todos los derechos reservados