The Political Economy of the coffee market, fair-trade, sustainability and smallholders

By: David Caicedo Sarralde

The coffee sector generates around US 200 billion (ICO, 2019), supporting around 100 million farmers, of whom many are smallholders (Guido et al., 2020). However, several studies show that the producers receive between 5 to 10% of the revenues from the industry. In general, it is often said that the production of several agricultural commodities, including coffee, is marked by poverty from smallholders (Defries et al. 2017 in Grabs, 2020). According to Görlich et al. (2020), the world’s coffee growers are able to appropriate about US 20 billion from the annual revenue (Görlich et al., 2020, p. 4).

This situation can be associated to several factors of the political economy of coffee, in which the global markets have been conditioned by dynamics where roasters and middlemen have generated a market power that is detrimental to the profits of the farmers. Fair Trade and direct trade initiatives have attempted to address this situation, but their approaches have been insufficient to aid the farmer’s situation of poverty. An explanation for this can be found in the levels of economic inequality as well as the conditions in which the farmers live, that do not allow them to use the premiums from organizations like Fair Trade, in order to improve their poverty situation. Following Naylor (2017), the Fair-Trade initiatives have proven to be market-based schemes unable to break the patterns of market power and unequal terms of exchange that foster a situation of exploitation of most farmers and small-holder producers.

In producing countries like Jamaica, according to a FAO study, farmers received less than 5% of the coffee revenues between the years of 2006 and 2010 (Guido et al., 2020). In Africa, there are several cases where the political economy of coffee global value chains has maintained a situation of poverty amongst farmers. In countries like Rwanda (Behuria, 2019, p. 349) or Uganda (Wedig & Wiegratz, 2018), farmers have received a small fraction of value after exporting their coffee, while “… the coffee market shares of the top ten companies have continuously remained above 70% sincethe late 1990s, with six TNCs controlling 64.55% of total exports in 2014 (UBOS, 2010 in Wedig & Wiegratz, 2018). 

Initially the coffee that is exported is handled by large international traders, where one can find the Neuman Kaffee Group and Ecom, that handled, according to Troster (2015) about 28% of the world’s coffee exports. Such market power, in line with neoclassical economic theory is highly detrimental for an optimum price and distribution of profits between the elements of the value chain. Furthermore, Nestle and Jacob Douwe Egberts encompassed 40% of the global market value (Behuria, 2019).

Alternatively, as micro-roasters have started acquiring a bigger share of the market, their participation has promoted an increase in the coffee quality (Grabs & Ponte, 2019) which could mean an opportunity for smallholders to compete with quality, instead of quantity. The relationship coffee model has been created based on the need to help producers with their upgrading, so that they may be able to compete in terms of quality. Nevertheless, as Vikol points out, “these benefits have been subsequently captured by key individuals within the producer community who are able to accumulate wealth and consolidate their social position” (Vicol et al., 2018, p. 1).

The accumulation of market power by few firms was not always the rule in the coffee value chain. The decade of 1970 was the commencement of the drop of the producer’s share from the total coffee income, which went “…from an estimated 20% in 1971-88 to 13% in 1989-95” (Grabs & Ponte, 2019, p.818). Additional to this, the International Coffee Association parallelly came to an end during those decades, which weakened the bargaining power of producing countries, while coffee boards, institutes and quasigovernmental bodies were dismantled. (Grabs & Ponte, 2019).

In the year 1988, one of the first fair-trade initiatives was created in the Netherlands to offer small scale importers the possibility to get certified, whilst assuring that the coffee came from vulnerable but environmentally sustainable communities. The idea of offering a minimum price to cope with price volatility was to be implemented by the importers, including a social premium to build infrastructure in the farmers’ communities. Finally, reducing the distance between the producer and the consumer in terms of knowledge sharing and transparency for a greater amount of the final price to be directed to the producer was an expected outcome (Akram-Lodhi, 2018). As a compliment to this, certifications such as Fairtrade, Rainforest Alliance, and UTZ, were originated as a mechanism to alleviate poverty in smallholders and promote sustainable production of coffee.

Theoretically, Fair Trade attempts to follow “equity principles through a balancing of producer and labelling initiative influence in governance, integration of civil society stakeholders in defining its labour strategy, and promotion of civic and relational practices in its certification standards” (Raynolds, 2017). Yet, still nowadays, the consumers do not possess the market power that the choices between producers and retailers generate, to the extent that although some consumers would be willing to pay a minimum price or increase of price premiums, the market forces won’t favor such initiatives (Grabs, 2020).

