governing the coffee chain the role of voluntary regulatory systems 2005 world development

7/25/2019 Governing the Coffee Chain the Role of Voluntary Regulatory Systems 2005 World Development

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Governing the Coffee Chain: The Role of

Voluntary Regulatory Systems

ROLDAN MURADIAN and WIM PELUPESSY *

IVO, Tilburg University, The Netherlands

Summary.The coffee crisis has coincided with the emergence of a number of voluntary regula-tory systems in the global coffee chain. The present article explores the advantages and limitationsof such schemes, their impact on the chains governance, and their implications for farmersupgrading. We conclude that participation in these systems does not ensure a better economic per-formance, but it may facilitate coordination between roasters/traders and some growers, which

may lead to upgrading opportunities. The paper also explores some possible options for derivingrents from improved coordination along the coffee chain. 2005 Elsevier Ltd. All rights reserved.

Key words coffee, global commodity chains, governance, coordination, certification, voluntaryregulatory systems

1. INTRODUCTION

The price collapse witnessed by coffee farm-ers in the last five years has been characterizedby Osorio (2004), Executive Director of theInternational Coffee Organization (ICO), asthe worst coffee crisis ever seen in terms ofgrowers incomes. During the 1990s, themajor events affecting the performance of theglobal coffee industry were the dismantling ofthe International Coffee Agreement (ICA) andnational coffee boards, the boost of Braziliancoffee supply and the entrance of Vietnam asa leading coffee producer. 1 These events under-

pinned both the conditions for structural globalcoffee oversupply and a shift in the bargainingpower of agents in the coffee chain. The out-come has been a new situation favoring accu-mulation of rent in the nodes located indeveloped countries (Ponte, 2002a; Talbot,1997a, 2002). There has been a price reboundin 2005, yet it is too early to know if it will leadto a long-lasting better price for farmers.

The breakdown of the ICA in 1989 had mul-tiple causes, but probably the most importantones were the incapacity of members to negoti-

ate a new quota allocation, the lobby actions ofAmerican firms (Acheson-Brown, 2003), andthe inability of producing and consumer coun-

tries to control extra quota coffee movements(Pelupessy, 2001). In response to the post-ICA

price shrink, some of the major coffee produc-ing countries formed the Association of Cof-fee-Producing Countries (ACPC), whichdissolved after the conspicuous failure of itsretention plan.

The interpretation of the relationship be-tween deregulation and the coffee crisis woulddepend on the theoretical approach adoptedand the main issues for concern. From thestandpoint of economic efficiency, the crisis isan adaptation period that would lead to a moreefficient allocation of resources, as a result of

increased competition and the removal of mar-ket distortions, particularly those exerted bynational coffee boards. Indeed, the post-ICAsituation has led to better price transmissionbetween exporters and producers (Krivonos,2004), which is an indication of larger effi-ciency. However, deregulation has not im-proved price transmission along the entire

* We would like to thank three anonymous referees,

Rafael Diaz from CINPE-Universidad Nacional (Costa

Rica) and Guillermo Denaux Jr., for their comments onan earlier draft. Funding by EU/INCO, Contract ICA4-

CT-2002-10010. Final revision accepted: June 17, 2005.

World Development Vol. 33, No. 12, pp. 20292044, 2005 2005 Elsevier Ltd. All rights reserved

Printed in Great Britain0305-750X/$ - see front matter

doi:10.1016/j.worlddev.2005.06.007www.elsevier.com/locate/worlddev

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chain, and in some respects appears to haveworsened it noticeably (Shepherd, 2004) at theexpense of growers and consumers interests.This suggests that market failures are stillin place, caused by excessive market control

by intermediary agents (monopsonyoligop-oly).A third reading of the problem is also possi-

ble. The coffee crisis might be conceptualized asa governance failure, since (a) the impact ofdismantling the ICA and the national coffeeboards was not sufficiently assessed ex ante;(b) measures were not taken to prevent theshocking effects of liberalizing the industry onthe livelihoods of millions of coffee growers,and as a result, the crisis has pulled down thou-sands of coffee farmers below poverty lines

(ECLAC, 2002); (c) very low prices haveaffected the capacity of growers to invest inquality improvement or good maintenancepractices. In addition, in most of the cases,other institutions did not adopt the quality reg-ulation role of national coffee boardsafter theliberalization process (Ponte, 2002b). 2 Gener-alized quality deficits and unstable supply ofgreen coffee may negatively affect the economicperformance of roasters in the long run, leadingto a loselose situation; and last but not theleast (d) the response of multilateral and na-

tional institutions to the crisis has been slowand in most cases ineffective, mainly due tothe fact that they lack the capacity to imple-ment concerted policies.

The falling leverage of state-driven institu-tions dealing with transnational policies in thecoffee sector has called for alternatives outsidethe pubic domain for governing the coffee chainand alleviating the coffee crisis (Hillocks, 2001;Ponte, 2001). In the present article, we examinethe relationship between voluntary regulatorysystems, the governance structure of the coffee

chain, and upgrading opportunities for farm-ers. Some policy options are also explored.Sec-tion 2 presents a theoretical framework forunderstanding the governance structure of glo-bal commodity chains and its relationship withpublic or voluntary regulatory regimes.Section3discusses the most important voluntary regu-lation systems in the coffee sector. Section 4assesses the impact of these systems on theforms of coordination in the coffee chain, aswell as the upgrading opportunities they offerto growers. Section 5 addresses policy options

for improving the position of farmers, whilethe last section summarizes the main conclu-sions.

