mR 45 - Sustainable Coffee: Increasing Income of Small-Scale Coffee Farmers in Mexico Through Upgrading and Improved Transparency in the Value Chain

8/14/2019 mR 45 - Sustainable Coffee: Increasing Income of Small-Scale Coffee Farmers in Mexico Through Upgrading and I

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SUSTAINABLE COFFEE

INCREASING INCOME OF SMALL-SCALE COFFEE

FARMERS IN MEXICO THROUGH UPGRADING AND

IMPROVED TRANSPARENCY IN THE VALUE CHAIN

microREPORT #45

March 2005

This publication was produced for review by the United States Agency for International Development.It was prepared by Edward Millard of Conservation International, subcontractor to ACDI/VOCA, underthe Accelerated Microenterprise Advancement Project Business Development Services Knowledge andPractice Task Order.


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SUSTAINABLE COFFEE

INCREASING THE INCOME OF SMALL-SCALE COFFEE

FARMERS IN MEXICO THROUGH UPGRADING AND

IMPROVED TRANSPARENCY IN THE VALUE CHAIN

microREPORT #45

Edward Millard

March 2005

DISCLAIMER

The authors views expressed in this publication do not necessarily reflect the view of the UnitedStates Agency for International Development or the United States Government.


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CONTENTSFOREWORD 3EXECUTIVE SUMMARY 1

I. INTRODUCTION 3a. The Global Coffee Market 3

THE RISE OF SUSTAINABLE COFFEE 3

B. The Chiapas Coffee project 4C. Smallholder Coffee Production In Mexico 5

II. VALUE CHAIN INTERVENTIONS 9a. mse upgrading through best practices 9

B. DEVELOPING VERTICAL LINKAGES 10

starbucks pricing 11C. STRENGTHENING HORIZONTAL COOPERATION ANDCOOORDINATION 12

D. Facilitating the Emergence of Supporting Markets 14

E. Improving the business enabling environment 16

F. Socio-Economic Impact of the Project 17

III. CONCLUSIONS AND LESSONS LEARNED 18A. The role of the lead firm 18

B. Sustainable SUPPORTING MARKETS 19

C. PRECONDITIONS TO VALUE CHAIN INVESTMENTS 20

D. Changes in Power and Benefits 20

Reference List 21

FIGURES

FIGURE 1: Value Chain Map 6


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TABLES

TABLE 1: Chiapas Coffee Project Sales by Container 9

TABLE 2: Price Received by Farmers per Pound of ParchmentCoffee After Fees for Services Deducted 10

FOREWORD

This paper is part of a series of ongoing research activities funded under the AcceleratedMicroenterprise Advancement Project Business Development Services (AMAP BDS) In-definite Quantity Contract that explores industry-based strategies to achieving poverty re-duction and broad-based economic growth. This case study illustrates how an NGO (Con-

servation International) in collaboration with a leading international coffee roaster (Star-bucks), and with support from USAID, were able to realize increased incomes for ruralfarmers, significant investments in specialty coffee value chain upgrading, and importantand potentially enduring environmental benefits.

This paper examines the extent to which micro and small enterprises (MSEs) benefit fromparticipation in global and domestic value chains, the role of market leaders and the in-centives required for participants to invest in upgrading.

A number of themes are explored including the relationships among participating firmsand their role in project effectiveness and sustainability; preconditions to investment in

value chain upgrading; the link between access to services and MSE ability to upgrade inresponse to new opportunities; and the appropriate level of service provision by a facilitat-ing NGO.

JEANNE DOWNING

USAID/PR/MD


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UTIVE SUMMARYThis case study tells a story ofhow rural poor smallholder

coffee farmers in the State ofChiapas in southern Mexicoachieved significant increasesin their earnings as a result ofsales into a higher value mar-ket channel established in co-operation between Conserva-tion International (CI) and theStarbucks Coffee Company(Starbucks) in a project funded

by the United States Agencyfor International Development(USAID).

In 1997, when the CI-Star-bucks partnership was beingnegotiated, world coffee priceswere at an all-time low, andconsequently, many farmerswere abandoning the crop orcutting costs. This produced a

threat to the sustainable sup-ply of high quality coffee forStarbucks, to livelihoods forfarmers, and to the natural re-sources that were being des-troyed in pursuit of alternativelivelihoods.

The Chiapas Coffee Project

The Chiapas coffee project

began in 1997. Its purposewas to define and promote aset of land management prac-tices to conserve biodiversityin the area adjacent to El Tri-unfo Biosphere Reserve and todemonstrate that farmerscould obtain social and eco-

nomic benefits through theiradoption.