Regarding transitional certifications, the definition of what organic or fair trade is (Mutersbaugh, 2002), has been historically defined by consuming countries and market trends led by consumers and captivated by traders. In some cases, farmers have been benefited by producing certified coffees in the context of a fair value chain, which has allowed importers and roasters to “establish long-term relationships and contracts with producers in order to maintain the consistency of their product” (Lyon, 2009, p. 224).

The first fair-trade certifications intended to offer a private solution to public sector’s failures to find cooperative solutions in the context of volatile prices (Grabs, 2020). The premium that is paid under such certifications has been measured in the context of an econometric study by Lyon (2009), concluding that it is between 0.10 and 0.60 US dollars per pound for shade-grown certified coffee, and 0.15 US dollars for organic certified coffee. In terms of the added value that is paid for fair trade coffee, consumers are paying an average of 1.20 US for each pound of certified coffee. From the total price, 1.44 US is the wholesale premium and 0.21 US is the producer’s price premium (Naegele, 2019).

Nevertheless, the impact of Fair-Trade certifications has been very modest for the income of farmers because the situation of poverty amongst smallholders is not associated with the need of having a certification, but rather with market forces and regulations that prevent them to lift their households out of poverty. Such is the situation in Planadas, Colombia, where in spite of the possibility to acquire a fair-trade certification, which is already expensive, farmers choose to sell to cooperatives called FEDECAFE and CAFISUR at a minimum price of the coffee domestic market (Navarrete-Cruz, 2019).

For this reason, the introduction of a fair-trade certification did not impact the income nor the socio-economic situation of the farmers. A similar situation is seen Laos, where farmers have been forced to sell to middle-men instead of Fair Trade associations due to their indebtedness and need of liquidity or fast cash to pay their bills, which only middle-men offer (Minoo, 2017). Nonetheless, if certifications are rather introduced as mechanisms to promote farmers’ association, the monopoly of certain cooperatives can be broken while environmental protection is promoted (Rhiney et al., 2021). This situation was seen in Southern Tolima, in Colombia, after the certification scheme involved farmers in a participative and active way. Furthermore, giving ownership of the certification to the farmers as a collective, could be even more desirable. That is, if the goal is to improve their socio-economic status of farmers and protect the environment.

On another aspect, there has been a clash between the interests of producers and traders regarding the discussion of a higher minimum price for the coffee. One example was in 2006, where the Caribbean Network of Fair-Trade producers proposed an increase of 0.20 USD, from 1.21 to 1.41 USD for the minimum price. Representatives of Fair Trade International opposed the change while supporting the position of traders, under the argument that an increase in the price would undermine their market opportunities (Staricco, 2019).

According to some traders, fair-trade is presented as alternative to the traditional market relationships of the capitalist market. However, the impact of the certification has proven otherwise, firstly because its design operates within the market (Akram-Lohdi, 2018). In other words, as producers have to be price competitive, a real unification of their efforts has not been attained, while large-scale and labor exploiting producers dominate the market and absorb most profits.

Consequently, smallholders have become more dependent on capitalist markets instead of more independent and self-sustainable, for they cannot compete with large-scale producers. Additionally, although smallholders may possess small amounts of land and some means of production, they are unable to extract surplus value from their crops because of lack of social and cultural capital. Hence, if a certification scheme is not underpinned by a strategy to allow the farmer to extract such surplus in a collective and environmentally sustainable way, the dependency pattern of capital accumulation will keep being fostered (Fischer et al., 2021). Furthermore, if the interest of traders prevails over that of producers, the situation may continue as a “de-radicalization of its emancipatory potential (…) social justice is compromised by market power (Fridell 2007, 86) and the result ends up being a price that is ‘(as) fair (as possible)” (Renard, 1999, p.496 in Staricco, 2019).

As a preliminary conclusion, in accordance to Naylor (2018), if the impact of certifications is to be changed, the dynamics of “care at a distance” from consumers and certifiers must change as well, so that mutually beneficial relations between farmers and the other elements of the value chain can be attained. In other words, paying a premium for coffee and awarding a certification is not enough. Further solidarity and deeper connections between producers and consumers must be established (Naylor, 2018). Thereby, the creation of a different relationship scheme that transcends mere economic exchange is required, for if “…fair trade certification disappeared tomorrow, the interdependencies of the coffee roasters and coffee growing cooperatives would likely remain similar, and that is a profound difference.” (Naylor, 2018, p.1041). Regarding the price, as Naegele (2020), suggests, if the consumer spent an additional 1.20 US per pound, the income of the producer could be increase by 1 US, which could start paving the way for a fairer share of profits. 

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