2. GOVERNANCE, COORDINATION,AND REGULATION IN

GLOBAL CHAINS

Global commodity chains are border-cross-

ing value adding networks of labor and produc-tion processes whose end result is the use of afinished commodity (Gereffi & Korzeniewicz,1994). An essential property of the chain is itsgovernance structure, which determines to aconsiderable extent how resources and gainsare allocated and flow within the chain (Gereffi,1994). The overall mode of governance (or dri-verness) of a chain refers to the extent to whichthe leading segment(s) exert control over infor-mation exchange and production activities, andtherefore are able to shape the functional divi-

sion of labor along the chain and to set entrybarriers. This is a key mechanism throughwhich economic profits may be concentratedin particular segments (Gereffi, 2001). Poweris exerted when some lead firms in the chainare able to set and/or enforce the parametersunder which others in the chain operate (Hum-phrey & Schmitz, 2001, 2002). The governancestructure influences the distribution of incomeand margins between different segments of thechain, since purposeful market and non-market(coordination) activities taking place between

different firms may be a source of economicrent.

Gereffi (1994)has coined two broad catego-ries of governance structures for global com-modity chains, namely producer-driven andbuyer-driven. Producer-driven chains referto upstream-controlled production systemscommon in capital- or technology-intensiveindustries. The buyer-driven chains categoryis used to describe production networks con-trolled by downstream-located manufacturers,large retailers, brand-name merchandisers, or

trading companies, common in labor-intensivesectors. Normally, the role of TNCs in drivingboth kinds of chains is quite significant. Gereffi,Humphrey, and Sturgeon (2005)have extendedthese two categories to five governance types(market, modular, relational, captive, and hier-archy), stemming from the complexity of infor-mation involved in transactions, the extent thisinformation can be codified, and the capabili-ties of the suppliers.Ponte and Gibbon (2005)rightly argue that these types should be consid-ered as different forms of inter-segment coordi-

nation, instead of a typology of the overallgovernance structure of value chains. In fact,Dolan and Humprey (2004) have shown that

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some of these categories can be used to analyzeinteractions at different points in the fresh veg-etable chain between Africa and the UnitedKingdom.

The term coordination is often used for

describing non-market relationships betweenfirms in different segments, or between external(e.g., NGOs) and internal parties in the chain(Kaplinsky, 2000). For the present article, weuse this concept to describe the exchange ofnon-market information, capabilities, andactivities between two segments of the com-modity chain that are not linked through own-ership. Coordination is meant to ensureparticular product specifications, including per-formance, processes, and logistics. Coordina-tion is likely to arise in commodity chains

involving suppliers in developing countriesand buyers in industrialized countries, since itis a suitable way to ensure reliable transactionsin the context of high risk, heterogeneous pro-duction conditions, technological backward-ness, and unstable financial systems that arecommon in developing countries (Hobbs &Young, 2001).

Inter-segment coordination in commoditychains may take a large variety of forms, butthe following may be considered as a possiblesimplified classification:

Market transactions:Typical arms lengthtransactions with low or missing coordina-tion; low information exchange, mediatedmainly by prices and standard attributes ofproducts.

Weak coordination: This categorydescribes complex but not-so-specific (easyto codify) information exchange. It is char-acterized by low monitoring cost for buyersand low cost of switching to other commer-cial partners (both for suppliers and buyers).

Strong coordination: Considerable, com-

plex and specific information exchange (dif-ficult to codify), high monitoring andswitching costs (both for buyers and suppli-ers). In this case, mutual dependence islikely.

Vertical integration:Complex informationand very specific information (most of thetime secret). Standards, processes, and logis-tics are controlled through ownership.

The variables we have selected for determin-ing these coordination types are complexity ofinformation, ownership, and specificity of the

information. Complex information is a condi-tion for coordination, otherwise the interactiontends to fall in sheer market transactions. Com-

plexity and specificity are two different proper-ties of information. Complexity mainly refersto the number of variables, processes, and stan-dards involved in the specifications of the prod-uct, as well as the necessary skills to meet them.

Information may be specific to a particularinteraction between two firms, either becauseit is difficult to codify or due to particularrequirements from the buyer that only rela-tively few suppliers are able to meet. Specific-ity is meant to describe the extent to whichinformation about product specifications is un-ique to the interaction between two firms/seg-ments.

Contrary to what Gereffi et al. (2005)state,we think that the relationship between the de-gree of coordination and power asymmetry is

not straightforward. Power asymmetry notonly depends on the coordination structure,but primarily on market concentration andthe degree of specificity of the relationship.Hence, in market transactions, there might behigh power asymmetry in the case of oligopolyor monopsony, even though there might be nocoordination. In addition, strong coordinationmay entail less power asymmetry compared toweak coordination if there is mutual depen-dence, owing to a high degree of specificity.Furthermore, a higher degree of coordination

may encompass a more unequal distributionof income along the chain, but also a largervalue added accumulated in those segmentsobtaining a lower share of the total retail value.This occurs if the increase in income sizereaching a segment overcomes its lower share.

The relationship between the action of exter-nal (public or private) parties and the chainsgovernance is considered part of the socio-political and institutional dimension of globalcommodity chains (Gereffi, 1999). Relativelyfew studies have addressed the effects of volun-

tary or public regulatory regimes in the gover-nance structure of commodity chains. Gibbon(2003) examines how public regulatory inter-ventions can lead and have led to a mitigationof supermarket buyer power to restructurefresh fruits and vegetable chains. Talbot(1996, 1997b)described how Third World pro-ducing states have influenced the structure ofthe coffee chain directly, both through market-ing boards and regulation of coffee productionand exports. This had often guaranteed a sur-vival income to growers, or at least a larger

share of the retail value allocated to agents inproducing countries. The liberalization processin the coffee sector substantially reduced the

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effects of external public actors in the distribu-tion of bargaining power. As a result, the chainbecame more buyer-driven. The present main-stream coffee chain is characterized by markettransactions between roasters/traders and

growers/processors in the mass segment,and normally by stronger coordination in thespecialty segment, since coordination is a keytool for managing quality along the chain.

