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An exploration of commodity income stabilization options for coffee farmers - page 16 / 47





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such efforts have not been successful; while London Robusta prices have become less representative, the market is still liquid and users can be certain that they will easily be able to enter and exit.

  • A still small, but increasing, part of the market has pricing that is at least partly determined by special considerations: in particular, how is the coffee produced? There is now a wide series of programs to provide above-market prices to producers. Traceability “from the hoe to the cup,” from farmer to roaster, is a common element in all of these programs. Generally, the price paid will be market-linked, but with a premium; and often with a guaranteed minimum that is meant to cover production costs (a rather elusive concept in the case of coffee; it can be more appropriately described as a price at which farmers and their seasonal workers can achieve an acceptable standard of living). Box 1 provides an overview of these various programs and how they affect farmers’ risk exposure.

  • Some coffee is of a quality that commands large “gourmet” premiums over “standard” coffee.11 For example, Jamaica’s Blue Mountain coffee, or Hawaiian Kina coffee. There are efforts to increase the amount of coffee for which buyers are willing to pay such specialty prices, through branding (the creation of “appellations” or “indications of origin” similar to what one can see in the wine market), improving quality, and creating new marketing systems (in particular, electronic auctions). These efforts have had real success (very significantly so for the farmers who have seen their prices double or triple), but ultimately, one cannot expect this premium market to grow much beyond its current levels.

Box 1: Special marketing arrangements and their impact on farmers’ risk exposure

For an increasing number of growers, the price they receive for (part of) their coffee is determined by how it is produced rather than by the intrinsic quality of their coffee beans. The number and variety of schemes is steadily expanding, but the following are among the major, at times partially overlapping schemes:

Fair trade coffee

This is coffee produced in a way that the buyer considers “fair.” Until recently, buyers were western NGOs, but now a number of corporate houses have also started their own fair trade brands. Criteria to qualify differ a bit from buyer to buyer, but they include such things as fair payments to workers. Generally, farmers are organized into a cooperative which has to be certified by an NGO. The price paid is set at a premium to world market reference prices, with a certain minimum that reflects sustainable production costs. The NGOs that are part of the fair trade movement coordinate price levels with each other. Negotiations in 1988 between European fair trade leaders, farmer representatives and the industry established the initial floor prices, and for years, they have been kept stable at US$1.26 per pound for washed mild Arabica (US$1.41 if organically certified); and US$1.10 for washed Robusta (US$1.25 when organically certified). Market prices have remained below these levels, but if this were to change, the fair trade premium will be only US$0.05 per pound. The premium may be allocated to the cooperative for community activities (education, healthcare or

11 See for a discussion chapters 5 and 6 of Bryan Lewin, Daniele Giovannucci and Panos Varangis, Coffee Markets – New Paradigms in Global Supply and Demand, The World Bank, March 2004.


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