GHENT UNIVERSITY

FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION

ACADEMIC YEAR 2013– 2014

Coffee cooperatives and Fairtrade certification: a case study in Burundi

Master’s Dissertation submitted in partial fulfillment of the requirements for the degree of Master of Science in Economics

Margot Vandorpe

Under the guidance of

Prof. M. D’Haese + S. Desiere

GHENT UNIVERSITY

FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION

ACADEMIC YEAR 2013– 2014

Coffee cooperatives and Fairtrade certification: a case study in Burundi

Master’s Dissertation submitted in partial fulfillment of the requirements for the degree of Master of Science in Economics

Margot Vandorpe

Under the guidance of

Prof. M. D’Haese + S. Desiere

PERMISSION I declare that the contents of this thesis may be consulted and/or reproduced, provided that the source is acknowledged. Margot Vandorpe

Abstract (Dutch) Cococa, consortium des coopératives de café, is een unie van koffie coöperatieven in Burundi en

regelt de koffie marketing en de export. Van de 13 aangesloten coöperatieven zijn er drie sinds

maart 2013 Fairtrade gecertificeerd.

Deze thesis onderzoekt de werkingsproblemen van vier van deze coöperatieven, gerelateerd

aan de coöperatieve organisatievorm, de aard van de koffiemarkt en de lage socio-

economische ontwikkeling van Burundi. Vervolgens wordt geanalyseerd of het Fairtrade label

financiële en/of sociaal-economische voordelen biedt/kan bieden aan de coöperatieven,

gegeven de specifieke context. Het onderzoek is gebaseerd op de analyse van documenten en

kwantitatieve data van Cococa en semi-gestructureerde interviews met de voorzitters van de

coöperatieven, de coördinatoren van Cococa en verantwoordelijken van de ondersteunende

NGO’s.

De belangrijkste werkingsproblemen zijn: gebrek aan focus op hun educatieve en sociale rol;

lage participatie van hun leden in beslissingen; onvoldoende werkingskapitaal en daardoor late

uitbetaling van de koffieboeren; weinig voordelen van het lidmaatschap; moeilijke

kwaliteitsverbetering ondanks de betere prijzen voor hogere kwaliteitskoffie; en lage scholing

en ervaring van management en leden waardoor deze en andere problemen uitvergroot

worden. Cococa en de non-gouvernementele organisaties nemen echter enkele taken van de

coöperatieven op zich, wat betreft de ontwikkeling van de coöperatieve, financiële steun en

opvolging van de certificatie.

Cococa heeft tot vandaag geen Fairtrade kopers gevonden, waardoor de gecertificeerde

coöperatieven niet konden genieten van de directe voordelen van het Fairtrade label, zijnde de

Fairtrade minimum prijs, de sociaal-economische premie en de mogelijkheid tot

voorfinanciering. Dit is niet verbazingwekkend gezien het grote overaanbod op de Fairtrade

markt. De Fairtrade certificatiecriteria leveren de coöperatieven echter wel indirecte voordelen

op inzake organisatieontwikkeling, milieubescherming en veiligheid op de werkplaats. Een

andere beperking van het certificaat is de kwaliteitsinvariante Fairtrade minimumprijs. De

coöperatieven met koffie van hogere kwaliteit (en dus hogere marktprijzen) zullen minder

voordeel halen uit het Fairtrade minimum.

I

Acknowledgement Merci, merci beaucoup to all the people who helped me during the last year. First of all I want

to thank professor D’Haese for guiding this master thesis. Special thanks to Sam Desiere for the

excellent tutoring. Many thanks to Stefaan Calmeyn, the legal representative of Broederlijk

Delen, who helped me in the start-up of the research and brought me in contact with many

local organizations in Burundi. VLIR-UOS to make the journey financially possible. Sincere

gratitude for the motivated and highly skilled team of Cococa, to welcome me in their

organization and explain me with great patience the coffee and certification process of the

cooperatives. Many thanks to Etienne Bihogo from Inades Formation to spend a lot of time,

sharing his impressive knowledge on cooperatives and certification. Joseph and the whole team

of Inades Formation, to help me where possible. Thanks to Abdon from Adisco to devote many

hours explaining complex accountancy of the cooperatives. To all the coffee related people I

met in Burundi, from the presidents of the coffee cooperatives and coffee farmers to the coffee

cuppers of the Cup of Excellence and coffee bars in Bujumbura. Many thanks to my aunt Ann

and uncle Paul to read and correct this work. Special thanks to my eldest sister Adeline and her

friend Matthias, for being my best imaginable support team and giving me a house and home in

Burundi. Thanks to my parents for having a lot of confidence in my studies and me. Thanks to

my roommates Hanne & Kaat, my sisters and my friends. Thanks to all the coffee bars and

libraries in Burundi and Belgium to provide a good working atmosphere. Thanks to the many

cups of coffee that helped me focus during writing.

II

III

Table of Content Acknowledgement .......................................................................................... I

List of abbreviations ...................................................................................... VI

List of figures ................................................................................................ VII

List of tables ................................................................................................ VIII

Introduction ................................................................................................... 1

Part I: Literature review ................................................................................. 3

1. Burundi and its coffee sector ................................................................................................... 3

1.1. Socio-Economic situation of Burundi ................................................................................ 3

1.1.1. Economic indicators .................................................................................................... 4

1.1.2. Role of coffee .............................................................................................................. 5

1.2. History of the Burundian coffee sector ............................................................................. 7

1.3. Burundian coffee production ............................................................................................ 9

1.3.1. Production processes ................................................................................................ 10

1.3.2. Production volatility .................................................................................................. 13

1.3.3. Burundian coffee quality ........................................................................................... 14

1.4. International coffee prices .............................................................................................. 15

2. Cooperatives .......................................................................................................................... 17

2.1. Definition ......................................................................................................................... 18

2.2. History of cooperatives in Africa ..................................................................................... 19

2.3. Advantages of the cooperative organization form ......................................................... 21

2.3.1. Transaction costs ....................................................................................................... 21

2.3.2. Scale Economies ........................................................................................................ 22

2.3.3. Filling up a market vacuum ....................................................................................... 23

2.4. Operating difficulties inherent in cooperatives............................................................... 23

2.4.1. Free-rider problem .................................................................................................... 23

2.4.2. Horizon problem ....................................................................................................... 23

IV

2.4.3. Portfolio problem ...................................................................................................... 24

2.4.4. Control problem ........................................................................................................ 24

2.4.5. Influence cost problem ............................................................................................. 24

3. The Fairtrade label ................................................................................................................. 24

3.1. Pricing policy .................................................................................................................... 25

3.2. The certification process ................................................................................................. 27

3.3. Positive impact ................................................................................................................ 29

3.4. Criticism ........................................................................................................................... 30

3.4.1. Impact on poverty reduction .................................................................................... 30

3.4.2. Stable prices guarantee? ........................................................................................... 32

3.4.3. Lack of recognition for quality .................................................................................. 33

3.4.4. Other criticism ........................................................................................................... 34

Part II Case study: Burundian coffee cooperatives and Fairtrade ................... 35

1. Introduction ........................................................................................................................... 35

2. Methodology ......................................................................................................................... 36

3. Cococa and partner organizations ......................................................................................... 37

3.1. Cococa ............................................................................................................................. 37

3.2. Role of NGO’s .................................................................................................................. 39

4. Internal structure cooperatives ............................................................................................. 41

4.1. Characteristics of cooperatives ....................................................................................... 41

4.2. The seven ICA principles .................................................................................................. 45

4.3. Advantages of the cooperative organization form ......................................................... 47

5. Operating challenges of the cooperatives ............................................................................. 49

5.1. Payment of coffee farmers .............................................................................................. 49

5.2. Pricing and marketing...................................................................................................... 50

5.3. Member recruitment and compensation ....................................................................... 54

5.4. Quality improvement ...................................................................................................... 55

5.5. Low educational level of members and staff .................................................................. 60

V

6. Fairtrade certification: illusion or solution? .......................................................................... 62

6.1. Certification process ........................................................................................................ 62

6.2. Opinions ........................................................................................................................... 64

6.3. Impact .............................................................................................................................. 66

6.3.1. Conditional advantages ............................................................................................. 66