Ponte and Gibbon (2005) argue that socialconventions, including voluntary regulatorysystems, such as certification schemes, may in-duce changes in the mode of governance anddegree of driven-ness in value chains. Theypoint out that the emergence of sustainablecoffees may induce a reduction in the degreeof driven-ness, and that specialty coffees (based

on geographic indications and particular no-tions of quality) might generate a move towarda mode of governance closer to the producer-driven typology, because they may improvegrowers positions vis-a-vis traders and roast-ers.

The emergence of an impressive variety ofvoluntary regulatory systems is a key elementof the current globalization process. As a re-sponse to a growing demand for informationabout production conditions by wealthy con-sumers, certification and labeling schemes, code

of conducts and private self-regulation regimeshave appeared in a large list of global economicsectors. These systems are normally meant toset quality, social, or environmental standards,and typically involve a larger degree of coordi-nation, traceability, and monitoring along dif-ferent agents of the commodity chain. Codes,certifications, and labels are all tools for codify-ing the information and increasing consumerconfidence. They reduce monitoring costs forbuyers and enable suppliers to demonstratetheir skills and standards of production. The re-

sult is expected to be an overall reduction oftransaction costs along the chain. Regulatorysystems induce changes in the forms of coordi-nation between different segments of the chain.In principle, voluntary regulatory systems arisedue to a need for larger coordination of activi-ties between different agents, in order to meetstandards, and normally result in product dif-ferentiation. Private (self-controlled) regulatorysystems should lead to stronger coordination,since they increase the amount and complexityof non-market information exchanged. Third

party verified schemes also lead to a larger ex-change of information, but at the same timethey increase the ability to codify information

(reducing specificity), thus inducing a weakerdegree of coordination. However, in practice,the interactions of agents in some third partyvoluntary regulatory systems may also entail aconsiderable exchange of extra standards

information, creating the conditions for stron-ger coordination. Extra standards informationrefers to critical information involved in themanagement of the supply chain, which is notrelated to the standards codified in codes/certi-fication protocols. In the case of coffee, this in-cludes quality consistency, reliability of supply,managerial performance, and place of origin ofsuppliers.

3. VOLUNTARY REGULATORY

SYSTEMS IN THECOFFEE INDUSTRY

This section describes the most importantvoluntary regulatory systems in the coffee sec-tor. Following Gereffi, Garcia-Johnson, andSasser (2001), we may identify four general cat-egories, according to who develops the guide-lines.

(a) First party voluntary regulatory systems

An example of a first party regulatory systemin the coffee sector is the Coffee SourcingGuidelines of Starbucks, which sets standardsfor good social and environmental perfor-mance. It includes a score system for calculat-ing price premiums to farmers meeting thestandards. Monitoring of Starbucks principlesis carried out by third parties and the costs arecovered by farmers. This code is part of Star-bucks preferred supplier program. Growersable to participate in this program normally ob-tain considerable price premiums.

(b) Second party

Major food TNCs created the SustainableAgriculture Information (SAI) Platform inOctober 2002. The ultimate goal of the SAI isthe definition and implementation of com-modity-specific guidelines for sustainable agri-culture which are harmonized along the foodchain. The platform has worked on the intro-duction of common and minimum sustainabil-ity standards for coffee and suitable indicators

for sustainable practices, including social andenvironmental concerns. So far, no premiumprice is contemplated in this regime. The mon-



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itoring system is not yet established, but it willlikely be based on an independent third partystructure. The SAI platform is running pilotprojects in different countries to test the practi-cal implementation of its code. The SAI code

sets minimum good practices, in line withother voluntary regulatory systems (see below).

(c) Third party

Third party certification schemes are by farthe most important voluntary regulatory sys-tems applied to the coffee industry. Eventhough some authors state that voluntary certi-fications are a new form of non-tariff barriers(Chang, 1997; Verbruggen, Kuik, & Bennis,1995), it is usually assumed that they do not

violate the WTO principle of non-discrimina-tion between like products (Shaw & Schwartz,2002; Tallontire & Blowfield, 2000). In fact,some agencies consider environmental certifica-tions as a means of exports promotion (CEC,2000). The main goal of certification is to re-duce the cost of information about productattributes reaching final consumers (Hadfield& Thomson, 1998). This would enable consum-ers to vote for alternative production meth-ods (Shaw & Newholm, 2002). Specifically,sustainable certification gives consumers

encapsulated information about produc-tion-related credence attributes of products(Kirchhoff, 2000; Nada, 2001; Reardon, Co-dron, Bursch, Bingen, & Harris, 2001). Theunderlying assumption is that certified labelingmay aid in solving the market failures arisingfrom information asymmetries between provid-ers and consumers (Peterman, 2002), while alsoallowing firms to gain market share and tomaximize rents (Teisl, Roe, & Levy, 1999).

Third party certification schemes also consti-tute a central element of the new trend toward

ethical trade (Barrientos, 2000) and con-sumer activism (Gabriel & Lang, 1995). Greenand ethical consumers typically share the samesocial profile as specialty coffee buyers (Iyer &Banerjee, 1993; Wagner, 1997). In addition,standards and certification schemes should alsobe viewed as strategic instruments for influenc-ing the distribution of value added along thechain and set inclusion/exclusion thresholds(Ponte, 2002c). Coffee is probably the mostimportant sector in which sustainable certifi-cations have been applied so far. 3 It is note-

worthy that the whole aggregated sales ofcertified sustainable coffee represent less than1% of the global total coffee sales, and that

about 45% of current Fair Trade coffee is alsocertified organic (Giovannucci, 2003). The fol-lowing part of this section will address the mainadvantages and shortcomings of each of thebetter-known third party certification schemes

in the coffee industry.

