Coffee, Fair-Trade and Quality

Lavazza coffee cup

In January 2006 we spent a week at Lavazza in Turin learning about coffee. It was one of the most informative and well-managed learning field-trips we have had with the university and Lavazza really came across as a great company with a real commitment to the quality of their products. Here is a report I wrote for the university on our field trip looking at one aspect they presented to us that I wasn’t wholly convinced by. However, I do commend them for having done something, which is more than many of the other big coffee companies…

Introduction

During the week we spent at Lavazza for the thematic coffee stage we learnt about some of the problems involved with the coffee supply market and were told about Lavazza’s initiative to improve sustainability and conditions for their coffee growers. This programme is called “¡Tierra!”. I decided to briefly look further into the issues involved in coffee production and compare Lavazza’s scheme to established Fair Trade organisation schemes.

Problems in the Global Coffee Market
Coffee market statistics for the last 20 years make very depressing reading from the perspective of anyone involved in the primary production of coffee, ie the farming and initial processing. Looking at the statistics shown to us by Lavazza on the price of coffee on the New York coffee market I noticed that between 1976 and 1989 the price averaged over $1.20 per pound and in 1997 the price reached $3.00 per pound. However, between 2000 and 2004 the price averaged under $0.60, ie half what it had been 15 years before and less than a quarter of the 1997 price. This gives some idea of why it has been difficult to be a coffee farmer in recent years.

These price declines were due to deregulation of restricted coffee markets in the late 1980s with the scrapping of the International Coffee Agreement(i) and the subsequent increase of supply, producers and producer nations. For example, Vietnam went from being an almost insignificant producer to being second biggest producing country in the world. Coffee production has also been encouraged as a way for developing countries to boost foreign income earnings, especially for countries needing to make debt repayments. Furthermore, the high prices of the late 1990’s following some catastrophic harvest failures in Brazil(ii) would have further encouraged later over-expansion of production. The result is that production has expanded considerably where consumption increases have been much more modest. With the over-supply, producer countries have large stocks unsold, consumer countries have large stock-piles and the value of the whole market has decreased in real terms. Producer nations are locked in a vicious circle of expanding production to try to gain a greater proportion of the dwindling market value while their farmers sometimes hardly earn enough to make harvesting worth-while.

Another factor involved with the coffee market is the nature of its trading as a commodity market. Due to investment opportunities, much of the trading on these markets can be speculative and not a simple question of supply and demand. The market fluctuations also allow coffee buyers to buy up stocks when prices are lower so that they don’t need to buy so much when prices rise. The problem for small coffee producers is that a) they rarely have access to information about these commodity markets and b) even if they did, they generally don’t have enough resources to do much about. Finally, growers are at the mercy of whatever buyers and intermediaries are available to them, and often these middle-men have little interest in the plight of the growers and may be offering prices well below that of the market. These factors leave the coffee market suffering from “deep and pervasive market imperfections related to imperfect information, market concentration and externalities associated with the provision of public goods”(iii).

The situation is worst for robusta coffee, with more over-supply than with arabica(iv). Quality arabica coffees are more difficult to find, although prices are still affected by the slump. Coffee roasters in the west, especially those with large soluble coffee operations have switched to using more robustas and lower quality coffees in general, lowering their green coffee costs. Lower coffee quality has been counteracted by technical advances in processing to prevent this lowering of coffee quality to overly affect the quality in the final cup(v). Lavazza, being involved only in higher quality roasted/ground coffees and being small compared to the giants of the coffee roasting world is therefore different. Indeed, the highest profits and margins in coffee go to the soluble coffee producers and chains like Starbucks that sell the prepared product. Furthermore, Lavazza having much of its market within Italy where consumer coffee prices are lower than in other parts of Europe, would have lower profit margins than companies operating primarily in other markets.

Some of the big coffee roasters have acknowledged that the situation is harmful to their interests due to the associated worsening of coffee qualities(vi). But they don’t seem to have done very much to improve the situation.

Fair Trade
In the late 1980s organisations started to develop schemes to fairly trade agricultural commodities from developing countries due to price falls in these commodities and coffee was one of the first products involved. The fair trade philosophy, along with a number of other benefits, involves negotiating reasonable prices between producers and buyers, even if they are well above market prices(vii).

Having started out as a relatively obscure initiative, with limited product availability to most end consumers, Fair Trade systems have grown in the last 10 years, and it is now possible to find Fair Trade labelled products quite widely, especially in the Netherlands, Germany and the UK(viii). Fairly traded coffee has been successful in capturing some consumer market share and many producers, supermarkets, and coffee shop chains have increased fair trade offerings with more than half a million coffee growers involved with supplying that trade(ix). Consumers seem to have identified with the fair trade concept and have been willing to choose these products, even at a premium to non Fair Trade products.

Most of the Fair Trade products have been marketed by small specialist operations and, in the UK at least, by supermarkets with their own label products. Very few of the big coffee roasters have got involved with Fair Trade schemes,(x) at least in the UK. Starbucks have recently taken a lead in this area, offering a range of Fair Trade certified coffees and also boosting all their coffee purchase prices above market levels in order to improve producer’s livelihoods(xi).

