coffee economics

THERE IS NO SUSTAINABILITY WITHOUT ECONOMICS

The living income movement is a strategy primarily being driven by economic development agencies, like Heifer International, whose mission is to “help lift families out of poverty.” This is a very different mission, than say, working to make coffee producers economically and environmentally sustainable, however. Are these two missions working against each other?

After years of enduring the “coffee price crisis,” economic sustainability is finally capturing at least as much attention as its traditionally more popular and well-known sister, environmental sustainability.  A whole article could be written exploring why environmental concerns outshined economic ones for producers, but this correction, this rebalance is the silver lining to that dark cloud that punished producers with low prices for so long. 

As we know, commodity prices have jumped in recent months. It will be interesting to see how the narrative for economic sustainability is sustained through the rally. Though coffee price spikes have traditionally been short-lived, this rally may be with us longer than past ones. The ongoing and deepening frost and snow episodes in Brazil may have been the straw that broke the camel’s back, but a decade of low prices have reduced producers’ abilities to invest in their production, leaving them far less resilient and susceptible to all manner of crisis.

When prices are low, producers reduce their use of inputs, like labor and fertilizers. Without weeding, pruning, and feeding, plants become weak, producing much less cherry, and become far more susceptible to pests and diseases, like coffee leaf rust. Coffee plants around the world are in a fragile state, and now, with demand greater than supply, regional issues negatively impacting supply can no longer be filled in by Brazil’s vast mechanized production. And though farmers cheer $2.00/lb. C-prices, it doesn’t do a farmer much good when their plot produces only a small fraction of its potential.

For the last 5 years, I’ve been part of the band beating the drum that economic sustainability is the foundation for all other sustainability work. 

There is no greater threat to the environment than poverty. Juan Esteban Orduz, President of the Colombian Coffee Federation

What’s the point of a coffee agroforestry project or wastewater treatment for wet mills, or technical assistance on integrated pest management if coffee farmers go out of business or replace coffee with something more profitable?

With the increased focus on economic sustainability, the frequency that we heard the term, “cost of production” also increased.  How else does one ensure economic sustainability without knowing COP? Yet this line of questioning has always left me uneasy. The power differentiation in the supply chain becomes starkly visible. Were roasters discussing their margins with producers in the attempt to figure out who made what? (Uh, no.) Regardless of how well-intentioned, why do roasters get a say in how much a producer should profit?

Then, on the other side of the equation, if you’re in the business of deciding how much profit a farmer should make, if you’re ethical, you also need to know what it costs to live.  Millions have been spent calculating the cost of a decent standard of living in rural communities around the world. It’s a sea of endlessly changing variables and conditions, of exceptions, of averages and means, of winners and losers.

Generally speaking, traders and roasters should have a general idea of what the COP is in their supply chains. Even if one’s supply is only tracible down to the country, it’s possible to understand a reasonable range of COP.  If you know you are paying well below COP, you also know that quantity and quality from these producers is at risk. But using COP, regardless of how accurately this has been calculated, and a living income benchmark, regardless of how accurately this has been calculated, to set a price for green coffee is a northern, computer-based, excel approach that is simplistic and likely harmful to coffee producers in the long run. 

When we use a term like “smallholder,” we generalize to the point error.

A very large number of variables go into determining the cost of production for a single smallholder producer: farm size, access to inputs, market served, soil, weather, altitude, shade vs. full sun, coffee varietal, the technical expertise of the farmer…. It’s an endless list.  The cost of production varies dramatically from producer to producer.

From the observation deck of a Manhattan skyscraper, the height variation of each building becomes harder to distinguish the further towards the ground one’s eye travels. For those buildings near your own height, it’s easy to see the variation, but looking down to the smaller ones, angle and distance distort the view.  From our skyscrapers in the global north, “smallholders” can look quite similar.  But from the ground, there’s a 3X difference between a two-story walkup and a 6-story apartment building. In other words, some smallholders are spraying pest control on their 0.5 ha plot wearing flip flops, and economic development can look like a pair of boots. 

Recently Heifer International, in partnership with Sustainable Harvest and Bellwether Coffee, published a white paper on the Verified Living Income:

“This Verified Living Income pilot was conducted using a sample size of 38 smallholder farmers, all of whom are members of the cooperative ASOPEP based in Tolima, Colombia.”

ASOPEP is an exceptional cooperative.  A relatively high level of professionalism exists.  But even in this small subgroup of 38 producers from ASOPEP, Heifer International discovered an enormous range in yields and COP.  The yields from producers with less than 2 ha are shown to be producing 2x-3x the pounds of producers with twice as much land.

Without a doubt, the living income movement is largely humanitarian. Humanitarian efforts are designed to keep people alive through the duration of crises: a war, a blight, a natural disaster. It solves no systemic issues; builds no additional capacity. It can even hurt recovery, like when free food pours into a region, undermining existing local producers and supply chains. 

There is no crisis that recedes for subsistence farmers. Low economic growth and the resulting widespread poverty is not a “crisis” like a war or hurricane. It’s a chronic condition.  So how does one go about supporting the economic sustainability of smallholders, those smallholders with the desire and drive to grow in their knowledge and professionalism, to care for their environment and their communities? 