(i) Fair TradeThe main goal of Fair Trade certification is

to guarantee a minimum price at the farmerlevel by charging a price premium to consumers.It also aims to shorten the chain by excludingmiddlemen in producing countries (Pelupessy& van Tilburg, 1994) and to promote long-termrelations between suppliers and buyers. It tar-gets smallholders associated in cooperativesand provides a fixed and high price premium

to farmers, particularly in periods of pricedepression. The Fair Trade movement is in atransition toward a more intensified main-streaming of its products, through conventionaland costly marketing tools (Taylor, 2005).

A remarkable feature of the current FairTrade scheme is that it has been unable to cer-tify the total production of registered organiza-tions. Currently, there are more than half amillion producers registered at FLO. However,according to Global Exchange, the volume ofthe total sales of certified Fair Trade coffee

was only 13.6% of the total production of reg-istered producers in 2001. This reveals a largegap between potential and actual certified sales.The studies assessing the local impact of FairTrade certification in producing countries ingeneral agree that it has been beneficial for pro-ducers in terms of income generation, organiza-tional skills, capacity building, and resilience toexternal shocks (Bacon, 2005; Boot, Wunder-lich, & Bartra, 2003; Murray, Raynolds, &Taylor, 2003; Nelson, Tallontire, & Collinson,2002; Zadek & Tiffin, 1996). However, the cre-

ation of dependency and the extent to which itmay subsidize inefficient and sub-standard pro-ducers have been raised as major potentialshortcomings of the Fair Trade scheme (Pelup-essy & Thielen, 1989; Tallontire, 2002; Thom-son, 1999; Zehner, 2004). Furthermore,according to some authors, the mainstreamingof the Fair Trade scheme creates contradictionswith its philosophical foundations, built on analternative value system for framing con-sumerfarmer relations (Marsden, Banks, &Bristow, 2000; Raynolds, 2002; Renard, 2003).

Mendoza and Bastiaensen (2003) report, asdidPelupessy and Thielen (1989), that there isno significant difference between Fair Trade

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and conventional chains in regard to the distri-bution of income between the segments in pro-ducing and consuming countries. One of theexplicit goals of Fair Trade advocates is to cor-rect market distortions (Winnet & Oram, 2002).

Nevertheless, both the concessions required bythe mainstreaming process and the apparentinability to revert current power asymmetriesin the coffee chain question the capacity ofthe scheme to meet this objective. Basicallywhat the Fair Trade system does is to enlargethe total income size of the chain, by meansof asking a price premium to consumers.

Consumer behavior is probably the most crit-ical factor determining the reach of certificationschemes involving price premiums to consum-ers (Strong, 1997). This point is critical since

in those countries where the Fair Trade move-ment is better developed, it is facing a marketglass ceiling of about 3% (Giovannucci,2003). This ceiling is in part explained by thewell-documented gap between awareness andaction among potential green or ethicalconsumers (Browne, Harris, Hofny-Collins,Pasiecnik, & Wallace, 2000; Childs & Whiting,1998; Sedjo & Swallow, 2002; Shaw & Clarke,1999; Tallontire, Rentsendorj, & Blowfied,2001). Furthermore, since the main force steer-ing coffee consumers decisions to buy in the

specialty segment is taste, and as the qualityof Fair Trade coffee is reported to be veryinconsistent (Boot, 2002), the consumer typi-cally has to face a trade-off between good feel-ings and good taste when buying FairTrade. On the other hand, Fair Trade coffeeis generally too expensive to successfully com-pete in the mass segment. The lack of a consis-tent quality policy and its fixed premium mayimpose some intrinsic limitations on the marketshare of Fair Trade coffee. Moreover, consum-ers tend to be less keen on responding to prod-

uct attributes referring to distant public goods.Due to this limitation, labels demanding a pricepremium from consumers may be a poor meansfor addressing externalities in public goods(Golan, Kuchler, & Mitchell, 2001).

(ii) OrganicOrganic certification sets rigorous standards

for recycling wastes, reducing water pollution,chemical inputs, erosion, and improving soilquality. Different kinds of transaction costsare the main sources of entry barriers to organ-

ic certification (Barret, Browne, Harris, & Cad-oret, 2001; Udomkit & Winnett, 2002).Furthermore, there is a deficit of international

harmonization in regard to organic standards(Allen & Kovach, 2000), which has led to a pro-liferation of certifiers, and might imply theadoption of several seals if producers are togain access to different foreign markets. Organ-

ic certification offers a flexible premium to thefarmer, depending on market interactions be-tween buyers and suppliers, as do the rest ofvoluntary regulatory systems (except FairTrade) in the coffee sector.

Organic certification has been criticized foraltering traditional governance practices in rur-al communities by imposing paper burdens andexternally designed procedures and practices(Mutersbaugh, 2002). This imposition of strat-egies, codes, and auditing methods designedby agencies in the industrialized world has been

identified as one of the main challenges facingvoluntary regulatory schemes (Hughes, 2001).Moreover, the reduction of agrochemical in-puts as a result of the coffee crisis may facilitatethe transformation from conventional to or-ganic production and thus increase competitionin the organic segment. In fact, current premi-ums are covering transformation costs, butnot much more, according to some analysts(Giovannucci, 2003; Lynbk, Muschler, & Sin-clair, 2001). Notwithstanding these problems,there is evidence showing that in some cases

adopting an organic certification has had posi-tive effects on farmers environmental and eco-nomic performances (Bacon, 2005; Bray, Plaza,& Contreras, 2002; Nigh, 1997).

