The production, processing and marketing of coffee is experiencing rapid changes. Coffee appears to be a very dynamic sector, with frequent modifications in company structures and continuous reodefinition of marketing arrangements. Whereas the production structure for coffee cultivation – given the long-term investments in perennial plantations – cannot be easily adapted in the short run, processing, trading and marketing practices are subject to substantial product and process innovation. The organization of the supply chain for coffee includes many different actors (input providers, smallholder producers, coffee factories, traders, exporters, etc.) that are strongly interdependent. Mutual arrangements are structured in rather different ways, ranging from spot market exchange to long-term contractual arrangements.
Whereas coffee production was originally almost exclusively oriented towards rather uniform export markets, consumer preferences are becoming increasingly differentiated and demand for speciality coffee and convenience products is increasing rapidly. Concentration of coffee companies in the international markets is accompanied by product diversification tailored to specific consumer segments. In addition, investment costs for coffee processing and branding are relatively low, enabling easy entry to smaller companies producing for local outlets. Moreover, market outlets are becoming more diverse, ranging from corner shops and supermarkets to fancy coffee bars.
We notice increasing vulnerabilities in primary production of coffee – related to climate change and rural poverty that lead to sub-standard input use – and a continuous search for new articulation between different agents throughout the coffee supply chain. This offers scope for company-level sustainability upgrading programs but also requires more fundamental changes to the value added distribution to guarantee long-term partnerships that are critical to support in-depth investments for more resilient coffee systems.
Key solution directions
Based on our field research experiences with impact evaluations for different types of voluntary and company-wide certification programs, we identify five major solution directions for simultaneously enhancing environmental sustainability and poverty-reduction in coffee systems:
1. Widen prospects for sustainable production intensification
Coffee production in many parts of the world is still far below its (technical) potential. In Uganda, yield gaps in coffee range between 45% and 57% of the attainable yield. This suboptimal performance is mainly due to limited (or untimely) input use, delayed renovation of old coffee trees, inadequate spacing and nutrient management, and land ownership dominated by older and less-educated farmers. Most smallholder farmers are ‘cash constrained’ and therefore cannot easily engage into pre-harvest investments for sustainability intensification programs.
At the same time, coffee yields are becoming more variable due to irregular rainfall influenced by climate change. Coffee production is gradually moving upwards to hillside areas (with the risk of approaching the forest margin) and in some places farmers even need to recur on (drip-)irrigation to guarantee homogeneous flowering. These additional costs can only be covered if farmers are linked to coffee trading companies that provide substantial pre-finance and long-term contractual delivery arrangements.
2. Opportunities for market diversification
Most coffee is traditionally exported to Northern markets, where consumption is approaching a ceiling. Further market growth can only be reached through penetration into new mass consumption markets (Russia, China) or expansion into high-value speciality markets (Japan, EU, USA).
An important growth segment is also found in the expansion of local processing and sales within the producer’s countries. Sales for local coffee consumption in countries like Mexico, Honduras and Tanzania has grown to 10-15% of total production. These local sales include not only a series of national brands that are sold through supermarket outlets, but also nationally-owned coffee shops (especially in countries that are less dominated by international companies) that are capitalizing on sustainability programs that built on national brands and local denomination-of-origin seals.
3. Improving labour conditions
While many voluntary sustainability schemes used to focus on higher yields and better farmer’s income – reaching rather mixed results – attention is gradually shifting to programs that guarantee a living income to both farmers and workers. A focus of living income is by many deemed key when making choices on the design, implementation, and control of sustainability schemes, but requires close coordination between public, private and civic stakeholders. Moreover, it may become a unique selling point to convince and commit larger segments of consumers.
The growing focus on labour conditions is accompanied by a shift in attention to nutrition and health outcomes (instead of gross revenues) and inclusiveness. It is for example considered increasingly important to include attention for female workers. A focus on more formal and permanent labour contracts is used to safeguard this and to retain the experience of the coffee workforce in the sector. Combined, these shifts may very well enable a gradual rise in labour productivity.
4. Strategies towards value chain upgrading
Whereas most voluntary certification schemes focussed attention on smallholder primary production, it is increasingly acknowledged that coffee berries only represent 5-10% of the final consumer price of coffee. Much more can be gained at the stage of (wet and dry) processing by improving a higher and uniform quality of the harvested coffee and more timely processing in local coffee mills directly after harvest. Investment in efforts for reaching these benefits could be returned to producers under fairchain principles.
In addition, a large share of the value added in coffee is created during the stages of packaging, transport and retailing. Stronger vertical integration between companies within the coffee chain could avoid such high transaction costs and reduce investment risks to farmers. Moreover, post-harvest losses can be better controlled with improved bags and when branding takes place early in the supply chain. This can be supported by innovative blockchain technologies that increase insights in production systems and transparency on payment conditions at different stages of the supply chain.
5. New avenues for coffee expansion
Even though coffee growing is restricted to certain agro-ecological conditions, there are non-traditional coffee growing areas that also have suitable conditions for growing harder disease-resistant coffee. A good example comes from the production of high quality Robusta coffee near the Caribbean coast, or coffee from conflict areas with a longstanding cultivating traditions such as Yemen and Congo. The potential of these areas is increasingly acknowledged, and efforts to commercialize coffee from these areas are starting up. This intensifies, however, competition with traditional coffee areas and could further depress world prices.
Farmers converting land from other uses to coffee production often need initial support to help them with the high investment related to the coffee system establishment, but this provides them promising outlooks on higher cash income and local employment generation. We need to ensure that the sector takes onboard lessons from earlier coffee rehabilitation schemes, since such transitions do not necessarily guarantee economic and environmental sustainability and are only successful with consistent support and commitment in their early stages.
Ways forward
Given the different opportunities for reinforcing coffee sustainability – even in a context of rather depressed prices and stagnant markets after Covid-19 – attention should be focussed on structural changes in the coffee system, looking for strategic interventions at upstream stages of the supply chain (input use; farmer training, labour rewards; quality processing, packaging) that pay-off in better downstream transactions.
Company sustainability schemes might be better able to engage into long-term arrangements with other stakeholders (farmers, local traders, etc.) that provide durable incentives for quality upgrading and that reduce risks of power imbalances and free-riding behaviour (side sales). This also asks for deliberate adjustments in the institutional environment of coffee production and trade, asking for a fundamental shift from spot exchange (auctions, future markets, etc) to mutually binding contractual arrangements. The only way sustainability can get market value is when both sides of the coffee chain are fully committed and benefits are equally shared.