Traditional coffee farmingthreatened the Reserve be-cause farmers cleared theforest to plant and pollutedwater sources with the wastecreated from processing. Theprojects recommended bestpractices include the use ofshade trees to protect soil andwater and provide habitat towildlife and plants; and a banon environmentally damagingpractices such as hunting,dumping coffee waste in riversand the inappropriate use ofchemicals. Coffee producedaccording to these practiceswas trademarked by CI as Con-servation Coffee.

Adopting the best practicesimposed costs on the farmers,including time to attend tech-nical training and complete re-quired documentation record-ing progress on annual tar-gets, and increased labor in-vestment in their farms. Themain incentive to adopt thebest practices was the availab-

ility of a market paying premi-um prices: Starbucks agreedto buy coffee meeting its qual-ity requirements while fulfillingthe best practices annual tar-gets. It marketed the coffeeunder the brand name ShadeGrown Mexico.

Starbucks initially placed con-tracts directly with the cooper-

atives, which quickly demon-strated their inability to meetthe challenges of exporting. CItherefore temporarily steppedin to cover the lack of market-ing capacity of the cooperat-ives before establishing a rela-tionship with a broker, whichStarbucks later designated asits sole supplier in order to re-

duce transaction costs. Al-though this arrangement resul-ted in increased returns tofarmers and a greater degreeof transparency in pricing, fourof the cooperatives rejectedthe requirement to workthrough a trader and withdrewfrom the project.

In addition to marketing ser-

vices, farmers required accessto agricultural training and ex-tension, business planningtraining and financial servicesall of which were also ini-tially intended to be providedthrough existing cooperativeorganizations. CI soon foundthe cooperatives to be inex-perienced, administratively

weak and unable to commu-nicate to the farmers theconcept of best practices orthe risks and obligations asso-ciated with receiving creditand accessing internationalmarkets. As a result, CI began

SUSTAINABLE COFFEE 1


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providing these services dir-ectly. As the cooperativesskills and experience in-creased, CI transferred the im-plementation of these services

to the cooperatives and to in-dependent service providers,including community pro-moters.

The Role of the Lead Firm

The Chiapas coffee project il-lustrates the importance ofmarket leaders in linking smalland very small firms or farms

into higher value markets.Lead firms with the capital,skills, incentives and commit-ment to invest in upgradingvalue chains that incorporatelarge numbers of smallholderproducers can greatly acceler-ate growth and productivity. Inthis case, Starbucks providedan assured market, requiredstrengthened and transparentlinkages, provided product andmarket development services

and shaped demand in theglobal coffee industry.

Sustainable Supporting

Markets

The project demonstrates thatfarmers living below the offi-cial poverty line will pay feesfor services to upgrade in re-sponse to economic incent-ives, and that private serviceproviders can enter the marketto make impacts more sustain-able. While the project made asustained commitment toproviding vital services that

were unavailable, efforts weresimultaneously made to buildthe service market.

Preconditions to Value

Chain Investments

This case study identifies thefollowing preconditions toprivate sector market leaderinvestment in the value chain:

The ability of the marketleader to maintain somelevel of exclusivity in the

market channel and ashare of the consequentpremiums. In this case,this was achieved by estab-lishing a unique brand.

The presence of a facilitat-ing entityin this case CIable to take responsibilityfor strengthening the or-ganizational capacity ofparticipating smallholdersand reduce the risk of non-compliance with estab-lished agreements.

Impact on MSEs

By developing a product withattributes derived from theplace and method of produc-tion, the dynamics of thepower relationship betweenthe smallholder farmers andthe importer/roaster werechanged in favor of the farm-

ers. As a result, the benefitflow to the farmers also in-creased.



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I. INTRODUCTIONA. THE GLOBAL COFFEE

MARKET

An estimated 25 million farm-ers worldwide produce coffee,most of them smallholderswith plots of 1-5 hectares.They operate in a global mar-ket in which supply outstripsdemand, driving down prices.Over the last 15 years, farm-ers have also suffered a loss

of access to services as gov-ernments have withdrawnsubsidies that once supportedtraining, extension, marketingand financial services. In re-sponse to lower prices andfewer services, coffee farmershave reduced investments es-sential for maintaining qual-ity, such as renovating farmsand maintaining processinginfrastructure.

Over the same 15-year peri-od, there has been a stronggrowth in demand for spe-cialty coffees. This marketsegment embraces a numberof different concepts and ischaracterized by a high de-gree of product differenti-

ation, not unlike the wine in-dustry. Its original and stillpredominant characteristic isquality. Specialty coffees aresometimes sold as single ori-gin, as opposed to blends

from different origins, to em-phasize their distinctiveness.

