Coffee Acquisition Strategies: Free-Market
Despite his willingness to acquire all green coffee through known suppliers, Jim
knew that the volatility of the world coffee market would make contracting all of
their input risky, both for the company and the producers. Unusually low world
prices would hurt Creolé Coffee as competitors acquiring coffee on the world market
would be able to sell at lower prices, causing the company to lose money and/or
market share. On the other hand, unusually high world prices would appear to
benefit the company. Yet problems could arise as producers are tempted to violate
their agreement in favor of the higher world prices.
Given these potential difficulties, the proposal involves striking a balance between
coffee procured through contracts and the free-market. For example, depending on
the technical specifications of the blends produced, some percentage of coffee
requirements could be contracted while the remainder could be acquired on the free
market.
Additional tools are available that have been, and will continue to be, used by the
company to minimize price volatility in the world market. Primary among these is
the use of futures contracts to mitigate price uncertainty. Company expertise in
hedging could also be provided to producers as an incentive to participate in the
company’s contracting program, another means of increasing the level of trust