Rewarding Small Producers for Quality Coffee

Michael Giberson

Back in December I wrote:

I think quality, rather than customer goodwill and trust, will be the truly sustainable approach to providing a premium to small [coffee] producers in less-developed nations. To that end, programs like the Cup of Excellence are the better approach. It provides a rigorous quality scoring system followed by auctions, with high scoring lots commanding significant premiums. Cup of Excellence says that about 85% of the auction price goes to the producer.

This month Reason is carrying an article that makes similar points, only supported by actual journalism rather than just my idle speculation. Kerry Howley writes:

The range of prices between high- and low-quality coffees is still minuscule compared to what you’ll find with a highly branded beverage like wine, but it is growing, and consumers have consistently demonstrated that they’re willing to pay more for better beans. The best hope for farmers lies with consumers demanding better coffee, not just from Starbucks but from the supermarket shelf.

This point is further illustrated by an article from the Miami Herald discussing Bolivia’s second annual “Cup of Excellence” competition. Bill Faries describes how investing in a quality, differentiated product is paying big dividends to some small farmers. He uncovers an interesting economic angle to the situation faced by small producers: reaping the benefits of investing in quality sometimes requires small producers to break away from the farmer cooperatives intended to assist them.

Small-scale farmers in the isolated Yungas Valley usually sell their beans to cooperatives, which then combine them into marketable quantities for sale to domestic and international buyers. A farmer producing high-quality beans might have his product lumped together with low-end coffee, and both farmers would receive the same price. The financial incentives favored mediocrity, and market information was in the hands of the cooperative managers….

Of the 67 producers whose coffee qualified for the Cup of Excellence this year, nearly one-third failed to submit their beans to the final competition. One reason, according to Mr. Jaldín and others, is that cooperative owners opposed to the program either prohibited their members from participating or sold their farmers’ beans before they could be made available to the judges.

“This program really empowers individual producers,” says Joel Webber, an official with the USAID project. “They can demand much more of their cooperatives.”

A similar dynamic has twarted efforts in African to foster development of specialty coffee production. In Kenya, for example, coffee growers have been required to sell coffee through a monopoly government-managed auction. While the auction permits prices to vary among producers in a way that could support quality differentiation, the minimum lots sizes are such that small producers must combine their production with other farmers. The costs of an individual farmer’s investment in quality are largely born by the farmer alone, while the benefits of quality are averaged across all members of the cooperative.

Addendum: The New York Times ran an article on Fair Trade commodities on March 19. Available here. A quote:

Fair Trade labels don’t list the amount paid to farmers; that sum requires research. The amount can vary depending on the commodity. An analysis using information from TransFair shows that cocoa farmers get 3 cents of the $3.49 spent on a 3.5-ounce chocolate bar labeled “organic fair trade” sold at Target. Farmers receive 24 cents for a one-pound bag of fair trade sugar sold at Whole Foods for $3.79.

The coffee farmer who produced the one-pound bag of coffee purchased by Mr. Terman received $1.26, higher than the commodity rate of $1.10. But whether Mr. Terman paid $10 or $6 for that fair trade coffee, the farmer gets the same $1.26.

For comparison, in the last Brazil “Cup of Excellence” auction, the highest paid producer received an astronomical $49.75/lb. (The other lots averaged $4.75/lb, which is still nearly four times the “Fair Trade” price.)

Hat tip to Russell Roberts at Cafe Hayek.

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