Newer concepts to enter thespecialty segment include en-vironmental and social bene-fits at the point of production,categorized together broadlyas sustainable coffees.1 Or-

ganically certified coffee is animportant part of this seg-ment. Organic cultivation haslittle or no impact on the taste

but provides benefits to theenvironment through guaran-

teeing the absence of chemic-als. Other concepts that aregrowing in the specialty seg-ment are fair trade (coffeetraded by producer associ-ations at a guaranteed pricethat is determined by a set offair trade standards) and eco-label (coffee grown under sys-tems that conserve forest can-

opies).

The growth in the specialtycoffee segment is part of alarger trend in food consump-tion in North America andEurope, where consumers aremore informed about interna-tional trade, the often lowprices farmers earn, the poorworking conditions of many

employees, the environmentaleffects of agrochemical useand the impact on biodiversityof forest clearing. This in-crease in consumer aware-ness requires companies thatprocess and manufacture cof-fee to know what is happeningat all stages of the productionprocess.

The strong growth in the spe-cialty segment is taking placein a global coffee market thatis growing only about 1 per-cent annually. In North Amer-ica and Europe, total coffeedemand is static or even fall-

THE RISE OF SUS-

TAINABLE COFFEESustainable coffees are nowproduced in 32 countries andconsumed in 20. Global salesare about 125 million pounds,with a retail market value es-timated at U.S. $565 million.The organic market is thelargest part of the sustainablesegment, with U.S. retail salesof organically certified coffeeestimated at U.S. $223 millionand growing at 20 percent an-nually. Fair trade coffees havebeen particularly successful inthe U.S. market in the last fewyears. The fair trade labelingorganization Transfair USA es-timates that retail sales grew90 percent in 2003 to U.S.

$208 million.


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ing slightly in the face of com-petition from other drink cat-egories. However, the spe-cialty segment is growingstrongly in these markets.

B. THE CHIAPAS COFFEE

PROJECT

The Chiapas coffee project,funded by USAID and imple-mented by CI in partnershipwith Starbucks was designedto increase the incomes of rur-al poor smallholder coffee

farmers while conserving biod-iversity through:

Introducing an innovativeproduct concept, Conserva-tion Coffee

Developing vertical link-ages to access new endmarkets

MSE upgrading to meet thedemands of this new mar-ket

Strengthening horizontalcooperation and coordina-tion to achieve scale

Facilitating the emergenceof supporting markets forfinancial services and tech-nical assistance

Improving the business en-abling environment, bothlocally and internationally

1. THE PARTNERSHIP

The goal of the CI-Starbuckspartnership was to create amarket-based incentive sys-tem to improve the environ-

mental and social impact ofcoffee farming, processing andtrading, resulting in increasedearnings for farmers, thestable long-term supply of

high-quality coffee, and theconservation of biodiversity.

CIs role in the partnership wasto bring together the firms inthe value chain, governmentinstitutions and conservationorganizations to define andpromote best practices, andto provide and facilitate busi-ness and financial services to

enable farmers to adopt thepractices and to increase theirefficiency.

Starbucks2 role in the partner-ship was to create a new cof-fee brand (Shade Grown Mex-ico) that would grow the mar-ket, pay premium prices thatwould create an incentive forfarmers to adopt the bestpractices, communicate toconsumers about the socialand environmental value ofthe partnership, and provideexpert technical assistance indeveloping quality coffee.

Starbucks role reflected its val-ues as a company: Purveyingquality coffee means much

more than selecting the finestbeans in the world. It means

protecting a way of life for

farmers by supporting social,

economic and environmental

issues that are crucial to their

livelihood. Starbucks is dedic-

ated to creating a sustainable

growing environment in coffee

origin countries.3

2. THE GEOGRAPHICAL

LOCATION

The farmers participating inthe Chiapas coffee project arelocated in the buffer zone ofthe El Triunfo Biosphere Re-serve, a protected cloud forestof approximately 120,000 hec-tares (about 300,000 acres)that provides habitat for thethreatened quetzal, ocelotand jaguar, rare plants and

240 bird species.

Coffee growing presents achallenge to conserving thebiodiversity of the Reserve asfarmers traditionally clearforest to plant, encroach onprotected land and dump pro-cessing waste in waterways.Traditional growers are oftenunaware of the long-term

value that the shade of forestshas for production through re-taining soil moisture, protect-ing the plants and providinghabitat for birds and spidersthat eat harmful insects.

Low coffee prices contributeto many of the problemsthreatening the biological in-tegrity of the Reserve, includ-

ing the introduction of live-stock, fires to clear land, illeg-al extraction, and the estab-lishment of settlements insideReserve boundaries. At thestart of the Chiapas coffeeproject, relationships between


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the low-income communitiesaround the Reserve and thelocal authorities werestrained: the administrationconsidered agriculture a major

threat to protecting wildlife.

