coffee.edu: Alternative Coffee Markets and Poverty Reduction

Can Fair-Trade, eco-friendly coffee help farmers get out of poverty? One study suggests so.

Poverty and income fluctuation are the most important problems for many households in developing economies. Poverty is exacerbated when these poor households also face fluctuated income. For these poor households living in poverty and lack of access to financial markets, a slight drop in the price of their agricultural product forces them to reduce consumption and health expenditure, withdraw their children from school, or sell their productive assets. All of these responses to the adverse event lead to lower productivity in the long run, further reducing their chance to get out of poverty. This is especially the case for poor small-scale farmers, whose income is low and vulnerable to crop failures or drops in output prices. However, a study of coffee farmers in Northern Nicaragua by Christopher Bacon may provide a potential partial solution for poverty and vulnerability reduction for these households.

The study took advantage of the changing structure of the global coffee markets in the 1990s (the disintegration of the International Coffee Agreement, market liberalization, and higher rate of transnational corporate concentration). The events led to the decline in world coffee price since 1997 throughout 2005. (Specifically, the average price of mild Arabica beans grown outside Colombia dropped from almost 2 USD per pound in 1997 to slightly above 50 cent in 2001.)  To make the situation worse for Nicaraguan farmers, the drop in world coffee price came at the same time as the 1999-2001 droughts.

Bacon conducted an interesting survey of 228 small-scale coffee farmers in Northern Nicaragua in 2001, right at the time when coffee price hit one of the lowest levels in years. He found that the average prices paid at the farm gate for the 2001-01 harvests differed tremendously by the markets. Coffee sold by cooperative members directly to roasters commanded the highest average price at 1.09 USD while cooperative Fair-Trade coffee and cooperative organic coffee were sold at 0.84 and 0.63 USD, respectively. In contrast, farmers selling coffee to local middleman earned only 0.37 USD. When Bacon looked at how long until the farmers got fully paid, he found that selling to local middleman took only 9 days while selling organic coffee through cooperatives took 73 days. The result is consistent to the fact that the farmers were forced to sell their product to local middlemen at large discount in order to get the payment quickly to satisfy their urgent need due to financial market imperfection.

According to 2000-01 harvest data, 80% of Nicaraguan coffee was potentially specialty coffee. However, only 10% of the 2000-01 harvests were indeed sold as specialty coffee. Bacon therefore concluded that specialty, and other nonconventional coffee markets (such as Fair Trade and eco-friendly coffee markets), which commanded higher price, would be a potential strategy that could help small-scale coffee farmers in Nicaragua achieve higher prices of their product and in the end mitigate their poverty and vulnerable to price shocks. What needed is the creation of the alternative nonconventional coffee markets for these farmers with potential for premium coffee trade.

Questions remain, however: What in fact explains the higher price in special coffee market and in other alternative coffee markets? Is it the inelastic consumer demand? Is it due to insurance or hedging mechanisms that provide the farmers a “buffer” to the change in world coffee price? Is it the bargaining power the farmers have as opposed to the exporter/importers? More research is needed before we fully understand whether and how nonconventional alternative coffee markets could help the poor coffee farmers. Surprisingly, the higher price is not one of the leading reasons the the surveyed households listed as their reasons for growing organic coffee, which include safety for their families and children without agrochemicals on the farm, lower expenditures for synthetic inputs, better environment, and protecting water. But promoting certified, organic, Fair-Trade, eco-friendly coffee to the poor farmers might be one of the strategies to which poverty-reduction campaigns might want to pay more attention, at least for now.

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