When it comes to “interventions,” broadly speaking, there are two types: reductive and additive.  Though both can lead to unintended consequences and harm, reductive actions, stopping something, is often a far safer bet than starting something.  A new rule, a new regulation can trigger a cascade of unintentional outcomes.  And to be sure, ignoring the laws of supply and demand by implementing an artificial price floor has never ended well for the very people it was designed to save. Examples of such a thing are mostly found in government programs, where the source of subsidies is tax revenue, rather than from an actual expense the market pays.  Inevitably, such interventions help some, hurt others, and all off it is sustainable only when the money comes from outside the supply chain.

“Iatrogenesis is the causation of a disease, a harmful complication, or another ill effect by any medical activity, including diagnosis, intervention, error, or negligence.” –Wikipedia

Iatrogenesis is not a term used much outside the medical professions, even though the amount of unintended harm that has come from all manner of well-meaning efforts has impacted us all.  Advocates for the worlds poor should have their own version of the Hippocratic oath, “…first, do no harm.” 

The key principle necessary to fulfil that oath is to understand and accept the limits of one’s knowledge.

Supply and demand have been the market mechanism that sets the price of goods and services for as long as people have traded goods and services. No farmer anywhere gets to show up in the market demanding a higher price for their average or low-quality crop, simply because their COP was higher. 

With a “guaranteed living income” are we potentially setting up a dynamic of dependence and charity, rather than self-sufficiency and capacity building?

And if you can be “guaranteed” a living income by planting and growing coffee, do we guarantee overproduction of low-value commodity coffee? Do we distort the natural market mechanisms in that region that might appropriately lead a producer to leave coffee for beans and bananas?

Yet it’s hard for me to be against something that is focused on the economic sustainability of people born in developing economies, an objective that has been the magnetic north for my career compass for nearly 30 years.

In a conversation with Christophe Montagnon, PhD, a world-renown coffee scientist with decades of experience working alongside producers, an alternative approach was revealed: ask producers how much they need to make at farmgate, and how long they need to be assured of making it before they will become motivated to make investments in their production.

This isn’t perfect, but it isn’t paternalistic. It isn’t a northern Xls analytical, In silico approach. Most smallholders of the world don’t track COP, and many have ideas about the price they need which may prove to be wrong. Exporters buying from producers talk about “magic numbers” that can be found in various regions. These are commonly held beliefs about what makes for a good price and will trigger the sale. But often the magic numbers break down in subsistence environments, where needs are vast and unpredictable year to year. But again and again, if producers are asked this simple question, eventually both buyers and producers learn the price needed to ensure economic sustainability.

Not all smallholders are career farmers. If you’re growing coffee to support a subsistence existence, you farm because you have few, if any, economic opportunities. That’s not a person who has chosen to farm, so much as it’s a person who is poor and without other means to get the cash they need for essentials. That is a person who may and likely should give up farming at the first possible opportunity.

Though much nostalgia distorts and defines our perception of small family farms, the 80%/20% rule applies: for most, farming is a difficult, high risk, low reward activity. This is rarely disputed. In every developed economy on the planet, when farming is no longer the only game in town, people leave it as soon as possible. Every modern economy has transitioned through an agricultural phase for a better life. Investments in this type of farmer will not likely produce a long-term return on investment. Incentivizing more, low quality, low-value coffee from more of the world’s poor could result in significant harm.

It’s the buyer’s job to determine which producers are a good investment. It’s their skin in the game.  If this is a producer, picking green cherry, using their plants like an ATM machine for a little cash here or there for as long as soil and plant health allow, then paying more for the green will not likely result in that producer making investments in their production. It’s a nice bonus, and this will result in modest, short term economic gains, helping to achieve the goals and missions of development agencies. But these income increases are not sustainable and completely dependent upon the goodwill of downstream charity-minded supply chain actors.

But for those producers showing signs of professionalism, of continuous improvement, of environmental concern and farm resiliency, you almost can’t pay too much for the green. These are small businesses, entrepreneurs, the true engines of economic development in their communities. These are producers who are copied by the neighboring farmers, incentivized to do so by the profitability that is attainable. Talking to, rather than about, smallholders is key. Maarten van Kuelen, Head of Operations at This Side Up Coffees, said,

The importance of the C-price fades when you’re talking about what’s going on at the farm, at the roastery, and at the café. – Maarten van Kuelen, Head of Operations at This Side Up

The chain is the source of value creation, and by connecting these entrepreneurs on equal footing, the chain can make the price. This is one of the key roles and values that green suppliers bring to the table: the facilitation of relationship building.  It is the person in the middle who sees what roasters don’t understand about producers, and what producers don’t understand about roasters. The person in the middle can either exploit this, which results in fragility, or they can work to reduce it, which results in resiliency and sustainability.  The resiliency of the supply chain, then, is only limited by the level of trust, equality, and mutual respect that can be developed.

Coffee production, and more broadly agriculture, is an important economic development tool.  The coffee supply chains around the world, many that are hundreds of years in the making, are amazing.  A smallholder in a remote village of Huehuetenango Guatemala picks a cherry whose seed eventually ends up in my morning cup… incredible.  But top-down, highly complicated and expensive systems of determining appropriate profit margins and living standards, systems that are analytically superb, but ultimately misleading, may struggle to deliver on their intended purposes and could result in unintended harm.

Greg Meenahan is the Strategic Advisor & Program Developer at Equal Origins (The Partnership for Gender Equity).

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