Conversely, because the cof-fee sector has been very im-portant to the economy ofChiapas, the government hastraditionally subsidized it (es-pecially in election years). Atthe time of this study, about73,742 producers were farm-ing 228,254 hectares in

Chiapas, producing a third ofMexicos coffee.4 Subsidiescovered occasional training,extension and financial ser-vices. Inefficiently executedgovernment-funded rural cred-it programs had resulted in aculture of loan delinquency,preventing financial service in-stitutions from entering the

market and consequently lead-ing to a lack of credit availabil-ity.

As is the tradition in Chiapas,many coffee producers aremembers of cooperatives. Ingeneral, the coffee cooperat-ives lack basic capacity inbusiness administration. Co-operatives had been formed

not as business entities but astax-exempt legal entities topromote social solidarity andwellbeing among membersand their communities. Theirofficers had minimal educationand no management experi-

ence. This situation causedtheir substantial dependenceon technical staff that thestate government subsidizedand encouraged them to ap-

point.

C. SMALLHOLDER COF-

FEE PRODUCTION IN

MEXICO

1. THE VALUE CHAIN

The farmers who produce cof-fee in Mexico are removedfrom the major final productmarkets, both in terms of geo-graphy and number of links inthe value chain. The situationin Chiapas, where most farm-ers are smallholders (2-4 hec-tares) who depend primarilyon coffee sales for their liveli-hoods, is fairly typical.5 Farm-ers harvest their coffee in theform of cherries from the tree

and undertake the first stageof processing to remove thecoffee beans from the cherriesand dry them. Farmers sell thedried beans to independentlocal traders or buying agentsof processing/trading compan-ies, or to a cooperative if theyare members of one.


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Training and evaluation ofConservation Coffee Best

Credit and government

Quality testing, roasting and

Purchase of coffee orfulfillment of export service

Quality testing and milling

Weighing and storage ofparchment coffee

Production and first-stageprocessing by cooperatives

Training and evaluation

Credit to farmers

Financial

Services

Institutions

Extension

Service

Providers

Importers / Roasters

Exporters

Producers

Production and processing

Importing, roasting and

Payment and

Quality control and milling

Processors

Figure 1: Value Chain

Processing/trading companiesundertake milling, a secondprocessing stage that consistsof removing the coffee beanskin (parchment) and thensorting and grading for qualityin terms of bean condition asdefined by trade standards.

The processor/trader bags thegreen, unroasted beans for ex-port or local sale. Export-qual-ity green coffee is importedeither by a trading companythat sells it on to a roaster orby a roaster directly. There hasbeen considerable integrationin the coffee industry, particu-larly by large trading compan-

ies. Only a few companiesNeumann, Volcaf and theECOM Group are the threelargestundertake most of theworlds coffee trading.

The roaster roasts and blendsthe coffee to achieve the con-

sistency and flavor profile de-termined for the brand. Mostbrands belong to roasters, whothen sell the branded con-sumer products to retailers.

A value chain map is presen-ted as Figure 1 above.

2. RETURNS TO MSE PRO-DUCERS

The power and benefit flowsbetween traders and roastersin the commodity (as opposedto specialty) coffee valuechain are highly asymmetrical,with a small number of leadfirms determining the amountand type of coffee that is

bought and the internationalcommodity market largely de-termining the price that roast-ers pay. The product attributesare largely enshrined in thebrand value, far in the valuechain from the producers, who

hence have no leverage to ne-gotiate more favorable prices.Less than 10 percent of the re-tail price of coffee products ac-crues to the farmers.6

The weak bargaining positionof coffee farmers in the valuechain is due to a number of

constraints, which result inlower earnings and poverty.

End Market Constraints

The very low internationalprice for coffee affects theability of smallholders to in-vest in quality. Coffee farmerslack an economic incentive toimprove their product and ser-vice quality because it doesnot gain them a higher pricefrom local distribution chan-nels. At the start of the pro-ject, the Conservation Coffeeconcept was as yet unknownin the market.


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Enabling Environment Con-

straints

There is limited investment inagriculture, especially in amarginalized state such as

Chiapas. Periodic, subsidizedpublic sector schemespartic-ularly in advance of electionsmake agriculture unattract-ive to the private sector.

Horizontal Linkage Con-

straints

As with many rural enter-prises, local traders undertakeadditional functionssuch as

credit provisionto com-pensate for the lack of inde-pendent local service pro-viders. Most smallholder coffeeproducers live below thepoverty line and are usually indebt. The cooperatives lackbusiness skills and transpar-ency. Consequently, farmerstend to assume that everyone

is trying to exploit themamindset that makes it difficultto build trust in new ideas andcollaborations.

Vertical Linkage Con-

straints

The coffee cooperatives oftenemploy technical advisors withgovernment support but areusually not able to managethese people effectively, lead-ing to inefficiencies. Farmerslack of knowledge of markets,geographic isolation, smallscale of production and loweducation levels make identi-fying and directly accessing

more rewarding relationshipsin the value chain very diffi-cult.