(iii) Shade grownThe environmental impacts and benefits of

the coffee chain are accumulated in producingcountries (Daz, 2003). Coffee can be cultivatedunder a large variety of conditions and agricul-tural methods. Production systems range fromthe most traditional (shaded) one to the sun-ex-

posed and intensively managed mono-cropplantation (Gobbi, 2000; Moguel & Toledo,1998). In comparison to sun-exposed planta-tions, traditional plantations may hold morebiomass (Peeters, Soto-Pinto, Perales, Motoya,& Ishiki, 2003), serve as a bigger carbon sinkand cheap energy source (firewood), allow lar-ger leaf water retention during the dry season,reduce the incidence of weeds, and increasethe effectiveness of microbial and parasiticorganisms against coffee pests (Staver, Guha-ray, Monterroso, & Muschler, 2001). In addi-

tion, shade plantations require feweragrochemicals (MacVean, 1997) and are animportant biodiversity holder (Faminow &



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Rodrguez, 2001; Greenberg, Bichier, Cruz-Angon, & Reitsma, 1996; Johnson, 2000;Perfecto, Rice, Greeberg, & van der Voort,1996). In addition, shade increases fruit weightand bean size, as well as improves bean appear-

ance, acidity, and body of the brew (Muschler,2001). Traditional shaded coffee plantations aregenerally environmentally and quality superiorin comparison to intensive and sun-exposedones. Nonetheless, after a threshold level, thereis a negative relationship between shade coverand yields (Soto-Pinto, Perfecto, Castillo-Hernandez, & Caballero-Nieto, 2000), whichconstitutes the major incentive for transforma-tion from shade-grown to sun-grown coffee.

The term coffee as habitat has been used todescribe the role of coffee plantations in provid-

ing the above-mentioned environmental ser-vices (Rice, 2003). There are two certificationschemes that take into account the degree ofshade in coffee plantations: the Bird-Friendlyand the Rainforest Alliance. The Bird-Friendlylabel is the most rigorous environmental certifi-cation scheme in the coffee sector, since it com-bines organic standards with shade cover andspecies richness. The Rainforest Alliance is acomparatively looser certification scheme,which integrates environmental and social con-cerns. Whereas the Bird-Friendly certification

targets as buyers the numerous North Ameri-can birdwatchers and bird lovers, RainforestAlliance aims to enlarge the actual impact ofthe scheme in the shortest period of time, bymeans of encouraging its adoption among largecoffee estates. Therefore its standards are basi-cally restricted to complying with local laws,the adoption of good practices for managementof agrochemicals and wastes, and keeping aminimum cover of trees. These standards arevery much in line with those in the Starbuckscode, the SAI code, and Utz Kapeh (see below).

There has been a clash between both schemes,which are both blamed for being misleading(Tangley, 1996).

Both of the shade-grown certification systemsshare a common challenge: the difficulty ofcommunicating a relatively complex propertyof coffee cultivation (shade) and its very rele-vant environmental implications to the generalpublic. Lay consumers are usually not able toprocess complex or profuse informationembodied in environmental or similar labels(Aldrich, 1999; Karl & Orwat, 1999; Morris,

Hastak, & Mazis, 1995). This fact probably re-stricts these initiatives to a very particular mar-ket niche, characterized by well-informed

green consumers. Even though TNCs suchas Lavazza, Kraft, and Procter and Gamblehave recently started to buy Rainforest Alliancecertified coffee, the market share of both initia-tives is still very small. Both schemes offer flex-

ible price premiums to farmers, depending onthe market context.

(iv) Utz KapehUtz Kapeh originated as an initiative of some

large Guatemalan coffee producers and theAhold Coffee Company. Later, the organiza-tion became an independent Guatemalan/Dutch NGO. This scheme has developed a setof standards for third party coffee certification,formally equivalent to the EurepGAP, a certifi-cation system for the sourcing of fruit and veg-

etables led by European retailers. Utz Kapehstates that it is a response to the low levelsof market penetration of organic and FairTrade products. The emphasis of the UtzKapeh code is on compliance with local laborand environmental laws and good managementpractices in estates. This system offers a littleprice premium to farmers (depending on themarket context) and is focused on consolidat-ing the adoption of the label by large retailersand roasters. In only a few years, Utz Kapehhas been very successful in incorporating a con-

siderable number of new buyers and suppliersin different regions of the world. European de-mand for this label is increasing rapidly. Forexample, Douwe Egberts and Aholdalto-gether accounting for about 75% of the Dutchmarkethave adopted the scheme. This is ex-pected to increase its market share to around15% in The Netherlands. 4 Utz Kapeh basicallyworks as an instrument for gaining market ac-cess at the farmer level and as a marketing toolfor retailers and roasters.

(v) Fourth partyThe Common Code for the Coffee Commu-

nity (4C) initiativelaunched in January2003is an attempt to create a fourth party(multi-stakeholder) voluntary scheme. This ini-tiative is led by the German DevelopmentCooperation Agency (GTZ) and the GermanCoffee Association (DKV). Its Steering Com-mittee is composed of major stakeholders inthe coffee industry. Like the SAI platform, 4Caims at developing a global code for the sus-tainable growing, processing, and trading of

mainstream coffee, but it involves other agentsin the coffee chain, apart from TNCs. Membersof the SAI platform (Nestle, Kraft Foods, Sara

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Lee, and Tchibo) took part in the agreement ona common code reached among 4C members inSeptember 2004. Signatories will have to payminimum salaries, abandon child labor, allowtrade union membership, and stick to interna-

tional environmental standards on pesticideand water pollution. Hence, the code stressescompliance with ILO regulations and goodenvironmental practices, very much in line withthe minimum standards shared by UtzKapeh, Rainforest Alliance, the Starbuckscode, and the SAI code. The initiative is cur-rently undertaking pilot projects for testing itspractical implementation in different countries.When fully implemented, the code is expectedto cover 80% of the coffee industry. Monitoringand auditing will be carried out by third party

bodies, and the costs will be probably coveredby farmers. No price premium to farmers is con-templated in the code, nor are measures fore-seen to reduce income asymmetries in the chain.

