A Corporate Perspective

Published: May 12th 2009EDIT THIS ENTRY

Coffee farmers live at the mercy of the world market. In 2000, they were reminded of how fickle a friend the market can be when prices crashed to a historic low in real and nominal terms. Unable to afford the expensive chemicals and fertilizers they depended on for a successful harvest, many farmers helplessly watched as their malnourished plants languished under the tropical sun. Unable to provide for their families, they had no choice. The Crisis literally burned through coffee households across Central and South America as farmers set their fields alight. An untold number of Central American farmers migrated to urban centers and then northward to the United States in search of a better living. From their point of view the future of their children no longer lay in coffee cultivation.

In 2003, as the crisis abated, coffee exporters began sending bags of green coffee half way around the world in container ships full of exercise bikes and t-shirts. The CEOs of international coffee conglomerates held teleconferences across multiple continents to discuss the rapid and significant contraction of the world’s coffee supply. Roasters from Norway to San Francisco sipped cups of less than satisfactory beans as they struggled to find a premium product in untended fields. From the smoldering ashes of the Crisis, certification rose as the salve on the industry’s wounds.

During the 1980’s and 1990’s, different forms of certification emerged as a response to the unsustainable ills of the coffee industry. At the economic level, the lengthy international supply chain significantly eroded the price received by smallholders, impoverishing millions of families across the Americas. To ease the suffering, Max Haveleer created the FairTrade label as an alternative trading system designed to give a comparative advantage to cooperatives composed of small farmers. In terms of the environmental impact, due to the structure of the global trading system, farmers earned greater profits from producing greater quantities of coffee. Across Central America, farmers stripped their farms of shade as they planted sun-loving, high-yielding varieties of coffee. To counteract the propagation of sun-grown coffee, Bird Friendly certification paid a premium for shade-cultivation to protect the habitats of birds migrating across the Americas. Intensive chemical use accompanied sun-cultivation as farmers required greater amounts of herbicides, pesticides and fungicides to control weeds, pests and diseases. Recognizing the threat to the biodiversity of the coffee growing regions, Rainforest Alliance certification aims to engender an economically viable style of farming that uses non-toxic chemicals and a diverse shade canopy to control disease. The organic label sought to develop a market for a tastier, chemical-free form of coffee that depends on compost manures to produce a profitable crop. Beyond the environmental impact of the sun-cultivated coffee, the well-being of the farming community suffered as farmers imported additional laborers to cultivate and harvest their ever-increasing number of red cherries. Children pulled down kilos of coffee, while living in dirt huts with no running water and no access to a local school. Utz Kapeh certification aims to create more socially and environmentally responsible large farms by improving labor practices as well as controlling chemical use. As the number of standards grew, the industry saw the need to police themselves. In consultation with these certification powerhouses and other players, the coffee industry created the 4C standard which regulates farms in a coffee farmer friendly manner with less stringent labor and environmental restrictions. As the Crisis revealed standards to be an effective tool to guarantees decent price for farmers and a sizeable and quality supply of coffee to the international market, standard setting began to shape the methods of the coffee industry.

The stated goal of these standards is to provide social and environmental accountability to the consumer in an industry that impacts a wide range of ecosystems and individuals while economically rewarding producers for employing practices that protect their environment and promote the well-being of their entire communities. At first, the uptake of these standards was slow and they remained a small niche within the global marketplace. In 2003, less than 1 percent of the worlds coffee was sold as certified by any body. After the crisis, the industry realized that coffee farming had become economically unsustainable for a large number of producers. Farmers began seeking out certification as a protective measure against the low prices that threatened to destroy their livelihoods and coffee culture.

At first, major players in coffee trading were reluctant to embrace these market control mechanisms. They saw certification as a small niche market without industry wide implications. When the crisis hit and supply contracted, according to Mauricio Muyshodt, a trader with the Ibero trading house in San Salvador, the international coffee trading companies saw certification as a way to shore up their dwindling coffee supply during a period of extreme low prices. Ibero is a subsidiary of the Neumann Corporation which is the second largest coffee company in the world. Twenty percent of the world’s coffee passes through their hands. Certification enabled companies like Neumann to protect their business while generating positive social and environmental externalities that accompany the certification process. Almost any farm can gain certification. In general, the farmers must alter their farming practices, replant shade and cease abusing their laborers. From the point of view of many traders I spoke with, these were needed moral changes within the industry spurred by an economic crisis. The certification trend shifted the industry toward a more sustainable form of production and appeased social and environmental activists.