Supporting Market Con-

straints

Few financial institutions arewilling to provide credit: thedecline of coffee prices in-creases the risk of financingthe small-scale coffee sector,which has a history of lowprofitability and loan default.Politically motivated soft gov-ernment loans have led to aculture of non-repayment. Pro-

ducer organizations, govern-ment agencies and other ser-vice providers lack the re-sources and tools to providerelevant training and exten-sion.

Firm Level Upgrading Con-

straints

Neither farmers nor cooperat-

ive officers have the necessaryknowledge of internationalmarkets, coffee quality or busi-ness management to buildcompetitive enterprises. In ad-dition, they lack the facilitiesrequired for processing coffee,limiting their options foradding value to the product.

3. VALUE CHAIN OPPOR-

TUNITIES

At the outset of the projectthere were, however, a num-ber of significant opportunitiesto be exploited. The most im-portant of these was Star-

bucks interest in playing therole of a lead firm driving in-dustry change, and its com-mitment to increasing thelearning and benefit flows to

smallholder farmers.

The authorities responsible formanaging El Triunfo Reservewere very supportive of theidea of producing according tothe best practices and helpedto promote this conceptamong farmers in addition toparticipating in defining thepractices.

Other opportunities includedthe growth of the specialty cof-fee market and the availabilityof USAID funds (PVC MatchingGrants program and the GlobaDevelopment Alliance) awar-ded to CI.

1 Giovannucci, 2003

2 Starbucks does not use an apo-strophe when the name is writtenas a possessive adjective.

3 Starbucks website, as viewedNovember 2004

4 Consejo Mexicano de Caf, 2002

5 CIs socio-economic study ofChiapas coffee farmers revealed anaverage income of about U.S. $30per week at household level, withno other sources of cash income.

On average, 33 percent of eachcommunitys land is dedicated tocoffee growing and 29 percent iscovered by forest. The remainder isused for the production of maizeand beans, housing, and grazinglands.

6 Oxfam International, 2002


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II. VALUE CHAIN INTERVENTIONSA. MSE UPGRADING

THROUGH BEST

PRACTICES

The project aimed to establishmarket incentives for farmersto become stewards of the Re-serve through the adoption ofbest practices. Capitalizing onrecent trends seen in con-sumer preference, the adop-tion of best practices would

enable the coffee farmers toimprove their competitive pos-ition.

The cooperatives that particip-ated in the project already hadorganic certification, which isavailable in Chiapas at a man-ageable cost. However, thebest practices developed earlyin the project went beyond or-

ganic standards, which CI con-siders insufficient to createbiological connectivity andconserve the ecosystem func-tions in the wider landscape.

1. DEFINING CONSERVA-

TION BEST PRACTICES

Defining best practices hadfour steps. First, a global

framework was designed. In2001 CI developed the Con-servation Principles for CoffeeProduction jointly with theConsumers Choice Council,Rainforest Alliance, the Smith-sonian Migratory Bird Center

and the Summit Foundation,and in consultation with in-

dustry leaders, including Star-bucks, farmer organizationsand nongovernmental organiz-ations.

Second, a draft of best prac-tices was developed based onavailable research and know-ledge of local practices.

Third, farmer focus groups

were convened to refine thedraft best practices for thespecific origin.

Finally, the draft best practiceswere reviewed and finalizedwith local and international ex-perts. The best practices areperiodically updated to reflectthe knowledge gained throughtheir application. A highly par-ticipatory approach ensuredsupport for the practicesamong farmers, processorsand other service providers.

2. STARBUCKS PREFERRED

SUPPLIER PROGRAM

The Conservation Coffee BestPractices formed the basis forStarbucks own system of pur-

chasing guidelines, definingeconomic, social, environ-mental and quality standardsfor growing and processingcoffee. The Chiapas project be-came the pilot site for testingthe guidelines and the train-

ing, technical assistance, fin-ancial services and monitoring

programs necessary to pro-mote their adoption.

Based on the guidelines, andwith CIs technical support,Starbucks introduced inNovember 2001 its PreferredSupplier Program (PSP), whichevaluated suppliers using ascoring system that awardedpoints for the achievement ofdefined social, environmentaland quality criteria. It operatedon the basis of self-reporting,using existing documentation,and including a verificationprocess to check data validity,rather than undertaking ex-ternal inspection.

The result was a low-cost, un-

complicated reporting systembased on compliance with theguidelines, which documentedthe value passing through thechain, and which was compat-ible with other certificationsystems.