4. VOLUNTARY REGULATION,COORDINATION, AND UPGRADING

To what extent may the adoption of volun-tary regulatory systems favor the position offarmers in the coffee chain? This section ex-

plores the impact of voluntary regulatoryschemes on the coordination of the coffeechain, as well as their implications for growersupgrading.

The adoption of voluntary regulatory sys-tems by farmers has two potential benefits: (i)it increases the ability to reap economic rent(upgrading) and (ii) it improves the chances ofgaining access to, or remaining in, a particularmarket. There is a noteworthy difference be-tween both functions. The former entails reten-tion of value added and a better position in the

chain. The latter is a tool for avoiding exclusionand outperforming competitors by ensuringparticipation, which does not necessarily implya larger retention of value added or bargainingpower. In this case, standards work as implicitmarket requirements, and the ability to meetthem as a reputation tool.

Table 1summarizes major features of the vol-untary regulatory systems described in the pre-vious section. In regard to the stringency ofstandards, the voluntary regulatory systems inthe coffee industry may be divided in at least

two groups. (i) Good practices: in this categoryare the Starbucks code, Rainforest Alliance,SAI code, Utz Capeh, and the 4C, which hold

very similar types of minimum standards orbaseline benchmarks on the social, environ-mental, and economic performance of coffeecultivation. These schemes are meant to excludeworst practices and target the mainstream

sector. That is, they encourage the productionof sustainable coffee at competitive prices.Therefore, entry barriers are purposely low. (ii)Stringent practices: bird friendly, Fair Trade,and organic belong to this category, whose stan-dards are far from common practices and tar-get niche market segments. Except Fair Trade,voluntary regulatory systems in the coffeeindustry command a flexible price premium,which is determined by market and non-marketinteractions between agents along the chain,including quality concerns.

Coordination between traders/roasters andfarmers tends to be stronger in the Starbuckscode and Fair Trade schemes due to the levelof extra standards information (difficult tocodify) involved in the interactions between dif-ferent agents of these chains. In the case ofStarbucks, strong coordination is the result ofvertical integration, while in the Fair Trade sys-tem strong coordination is shaped by two fea-tures: (i) the long-term relations promoted byFair Trade organizations and (ii) its structuraldemand/supply mismatch, which provides con-

siderable power to traders/roasters to decidewhich farmers participate, or are excluded fromthe system. Despite these power asymmetries,in these cases strong coordination normally en-tails considerable upgrading opportunities forthose farmers who are able to participate, sincea relative high premium can be obtained. How-ever, the main limitation, particularly in thecase of Fair Trade, is the total number of grow-ers (and the total volume of coffee) that mayactually participate in these commercializationchannels.

In the Rainforest Alliance, Bird-Friendly,SAI code, Utz Kapeh, and 4C schemes, coordi-nation between roasters and farmers tends to bevery weak since these systems intend to setminimum good practices, the informationexchanged is easy to codify and the level of ex-tra standards information exchanged is low.As the price premium associated with theseschemes tends to be little or inexistent, upgrad-ing opportunities for smallholders are compar-atively lower, and the adoption of theseregulatory frameworks is rather a tool for

accessing or remaining in particular markets.Due to the stringency of organic certification,the level of information exchanged between



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Table 1. Voluntary regulation systems in the coffee industry

First party Second party Third party

Starbuckscode

SAI code Fair Trade Organic RainforestAlliance

U

Distance betweenstandards andcommonpractices(stringency)

Short Short Large Large Short

Importance ofextra-standardsinformation(specificity)

High Low High Low Low

Monitoring Third party(paid byfarmers)

Third party(probably paid

by farmers)

Third party(paid by farmers)

Third party(paid by farmers)

Third party(paid byfarmers)

T

Overall entrybarrier

High Low Low to beregistered. High toactually participate

High, becominglow

Low

Expected impact onprice premium tofarmers

Medium.Flexible

(decided byStarbucks)

Very low. Flexible(market)

High. Fixed Medium, becominglow.

Flexible (market)

Low. Flexible(market)

Lo

Target group(growers)

Growers ofhigh quality

coffee

Any kind Small landholdersin cooperatives

Any kind Large estates Ila

Upgradingconstraintsfor growers

Control byStarbucks

It tends to becomea market

requirement

Limits to thenumber offarmers the

system may reach

Increasingcompetition

(price premium

erosion)

Reducedconsuming

market

I

reCoordination type

(between traders/roasters and farmers)

Strongcoordination

Very weakcoordination

(near to markettransactions)

Strongcoordination

Weakcoordination,

becoming closerto market

transactions

Very weakcoordination

(near to markettransactions)

Vco

(netr


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traders/roasters and farmers tends to be higherin this system. However, this information is rel-atively easy to codify and therefore strongcoordination is not needed. Its relative hightransformation cost and the current trend to-

ward erosion of its price premium reduceupgrading opportunities in this system.Market competition between alternative vol-

untary regulatory systems in the coffee sectorwill likely increase in the near future. For exam-ple, in Dutch supermarkets, it is already com-mon to find both Utz Kapeh- and MaxHavelaar-certified coffee on shelves. Utz Ka-pehs label uses the catchphrase responsiblecoffee, while Max Havelaar uses Fair Tradecoffee. Are consumers really able to distin-guish the information embodied in both labels?

The evaluation of credence attributes is condi-tioned by awareness of and confidence in theproviders of the information by consumers(Cason & Gangadharan, 2002; Grolleau,2002). The proliferation of voluntary regula-tory systems may increase awareness, but atthe expense of undermining consumer confi-dence (Lewin et al., 2004) and creating a raceto the bottom of standards.

