Coffee pricing volatility hedging using a single-step model

Under the dominant liberalised market regime, coffee pricing volatility has been a significant challenge to producers of coffee in Ethiopia, Kenya, Uganda, India and other less developed countries. The volatility exposes the coffee producers to a pricing risk situation since their livelihoods depend on income from the coffee trade. This paper proposes the development of a single-step model pricing that can be used effectively by the producers in the coffee trade to mitigate their pricing risk exposure. The model is applied using numerical analysis on historical data in order to ascertain that it provides Ethiopian coffee producers and other LDCs with a pricing model that could serve as a hedging solution to coffee pricing volatility. Following on the analysis, the paper suggests to the coffee producers that the single-step model pricing may be one of the solutions for pricing coffee products in order to mitigate volatility in coffee trade pricing.