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

DOI 10.7160/aol.2023.150407
No 4/2023, December
pp. 97-107

Pantoja-Robayo, J. and Rodriguez-Guevara, D. (2023) "The Climate Effect on Colombian Coffee Prices and Quantities Based on Risk Analysis and the Hedging Strategy in Discrete Setting Approach", AGRIS on-line Papers in Economics and Informatics, Vol. 15, No. 4, pp. 97-107. ISSN 1804-1930. DOI 10.7160/aol.2023.150407.


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.


Weather index, Coffee market, hedging strategy, forward risk premium.


  1. Álvarez, M., Luján, G. and Pantoja, J. (2019) "Instrumentos financieros derivados del clima como herramienta de cobertura en la industria bananera del Urabá antioqueño", Magister Thesis, EAFIT, Medellín. [Online]. Available: [Accessed: May 10, 2023]. (In Spanish).
  2. Bai, J. and Perron, P. (1998) "Estimating and Testing Linear Models with Multiple Structural Changes", Econometrica, Vol. 66, No. 1, pp. 47-78. E-ISSN 1468-0262, ISSN 0012-9682. DOI 10.2307/2998540.
  3. Barrios, G., Galván, O., Pérez, F., Sangerman, D. M. and García, R. (2022) "Price hedging for coffee, using the futures market", Revista Mexicana de Ciencias Agrícolas, Vol. 13, No. 6, pp. 1147-1154. ISSN 2007-0934. DOI 10.29312/remexca.v13i6.3313.
  4. Bessembinder, H. and Lemmon, M. (2007) "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets", The Journal Finance, Vol. 57, No. 3, pp. 1347-1382. E-ISSN 1540-6261. DOI 10.1111/1540-6261.00463.
  5. Cárcamo, U. and Franco, L. (2012) "Una aproximación a la estimación de rendimientos de conveniencia y precios teóricos de futuros para commodities agropecuarios en Colombia", Cuadernos de Administración, Vol. 25, pp. 141-173. ISSN 0120-4645, E-ISSN 2256-5078. (In Spanish) DOI 10.11144/Javeriana.cao25-44.aerc.
  6. Čermák, M., Malec, K. and Maitah, M. (2017) "Price Volatility Modelling – Wheat: GARCH Model Application", AGRIS on-line Papers in Economics and Informatics, Vol. 9, No. 4, pp. 15-24. ISSN 1804-1930. DOI 10.7160/aol.2017.090402.
  7. Chen, H. and Ryan, J. K. (2023) "Optimal specialty crop planning policies with yield learning and forward contract", Production and Operations Management, Vol. 32, No. 2, pp. 359-378. ISSN 1059-1478. DOI 10.1111/poms.13842.
  8. Chow, G. (1960) "Tests of equality between sets of coefficients in two linear regressions", Econometrica, Vol. 28, No. 3, pp. 591-605. E-ISSN 1468-0262, ISSN 0012-9682. DOI 10.2307/1910133.
  9. Federación Nacional de Cafeteros de Colombia (2016) "Comportamiento de la Industria Cafetera Colombiana 2016", Bogotá, Colombia. [Online]. Available: files/Informe_Industria_2016.pdf [Accessed: May 10, 2023]. (In Spanish).
  10. Federación Nacional de Cafeteros (2017) "Comportamiento de la Industria Cafetera Colombiana 2017", Bogotá, Colombia. [Online]. Available: Informe_Industria_2017.pdf [Accessed: May 10, 2023]. (In Spanish).
  11. Federación Nacional de Cafeteros (2018) "Comportamiento de la Industria Cafetera Colombiana 2018", Bogotá, Colombia. [Online]. Available: app/uploads/2019/10/Informe_de_la_Industria_Cafetera_20182.pdf [Accessed: May 10, 2023]. (In Spanish).