Applicants to the PSP whoachieved a minimum of 60percent total performance rat-

ing and 60 percent in eachsubject area achieved a Pre-ferred Supplier status to Star-bucks. This status earnedthem preferential contractterms and priority for buying.Applicants achieving an overal


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80 percent rating with a min-imum of 60 percent in everysubject area were awardedStrategic Supplier status. Thiscarried the additional benefit

of a one-year premiumof U.S.$0.05 per pound on all greencoffee meeting the programguidelines and shipped duringthe first crop year in whichthat score was achieved.

In addition, Starbucks encour-aged continuous improvementwith a one-year U.S. $0.05premium for all green coffee

shipped by supplier applicantswho achieved at least a 10point increase in their scoreabove 80 percent over the pre-vious year.

3. STARBUCKS C.A.F.E.

PRACTICES

In March 2004, Starbucks re-named and re-launched the

PSP as Coffee and FarmerEquity (C.A.F.E.) Practices, toaddress additional social con-ditions, labor issues, environ-mental practices in coffee pro-cessing and economic trans-parency criteria.

Starbucks is presently traininglocal verifiers in C.A.F.E. Prac-tices in order to reduce the

verification cost. This is an im-portant consideration in a mar-ket characterized by a prolifer-ation of certification schemes,all bearing a cost for the farm-ers.

Starbucks has committed topurchasing 60 percent ofC.A.F.E. Practices verified cof-fee by 2007.

4. LEAD FIRM-DRIVEN UP-

GRADING

The upgrading of smallholdercoffee is being driven by Star-bucks, the largest roaster and

a major retailer of specialtycoffee products and bever-ages. By offering a securemarket and price premiums, itis using its strength as a leadfirm to pull best environmentaland social practices throughthe specialty coffee valuechain for the benefit of small-scale producers.

This leadership also sends achallenge to other coffee com-panies to move in a similar dir-ection to avoid weakeningtheir capacity to compete forraw material supplies.

B. DEVELOPING VERTIC-

AL LINKAGES

In August 1999, coffee cooper-atives working with the projectmade their first sale to Star-bucks, which launched a newbrand, Shade Grown Mexico,in all its own stores in NorthAmerica. The product carriedCIs logo and a conservation

message. It recorded thehighest sales on Starbuckswebsite and could not bemaintained in stock all yearbecause of limited supplies.

The concept of shade-growncoffee was not unknown in theinternational market. By 1999other specialty coffee compan-ies had introduced products

that referred on their pack-aging to the value of con-serving forest shade as habitatfor birds. Starbucks productwas innovative in its attributeof a whole system of bestpractices and subsequently inthe commitment of the com-pany to developing a completepurchasing system based on

the concept of environmentaland social responsibility.

1. STARBUCKS TO COOPER-

ATIVES

Starbucks initially placed con-tracts directly with the cooper-atives. This proved to be a dif-ficulty from the outset in build-ing a sustainable trading mod-el. Functional upgrading re-quires quick and thorough de-velopment of the skills re-quired to perform the newfunction.

The Chiapas cooperatives haddemonstrated in 1997 and1998 their inability to meet on

Table 1: Chiapas Coffee Project Sales by Container

(1 container = 38,000 lbs of green coffee)

Client 1999/2000

2000/01

2001/02

2002/03

20034

Star-bucks

8 19 42 45 42

Other 6 2 2 2 0Total 14 21 44 47 42


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their own the challenges of dir-ect exporting, failing in criticalaspects of service such assending pre-shipmentsamples, shipping within the

contract period, notifying theclient of shipment, sending fulldocumentation, maintainingconsistent quality and shippingthe amount of coffee contrac-ted. The gap between the ex-perience of the cooperativesand the requirements of ex-porting to a large specialtycoffee company was too great

to bridge.For Starbucks to receiveproduct on time and to qualityspecifications required CI to re-luctantly step in to cover thelack of marketing capacitywithin the cooperatives, whichcontracted local processors formilling their parchment coffee.

The urgency of a more sustain-

able approach became clearas Starbucks increased its de-mand in response to the suc-cess of Shade Grown Mexico.Sales to Starbucks from theChiapas coffee project are il-lustrated in Table 1 above.

2. COOPERATIVES TO

BROKER

The cooperatives resisted CIsfirst attempt in 2000/01 to in-troduce a local trading com-pany into the project. Never-theless, it became essentialfor CI to pull back from itsunanticipated role in support-ing marketing for the cooper-

atives. To this end, CI estab-lished a relationship with

Agroindustrias Unidas de

Mxico (AMSA), a member ofthe ECOM group, to provide

export services to the cooper-atives for the 2001/02 harvest.