6.3.2. Incentives .................................................................................................................. 69

7. Conclusion: to certify or not to certify? ................................................................................. 70

Bibliography ................................................................................................. IX

VI

List of abbreviations Adisco Appui au Développement Intégral et la Solidarité

ARFIC Autorité de Régulation de la Filière Café du Burundi

BIF Burundian Franc

CEVAL Centre for Evaluation

Cococa Consortium des coopératives de café

Flo-Cert Fairtrade Labeling Organizations International - Certification

FW Fully Washed

ICA International Co-operative Alliance

ICO International Coffee Organization

ILO International Labour Organization

IRED Innovations et réseaux pour le développement

ISTEEBU Institut de statistiques et d’études économiques du Burundi

ITC International Trade Center

LIFFO London International Financial Futures and Options Exchange

NCFC National Council of Farmer Cooperatives

NGO Non-governmental Organization

NYBOT New York Board Of Trade

OHCHR Office of the High Commissioner of Human Rights

PTD Potato Taste Defect

SDL Stations de lavage

SODECO Société de déparchage et de conditionnement

UN United Nations

USAID United States Agency for International Development

USD United States Dollar

VII

List of figures Figure 1: Share of coffee in total export earnings 2005-2010 ........................................................ 5

Figure 2: Distribution of coffee trees in Burundian provinces ...................................................... 10

Figure 3: Two main coffee cherries production processes ........................................................... 11

Figure 4: Green coffee production in Burundi since 1982, for two different processing methods

....................................................................................................................................................... 13

Figure 5: International market prices for Arabica and Robusta coffee (1980-2010) .................... 17

Figure 6: The Arabica Coffee Market 1989-2010: Comparison of Fairtrade and New York Prices

....................................................................................................................................................... 26

Figure 7: Cococa and partners ...................................................................................................... 36

Figure 8: Proportion of coffee trees of 30 years and older in Burundian provinces .................... 44

Figure 9: Relationship price ($/kg) and quantity (kg) of FW15+ green coffee contracts ............. 53

Figure 10: Price range ($/kg) of Cococa’s contracts in 2012-2013 and 2013-2014 ...................... 54

Figure 11: Cococa’s average prices of the superior quality grade and inferior quality grade,

2012-2014 ..................................................................................................................................... 59

Figure 12: Comparison of three relevant prices, April 2012- March 2014 (USD cents/pound) ... 67

VIII

List of tables Table 1: Economic indicators of Burundi, 1962-2008 ..................................................................... 4

Table 2: Fairtrade minimum prices and premiums for different varieties of Arabica coffee ...... 27

Table 3: Characteristics of the four cooperatives ......................................................................... 42

Table 4: Characteristics of buyers of Cococa ................................................................................ 52

Table 5: Grading system of Fully Washed coffee .......................................................................... 57

Table 6: Average prices per grading quality in coffee year 2012-2013 (USD/kg) and number of

different buyers per quality .......................................................................................................... 58

Table 7: Results linear regression of price .................................................................................... 60

1

Introduction This research essentially consists of two parts: a literature review and a case study. The first

part discusses the relevant literature required to analyze a case study of four coffee

cooperatives and a second-level cooperative Cococa, Consortium des Cooperatives de Café, in

Burundi. Cococa is a union created to help 13 cooperatives managing their own washing station

to commercialize and export their coffee. Two of these cooperatives have recently been

Fairtrade certified. The purpose of this master thesis is twofold: an analysis of the main

operating problems of the cooperatives and answering the question: can Fairtrade certification

be considered as a financial or socio-economic development for these coffee cooperatives? The

analysis of this question requires careful understanding of different topics. The first topics

discussed in the literature review are the coffee cultivation and coffee market in Burundi, in

order to gain a good insight into the core business of the cooperatives. Also important are the

socio-economic situation of Burundi, the history of coffee cultivation and the recent

privatization of the coffee sector. The second part of the literature review provides the theory

on the cooperative organization form by analyzing the International Co-operative Alliance

principles (ICA), the advantages over other business forms and the operating difficulties. Of

course the research question demands an analysis of the Fairtrade label, issued by Flo-Cert.

This third part focuses on the producer’s side: the certification criteria, positive impacts and

criticism. The criticisms elaborated are those relevant for this case study: poverty reduction,

stable prices guarantee and the lack of recognition for quality.

The case study begins with the framework of Cococa and the introduction of the non-

governmental organizations, which are part of the advisory board. The nature of the coffee

cooperatives is studied, by applying the ICA principles and looking into the advantages and

disadvantages. By discussing the main operating challenges of the cooperatives and analyzing if

the Fairtrade certificate provides a solution, an answer to the research question is formulated.

The operating challenges discussed here are the late and low payment of the coffee farmers,

the low and volatile prices, the poor distinction in compensation between members and non-

members, the difficulties of focusing on quality improvement and the low educational level of

the management of the cooperative.

2

The case study is based on semi-structured interviews and document analysis. The time scope

of the data is limited because Cococa has only been operational since 2012, one year before

this research started. Moreover, the Fairtrade certificate was obtained in March 2013, only four

months before the start of the research. Until today, no Fairtrade contract has been concluded

by Cococa. This means the research lacks quantitative data on Fairtrade sales contracts to

support conclusions or perform anything like a cost benefit or impact analysis. It is therefore

mainly a qualitative analysis complemented with quantitative data on the coffee prices,

quantities and quality. Another limitation of the research is the difficult in data collection: some

data were incomplete or incorrect. Nevertheless, most of the data received by Cococa is

trustworthy and carefully maintained.

3

Part I: Literature review

1. Burundi and its coffee sector

Burundi is a small country in Central Africa. Coffee is its main export product and accounts for a

large share of its foreign exchange earnings (ITC, 2011). In what follows, some economic

indicators of Burundi and the important economic role of coffee for the government and the

inhabitants is outlined. Paragraph 1.2 covers the history of the Burundian coffee sector and

paragraph 1.3 covers the Burundian coffee production, its production processes, volatility and

quality. Paragraph 1.4 gives a brief introduction to the international coffee prices.

1.1. Socio-Economic situation of Burundi

Burundi is a small country in Central-Africa, without access to the sea. It is surrounded by

Rwanda, Tanzania and Congo. Between 1993 and 2000 Burundi was trapped in an ethnic-based

civil war between Tutsis and Hutus, which caused severe social and economic damage. In 2000

the peace agreements of Arusha were signed, and some major challenges lay ahead for the

unstable country: rebuilding their cities and infrastructure, organizing democratic elections,

improving the living standard of its population, collecting external funds etc. (Vandenginste,

2012). Burundi ended up worse than before the civil war: with a GDP per capita of only 600$

(2012) it is ranked 5th poorest country of the world, after Zimbabwe, Somalia, the Democratic

Republic of Congo and San Marino (CIA, 2013). Burundi faces many difficulties in modernization

and development: bad infrastructure and roads, political instability, low agricultural

productivity, low health and educational level of the population, low electricity supply,

government corruption etc. The economy is characterized by subsistence farming. Agriculture

accounts for 30% of the GDP and employs 93.6 % of the population. The primary sector remains

the main sector, but the secondary and tertiary sectors gain importance (World Bank, 2011).

Despite its small surface (27,830 km2), Burundi has a population of 10.8 million and a

population growth rate of 3.08% (CIA, 2013). Rwanda and Burundi comprise one of the most

densely populated areas of Africa (Isteebu, 2013). Sixty-eight percent of the Burundian

population lives below the poverty line (CIA, 2013).

4

1.1.1. Economic indicators

Table 1 enumerates some economic indicators between 1962, the year of independence, and

2008. The GDP per capita declined over the 46-year period. This is mainly because of the high

population growth rate and the sharp decline in GDP per capita during the civil war. We notice

a spectacular rise in aid per capita. Burundi is extremely dependent of foreign aid, which

represents 42% of its national income. This is the second highest percentage in Sub-Sahara

Africa (World Bank, 2011). A declining export share in % GDP and a rising import share in % GDP

contribute to a deficit in the current account balance.