  12. Federación Nacional de Cafeteros (2020a) "Informe de Gestión 2021", Bogotá, Colombia. [Online]. Available: [Accessed: May 10, 2023]. ISSN 2711-3728. (In Spanish) DOI 10.38141/10793.
  13. Federación Nacional de Cafeteros (2020b) "Informe del gerente al congreso nacional de cafeteros", 88 Congreso Nacional De Cafeteros, Bogotá, Colombia. [Online]. Available: Nacional-de-Cafeteros-Virtual.pdf [Accessed: May 10, 2023]. (In Spanish).
  14. Federación Nacional de Cafeteros (2021a) "Informe del Gerente General", 89 Congreso Nacional de Cafeteros Virtual, Bogotá, Colombia. [Online]. Available: wp/category/nacional/89-congreso-nacional-de-cafeteros-virtual/ [Accessed: May 10, 2023]. (In Spanish).
  15. Federación Nacional de Cafeteros (2021b) "Informe de Gestión 2021", Bogotá, Colombia. [Online]. Available: [Accessed: May 10, 2023]. ISSN 2711-3728. (In Spanish) DOI 10.38141/10793..
  16. Garcia, I. (2003) "Análisis y predicción de la serie de tiempo del precio externo del café colombiano utilizando redes neuronales artificiales", Universitas Scientiarum, Vol. 8, pp. 45-50. [Online]. Available: [Accessed: April 23, 2023]. E-ISSN 2027-1352, ISSN 0122-7483.
  17. Greene, W. H. (2008) "Econometric Analysis", 8th ed., Pearson/Prentice Hall, New York. ISBN 10 0134461363, ISBN 13 978-0134461366.
  18. Hazell, P. (2000) "Could futures markets help growers better manage coffee price risks in costa rica?". 42 p. [Online]. Available: [Accessed: April 23, 2023]. DOI 10.22004/ag.econ.16057.
  19. Jenkins, M. and Barbosa, F. (2020) "The specialty coffee trading company (TSCT): future and option contracts", Emerald Emerging Markets Case Studies, Vol. 10, No. 2, pp. 1-18. DOI 10.1108/EEMCS-04-2020-0122.
  20. Johnson, L. L. (1957) "Price instability, hedging, and trade volume in the coffee futures market". Journal of Political Economy, Vol. 65, No. 4, pp. 306-321. E-ISSN 1537-534X, ISSN 0022-3808. DOI 10.1086/257937.
  21. Läderach, P., Ramirez–Villegas, J., Navarro-Racines, C., Zelaya, C., Martinez–Valle, A. and Jarvis, A. (2017) "Climate change adaptation of coffee production in space and time", Climatic Change, Vol. 141, pp. 47-62. E-ISSN 1573-1480, ISSN 0165-0009. DOI 0.1007/s10584-016-1788-9.
  22. Longstaff, F. A. and Wang, A. W. (2004) "Electricity Forward Prices: A High-Frequency Empirical Analysis", Journal of Finance, Vol. 59, No. 4, pp. 1877-1900. E-ISSN 1540-626. DOI 10.1111/j.1540-6261.2004.00682.x.
  23. Makkonen, A., Vallström, D., Uddin, G. S., Rahman, M. L. and Haddad, M. F. C. (2021) " The effect of temperature anomaly and macroeconomic fundamentals on agricultural commodity futures returns", Energy Economics, Vol. 100. p. 105377. E-ISSN 1873-6181, ISSN 0140-9883. DOI 10.1016/j.eneco.2021.105377.
  24. Martins, E., De Oliveira, L. E., Santos, L. P., De Mendonça, M. J. and de Souza, S. P. (2015) "Influência das condições climáticas na produtividade e qualidade do cafeeiro produzido na região do Sul de Minas Gerais". [Online]. Available: [Accessed: April 23, 2023]. (In Spanish).