AMSA received parchmentbeans from the cooperatives,

processed, selected and

graded them and prepared theexport documentation. This ar-rangement continued for the2002/03 harvest and the co-operatives began to trustAMSA, which returned to thema higher yield of export qualitygreen coffee from the parch-ment beans they supplied thanthey had previously obtained

from other local processors.AMSA also returned to the co-operatives the damaged beansthat were not saleable, knownlocally as desmanche. Thiswaste product has a smallvalue, which increased farm-

ers earnings. These efficien-cies offset the additional feeAMSA charged the cooperat-ives for export documentation.

3. STARBUCKS TO BROKER

After receiving its 2003 ship-ments, Starbucks wanted tochange the export procedurefor future years. It requestedAMSA to buy from the cooper-atives and sell directly to Star-bucks and asked CI to facilit-ate the new arrangement. Thereason for the change was to

reduce Starbucks transactioncosts by dealing with only onesupplier. Starbucks would thenhave direct communicationwith the supplier. The cooper-atives could not communicatewith international clients be-cause they do not all havetelephones, do not speak Eng-lish and lack written commu-

nications skills.In response to this new situ-ation, CI facilitated a purchas-ing system that required Star-bucks contracts to state boththe price that Starbucks wouldpay AMSA and the price thatAMSA was to pay the cooper-atives. CI facilitated the nego-tiation between AMSA and the

cooperatives by providing adetailed costing of each of theprocessing and exporting ser-vices that AMSA provided.

STARBUCKS PRICING

Starbucks has two pricinglevels, one for organically certi-fied coffee and one for in-trans-ition, i.e. coffee that is in athree-year period of conversionto organic and is not yet certi-fied. Shade Grown Mexico isa certified organic product,which is now available year-round in Starbucks retail out-


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Initially, when exporting dir-ectly, the cooperatives weremanaging many functions.This, combined with their ad-ministrative weakness, made

it much more difficult to un-dertake rigorous cost analysis.When AMSA entered into thechain, the cooperatives wereleft with fewer functions, mak-ing it easier to calculate theirexact costs. This transparencyalso helped overcome the co-operatives distrust of AMSA.Moreover, Starbucks experi-

ence in the Chiapas projectalerted it to the great import-ance of transparency in thevalue chain, which it then in-troduced into the C.A.F.E. Prac-tices.

4. BENEFITS OF NEW VER-

TICAL LINKAGES FOR

PRODUCERS

Despite the systems transpar-ency, four of the cooperativesparticipating in the project re-jected the requirement to workthrough a trader that they per-ceived as having not treatedthem fairly in the past. Theybelieved they would obtainhigher prices selling else-where. Lengthy meetingsfailed to resolve the conflictsand the four cooperativespulled out of the project. A fewmembers called press inter-views to denounce CI forweakening and dividing thecooperatives.7

The other cooperatives parti-cipating at that time remained

in the project, and AMSA alsooffered its services to individu-al farmers who were imple-menting the best practicesand wanted to continue sellingto Starbucks. A number of

these farmers accepted, andas a result the amount of cof-fee supplied to Starbucks fromthe 2003/04 harvest was al-most at the level of the previ-ous year.

The result of the new exportprocedure was positive forfarmers. Although Starbucksbuying price did not change,

farmers earned more for theircoffee than in 2003 when theyexported through their cooper-atives because of increased ef-ficiency of transactions.Moreover, the cooperativesimproved their cash flow, asAMSA paid them on receipt ofthe coffee; and their risk de-creased because AMSA under-

took quality control to Star-bucks standards, removing thepossibility of rejected ship-ments. Table 2 below showspayments to producers.

C. STRENGTHENING HO-

RIZONTAL COOPERATION

AND COOORDINATION

Many producers throughoutthe world consider direct ex-porting to be the optimalstrategy. However, while theprice paid clearly increases as

a product goes through thevalue chain, attempting to by-pass intermediaries exposesthe producer to significanttrading and currency risks andmay therefore not be the bestapproach to improving farmerearnings.

Inexperienced enterprises lack

an adequate knowledge of pro-cessing and trading proced-ures to create a uniform coffeeand provide a high-quality ser-vice to an international buyerand generally lack the eco-nomies of scale required to ful-fill contracts competitively.Such enterprises may servefarmers poorly by causing im-porters to withdraw from themarket.

1. COOPERATIVES AS EX-

PORTERS

The Chiapas project sufferedinitially from this problem.When CI started the project in

Table 2: Price in Mexican pesos received by farmers perpound of parchment coffee after fees for ser-vices deducted

1999/2000

2000/01

2001/02

2002/03

2003/04

Organic 10.05 9.43 9.47 9.73 10.16In-Transition 8.20 6.32 6.22 7.78 8.92


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1997, it facilitated direct ex-porting by three cooperativesestablished close to the El Tri-unfo Biosphere Reservea de-cision based on the farmers

stated interest in building theirown organizations to competewith the private traders oper-ating in the region.

