Colombia is launching insurance to protect coffee plantations hit by climate change, which has damaged output in the world's top producer of high quality Arabica beans in recent years, officials said on Wednesday.
After three years of bad weather and a recent slump of international bean prices, Colombia is broadening the financial instruments available to farmers, a policy long practiced by more developed Latin American markets.
Small growers in Colombia will have insurance to protect their crops from drastic weather changes, starting from January, said Andres Lozano, a top advisor at the Colombian agricultural development bank, Finagro.
"The producer doesn't have to pay for the insurance. This is money that comes from the government and the coffee growers' federation," Lozano told Reuters.
"It will cover the value of the coffee plant but such value will depend on whether the plant is old or new. It is not the same to indemnify an old car from a new car."
Coffee crops faced extreme dry weather from September 2009 to April 2010 due to the weather phenomenon El Nino, which then shifted to torrential downpours related to La Nina in the second half of 2010 until April this year.
The federation on Saturday again lowered its production target for 2012, to around 8 million bags 60-kg bags, due to poor weather from an already lowered target of 8.5 million. Earlier this year, it set the goal at 9 million sacks.
"If we've learned anything about La Nina, it's that climate change has come to stay," President Juan Manuel Santos told an annual meeting of coffee growers.
The insurance plan, financed with 30 billion pesos (around $16.5 million) of which 60 percent will be managed by Finagro, will shield 96 percent of the country's 500,000 growers who have less than 5 hectares (12 acres) in coffee beans, officials said.
The insurance will only cover plantations damaged by hailstorms, landslides, excessive rainfall or extreme droughts, and will initially have funding for a year, said the coffee federation's chief of marketing, Luis Fernando Samper.
Farmers have also been hit by the firming peso currency, which has strengthened more than 6 percent in 2012, as well as a 40 percent slump in the domestic coffee price since the start of the year; tracking international bean prices.
Growers get around 525,000 pesos for two 125-kg bags of parchment coffee, sharply lower than the 874,000 pesos at the beginning of the year, while production costs are 650,000 pesos for efficient producers, industry players said.
The federation started a put contract in October to help farmers hedge currency and price fluctuations.
Growers can access the instrument from their farms by using a mobile phone. As the contract becomes more widely used, the federation expects to attract international commodity funds and international banks.
"We're bringing market risk instruments to coffee growers of all sizes which they didn't have in the past because of their size," Francisco Julian Medina, the federation's chief financial officer, told Reuters.