Table 1: Economic indicators of Burundi, 1962-2008

Source: World Bank, 2011, p3

The financial market of Burundi is clearly underdeveloped. The World Bank showed that only

2% of the Burundian population had a bank account, 0.42% used bank credits and 4% was

active in microfinance. Especially in rural areas access to bank accounts is difficult (World Bank,

2011). The inflation rate is spectacularly high. In June 2013 it reached a maximum of 11.4%.

This is of course not favorable to a stable investment climate (Isteebu, 2013). Since 2009

Burundi joined the East African Community, which tries to strengthen the trade relations in the

region.

The survey of Bachmann (2009) in the provinces Kayanza, Ngozi, Gitega and Murumvya reveals

that 55.3% of the households live under the poverty line of one dollar a day. Coffee is the

5

principal source of revenue for the rural population, followed by bananas and livestock.

Estimates of the average land holdings are 2.17 hectares per household. Inspecting the

numbers more closely they reveal that the land is very unequally distributed. 14.7% of the

households cultivate less than 0.5 hectare and 27.9% cultivate more than 2.5 hectare. The

shortage of land is a major problem for the poorest.

1.1.2. Role of coffee

Coffee is the second largest export commodity in the world after petrol. In the coffee season

2010/2011 the total coffee production is estimated at 7.8 million tons. Coffee is the main

export product of Burundi and accounts for 62% of its export value (see figure 1) and 90% of its

foreign exchange earnings (ITC, 2011).

Figure 1: Share of coffee in total export earnings 2005-2010

Source: ITC, 2012, p20

6

Burundi’s export base is very limited and undiversified mainly because of the stagnation in

agriculture. Because of the low diversification Burundian export incomes are volatile and

vulnerable to external shocks such as bad weather, quantity or price shocks (World Bank,

2011).

According to a study of the ISTEEBU, Institut des Statistiques et d’études Economiques du

Burundi (2013), 590.000 farmer families grow coffee, which is 45% of the total population. On

average a coffee farmer owns 200 coffee trees (Ntimpirangeza, 2010). The income generated

from coffee, is treated as unique by the farmers because of its seasonal effect and the lump

sum it generates. Kimonyo & Ntiranyibagira (2007) write that as coffee is a seasonal product,

revenues from coffee are larger than what the farmer is able to save over the year, and thus

often used for non-daily expenditures such as construction works, school fees etc.

Most farmers cultivate more than coffee: food crops (beans, maize, sorghum, potatoes,

manioc…) and cash crops (bananas, sugar cane, tea…), and some farmers own livestock animals

(Cochet, 1995). However the same study of Cochet in 1995 reveals that coffee is not the most

beneficial and profitable crop for most Burundian farmers. The remuneration is low, the

working conditions are bad and the purchasing power is decreasing. This outdated study of

Cochet (1995) proves to be still relevant today. The Iwacu1 published on 23 March 2013:

« Le café n’est plus rentable», se lamentent certains caféiculteurs. Ils menacent de le remplacer

par d’autres cultures. Côté administration, le café est source de devises pour l’Etat et n’est pas à

négliger. Des mises en garde viennent de tomber. » (Bukeyeneza, 2013, March 23)

Until today the coffee culture is under threat due to low profitability. Coffee farmers may

choose to switch to other cultures, which would pose a serious threat to state income. In the

article cited, coffee is called a state project. The state imposes penalties of 2 000 BIF for each

extracted plant and 20 000 BIF for each poorly maintained field.

1 Iwacu is a national newspaper of Burundi

7

1.2. History of the Burundian coffee sector

In 1930, Belgian catholic missionaries introduced coffee in Burundi. It was considered as a cash

crop and thus an opportunity to acquire a good income for the farmers who were focused

mainly on subsistence agriculture. The coffee production grew and reached 27.279 tons of

green coffee in 1959 (Ired, 2011).

In 1962, the independence of Burundi was celebrated. Coffee reminded the farmers of

(unhappy) colonial times: production and quality dropped (Broederlijk Delen, 2011; Kimonyo &

Ntiranyibagira, 2007), which worsened with the fall in prices. However, in 1976 the coffee

landscape of Burundi changed completely. The government realized coffee could secure

financial resources for the state and generate an income for the rural areas, where otherwise

this is scarce. All private operators were nationalized and export related activities were

regulated by OCIBU, Office du Café du Burundi. The OCIBU paid a fixed amount to the

Burundian farmers, unrelated to the international price. This meant stability and protection

from market volatility, but on the downside, farmers did not benefit from price increases

(Broederlijk Delen, 2011).

After the nationalization many investments were made in the sector: 133 coffee washing

stations to produce washed coffee were installed in the countryside and plantation area

doubled between 1980 and 1993. However due to large population growth and land scarcity in

Burundi, the sector experienced growing difficulties (Kimonyo & Ntiranyibagira, 2007).

Despite the investments, reform seemed necessary due to the following reasons: i) the

expansion of coffee plantations did not lead to an expansion of production, which remained

relatively stable between 1980 and 1993; ii) a monopoly of the OCIBU on the coffee export

resulted in inefficient governance and low prices; iii) the price falls led to the build-up of

significant deficits; iv) coffee farmers earned little while factory workers were well paid etc.

(Kimonyo & Ntiranyibagira, 2007).

In 1986 negotiations about privatization of the sector began with the IMF and World Bank.

Seven years later, a terrible civil war began, which caused a rural exodus, demolition of

plantations and washing stations, and a neglect of those plantations that survived. Privatization

plans were postponed until after the peace agreements in 2000. The sector experienced much

8

material damage and the toll of human life was enormous. After the coup d’état of Pierre

Buyoya in 1996, neighboring countries imposed an economic embargo on Burundi (Broederlijk

Delen, 2011; Kimonyo & Ntiranyibagira, 2007).

The Special Rapporteur on the human rights situation in Burundi reported the embargo was

having a ‘disastrous effect’ on the Burundian population (Bossuyt, 2012). It also caused severe

losses and disturbance in the coffee industry. In 1999 the embargo was lifted after progress by

the government in the peace process. In 2006 the Burundian government opted for a total

liberalization (Kimonyo & Ntiranyibagira, 2007). Two facts complicated this privatization

process considerably: Burundi was still recovering from the civil war and the coffee sector was

one of the most income generating sectors for the state. The privatization required the sale of

the 133 coffee washing stations owned by the state. Owning a washing station is a very

strategic possession in the coffee sector: at the washing station the quality of the coffee beans

can be controlled and the product remains property until the export. In 2009 13 washing

stations were sold to Webcor, a Swiss Company. In 2011 another 28 were sold to various

private investors. Ninety-two washing stations remain property of the state today (Broederlijk

Delen, 2011).

Although the stakeholders agreed on the need for privatization, there is much criticism of the

way the reforms have been implemented. The sale of the washing stations does not offer real

opportunity for Burundian associations and companies. The would-be buyers need to show a

bank balance of at least one million dollars over a minimum of three years. President Pierre

Nkurunziza declared in his speech on the 1st of May 2007 that, coffee until exportation, is

exclusively owned by the farmer, and 25% of the shareholding of the privatized stations de

lavage (SDLs) would be given to farmer associations. These promises remain unfulfilled

(Broederlijk Delen, 2011).

On these reforms the CNAC, Conféderation Nationale des Caféiculteurs, an organization, which

gives coffee farmers a voice at national level, reacted strongly. They demanded more

participation and more ownership and blamed the government for not listening to the

producers (Broederlijk Delen, 2011). Two UN experts, Olivier De Schutter en Cephas Luminas

wrote on 18 April 2013 that privatization of the coffee sector in Burundi does not pay attention

9

to the interests of the producers. Meanwhile the reforms caused an ownership shift of those

operations generating the highest profits to foreign companies (OHCHR, 2013, April 18).

In 2007 OCIBU was replaced by ARFIC, Autorité Regulatoire du Filière de Café, a state-owned

control organ of the coffee sector. ARFIC is responsible for statistics of the sector, collecting and

dispersing data, and controlling and defining quality of the exported coffee. In the beginning of

the coffee season ARFIC determines a minimum price per kilo to be paid to the producers. This

price is in function of the market price (Broederlijk Delen, 2011).

1.3. Burundian coffee production

The Burundian coffee year starts on the 1st of April and runs until the 31st of March (ITC, 2011).