  25. Nhung, N. T., Ngan, N. N., Hong, T. T. and Cuong, N. D. (2020) "Hedging with commodity futures: evidence from the coffee market in Vietnam", Investment Management and Financial Innovations, Vol. 17, pp. 61-75. E-ISSN 1812-9358, ISSN 1810-4967. DOI 10.21511/imfi.17(4).2020.06.
  26. Null, J., CCM (2023) "El Niño and La Niña Years and Intensities", [Online]. Available: (accessed 3.12.23) [Accessed: Dec. 3, 2022].
  27. Oum, Y., Oren, S. (2009), "VaR Constrained Hedging of Fixed Price Load-Following Obligations in Competitive Electricity Markets", Risk and Decision Analtsis, Vol. 1, No. 1, pp. 43-56. E-ISSN 1875-9173, ISSN 1569-7371. DOI 10.3233/RDA-2008-0005.
  28. Paes de Camargo, M. B. (2010) "The Impact of Climatic Variability and Climate Change on Arabic Coffee Crop in Brazil", Bragantia, Vol. 69, No. 1, pp. 239-247. ISSN 1678-4499. DOI 10.1590/S0006-87052010000100030.
  29. Pokorná, I. and Smutka, L. (2010) "What is the structure of the coffee market: Can the real poor benefit from the coffee trade?", Agris On-Line Papers in Economics and Informatics, Vol. 2, No. 2, pp. 27-37. ISSN 1804-1930.
  30. Pantoja, J. (2012) "Modelling risk for electric power markets", Revista Innovar Journal, Vol. 22, pp. 51-66. E-ISSN 2248-6968, ISSN 0121-5051.
  31. Pantoja-Robayo, J. and Vera, J. C. (2020) "Static hedging of weather and price risks in electricity markets", Optimization and Engineering, Vol. 22, pp. 2779-2799. E-ISSN 1573-2924, ISSN 1389-4420. DOI 10.1007/s11081-020-09581-0.
  32. Pham, Y., Reardon-Smith, K., Mushtaq, S. and Cockfield, G. (2019) "The impact of climate change and variability on coffee production: a systematic review", Climatic Change, Vol. 156, pp. 609-630. E-ISSN 1573-1480, ISSN 0165-0009. DOI 10.1007/s10584-019-02538-y.
  33. Ravi, A., Praveen, T. and Anjum, A. (2022) "View of Derivatives and Price Risk Management: A Case of Indian Commodity Cotton Futures and Spot Prices in India", Journal of Positive School Psycology, Vol. 6, No. 6, pp. 9391-9397. ISSN 2717-7564.
  34. Riaño, J. (1997) "El mercado de futuros y la volatilidad del precio internacional del café", Ensayos Sobre Economía Cafetera, Vol. 13, pp. 83-96. ISSN 2248-8731. (In Spain).
  35. Rodríguez, A. and Melgarejo, M. (2020) "Identification of Colombian coffee price dynamics", Chaos, Vol. 30, No. 1, p. 013145. ISSN 1054-1500. DOI 10.1063/1.5119857.
  36. Tröster, B. and Gunter, U. (2022) "Trading for speculators: The role of physical actors in the financialization of coffee, cocoa and cotton value chains", ÖFSE Working Paper No. 68. [Online]. Available: [Accessed: April 23, 2023].
  37. Tucker, C. M., Eakin, H. and Castellanos, E. J. (2010) "Perceptions of risk and adaptation: Coffee producers, market shocks, and extreme weather in Central America and Mexico", Global Environmental Change, Vol. 20, No. 1, pp. 23-32. ISSN 1872-9495, ISSN 0959-3780. DOI 10.1016/j.gloenvcha.2009.07.006.
  38. Vijayakumar, A. (2022) "Impact of the US Dollar Index and Crude Oil on Prices of Arabica and Robusta Varieties of Indian Coffee. Business Perspectives and Research", Business Perspectives and Research. E-ISSN 2394-9937, ISSN 2278-5337. DOI 10.1177/22785337221077399.

Full paper

  Full paper (.pdf, 1.63 MB).