Lifting Coffee Farmer Income – Pt. 1

Workers stacking sacks of raw coffee beans in a warehouse in Addis Ababa, Ethiopia

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From the enduring popularity of café culture to the booming at-home coffee market, the cultural and commercial potential of coffee in developed economies has arguably never been stronger. Yet, a toxic combination of low market prices and damaging climate change is eroding the ability of many coffee farmers to make a living wage.

In November 2016, the global commodity price (c-price) for washed arabica coffee fell below Fairtrade’s $1.40/lb minimum. By August 2018 it had fallen below the $1/lb threshold for the first time in more than a decade. Despite prices jumping 10.4% in May 2021 to $1.34/lb, the coffee price crisis, and its severe detrimental impact on farmers, persists. But how did the coffee industry get here?

Prior to 1989, coffee prices were controlled by an international consortium, much like OPEC for the oil industry. The International Coffee Agreement was renegotiated by member countries every five years and resulted in a relatively stable global commodity price (c-price) of $1-1.50 per pound for arabica coffee.

Following the collapse of the agreement in 1989 and the move to free trade, the c-price has been characterised by volatility and persistent low prices, with coffee farmers at the sharp end of boom-and-bust instability. In 1992 the c-price crashed to $0.49 per pound – five years later in 1997 a harsh frost in Brazil briefly sent it soaring above $3.

Global oversupply of cheaper robusta coffee deflated prices further. As world development banks promoted export-led development, ironically often as a means to fight poverty, funding for commodity coffee production increased exponentially. Notably in Vietnam, coffee production grew more than 1,100% in the decade following 1991.

The climate emergency is also exacerbating economic hardship in vulnerable coffee growing communities. Between 2012-2017 coffee leaf pathogen La Roya, commonly known as coffee leaf rust, was responsible for over $3bn of damage across Central and South America and forced nearly two million farmers from their land.
 

"Supply chains wield a lot of power and have held the coffee price largely flat for a long time”

–  David Davies, Founder, AgUnity

A major 2019 study conducted by the Royal Botanic Gardens, Kew, warned 60% of the world’s wild coffee species face extinction due to a lethal cocktail of deforestation, climate change, and fungal pathogens and pests.

Sustained low prices continue to evaporate profit margins for coffee farmers, pushing many into the red. A 2018 study conducted by pioneering coffee trader Caravela Coffee found the c-price often failed to cover the cost of coffee production in Colombia, Ecuador, Nicaragua, Peru, Guatemala and El Salvador. At the time of the study, four out of five of the countries experienced a negative profit margin ranging from -1.7% in Colombia to -38.7% in Ecuador. Only Nicaragua generated a positive profit margin of 11.4%.

In the 1970s and 1980s, a coffee farmer could expect 15% of the value of a cup of coffee in a coffee shop. Today that figure is down to around 3%, according to AgUnity, a provider of digital services to some of the world’s poorest farmers. Clearly, something is being lost in the coffee industry’s lucrative ‘crop to cup’ narrative.
 

A holistic solution

While much support for coffee producing countries has centred on roasters in consuming countries paying fairer prices, a growing number of initiatives are empowering coffee farmers to establish and access critical infrastructure to generate value from supply chains themselves.

From greater international cooperation between coffee producing countries and the private sector, to the deployment of radical technologies, such as blockchain and supply chain tracking systems, today there is growing hope for definitive action on tackling systemic poverty in coffee production.
“Supply chains wield a lot of power,” says David Davies, Founder of AgUnity. “They’ve been very protective of market prices, and they’ve held the coffee price largely flat for a long time.”
 

Deployment of AgUnity technology in Ethiopia, April 2021 | Photo courtesy of AgUnity

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On 20 September 2019, the International Coffee Organization (ICO) issued Resolution 465, which formally acknowledged that current coffee market prices do not allow coffee growers in most producing nations to cover production costs.

The subsequent ‘London Declaration’ is an historic private sector and governmental collaboration bringing together some of the world’s most prominent coffee businesses including illycaffè, Jacobs Douwe Egberts (JDE), Lavazza, Mercon, Nestlé, Neumann Kaffee Gruppe, Olam, Starbucks, Sucafina, Tchibo and Volcafe.

Together with national governments, NGOs and trade bodies, signatories have pledged to promote competitive and sustainable production; foster responsible and equitable growth; promote responsible consumption; and promote public-private dialogue regarding policy development.

An ambitious ten-year roadmap sets signatories technical workstream KPIs across living income, resilience and the inclusion of women and youth; market transparency; responsible consumption; and sustainable production and sourcing. The task is huge, but one best tackled through international cross-sector cooperation, says ICO Executive Director José Sette.

“I see sustainability as a moving target rather than an endpoint. We want to go beyond the question of living income to a situation where coffee farmers can prosper,” he says.

“The underlying realisation behind the London Declaration is that governments, especially in producing countries, and the private sector, cannot affect lasting change alone – they need each other.”

Sette acknowledges that balancing the commercial imperatives of coffee companies with government regulation is challenging. However, he remains optimistic that greater cross-sector cooperation has the potential to generate lasting positive change for the global coffee industry.
“I have been pleasantly surprised by the reactions we have received. Obviously, there are concerns in the private sector about revealing sensitive proprietary information, and we must find a balance there,” he says.

Sette also highlights the rise of global value chains (GVCs) over the last three decades and the potential for adding value for coffee farmers. The ICO’s landmark 2020 Coffee Report notes increasing specialisation, such as a focus on producing more lucrative, higher-quality coffee, greater efficiency, and a strengthening of relationships in GVCs has already begun to generate rewards for coffee farmers.
 

"We want to go beyond the question of living income to a situation where coffee farmers can prosper”

– José Sette, Executive Director, International Coffee Organization (ICO)

However, while the share of coffee growers reaping the benefits of these approaches is growing, it remains relatively small, with different approaches required for producers focused on quality and those farming commodity crops. Bringing smallholder coffee farmers, who account for up to 80% of coffee production globally, a greater share of the GVC dividend is another key objective identified by Sette.

“There is always potential for value addition in the system. Typically, arabica producers add value to their product by what we call ‘product upgrading’, or decommodifying coffee, especially by selling to the specialty market. The best option for robusta producers is often what we call ‘functional upgrading’, which is processing more of their crop into soluble coffee and at least adding value there.”
 
In part two we examine blockchain technology and coffee supply chain traceability and ask what the future could look like for coffee farmers at origin.
 

This article was first published in Issue 7 of 5THWAVE magazine.

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