In recent years only Arabica coffee has been produced in Burundi. Arabica coffee represents

60% of the coffee worldwide and is considered the coffee with superior quality and taste. The

international prices for Arabica coffee are higher than for Robusta, but Arabica is more

susceptible to diseases. Important geological factors for coffee production are height, climate

and rainfall. Arabica coffee requires an altitude between 1200 and 2000 meters, a moderate

climate between 18 and 22°C and yearly rainfall between 1400 and 2000mm (ITC, 2011).

Figure 2 shows the regional distribution of coffee trees in Burundi. The provinces with an

important coffee cultivation are Kayanza, Ngozi, Gitega and Muyinga, all situated in Northern

Burundi. The report of Isteebu (2009) reveals that washing stations are an important link in the

coffee chain in Burundi. In the provinces with more than 150 001 coffee trees (see figure 2),

65% to 90% of the coffee farmers sell their coffee to washing stations. In other provinces, with

low coffee cultivation and probably less washing stations, the percentage of coffee farmers that

sell their coffee to washing stations is much lower: in the eastern provinces Cankuzo and Ruyigi

this is only 3.4% to 13% of the coffee farmers.

10

Figure 2: Distribution of coffee trees in Burundian provinces

Source: Isteebu, 2009, p15

1.3.1. Production processes

The two main primary processing methods are the dry or unwashed process and the wet or

washed process. Figure 3 shows the different steps in these processes. In both transformation

processes, preliminary sorting and cleaning of the cherries is the first step. The damaged,

unripe cherries are removed by hand or by flotation in washing channels. The next steps differ

for the wet and dry process. The dry process is the oldest and simplest method. It requires less

water, infrastructure and labor than the wet process. Almost all Robusta coffees and 90% of

Arabica in Brazil are treated using the dry process. After cleaning, the cherries are dried in the

sun. This is a step that heavily influences the quality of the coffee. The dried cherries are then

stored in silos before transportation to a hulling machine, which removes all the remaining

layers in one step (ICO, 2014b). The dry process delivers natural coffee (ITC, 2011). The key

difference between the dry and wet process is the pulp removing operation. In the wet process

11

the pulp is separated from the beans before drying. This is done mechanically and should be

initiated as soon as possible after harvesting to avoid deterioration of the fruit. Before

proceeding to the next step, the beans need to pass screens and washing channels to separate

out the unpulped and imperfect cherries. A parchment and a sticky mucilage layer now

surround the coffee beans. This mucilage has to be removed by fermentation. After

fermentation, the beans are washed in water and dried. In Africa, the coffee beans are often

dried on drying tables. This method is appreciated and imitated around the world because it

allows a uniform drying process with no fermentation. It may take up to four weeks before the

cherries are perfectly dried, and this needs intensive hand labor to turn them and ensure even

drying. The wet process produces fully washed coffee (ICO, 2014b). Coffee produced for both

methods is called parchment coffee.

Figure 3: Two main coffee cherries production processes

Source: ITC, 2011, p189

12

In-between these two processes there is the semi-washed process. The semi-washed process is

in the Great Lakes region of Central Africa performed by small hand equipment that pulps the

ripe cherry (ITC, 2011). The semi-washed process differs from the dry process because of the

pulp removing operation and differs from the wet process because there are no fermentation

and washing tanks needed. However, the use of pulper and demucilager units are

recommended (Winston et al., 2005).

After drying, the coffee needs to be transported to the dry mill factory where the coffee grain is

released of its parchment (hulling) (ICO, 2014b; Mutua, 2000). The two biggest dry mill factories

in Burundi are in the hands of the government body SODECO, Société de déparchage et de

conditionnement. SODECO is based in Bujumbura and Gitega and is a service provider, meaning

that the coffee treated remains property of the cooperative. It processes the fully washed

parched coffee to green coffee, ready to be exported (Cafe du Burundi, 2011).

More than 95% of the coffee exports worldwide is exported as green coffee. Exports of roasted

coffee are of negligible quantity. The coffee roasting is mostly performed by importing

countries (ITC, 2011; Pay, 2009).

Of all the Burundian coffee cherries 80 to 85 % are transformed in an industrial way to washed

parchment coffee, and 15 to 20% is transformed at small-scale to semi-washed parchment

coffee (Ired, 2011).

Despite the advantages of selling coffee cherries to the washing station and produce washed

parchment coffee (one gains time and gets higher prices) many coffee farmers still keep a part

of the coffee cherries for home treatment (and thus produce semi-washed parchment coffee

and sell their coffee to traders). Cochet (1995) cites some reasons: i) it is a way of family work

for which the opportunity cost is low; ii) the harvested quantities are sometimes too low to

undertake the journey to the washing station (the distance is often long and there is a lack of

good conveyance); iii) some coffee farmers prefer to sell their coffee in accordance with their

monetary needs throughout the year. The parchment coffee can be preserved for longer and

can be sold as and when needed; iv) The farmers are often required to sell their coffee

immediately because of lack of access to credit. The traders pay immediately, but give a lower

price, which can be interpreted as an extremely high interest rate.

13

1.3.2. Production volatility

Arabica coffee trees have a two-year harvest cycle, with consecutive bad and good harvesting

years (Guariso, Ngabitsinze & Verpoorten, 2012). Figure 4 shows the production of green coffee

in Burundi since 1980. Two major trends are noticeable: first, the total production of coffee in

Burundi declined, probably due to old coffee trees still dating from colonial times, growing

population requiring more land for food production and low international prices. A second

trend is the more extreme fluctuations of production since 2000. In the eighties the coffee

production fluctuated around 30.000 tons. After 2005 production fluctuated between 5.000

and 30.000 tons. According to ARFIC the national coffee production of Burundi decreased from

23 million ton in 2012-2013 to 10 million in 2013-2014, a decline of more than 50%

(Nkengurutse, 2014, May 6).

Possible explanations for these extreme fluctuations are climate change, ageing coffee trees,

lack of fertilizers, demotivation of coffee farmers to take care of their plantations due to the

privatization etc. (Twin, 2012). An interesting topic is the delayed reaction of supply on

augmented prices. After a coffee year with high prices most cooperatives and farmers invest in

new plants. Coffee trees can only be harvested three or four years after planting, resulting in a

delayed supply effect of four years (Guariso et al., 2012).

Figure 4: Green coffee production in Burundi since 1982, for two different processing

methods

Source: Twin, 2012, p3

14

1.3.3. Burundian coffee quality

The quality of coffee is a complex matter to discuss. It depends on invariant geographic

characteristics such as soil, height, climate and rainfall, and on production and processing

systems such as selectivity of picking the coffee cherries, and the wet or dry transformation

method. Besides these natural characteristics of the region and the manmade characteristics of

the treatment process, the quality of coffee is in its tasting and therefore very subjective

(Mutua, 2000).

Generally speaking, coffee can be divided into three quality categories: exemplary coffee, high

quality coffee and mainstream coffee. Mainstream qualities account for 85%-90% of world

coffee consumption, and exemplary and high quality is only 10% to 15% of the world market.

Exemplary quality is coffee with a high intrinsic value, usually of limited availability and retailed

under origin names. The market for high quality coffee is much broader and represents a big

percentage of the specialty coffee market. It includes good quality, organic coffees, washed &

superior quality natural robustas. Mainstream quality is coffee of average quality. On the

international coffee market there is room from top quality coffee to undergrade or lowgrade

coffee. Undergrades or lowgrades are coffee beans, which do not fit into the above mentioned

categories and contain many defects (the maximum number of defects allowed depends on the

market) (ITC, 2011).

When the wet process is carefully done, the quality of the coffee beans will be better than

when dry processed, and better prices can be negotiated. On average 80% of Burundian coffee

is fully washed, thanks to the investments in building washing stations in the 80’s

(Ntimpirangeza, 2010). Production of high quality coffee is of course only interesting for the

coffee farmers if they are rewarded for the extra work. Like the price for conventional coffee,

the premium paid for high quality coffee is determined by supply and demand. Because the

quality coffee market is still very limited, producers should focus on both markets, selling their

top quality on the specialty market and what remains on the mainstream market (ITC, 2011).