Lavazza’s approach
Lavazza explained to us that the reason they started their own project rather than joining one of the Fair Trade schemes was that they preferred to build an initiative based on improving coffee quality, while guaranteeing environmental and social sustainability. They told us that the Fair Trade schemes artificially increased prices without addressing coffee quality.

They started programmes in communities in 3 different locations, Honduras, Peru and Colombia. The goal was to increase three dimensions of sustainability:
Economic: Increasing coffee quality thereby raising incomes
Social: Guaranteeing human rights and improving conditions
Environmental: Protecting bio-diversity and local environments
The programme has also involved building and renovating homes, sanitation systems, schools, healthcare centres and coffee processing facilities.

Looking at research on the outcomes of Fair Trade operations, improvements to coffee quality have been identified as a result of the schemes(xii) due to better access to training. Therefore, Fair Trade and increasing coffee quality are not mutually exclusive propositions. Fair Trade schemes are not perfect and researchers have identified problem areas such as where organisers do not fully engage individual growers in all the benefits of the schemes(xiii).

Where the ¡Tierra! Project is obviously beneficial for the communities involved, it would seem that using the coffee commodity market price as a base, even if supplementing with premiums for quality leaves some questions about economic sustainability. If the market price for standard quality coffee does not pay enough to cover production, that price plus a premium for better quality, which of course may require extra investment to achieve, does not seem to change the fact that the whole enterprise is under-valued. In a study of the sustainable coffee trade, Daniele Giovannucci comments on some sustainability programmes being “…characterised as corporate-driven endeavours that define sustainability somewhere between conventional practices and an improved level of sustainability companies feel they can reasonably achieve and pay for.”(xiv) I am left wondering whether that describes the ¡Tierra! project quite well.

Conclusion
It seems that prices in the coffee markets have now finally started to improve since the lows of 2001-2003, so some of the problems for producers are receding. Also, awareness of the problem has significantly grown, especially with the release of the documentary feature film Black Gold, an expose of the problems faced by coffee producers. Coffee is not the only product for which oversupply has destroyed market value, sugar and cotton among others suffer are in a similar position. Unfortunately, these producer’s problems seems to be tied in with the current global economic situation and huge and widening gap between rich and poor, both within countries and between. A situation where Starbucks needs to make $800 million dollars a year to keep shareholders invested and sells coffee at up to $5 per cup while coffee farmers can make as little as $30 for their whole year’s production(xv).

It is difficult to see how significant improvements to producers lives will happen without some change in the system of imbalance which at present seems unlikely. However, there are calls for the International Coffee Agreement to be reinstituted which could restore some stability and value to the market. And initiatives like Fair Trade, Starbucks’ programme and Lavazza’s ¡Tierra! project, while not perfect, increase awareness and improve conditions for some producers.

Notes
Information in this report came from verbal and visual presentations at Lavazza with additional research from sources listed below.

References

i Gresser C., Tickell S. (2002). Mugged, Poverty in Your Coffee Cup. Oxfam, p17

ii Gresser C., Tickell S. (2002). Mugged, Poverty in Your Coffee Cup. Oxfam, p17

iii Potts J. (2005). Building a Global Strategy for a Sustainable Coffee Sector: Considerations on the Renegotiation of the International Coffee Agreement. International Institute for Sustainable Development, p17

iv Gresser C., Tickell S. (2002). Mugged, Poverty in Your Coffee Cup. Oxfam, p29

v Gresser C., Tickell S. (2002). Mugged, Poverty in Your Coffee Cup. Oxfam, p28

vi Gresser C., Tickell S. (2002). Mugged, Poverty in Your Coffee Cup. Oxfam, p27

vii The Fairtrade Foundation (2002). Spilling the Beans on the Coffee Trade. p20

viii Giovannucci D. Koekoek FJ (2003). The State of Sustainable Coffee: A study of 12 major markets. International Institute for Sustainable Development, p66

ix Murray D., Raynolds L. & Taylor P. (2003). One Cup at a time: Poverty Alleviation and Fair Trade coffee in Latin America. Colorado State University, p3

x The Fairtrade Foundation. List of Fairtrade certified coffee products.

xi Starbucks. Starbucks and Fairtrade coffee factsheet.

xii Murray D., Raynolds L. & Taylor P. (2003). One Cup at a time: Poverty Alleviation and Fair Trade coffee in Latin America. Colorado State University, p8

xiii Murray D., Raynolds L. & Taylor P. (2003). One Cup at a time: Poverty Alleviation and Fair Trade coffee in Latin America. Colorado State University, p16

xiv Giovannucci D. Koekoek FJ (2003). The State of Sustainable Coffee: A study of 12 major markets. International Institute for Sustainable Development, p16

xv Charveriat C. (2001). Bitter Coffee: How the poor are paying for the slump in coffee prices. Oxfam, p3

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