Beyond the major companies and farms, aid agencies began promoting certification to cooperatives, government coffee associations and small farmers as a path to higher prices. They told them, “Consumers pay a premium for certified coffees and provisions within the standard insure that these additional funds return to farming communities in the form of higher prices to producers and social projects like schools and clean water.” Aid agencies tied funds and designed projects around different certification schemes. By certifying the coffee produced by poor farmers, the institutions that support these impoverished peoples believe that they will not face the devastating consequences of another coffee crisis. In light of the devastating impact of the Crisis, certification equals sustainability.

Over my months of travel, I found certification to be a carrot that incentivizes farmers to employ more sustainable farming practices as defined by an international standard with the promise of higher prices. As I visited different projects designed to certify a group of farmers to FairTrade or cooperatives that promote Rainforest Alliance certification or large farms that are Utz certified, I questioned, “Are the economics of certification sound? Is this a fair promise?” Scientific experts debate the merits of the environmental requirements. Infrastructure projects like schools, clean water and roads are the cornerstone of community development. The labor practices promoted by almost all the standards are delineated in a variety of International Labor Conventions. Yet the economic impact of these standards is murky at best. The costs of their implementation are often born by farmers for whom accounting equals placing a bean on the window seal for each bag of coffee they produce and then moving the bean to the other side of the window seal when they sell a bag. The price benefits of the certified market versus the conventional market are determined by a volatile international marketplace. The large price swings that caused immeasurable damage to farming communities are a product of a market composed of inelastic supply and demand curves. Certification does not aim to fundamentally alter the structure of this market but rather work within it as an incentive for farmers and industry players to do the right thing.

Across the globe millions of farmers produce coffee. Every one of them responds to higher prices by increasing their production. They plant more trees, use additional compost or try new chemicals, seeking to maximize their own personal gains from a bull market. Certified producers are not immune to this phenomenon. The propped up prices of certified coffees may provide an incentive for millions of farmers to certify their fields and potentially increase their production. Their rational response to the market could produce a global oversupply of certified coffee, similar to the surplus that initiated the coffee crisis, crashing the price of certified coffee. If the price of certified coffee crashes, this could prove even more damaging to poor farmers whose costs increased to certify their coffee and now receive significantly less than the farm next door.

I also find it unclear whether certification will remain resilient to outside economic trends. Over the last year conventional coffee prices were at times around $1.80 a pound for green coffee. During this period of abnormally high prices, no farmer sold their certified coffee at a higher price. Due to the design of most certification as a carrying a premium over the market price, the higher the New York C market coffee price, the smaller the difference between the price of conventional and certified coffee. As farmers must pay to be certified, they have an equally difficult time justifying the additional cost in a period of high conventional prices as they do during a time of lower certified coffee prices.

One of the great potential advantages of certification is that it internalizes the environmental and social externalities inherent to coffee production. For example, a higher return for shade grown rather than sun-cultivated coffee effectively pays farmers for the environmental service their shade provides by replenishing ground water, cleaning the air and providing a habitat for migratory birds. The environmental benefits of shade trees generate positive externalities currently not rewarded in the conventional marketplace.

I find it unclear that environmental certifications provide this vital service. Farmers bear the cost of certification. By some estimates, the higher price simply offsets these increased costs rather than increasing their overall income based on the environmental services they provide. Beyond the positive externalities of their cultivation methods, farmers often lose yield when they plant additional shade trees or shift to organic cultivation. The current price of organic coffee, for example, does not account for the decrease in yield and increased costs born by the producer. For the system of certification to adequately reward their services, farmers must receive additional economic benefits for being a more sustainable producers in relation to their conventional neighbors.
Finally, the current global coffee market is an oligopsony. There are only a handful of businesses buying coffee and an innumerable number of producers supplying the commodity. This oligopsony market structure continually depresses the price below what would be a market clearing price. Unless certification brings additional buyers into the market, I think it is unclear whether this system raises prices sufficiently to provide an incentive for farmers to maintain these sustainable practices over the long term. As coffee cultivation requires an intense monetary investment, consistently higher returns for certified coffee in relation to conventional coffee may be the only way to insure sustainable production cross generations.

Given these economic realities it is unclear if certification will be sustainable over the long term. The farmers I spoke with truly value their craft and understand the role they play within their local ecosystem. They value the schools that come with certification and hope that better drinking water will soon flow from their tap. Yet most do not see a future in farming for their children, regardless of whether or not they live on a certified farm. Farming is too unstable. The price is high one day and low the next, too variable for the amount of back breaking work that goes into a farm. They envision a brighter future for their children with a steady stream of income from a job in the city, away from the farm. Given the reality of modern economies, the inherent unpredictability of coffee and the questions surrounding certification, I do not see it as the savior of an industry or a guarantee that coffee farming has a bright future. Given the number of unanswered questions, I remain to be convinced whether certification and sustainable should be uttered in the same sentence.


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