Despite its high intrinsic quality, the Burundian coffee has been used as a cheap substitute for

washed Arabica’s from Kenya, Ethiopia, Tanzania and Rwanda (Twin, 2012). Twin (2012) holds

the lack of vision and strategy to promote Burundian quality coffee responsible for not

maximizing its market value.

15

Improvement of coffee quality is a topical subject in Burundi. Some highly regarded Specialty

Coffee events took place in Bujumbura: in August 2013 the Cup Of Excellence; in February 2014

the 11th conference and exhibition of the African Fine Coffees Association. In March 2014 Iwacu

writes “The production of high quality coffee starts in the field”, reporting on a one-week

conference in Ngozi on production of quality coffee, organized by Kahawatu foundation

(Ndayikengurukiye, 2014, March 7).

Burundi and neighboring Rwanda however cope with a serious quality threat, the potato taste

defect (PTD), causing an odor and flavor of rotten potatoes in the coffee cup (Pittalwala, 2013,

August 23). This disease, which reduces the quality considerably, is caused by bacteria entering

the cherries via insect bite of the Antestiopsis bug (Bouyjou, Decazy & Fourny, 1999). Much

research still needs to be done on the subject but so far it is known that the potato taste defect

is only apparent after brewing and thus generally occur after shipping (Pittalwala, 2013, August

23).

1.4. International coffee prices

The coffee market is a very complex market to discuss. In order to give a general introduction,

this part discusses the volatility of international coffee prices and the International Coffee

Agreement designed to reduce this volatility. It is a very brief introduction but necessary to

understand the following parts.

Big fluctuations in demand and supply and very volatile prices are warp and weft at the

international coffee market: prices of Arabica coffee rose at the start of 2014 by 90% due to

drought in Brazil and market speculation. This will very likely affect the coffee prices for

consumers (Matyn, 2014, March 12). In Burundi the price paid to the producers rose from 400

BIF to 600 BIF (Nkengurutse, 2014, March 22). Only a few months earlier, coffee prices were

described as reaching an historic low by International Business Times (Rudarakanchana, 2013,

October 23). This price volatility can be explained by the fluctuating supply due to harvest

cycles and weather conditions in the biggest export countries (Brazil, Colombia, Indonesia and

Vietnam) (ITC, 2011). The extreme volatility of the coffee market affects the production and

investment decisions in the coffee growing countries considerably. The demand for coffee and

especially quality and certified coffee is growing in western countries, but profitability of coffee

http://www.ibtimes.com/reporters/nat-rudarakanchana

16

cultivation in coffee producing countries is decreasing (Osorio, 2002; Rudarakanchana, 2013

October 23).

The International Coffee Agreement (ICA) came into force in 1962 and was introduced as an

export quota system to stabilize and increase coffee prices. The International Coffee

Organization (ICO) is the controlling body of the agreement, which is binding in all major

producing countries and most consuming countries. In 1989 the quota system was suspended,

mainly because of competition among producing countries that strove for larger market shares

and thus brought about the demise of the quota system. The failure of this agreement resulted

in deregulation of the market and due to new producers such as Vietnam and technological

innovations in the roasting industry, prices fell sharply (Hoebink, Ruben, Elbers & Rijsbergen,

2014). Since then there have been six subsequent agreements. The ICA of 2007 came into force

in 2011 with the same objectives of stabilizing prices (ITC, 2011).

Figure 5 depicts the international market prices for Arabica and Robusta coffee between 1980

and 2010. There is a sharp decline in prices after the demise of the ICA in 1989. The fall in

earnings is particularly severe for countries where coffee represents a high share of the export

revenue, such as Burundi. Prices peaked in 1994 and 1997 due to respectively frost damage and

drought in Brazil. In 2001 a 30-year low was reached due to oversupply of coffee, called the

‘coffee crisis’ by the ICO (Osorio, 2002). After a small depression in 2008, caused by the global

financial crisis, prices reached a high in August 2010 (Fairtrade International, 2011f).

http://www.ibtimes.com/reporters/nat-rudarakanchana

17

Figure 5: International market prices for Arabica and Robusta coffee (1980-2010)

Source: Guariso et al., 2012, p403.

Coffee prices are determined by availability, quality and market trends such as expectations,

speculation, currency exchange rate changes etc. The New York Board of Trade (NYBOT)

determines the price for Arabica coffee and the London International Financial Futures and

Options Exchange (LIFFO) for Robusta coffee. These are future prices reflecting the future

estimated availability and demand for coffee as a whole. This one single price index reflects an

average quality. High quality Arabica coffee will therefore have a positive differential in the

New York price (ITC, 2011).

2. Cooperatives

After the financial crisis renewed interest in the cooperative as an alternative organization

form, was showed. The United Nations declared 2012 the international year of cooperatives

(UN, 2012). Agricultural cooperatives proved their importance in achieving food security (UN,

2013). ILO, the International Labor Organization, created the cooperative facility for Africa

(CoopAFRICA), a regional technical cooperation program, in order to achieve the Millennium

Development Goals and strengthen the cooperative network (Pollet, 2009). All this clearly

indicates renewed interest and belief in cooperatives and what they can achieve.

18

In Burundi cooperatives play an important role in the coffee sector. Valentinov (2007) develops

an explanation why cooperatives are important in agriculture. He argues family farms

experience high transaction costs that can limit the ability to realize economies of scale. Family

farms are also less suitable to develop market power. The disadvantages of the family farm

represent the major motives for the creation of agricultural cooperatives.

In what follows a definition and the main principles of a cooperative are given. Paragraph 2.2

discusses briefly the history of cooperatives in Africa, paragraph 2.3 and paragraph 2.4

elaborate on the main advantages and challenges of cooperatives. All literature discussed

focuses on agricultural cooperatives in an African context.

2.1. Definition

The ICA, international Cooperative Alliance, defines a cooperative “an autonomous association

of persons united voluntarily to meet their common economic, social and cultural needs and

aspirations through a jointly-owned and democratically-controlled enterprise” (ICA, 2014). To

be considered as a cooperative, the organization must meet seven internationally recognized

principles:

- Open and voluntary membership. This connotes no discrimination of gender, religion,

race, or social, political preference;

- Democratic member control. The members of the cooperative actively participate in

decision and policy making and representatives are elected in a democratic manner;

- Member economic participation. A part of the capital of the cooperative is made of

contributions of members, and members receive limited compensation for their

membership fees. Cooperatives return surplus income to members in proportion to

their use of the cooperative, not to their investment. Moreover, this capital is

democratically controlled and is most often allocated to development of the

cooperative, to facilitate transactions for members and to support other activities;

- Cooperatives should be autonomous and independent. They are controlled by their

members, not by external organizations or governments;

- Crucial role of cooperatives in education, training and information of their members,

employees, elected representatives. This is important for the development of the

cooperative;

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- Cooperation among cooperatives and strengthening of the cooperative network which

lead to better service for their members;

- Concern for community. Cooperatives take care of the sustainable development of their

communities;

(ICA, 2014)

Economic theories about cooperatives are found in new institutional economics, which

criticizes the neoclassical theory for its unrealistic assumptions of zero transaction and

adjustment costs and exclusive focus on profit maximization. The new institutional economics

focuses on the existence of transaction costs, property right structures and agency theories.

The theory pays attention to institutional constraints and alternative organization forms

(Ortmann & King, 2007a). Helmberger & Hoos (1962) can be considered as the first authors

presenting a mathematical behavioral model of agricultural cooperatives. The optimization

problem of the cooperative in their model is the maximization of the price per unit by

distributing all earnings back to its members in proportion to their use of the cooperative.

Generally, agricultural cooperatives can be classified in three subgroups: marketing

cooperatives which negotiate better prices and produce and sell agricultural products; farm

supply cooperatives which buy farm supplies such as fertilizer, seeds… and redistribute these

among their members at advantageous prices; and service cooperatives which organize

services such as transport, insurance, storage for their members (Ortmann & King, 2007a).