It is likely that the systems promoting goodpractices will converge in a common code,such as the 4C. The 4C is an interesting initia-

tive and a historical novelty, since it constitutesa new voluntary agreement between a variety ofstakeholders for regulating different dimensionsof the global coffee chain, a task that in the pastwas in hands of national states and inter-gov-ernmental bodies. If adopted in practice, it willimprove the social and environmental perfor-mance of coffee farming. Nonetheless, the 4Cwill be unable to improve the position of grow-ers (as a whole) within the chain and economi-cally reward the farmers adopting betterpractices. Besides, its widespread implementa-

tion will probably have impacts on both thecurrent institutional framework of the coffeeindustry and other voluntary regulatoryschemes.

On the one hand, a possible outcome of theconsolidation of the 4C may be a further disar-ticulation of the ICOwhose role would beeven hazier than nowadaysand the subse-quent cutback of states participation in theglobal governance of the international coffeechain. In addition, it would be harder for therest of the schemes to justify a price premium,

since consumer perception of the difference be-tween mainstream and sustainable coffeechains would be more blurred than at present.

5. POLICY OPTIONS

Policy proposals for coping with the coffeecrisis have been restricted to basically threemajor and inter-related issues of concern for

producing countries: supply control, cropdiversification, and quality improvement(IADB et al., 2002). This section describes thedifficulties for putting into practice these poli-cies and explores some options that alternativeinteractions between agents along the chainmay provide.

(a) Supply control and related measures

Market-friendly approaches to reduce

overall coffee supply have failed in the re-cent past. The most remarkable attemptwas the Quality-Improvement Program (QIP),launched by the ICO in February 2002.This program aimed to reduce supply by meansof diverting poor quality beans from the mar-ket, but it was blatantly unable to achieve itsgoals. Two factors may explain this result: (i)there is in fact a considerable demand forlow-quality green coffee in the mass segment,which makes it hard to create economic incen-tives to eliminate this kind of coffee and (ii)

due to its current institutional weakness, ICOlacks the capacity to implement its resolutions.Owing to these and other factors, a globallyconcerted strategy to reduce overall supplydoes seem politically plausible in the nearfuture.

The present global oversupply of green cof-fee reveals that coffee farmers share a sort ofproduction lock-in. The most importantcauses are likely lack of information, financialsupport, and alternative markets. Anotherbarrier to diversification is the fact that coffee

is a permanent crop and the coffee industryhas been traditionally cyclical; both featuresinduce time lags in the reaction to marketdevelopments. In addition, governments indeveloping countries lack institutional andfinancial capacity to implement diversificationprograms, and in some locations, there arehardly profitable alternative agricultural prac-tices to coffee production. In the current con-text of globalized tropical agricultural systemscharacterized by lack of subsidies and clearcompetitive advantages of economies of scale,

the promotion of crop diversification is a verydaunting task, particularly among small coffeegrowers.



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(b) Quality improvement

Quality, including location-specific images, isbecoming the critical element of the currenttrend toward coffee differentiation. The man-

agement of quality is the most immediate toolfarmers can use for improving their upgradingopportunities. The international market of cof-fee is nowadays characterized by two remark-able features: (i) a great variety of tastes andnotions of quality, which vary highly fromcountry to country and (ii) a broad marketfragmentation between mass and specialtysegments. The former feature favors economiesof scale and transnational organizational struc-tures for managing quality, which imposesupgrading constraints on the agents in produc-

ing countries. The latter characteristic may actin the opposite direction, since particular tasteproperties determined in cultivation are keyattributes in the specialty market.

Although the specialty segment has experi-enced a boom (Giovannucci, 2001), the coffeemarket is still dominated by mass consumers.Furthermore, recent technological develop-ments have allowed coffee roasters to use a lar-ger proportion of cheaper and lower qualityrobusta beans in mass-oriented blends (Varan-gis, Siegel, Giovannucci, & Lewin, 2003; Vell-

ema, Jansen, & Boselie, 2003). Blending is adistinctive feature of the mass segment. It al-lows roasters to substitute coffees from differentorigins and qualities. Through this process,roasters reduce risk and dependency on specificproviders, control information, and retainvalue added. Roasters buy coffee with completeinformation about quality, but they releasehardly any information to the customers (Ponte& Gibbon, 2005).

In recent years, besides the specialty marketthere have been two other sources of innova-

tion in the coffee sector: (i) sophisticated con-sumption environments (e.g., Starbuck storesand fashionable cafes) and (ii) preparation ma-chines allowing a better appreciation of taste,aroma, and freshness (e.g., Senseo system,encapsulated espresso, Illys pads, etc.). Theformer trend is normally associated with anenlarging consumption of specialty coffee,which enhances upgrading opportunities forfarmers. Nevertheless, the latter industrialstrategy works in the opposite direction: it al-lows roasters to increase the perception of qual-

ity by consumers, while continuing to useblends and a high degree of information con-trol. In addition, the adoption of such prepara-

tion systems reduces consumer access to coffeevarieties, at least in the short term. The impactof these emerging systems is not negligible. 5 Inaddition, there is some evidence showing thatdue to the asymmetric market power in the cof-

fee chain, the returns to differentiation tend toaccrue to the nodes closer to consumers (Fitter& Kaplinsky, 2001).

