Poverty Alleviation Through Participation in Fair Trade Coffee Networks Comments on the Implications of the Mexico Reports—Ronald Nigh August 2002 Producers in developing countries have suffered not just from low prices but also from an increasingly unequal distribution of the wealth generated by the coffee trade. This is the result of corporate practices that seek to convert low prices into expanded profit margins, and of domestic market reforms that have deprived producers of the marketing and infrastructure support they need. In 1997 world coffee sales reached US$43 billion. But while developing countries produced the raw material on which this wealth was built, they received less than one-third of the total revenue. Most of it was captured by the transnational companies which (sic) control the international trading and processing of coffee, such as Philip Morris and Nestlé, and by the major coffee retailers such as Tesco and Starbucks. OXFAM (2001: 5-6) Introduction The OXFAM (2001) report presents anecdotal evidence and several persuasive arguments for a fair-trade approach to solving the coffee crisis. In general, our case studies provide strong support for this argument, as well as adding some new aspects to the argument. The experiences of the organizations outlined in the case studies shine some light on problems with fair trade as it has evolved over the past two decades. These problems suggest where obstacles have arisen to the fair trade strategy to poverty alleviation and also suggest where further work needs to be done. This report will develop three themes. First, I review and comment on the experience of Mexican organizations with fair trade as presented in the reports and in the collateral research carried out on other organizations not selected as case studies. Secondly, I will briefly discuss the results of an initial, informal survey of marketing of fair trade coffee in the United States. And finally, I will discuss some very recent trends in the coffee trade that promise rather fundamental changes in the industry in the near future. Fair Trade and the Mexican Coffee Coops It is clear from the reports that the fair trade has had an important positive impact on smallholder coffee organizations in Mexico. For those organizations that have had the perseverance and luck to get through the difficult registration process and eventually connect with fair trade buyers, fair trade has made an important difference in the livelihoods of growers and in the effectiveness of their cooperative organizations. There have been difficulties along the way and even now a number issues remain to be solved. In some cases, organizations have been excluded from participation by criteria that do not always seem to be consistent and clear. I shall summarize the most important positive impacts and synergies reported by the organizations or observed by us and then turn to some of the problems. Obviously the most direct and noticeable (to growers) impact of fair trade is the possibility of improving income through better prices for coffee. As a globally traded agricultural commodity, coffee has been subject to manipulation by commercial and financial interests with important stakes in this multi-billion dollar industry. Coffee producing countries, with the encouragement of international financial institutions to which they are heavily indebted, have followed a policy of maximization of foreign exchange as the principal criteria for coffee policy. This has involved stimulating greater production volume, regardless of market condition and places the interests of farmers and the national coffee industry first, with social and environmental factors and coffee quality as, at best, secondary considerations. The result of these policies applied for decades over the entire world, including bringing new producer countries on line—the notable recent example being Viet Nam—has resulted in world production greatly outstripping demand with consequent abysmal prices. As the OXFAM (2001: 7) report puts it: The main reason that prices are so low is the massive oversupply of coffee on world markets in relation to demand. Production has increased by 15 per cent since 1990 as a result of the planting of new coffee trees, technological innovation, and the arrival of newcomers on the market. Ten years ago, Vietnam was an insignificant exporter of coffee. Today, it is the world's second largest exporter. Other factors have contributed to the steady expansion of coffee supplies. The pressure of debt has forced countries to expand exports in order to generate hard currency. Meanwhile, the World Bank and other agencies have actively promoted export production, through project lending and wider macro-economic reforms. For example, World Bank loans were instrumental in helping Vietnam start producing and exporting coffee. In Colombia and Bolivia, farmers were encouraged by UN-sponsored programmes to switch from coca to coffee. And in Angola, the International Coffee Organisation recently provided funds for the revival of the country’s coffee production, which had been shut down by war. World demand for coffee has increased at a far slower pace than supply. In the past ten years production has increased at twice the rate of consumption. The result: massive oversupply, leading to rising stocks and sinking prices. Stocks in consumer countries, the most important determinant of price levels, currently stand at over one million tonnes. Although the current crisis, which promises to linger on for several years, is particularly acute, the problem of pricing has been a constant for growers for decades. Even in the golden years of the 1970s and 80s, years of good prices were outnumbered by years of lower ones. Policies pushing countries like Mexico to greater dependence on coffee place growers in a situation of dependence on a market over which they had no control. The virtual abandonment by governments and develop agencies of regional food markets and food security has created a social time bomb which, at least from a Chiapas viewpoint, has begun to explode. In this increasingly bleak story, so-called alternative markets have been hopeful developments, in particular markets for organic and fair trade coffee. These two markets have been closely linked from the beginning, though not without some tension, and continue to have increasingly important synergies, as discussed below. What they have in common, however, is a transformation of the marketing context for coffee that increases the information flow between growers and final consumers, shortening the “commodity chain” and creating mechanisms that permit the former to realize a greater proportion of the value provided by the latter. Greater information about the product, its environmental and social production conditions, and greater information to growers about the values sought by consumers are what has allowed the alternative-market process to advance. Our study has provided, not a little surprisingly I would say, rather firm evidence of the difference alternative markets can make for smallholder coffee growers, their communities and their cooperatives. Among many benefits reported I would select the following as the most significant categories: 1. Better farmgate prices. The most obvious and important benefit, from the standpoint of smallholders’ families, of their participation in alternative, particularly fair trade networks is the attainment of better prices. The difference made by fair trade minimum pricing of $1.21/lb has been particularly dramatic during this period of lowest-ever real prices for coffee. For example, Unión Majomut cooperative reports: During the 2000-1 cycle, the price paid by Unión Majomut to its members was 12 pesos per kilogram for non-organic pergamino and 18 pesos per kilo for organic pergamino. If we consider that the averge price paid by regional buyers was 6 pesos per kilogram pergamino, then a Unión Majomut member received 100 and 200% percent more than regional prices respectively…(p. 10) An average grower in Unión Majomut harvests about 15 quintales per cycle. If his production is organic then he received 15,500 pesos (equivalent to U$ 1,700). If the same grower had sold his coffee to a regional middleman he would have received only 5,000 pesos (equivalent to U$550) (p. 18). Unión Majomut is unusual in having been able to sell 100% of its export production (nearly 450 metric tons: p. 7) on the fair trade market. Other coops I am aware of are unable to market even most of their exports through fair trade buyers. UCIRI, pioneer and participant in the formation of fair trade coffee networks in Europe, apparently reports about 73% (the information is garbled, see table on p. 6 of the UCIRI report). ISMAM, another fair trade pioneer, has never market more than a little over half of its high-quality organic coffee through fair trade networks. Nonetheless they report that, thanks to fair trade and organic quality premiums, they achieved, for the 85,000 quintales they exported in the last cycle, an average price of around $0.80/lb., nearly double the current international price, for its 1,500 members. CEPCO, representing 44 regional coops in Oaxaca reports they will market between 60 and 70% of their coffee through fair trade buyers, up from 30% last year. These figures represent significant impacts on the incomes of thousands of smallholders in Chiapas and Oaxaca, who, nonetheless, represent a small percentage of all such growers in those states. 2. Empowerment of smallholder coops. One important indirect result of the higher prices provided through participation in the fair trade network is the prestige and credibility accorded by growers to the cooperatives and second level organizations that broker that participation. The economic cushion created by the income differences mentioned above, and the reduced uncertainty concerning prices and buyers encourages a high level of grower participation in these organizations, greatly enhancing their effectiveness. Many of the other benefits mentioned below flow from this enhancement.