2.2. History of cooperatives in Africa

The modern cooperative originates from Western Europe and was introduced to Africa in the

19th century by colonial authorities. The cooperative sector of those days was imposed and had

no links with existing pre-colonial structures and traditions. The foreign models were designed

for colonial purpose and benefits. Sub-Saharan Africa has known many failures of rural

cooperatives between 1960 and 1990, which is often attributed to management problems and

internal weaknesses of the cooperatives. Lack of knowledge and experience in management is

often a core problem (Develtere & Pollet, 2008; Van Niekerk, 1988). To blame are also local

politics and the donor sector. The donor sector preferred the one-size-fits-all strategy and

invested excessively in poorly adjusted, non-viable cooperatives (Develtere & Pollet, 2008). A

20

review of the World Bank in 1986 showed that 50% of all agricultural projects in Africa were

operated by cooperatives (Pohlmeier, 1990). Often, members of cooperatives were more

development aid partners than owners and decision makers of their own cooperative.

Many cooperatives functioned as semi-public and bureaucratic enterprises rather than private,

voluntary businesses. The colonial traditions heavily influenced the organizational structure and

the positioning in the socio-economic sector of cooperatives. Develtere (2008) define the

Belgian colonialism in Congo and the former Urundi-Rwanda as a social movement tradition.

The cooperative featured as an instrument of collective action and established social

organizations played the crucial role of bringing people together. Indigenous people were free

to set up own cooperatives, which were semi-public enterprises that generated income for

administrative structures and additional income for the local population. After World War II the

Belgian colonial authorities created special cooperative departments, which promoted the

creation of indigenous cooperatives and registered new ones. The paternalistic approach of the

Belgian colonists required that each committee contained one or more Belgian representatives.

The cooperative role in Belgian Central Africa continued without support of the colonials. Local

entrepreneurs set up credit or savings cooperatives supported by catholic missionaries. In

Burundi, a strong cooperative sector did not emerge. The Cooperative department, created in

1976, supported consumer cooperatives and later credit and saving societies, but very few

were sustainable. Religious organizations, social movements and non-governmental

organizations filled up the space with private initiatives. Survey studies in 9 countries in Africa

showed the lack of coherent cooperative movement and the negative connotations around

cooperatives (Pollet, 2009). Develtere, Pollet & Wanyaruma (2008) write about the renaissance

of the African movement. Despite the history, the cooperative organizational form did not

disappear from the scene. It continues to play a determining role in economic and social

sectors, but carries its history with it. “The colonial and post-colonial phases they went through

have definitely left their mark on the way people look at cooperatives, the way cooperatives

operate, and the way external patrons such as governments and the donor community relate

with them.” (Develtere, Pollet & Wanyaruma, 2008, p xiii-p xiv) However, the scene changed:

many African countries have been through a period of liberalization. ILO created COOPAFRICA in

2007, to guide this renaissance period of the cooperative movement. The goal of COOPAFRICA is

to improve the efficiency, management and governance of the cooperatives in order to create

21

more jobs, reduce poverty and provide social protection. This can be achieved through working

on a favorable legal and institutional environment, a stronger voice of the cooperative

movement, better management etc. (Pollet, 2009).

2.3. Advantages of the cooperative organization form

Why are cooperatives created rather than more conventional business entities, or rather than

individual trade relations? The non-state sector consists primarily of the business community,

which insists on the necessity of return on investment, and the civil society organizations,

insisting on primacy of community values and ethics. Cooperatives are an in-between form,

combining the value rationale of the civil society with the entrepreneurial rationale of the

business community (ILO, 2001).

Literature on market access of small-scale farmers in the developing world reveals many

difficulties such as information asymmetries and credit constraints (Poulton, Dorward & Kydd,

2010). The National Council of Farmer Cooperatives argues that cooperatives strengthen

bargaining power; maintain access to competitive markets; capitalize on new market

opportunities; obtain needed products and services on a competitive basis; improve income

opportunities; reduce costs and manage risks (NCFC, 2014). Three main advantages of the

cooperative organization form are discussed below: transaction costs, scale economies and

ability to fill market vacuums.

2.3.1. Transaction costs

Transaction costs are the costs of organizing and transacting exchanges. This can be divided

into search and information costs, bargaining and decision costs, and policing and enforcement

costs (Williamson, 1985). The theory on transaction costs was initiated by Coase (1937) and

remains a popular theme in the new institutional economics (Szabó, 2002). Transaction costs

are considered as one of the main reasons to integrate (Ollila & Nilsson, 1995; Williamson,

1985).

Smallholder farmers experience high unit transaction costs in all non-labor transactions. Access

to inputs, services and training is difficult. However, they have a competitive advantage in

access to labor over large producers because of the low costs of family labor (Poulton et al.,

22

2010). Collective action to overcome these high transaction costs and barriers to the market

has proven to be effective (Stockbridge, Dorward & Kydd, 2003).

The cooperative is able to overcome information barriers more easily than individual farmers.

The cooperative has more resources to collect information and can diffuse this information to

its members. Hereby the market transparency increases and the chance of market failure

lowers. More access to information and lower transaction costs means better market access.

Therefore cooperatives can be a deserving competitor of bigger players on the market

(Ortmann & King, 2007b).

Cooperation means a stronger voice at the bargaining table. This may result in financial

reductions for the cooperative and better prices for the cooperative members (Markelova,

Meinzen-Dick, Hellin & Dohrn, 2009; Szabó, 2002).

Last are enforcement costs. These are the costs of searching, making up and concluding

contracts with outsiders. Outsiders can be financial institutions, buyers, intermediaries, non-

governmental organizations etc. Collective action can facilitate this communication and

overcome barriers to entry (Markelova et al., 2009; Thorp, Stewart & Heyer, 2005).

2.3.2. Scale Economies

By working cooperatively, products and services can be obtained on a competitive basis. This is

better known as scale economies. The possibility of scale economies may increase the

investment possibilities (Ortmann & King, 2007b). Besides cost reduction of inputs, the

increased production volume and joint deliveries to the market can increase the market power,

reduce the transaction costs and improve the bargaining power for better prices

(Mujawamariya, D’Haese & Speelman, 2013).

In addition, collective action provides ample opportunities to improve the marketing of the

products or services. Cooperatives are well suited to create entry into new markets such as

certified or high quality markets (by obtaining the necessary information, achieving quality

standards, gaining a bigger quantity) or to introduce value-adding activities in existing value

chains (by innovating and/or branding) (Markelova et al., 2009).

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2.3.3. Filling up a market vacuum

Cooperative business can create a solution for certain needs in societies that are not provided

by the market. This may be social needs or economic needs. Markelova et al. (2009) conclude

collective action can help correct missing credit markets and fill in coordination gaps. They cite

many case studies where collective action enabled farmer’s access to financial loans, easier and

more affordable transportation and other services. In the case study of Mujawamariya et al.

(2013) in Rwanda, 46% of the farmers received credit of the cooperative.

2.4. Operating difficulties inherent in cooperatives

Cook (1995), Ortmann & King (2007a) and Royer (1999) present five core problems inherent to

the organizational form of cooperatives: the free-rider problem, the horizon problem, the

portfolio problem, the control problem and the influence cost problem are discussed below.

2.4.1. Free-rider problem

The free-rider problem of cooperatives exists both internally and externally. The internal free-

rider problem arises because returns and rights are distributed to the members proportional to

the use of the cooperative (for example: kilos of coffee brought to the cooperative) and not

proportional to their initial investment. New members therefore receive the same rights as

existing members, even though they are not required to make up-front investments. The

existing members see their returns dilute and are discouraged to invest in the cooperative. On

the other hand decisions that increase cash flow per member arise more frequently (Cook,

1995; Royer, 1999).

External free-rider problems originate if the cooperative provides goods and services for its

members, but cannot exclude non-members from benefiting. This arises when the provided

goods and services are public goods (Cook, 1995; Ortmann & King, 2007a).

2.4.2. Horizon problem

Cooperatives generally underinvest in research, development and marketing, typically assets

with long-term return (Ortmann & King, 2007a). This problem is caused by the simple fact that

members only benefit from the activities of the cooperative as long as they are member. This

24

puts pressure on the decision-making units to focus on current pay-offs instead of future

development and payments (Cook, 1995; Ortmann & King, 2007a; Royer, 1999).

2.4.3. Portfolio problem

Members of a cooperative cannot diversify their investments according to their own welfare

and risk preferences (Royer, 1999). Risk-averse members will pressure the board to lower risk

possibly at a cost of higher returns. Therefore suboptimal portfolios will arise (Cook, 1995).