Some of the points raised above suggest thatthe economic rewards accruing to farmersinvesting in quality improvement may be lessthan expected. A condition to be rewarded forhigher quality is to be able to participate incommercialization channels targeting the spe-cialty segment. Accessing and remaining insuch channels normally requires coordinationwith downstream agents in the chain. To what

extent are emerging voluntary regulatory sys-tems able to contribute to such coordination?The price premium actually paid in voluntaryregulatory systems (and the capacity to partici-pate) is to a considerable extent determined bythe quality of beans (Kilian, Pratt, Jones, &Villalobos, 2004). In practice, it is very hardto differentiate the effect of quality from thatof certification in the price farmers receivefor their coffee. What is clearer is that onlygood quality producers are able to obtainattractive price premiums. This suggests that

the adoption of a voluntary regulatory systemin practice may work as a tool for improvingthe image of farmers or cooperatives, vis-a-viscompetitors. A certified farmer has shownto be able to register its production processes,to trace physical flows, to process information,and to be accountable. These are critical fea-tures for successful coordination. Thus, certifi-cation is a reputation tool for farmers,which eases to become a preferred supplier.From this perspective, voluntary regulatorysystems of the good practices category are

not instruments for upgradingper se, but ratherfacilitatecoordination with other agents of thechain, which eventually may lead to access toparticular commercialization channels, and toupgrading opportunities.

There is currently a great momentum towardgenerating a common set of standards forexcluding the worst social and environmentalpractices from the coffee industry. This shouldbe welcomed. However, since price premiumswill not be provided, these standards will be-come de facto market requirements. The likely

result is that the social and environmental per-formance of coffee growers will improve, butnot necessarily their economic performance.

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The outcome will be that the cost burden ofraising the playing field by means of a com-mon code will be concentrated on the growerssegment. On the other hand, the systems adopt-ing stringent standards do not offer a much

better scenario. The reach of the Fair Trademarket seems to be constrained, and increasingcompetition with other voluntary systems willaggravate this situation. Organic certificationhas high transformation costs and is facingeroding price premiums.

(c) Upgrading opportunities from coordination

Notwithstanding the limitations mentionedabove, there might be policy options forincreasing farmers upgrading opportunities de-

rived from coordination with other agents. Oneobvious possibility is to engage in strongercoordination with roasters, in order to improvequality, post-harvest processing, managerialskills, and supply capacity.Kaplinsky and Fit-ter (2004)have called this strategy the system-atic application of knowledge in the valuechain, and describe the example of strongcoordination between Illy and its suppliers,who also reap economic benefits from thehigher prices commanded by Illys roasted coffee(larger income size of the chain). Low-quality

producers face apparently more difficulties inadopting such strategies, since they may be eas-ily substituted. However, as providers of themajor share of blends in the mass segment, theymay improve non-price competitiveness bylearning the capabilities required by their buy-ers, in order to become preferred suppliers.

Another option is to change the scope andstructure of some current voluntary regulatorysystems. For example, it would be possible toshift the status of Fair Trade from a trade-mark to a brand name by transforming na-

tional initiatives into an internal agent of thechain. National Fair Trade initiatives inimporting countries may move into roasting,where value added is considerable. This will re-quire substantial investment, but larger sales(encouraged by the reduction of final prices)may provide returns to it. A third possiblestrategy is to reduce the distance between grow-ers and final consumers in the non-householdmarket. An interesting example is the Smellof Coffee, a pilot coffee bar located in a busi-ness area in Rotterdam. This cafe is run by a

Dutch consultancy firm (Novo Trade) and fourorganizations of small coffee farmers in Centraland South America. It is planned to be the first

of a future chain of espresso bars. The maininnovation of this initiative is that small farm-ers participate as shareholders, retaining 40%of the shares. Partnerships between associa-tions of growers and non-profit or commercial

organizations in industrialized countries to de-velop roasting and retailing brands near con-sumer markets are still practically unexplored.This is an area that deserves creative effortsand initiatives.

The above-mentioned alternatives may besupported and facilitated by public policiesand concerted actions between different agentsin producing countries. For example, coordi-nated action from agents in producing coun-tries may target the international recognitionof coffee certificates of origin within the WTO

framework. Besides, national coffee institutesshould focus on the identification of coordina-tion opportunities for associations of smallgrowers, provision of credit facilities, market-ing assistance, brand management, and promo-tion of product differentiation.

6. CONCLUSIONS

The liberalization of the coffee industry hascoincided with the emergence of a number of

voluntary regulatory systems, which are start-ing to compete between them. A common codeof minimum good practices will likely be estab-lished, which would improve the environmentaland social performance of the sector. However,the application of such a code will not necessar-ily improve farmers ability to reap economicbenefits.

This article has explored the advantages andlimitations of some of the voluntary regulatoryschemes applied to the coffee sector, as well astheir impact on the governance structure of

the chain and their implications for farmersupgrading. The ability to participate in a volun-tary regulatory system may work as a reputa-tion tool for farmers, facilitating coordinationbetween roasters/traders and growers. We havealso explored some possible options for deriv-ing rents from alternative governance struc-tures of the coffee chain, such as promotingstronger coordination with roasters in orderto improve coffee quality and farmers skills,and shortening the length of the chain withthe assistance of public and private institutions.

National coffee institutes in producing coun-tries may play a role in promoting strongercoordination along the chain.



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NOTES

1. The aggregated production of Brazil, Vietnam, andColombia shifted from about 30% of global productionin 1970 to approximately 52% presently (Lewin, Gio-

vannucci, & Varangis, 2004).

2. However, marketing boards, particularly in Africa,have not been always effective in achieving their supposedgoals. In some cases, they increased transaction costs toproducers and exerted poor quality control (Jerome &Ogunkola, 2000; Winter-Nelson & Temu, 2002).

3. SeeRice and McLean (1999), Rice (2001), Slob andOldenziel (2003), and Ponte (2004)for thorough reviewsof sustainable labeling in the coffee sector.

4. Niewe Rotterdamse Courant, 14-4-05.

5. Currently, about one-third of the coffee that isavailable on the supermarket shelves in the Netherlandsis from the Senseo system (Sara Lee/Philips).

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