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An exploration of commodity income stabilization options for coffee farmers - page 17 / 47

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infrastructure) rather than to individual farmers. In addition to receiving higher prices, participating cooperatives also benefit from credit facilities.

Organic coffee

This is coffee grown without use of inorganic fertilizers, herbicides or pesticides; and then processed in an organic manner. Farmers receive an above-market price, but have to agree to be subject to a fairly stringent monitoring and certification process. Processors and roasters also have to be certified. About half of fair trade coffee is also organically certified.

Eco-friendly coffee

The major product in this relatively new category is shade-grown coffee, which is more friendly to the local fauna (in particular birds) than the traditional production of coffee as a mono-crop. It is predominantly procured from small farmers, who are paid a better price in return for accepting certain eco-friendly production methods (multi-storey shade trees, and avoidance of chemicals that endanger fauna). One of the two major certifications, by the Rainforest Alliance, also includes social responsibility criteria particularly in terms of labour practices.

Private/corporate standards

A number of large companies have adapted their own standards for procuring “sustainable coffee.” Criteria normally include both social and environmental factors as well as food safety conditions. Several of the world’s largest supermarket chains have come together under the “Utz Kapeh” initiative which sets standards for the coffee that they procure (directly from producers’ groups or from trading houses). The other major initiative is by Starbucks which tends to buy directly at origin. In both cases, an above-market price is paid. But not all corporate standards may lead to higher revenues for farmers—they constitute conditions that sellers have to meet, and the sellers have to carry the related costs.

Note that auctions (as used, for example, in Kenya and Tanzania) do not really influence the link between local farmgate prices and world market prices (other than imposing an extra cost). Auctions allow prices for some high-grade coffees to be discovered, but for the major part of the coffee passing through an auction, this is just an administrative phase (indeed, often the buyer is the same as the seller, or an associated party)—and an occasion for the government to impose taxes.

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Farmers’ exposure to coffee price risks

Once a farmer decides he is to be a coffee producer (a decision often determined by tradition and lack of alternatives) he becomes exposed to coffee price risk.12 There is not much that he can do about the nature of this risk, other than uprooting his trees—a radical decision which is made only very rarely, following prolonged periods of very low prices. But he can, and does, influence the scale of this risk. Farmers’ behaviour in this regard is rational, optimizing their risk/reward equation within the constraints of their environment. 13

12 For a formal discussion on what risk and uncertainty mean for farmers, see Jagdish Parihar, “Risk and Uncertainty in Agricultural Markets,” in Nigel Scott (ed.), Agribusiness and Commodity Risk: Strategies and Management, Risk Books, 2003.

13 For the case of coffee, see, for example, Ruth Vargas Hill, An analysis of abandonment and investment in coffee trees, Oxford University, mimeo, 2005. The paper concludes “Using econometric models of friction different models

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