Diversification by outside investors is not possible, because they are excluded from investments

in the cooperative (Ortmann & King, 2007a; Royer, 1999).

2.4.4. Control problem

Principal-agent problems will likely arise because of the division of control and ownership.

Divergence of interest between the principal (cooperative members and board of directors) and

the agent (management) are difficult to solve (Cook, 1995). Moreover the members experience

an information problem because there exists no equity exchange market where the value of the

shares and the management performance can be deducted from (Royer, 1999). This is less a

problem in small homogeneous cooperatives (Cook, 1999; Ortmann & King, 2007a).

2.4.5. Influence cost problem

“Influence costs are those costs associated with activities in which members or groups within an

organization engage in an attempt to influence the decisions that affect the distribution of

wealth or other benefits within an organization” (Royer, 1999, p56). Ortmann & King (2007a)

and Royer (1999) argue this is particularly a problem in cooperatives since the interests of the

members are related to individual farm production and are thus more diverse than the

interests of corporate stockholders who aim to maximize wealth.

3. The Fairtrade label

“Fairtrade is an alternative approach to conventional trade and is based on a partnership

between producers and consumers. Fairtrade offers producers a better deal and improved terms

of trade. This allows them the opportunity to improve their lives and plan for their future.

Fairtrade offers consumers a powerful way to reduce poverty through their everyday shopping.”

(Fairtrade International, 2011g; Introducing Fairtrade).

25

This definition from the Fairtrade website reveals the core idea of Fairtrade. Fairtrade counts

on the goodwill of consumers to pay a surplus for its products, which offer improved living

conditions to the producers by paying them higher prices. Fair Trade is the umbrella term for all

initiatives working on improvement of the terms of trade for small-scale producers in the

South. This includes labels such as UTZ and Rainforest Alliance but also more direct trade

relations making efforts for just prices (Sidwell, 2008). It is important to note that this research

only discusses the Fairtrade labels issued by Fairtrade Labeling International (Flo-Cert). This is

the largest and most widely recognized Fairtrade certification system but certainly not the only

one, although some authors write that Fairtrade is seeking a monopoly position of all ethical

labels (Mohan, 2010; Sidwell, 2008).

This part of the literature review focuses on the producer organizations’ side of the Fairtrade

label and does not cover the Fairtrade consumer perspective. The pricing policy is discussed in

paragraph 3.1 and the certification process in paragraph 3.2. Paragraph 3.3 cites impact studies

about the positive impacts of certification. Paragraph 3.4 covers the relevant critiques on

Fairtrade for this case study.

3.1. Pricing policy

The Fairtrade certificate guarantees the coffee producer a minimum price per kilo of coffee

beans. Whenever the market price is higher than the Fairtrade minimum price, producers

receive the market price or the price negotiated at contract signing. When the market price

falls beneath the Fairtrade minimum, all Fairtrade contracts have to guarantee at least the

Fairtrade minimum price (Fairtrade International, 2011b). Figure 6 shows this clearly.

26

Figure 6: The Arabica Coffee Market 1989-2010: Comparison of Fairtrade and New York Prices

Source: Fairtrade International, 2011f, p1

Table 2 indicates the different Fairtrade minimum prices valid since 1 April 2011. The Fairtrade

minimum price for Arabica Coffee differs for fully washed and natural coffee (0.05 USD/pound

difference). The minimum price for fully washed Arabica coffee is fixed on 1.40 USD/pound and

is equal in all countries (Fairtrade International, 2011e). How is this minimum price

determined? The minimum price should cover the average costs of production of the farmers

and therefore, the costs of sustainable production are estimated. The cost estimates are based

on information of the production and export process of all the Fairtrade producers worldwide

(Pricing Subunit, 2010). Surprisingly this minimum is equal worldwide. In addition to this

Fairtrade minimum price, the Fairtrade buyers have to pay a premium. This premium is

earmarked for investment in socio-economic and environmental projects of the cooperative

(Fairtrade International, 2011b).

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Table 2: Fairtrade minimum prices and premiums for different varieties of Arabica coffee

Product variety Price applies to Fairtrade minimum price

(USD/pound)

Fairtrade premium (USD/pound)

Valid from

Conventional, natural

Worldwide 1.35 0.20 01 April 2011

Organic, natural Worldwide 1.65* 0.20 01 April 2011

Conventional, washed

Worldwide 1.40 0.20 01 April 2011

Organic, washed Worldwide 1.70* 0.20 01 April 2011

*Organic differential of 0.30 USD/pound

Source: Fairtrade International, 2011e, coffee

Fairtrade International also states that facilitating long term trading partnerships is one of their

core objectives. Besides the price advantages of the Fairtrade certificate, traders should help

the cooperative by providing credit of up to 60% of the total sales volume, on request of the

cooperative. This is designed to facilitate access to credit for the cooperatives (Fairtrade

International, 2011c). However Flo-Cert does not determine the interest rate that can be

charged and suggests the cooperatives to verify if local credit might be cheaper (Elliot, 2012).

3.2. The certification process

FLO, Fairtrade Labeling Organization, is an international association that determines the

international norms of Fairtrade. The Fairtrade labels are issued by Flo-Cert. Important to

notice is that Fairtrade coffee labels are never given to individual producers, only to

cooperatives. To gain access to the Fairtrade system, an individual farmer must therefore first

join a cooperative (Fairtrade International, 2011a). The focus on democratically run producer

organizations is necessary for interaction and allocation of the social premium, but is also part

of Flo-Cert’s mission to empower individual producers (Elliot, 2012).

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The Burundian coffee cooperatives are classified as small-scale producers organizations. Flo-

Cert defines small-scale producers as:

- The farmers spend most of their time on agricultural activities on their own property.

- Most of the work is executed by family members.

- The income generated from these activities is their main revenue.

- Their limited infrastructure, capital and goods make it necessary to pool with other

producers to commercialize and sell their goods on the market.

Small-scale producers organizations must be comprised of a majority of small-scale producers

and the organization needs to be democratic. Each member has an equal vote and benefits are

equally distributed (Fairtrade International, 2011d).

The Fairtrade certification process is demanding. Flo-Cert enumerates all the requirements to

obtain the Fairtrade certificate. These requirements are divided into core requirements and

development requirements. Core requirements need to be satisfied in order to become a

Fairtrade organization. Development requirements specify advancement and continual

development of the cooperative. These are subdivided into general, trade, production and

environmental protection, working conditions and commercial activities. The working

conditions imply no child labor, no forced labor, freedom of association and collective

bargaining. The requirements about commercial activities contain standards about the

Fairtrade premium and plans, and about the participation and democracy in the cooperative.

The participation of the members in the decisions of the cooperative goes through the general

assembly. Flo-Cert requires an open and annual general assembly, which functions as the

highest decision organ (Fairtrade International, 2011d).

The decision to certify is an important investment decision where the cost and expected benefit

should be carefully analyzed. Freelance auditors recruited by Flo-Cert inspect the Fairtrade

organizations annually. Specialized certifiers, supervised by an independent certification

committee, take the final certification decision. If the evaluation is negative, the cooperative

needs to take corrective actions (Fairtrade International, 2011d).

Fairtrade certification is costly. The certification fees depend on the number of members of the

cooperative. The costs of an initial audit of a small producer organization with 50 to 100

29

members is €2040, for 101 to 250 members it is €2250, and for 251 to 500 members €2450 etc.

The annual audit costs are on average €457 less than the initial audit costs (Flo-Cert, 2013a).

The certification costs have been criticized as excessive and only necessary to finance the

bureaucracy of Fairtrade (Mohan, 2010). Again, it is remarkable that costs are equal worldwide.

If these costs are too high for the cooperative there is the possibility of applying for a grant

from the producer certification fund. These grants never fully cover certification costs but are

intended as co-financing support and can cover 75% of the annual certification costs (Fairtrade

International, 2007).

3.3. Positive impact

The recent popularity of labels can be explained by two evolutions, one in the coffee producing

countries and one in the coffee consuming countries. In the production countries poverty of

coffee farmers remained high due to the low production level and volatility of prices. In the

West the demand for socially and environmentally responsible coffee grew. Certificates have

been praised as a valuable marketing advantage in consumer markets. They add value to the

product and the consumer is willing to pay for this (Stellmacher & Grote, 2011).

