Coffee Sustainability: You Asked, We Answered

October 29, 2019

During the October 21, 2019 webinar with Professor Jeffrey Sachs discussing CCSI’s report, Ensuring Economic Viability and Sustainability of Coffee Production (Spanish version here) there were more questions asked than we were able to answer. We wanted to address this by answering some additional questions here. (The questions below have been edited for clarity and length, and we don’t include questions already discussed during the webinar, from minute 43:04-59:15.)

Question: There is no correlation between yield and net income. In most cases, low-income systems (namely smallholders) can have higher return of their investment by having a low productivity strategy. In fact coffee is a perennial crop. If you do nothing you can get something. What would be the strategy for low-input farmers that cannot raise the level of input investment to that of Brazil and Vietnam? 

Answer: It’s true that higher yield systems also tend to be higher cost systems. But improved seed varieties, effective management, and other approaches have clear benefits for yields, without drastically increasing costs of production. And without active management, yields drop by about 15% per year, from what they could be. Having said this, and as we note in the report, individual contexts and market opportunities can mean that increasing individual farmer profitability might come through increased productivity, efficiency, and/or quality.

Question: To clarify, the aim of the Fund is not to increase the farmgate price paid to small-scale farmers but to lower the cost of production by means of fertilizers, seeds, logistics, etc.?

Answer: Both of these approaches are potential solutions. Increasing yields and/or quality (with improved management) would make farmers more competitive. However, we also discuss in the report how the Fund could provide income support to farmers, which has additional beneficial knock-on effects, and would essentially be akin to a second payment for farmers, beyond what they originally received for their coffee, in recognition that the market is currently failing to internalize the full value of coffee. Our report also briefly discusses the potential for imposing a minimum price to the extent that monopsonistic pressure is pushing down prices, but in this case a minimum price would still be relatively low.

Question: How about promoting a reduction in production costs? Given that the main stressors are climate-market, on-the-farm access to climate services could benefit production, from fertilization schemes to pest management.

Answer: Climate services are clearly important, and our report discusses how approaches to support climate resiliency (including insurance and disaster relief funds), as well as on-farm support that increases profitability, could be included in National Coffee Sustainability Plans and funded by the Global Coffee Fund.

Question: Is the solution to liberate farmers from the yoke of larger players and large roasters to put them under the Amazon or Alibaba yoke? E-Commerce exercises even more power on small-scale players than traditional roaster/traders.

Answer: E-commerce provides new opportunities for coffee producers to go (more) directly to the consumer, and we think this should be explored, but online sales do not have to only go through the main commerce platforms, which offer both opportunities and significant risks. Our report includes multiple examples of efforts to increase value addition and capture by producers, such as Pachamama Coffee, a farmer-owned and farmer-governed company, with online sales, run by five cooperatives from five different countries. The model shifts some new business risks onto farmers, but also moves farmers from price-takers to price-setters. Finding ways to increase institutional support to farmers to get closer to the consumer, and combining that with e-commerce, regardless of the platform, is an approach that should be taken seriously.

Question: To what extent could investment in tenure security for coffee growers in developing countries be an important factor? Specifically, through cooperation from the private sector?

Answer: Investment in tenure security for coffee producers is indeed an important component of any solution. As our report recognizes, efforts to reduce producer poverty can include strategies such as

increasing their tenure security and documentation of land rights. This is why we suggest in the report that National Coffee Sustainability Plans should include legal and policy improvements (including commitments to formalize and protect land rights of small-scale producers). In terms of whether this should be done in cooperation with the private sector: it depends on what is meant by this. Private sector involvement in formalization of land rights can create risks for land users if, for example, the private sector entity has an interest in ultimately using the land in question—in such scenarios, formalization might be a way to make land more alienable from land users, and more likely to be transferred by farmers through distress sales (or leasing equivalents).

Question: What might it look like (in terms of Arabica prices), if there was a separate market just for Brazil?