By the end of 2009, 827 producer organizations in 60 developing countries were registered

under Flo-Cert and were able to supply Fairtrade certified products. The production is mostly

concentrated in Latin-America (Mohan, 2010). According to Sidwell (2008), 25% of Fairtrade

coffee is produced in Mexico. Coffee is the most valuable product within the Fairtrade system

and accounts for 25% of Fairtrade sales. Nevertheless, the market share of Fairtrade coffee

remains low: in 2009 it represented 1% of total coffee products worldwide. Worth noticing is

the impressive growth of Fairtrade sales: in 2011 global sales were more than six times larger

than seven years earlier (Elliot, 2012). This is attributed to the product diversification and

engagement with large corporations and multinationals of Fairtrade (Mohan, 2010).

Many economic authors defend the idea that Fairtrade represents an alternative speciality

market, not notably different from other speciality markets such as organic coffee or kosher

meat (Becchetti & Rosati, 2007; Hiscox, 2007; Mohan, 2010).

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“There is not one single coffee but instead many different coffee products which are

differentiated from one another in terms of quality, blends, packaging and also, more recently,

‘social responsibility’ features” (Mohan, 2010, p42)

Besides the pricing advantages, it has been argued that Fairtrade offers strong incentives for

organizational capacity building2 by working with democratically controlled cooperatives (to

represent small-scale producers) and unions (to represent the workers). This stimulates the

production and marketing skills of the members. Dealing with cooperatives implies that

Fairtrade farmers also benefit from the cooperative advantages such as stronger bargaining

power, training and credit possibilities (see part I, 2.3) (Mohan, 2010). Field research by Boot,

Wunderlich & Bartra (2003), Hoebink et al. (2014), Nelson, Tallontire & Collinson (2002),

Murray, Raynolds & Taylor (2003) and Zadek &Tiffen (1996) confirms Fairtrade certification has

improved the capacity building of the producers. The advantages cited are: improved market

information, best practices in growing and processing and access to pre-financing (Elliot, 2012).

3.4. Criticism

Fairtrade reviews and analyses are numerous. A study of Solidaridad, an international

organization focusing on sustainable food production (Solidaridad, 2014), provides a summary

of conclusions of the different impact studies subdividing them into very

positive/positive/limited effects and mixed results (Hoebink et al., 2014). This research will

cover critical analysis on three main themes relevant for this case study: impact on poverty

reduction, the oversupply problem and the nexus quality-Fairtrade.

3.4.1. Impact on poverty reduction

A question that is often raised is whether Fairtrade helps to rule out extreme poverty. In most

cases becoming member of a cooperative requires a financial contribution. Only the farmers

able to make small savings can join a cooperative and benefit from the Fairtrade system.

Cooperatives are therefore organizations for the middle layer and fail to include the poorest

(Bernard & Spielman, 2009; Münkner, 1976). On the other hand investment and capital of the

2“Organizational capacity building is the strengthening of internal organizational structures, systems and processes, management, leadership, governance and overall staff capacity to enhance organizational, team and individual performance” (AID STAR-two, 2011, p1).

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middle layer helps the poorer members to cooperate out of poverty (Develtere & Pollet, 2008).

Another important matter is proven by research in Jimma (Ethiopia) by Jena, Chichaibelu,

Stellmacher & Grote (2012). They conclude that the cooperative effect often rules out the

certification effect: efficient cooperatives obtain more easily a Fairtrade certification, whereas

less efficient cooperatives do not benefit from the Fairtrade system. Mohan (2010) explains the

complex applications, costly investments and costs of inspection exclude the least developed

cooperatives. Jena et al. (2012) therefore make the remark that when the impact of the

certification is measured, there is a strong cooperative effect that needs to be taken into

consideration.

Fairtrade quantitative impact analyses are scarce in sub-Saharan Africa. A recent study based

on balanced panel data with a four-year interval in Kenya, Uganda and Ethiopia reveals limited

impact of Fairtrade on livelihoods of the coffee farmers (Hoebink et al., 2014). This is mainly

attributed to the limited sales of the certified coffee to the Fairtrade market and coffee

representing only a part of the income of the farmers. Moreover, the positive certification

effects evened out over time. However, the same study does report a positive impact on the

number of educational programs in the certified cooperatives, but questions if this is due to the

certification effect or the cooperative effect (Hoebink et al., 2014). An impact study

commissioned by TransFair Germany and Max Havelaar Foundation Switzerland, two Fairtrade

trademarks, based on interviews, discussions and observations in six different countries,

concluded overall positive effects of the Fairtrade certificate. These were: slightly higher and

stable incomes for coffee farmers in Peru; more education and training programs covering

agricultural topics; strengthening of organization and market knowledge; positive community

effects through the Fairtrade Premium; a longer planning horizon of rural population which

translates into more savings and investments; etc. (Ceval, 2012). Giovannucci et al. (2008) show

that the social, ecological and economic impacts of the Fairtrade certification are very

dependent of the local context.

Another issue was raised after the coffee prices peak in 2010. Many Fairtrade buyers reported

to be left high and dry (Elliot, 2012, p2) because cooperatives sold their coffee to independent

buyers who offered higher market prices. Nevertheless, Fairtrade encourages sustainable and

predictable contracting and thus many cooperatives signed Fairtrade contracts months before

the price peaked in the summer of 2010. And thus the following question of Elliot (2012, p2) is

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very relevant: “Unexpected spikes aside, if commodity prices stay relatively high, will producers

still see value in fairtrade certification?”

3.4.2. Stable prices guarantee?

“The sort of guarantees that Fair Trade claim are provided to producers, are therefore not as

secure as might be thought by many purchasers.” (Mohan, 2010, p56)

Levi & Linton (2003) claim that since 1990 coffee production increased by 15 percent

worldwide, whereas consumption only increased by 7 percent. This production increase was

caused by deregulation, which followed the abolishment of the International Coffee Agreement

in 1989 (see part I, 1.4). The Fairtrade market experiences a similar problem. The demand is still

very low in Western countries. In Europe it represents 1% of the total coffee market but only

0.2% in the United States3 (Levi & Linton, 2003). The existing Fairtrade cooperatives can only

sell half of their coffee on the Fairtrade market. This is caused by the fact that offer exceeds

demand. The global supply of certified coffee is estimated to be two to four times greater than

the demand for Fairtrade coffee (De Janvry, McIntosh & Sadoulet, 2010). For other Fairtrade

certified product markets the numbers look better (Elliot, 2012).

Mendez, Bacon, Olson, Petchers et al. (2010) confirm that certified farmers receive higher

prices and coffee revenues, but sustainable livelihood effects were not reached due to too

limited sales to certified markets. Certified cooperatives have no certainty of finding Fairtrade

buyers and thus no guarantee of receiving the Fairtrade minimum price. The supply-driven

certification system4 offers strong incentives for over-certification (De Janvry et al., 2010). The

claim by Fairtrade that it protects producers against market volatility and guarantees stable

prices is therefore often not true. A study in Ethiopia shows that members of cooperatives

often engage in side selling and multi-certification to overcome this obstacle. The side sales

range from 25% in Kenya and Uganda up to 50% in Ethiopia (Hoebink et al., 2014).

3 The difference can mainly be attributed to the longer history of mobilization around food issues in Europe and the subvention of NGO efforts to promote Fairtrade coffee (Levi & Linton, 2003).

4 The Fairtrade certification system is supply-driven because cooperatives can apply for certification and Flo-Cert does not take into account the demand for certified coffee in its decisions to certify or not (De Janvry et al., 2010).

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3.4.3. Lack of recognition for quality

How does the Fairtrade system stimulate the production of good quality coffee? The New

Standards for Coffee from April 2011 demand that at least 25% of the socio-economic premium

(5 USD cents per pound) is invested in productivity and quality improvement. This is expected

to have a high return and to provide a way to reduce poverty among the Fairtrade producers.

Fairtrade International clusters the investments in three groups: creating the conditions for

improvement; investment at farm level; investment and investment at producer organization

level. The first cluster may include research, technical assistance, training and exchange visits,

credit facility