Answer: This is a good question, as one frequent complaint about the C contract is that it covers both washed Arabicas and natural Arabicas (from Brazil), despite their differences. Some argue that being able to better distinguish washed Arabicas and natural Arabicas could thus be useful, both for producers and for having a more fine-toothed price discovery mechanism. On the other hand, Brazilian coffee already trades with a significant differential discount under the C contract, which thus creates a consistent pricing distinction. Regardless, there is at least one other significant challenge to developing a separate market for Brazilian natural Arabicas: technology is making it easier for lower-quality coffee to taste similar to higher-quality coffee. For example, technology can help Arabica/Robusta blends to taste similar to 100% Arabica coffee, or lower quality natural Arabicas to taste more similar to higher quality washed Arabicas. This forces producers to compete more on price than on quality, unless producing at the very high end. The increasing substitutability of coffee at different quality levels would complicate efforts to break off a separate market for Brazil, as trading prices for Brazilian coffee, which is essentially interchangeable with other commodity coffee, would continue to have strong effects on the C-Price.

Question: Would a split between markets be an option? A C market for commercial higher volumes and another (“S”) for specialty, lower volumes, higher quality, as you don’t want to heap all coffee up, when there’s so much difference in profiles, varieties, qualities?  

Answer: The significant differences between commodity coffee and specialty coffee suggest that specialty coffee prices should NOT be set in reference to the C-Price. Specialty producers and their buyers can find their own way to strike a fair price, depending on quality and other factors, and should be encouraged to do so, rather than relying on the C-Price as the starting reference point for negotiations. One useful initiative in this regard is the Specialty Coffee Transaction Guide, which aims to equip producers and buyers with specialty-grade-specific reference points for negotiations, empowering them to move away from commodity prices as a starting point. While one potential challenge for the Guide is that specialty buyers who otherwise would pay higher than average prices might use the data to instead justify paying closer to the average, the Guide nevertheless presents a useful tool for helping the specialty coffee community move away from using the C-Price as a price discovery mechanism. One of the most important things specialty buyers could do is to move towards fixed price, long-term contracts that do not reference the C price.

Question: Malaysia, Madagascar and Thailand are very small players (not trivializing here!), but next to Colombia, Costa Rica and India, what other big players are in concern?

Answer: There is a lot of lost opportunity from not closing yield gaps, and we see that for Guatemala, Indonesia, Ethiopia, Uganda, and many others. Many of the largest producing countries, however, are able to continue to grow with the increased demand—just while losing ground to Brazil and Vietnam.

Question: Brazil has larger coffee farms than farms in other regions, notably Africa.  At what land scale does coffee production become profitable?

Answer: Yes, some coffee-producing areas in Brazil have size advantages as well as other advantages (such as topography, which allows greater mechanization). While profitability for coffee producers depends on a number of factors, what is clear is that producers who plant too small a hectarage may never be economically viable, as it is nearly impossible to avoid poverty when landholdings are too small. This is not to say that small-scale producers should not be producing coffee, but rather that if the plot size is too small, it is hard for a farmer growing any crop to earn a living income. (Some extreme exceptions may be for farmers producing extremely high quality beans and selling them at significantly above market prices – but even then, if the amount is very low, the farmers are likely to remain poor.)

 Question: The least privileged people in coffee production are often landless workers.  Will money from the proposed fund be allocated towards workers?

Answer: As our report notes, farmworkers in the coffee industry can be even more vulnerable than coffee producers. This includes vulnerability to non-payment and other exploitation, child labor, and, in the worst cases, working under slave-like conditions. As explained further in the report, we suggest that the Global Coffee Fund, as well as the public funding that it leverages, be used to fund activities to implement National Coffee Sustainability Plans (NCSPs). One of the specific sets of activities we suggest to be taken up under the NCSPs relate to strengthening government capacity in rural areas to monitor farmworker conditions and enforce compliance with labor laws, including payment of the minimum wage and avoidance of child labor. While simple, we believe this would go a long way towards improving the situation of laborers in coffee production. As this primarily contemplates government action, it would be more appropriate for the funding to come from leveraged public funds (national budgets, donors) than from the Global Coffee Fund itself.