CI started by training the farm-ers through the cooperatives,but found that the transmis-sion of information was poorand the adoption levels fornew skills were extremely low.

The technical staff lacked ca-pacity to make accurate pro-duction estimates, contractwith buyers an amount of cof-fee they could fulfill, calculatetheir credit needs and meetminimum standards for eitherorganic certification or themore demanding best prac-tices. Farmers were exposed to

risks and took on obligationswithout being fully informed ofthe consequences.

2. COOPERATIVES BY-

PASSED

CIs key strategic interest wasto implement the best prac-tices. Once the cooperativeslack of capacity was under-

stooda weakness that wasexacerbated by the regularturnover of officers mandatedin the cooperatives constitu-tionsCI changed its ap-proach, perceiving its best op-tion to be providing the train-

ing and extension services dir-ectly to farmers. However, thecost of taking on the role of aservice provider was high.

Furthermore, although to avoidlong-term dependence CI in-cluded fully the cooperativestechnical staff, resentmentgrew at what the technicalstaff considered to be an un-dermining of their role. Thesituation also caused confu-sion among farmers about theroles of CI and the cooperat-ives. An analysis of local capa-

city and sufficient participat-ory process at the outset couldhave reduced these negativefactors.

None of the cooperatives thatjoined the project in 1997 orthose that entered in sub-sequent years had any know-ledge of export markets. As CI

had not yet entered into thepartnership with Starbucks, itneeded to identify clients thatwould buy the coffee. It didthis successfully by facilitatingsales to three specialty coffeecompanies: Rapunzel Pure Or-ganics, Green Mountain CoffeeRoasters and Frontier Coffee.Securing licensing agreementsand investment commitmentscontributed to covering someof CIs costs of project imple-mentation.

Because of the inexperience ofthe cooperatives, CI negoti-ated the contracts with these

buyers on their behalf, facilit-ated the sending and approvalof samples and physically ac-companied the cooperatives tothe agencies and shippers to

fulfill exporting requirements.The Mexican harvest takesplace from November and con-tracts are shipped in the firsthalf of the following calendaryear. CI avoided the loss of themarket to the cooperatives asa result of poor quality productor service, but only by detailedinvolvement in the transac-

tions and by acting as thecommunications channel forseller and buyer.

3. ONGOING CHALLENGE

The concerns of the farmersabout the local intermediariesdespite the weakness of thecooperatives to compete withthem, the newness of the

concept of best practices, thelack of service providers in theregion, and the remoteness ofChiapas from the coffee exportdistribution points were thefactors that influenced CI totake a direct service providerapproach.

CI discontinued membership ofa cooperative as a condition

for participating in the project.The criteria for participationnow are a commitment to im-plementing the best practicesand the location of the farm ina strategic area for conserva-tion. CI gives preference to


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farms at high altitude becauseof quality considerations andalso to those that have initi-ated organic certification pro-cedures. There is a formal ap-

plication procedure and an in-duction course for new parti-cipants.

While the introduction of AMSAinto the value chain has al-lowed individual nonmembersof cooperatives to sell to Star-bucks, the failure of the co-operatives to provide effectivehorizontal linkages between

producers continues to presenttwo ongoing challenges: insti-tutional sustainability andscale of impact.

CI is evaluating the option ofestablishing a local organiza-tion to assume most of its ownremaining role, including valid-ating the best practices, facilit-

ating cooperatives negoti-ations with service providersand clients, and monitoring ex-port performance. With regardto scale, CI is particularly inter-ested in attracting large farmowners to the project in orderto extend the best practices tothe widest possible area andto achieve connectivitybetween forest fragments inthe landscape.

D. FACILITATING THE

EMERGENCE OF

SUPPORTING MARKETS

1. FINANCIAL SERVICES

Existing Services Market

The market opportunity withStarbucks required accompa-nying financial services to en-able the farmers to invest inbest practices and the cooper-atives to finance the purchaseand sale of coffee. The onlyavailable source of financingwas through local traders whooften lent money to farmersand deducted repayment plusinterest when buying theproduct, usually setting thebuying price low and the in-terest rate high.

Farmers referred to thesetraders as Coyotes, becausethey exploited the farmers

lack of knowledge of the mar-ket. Sometimes farmers soldelsewhere because they couldget a better price, despiteholding an advance from atrader, thereby contributing tothe indebtedness and mistrustthat characterized many trans-actions in these poor com-munities.

Early in the project, CI lookedfor a local financial services in-stitution but found none. In2000, the Mexican govern-ment, with financing from theInter-American DevelopmentBank, began a program called

Fondo Accin implementedthrough Banco de Mxico, theNational Bank. The purpose ofFondo Accin was to providelow interest loans to the rural

farming sector, and addition-ally, to provide some fundingfor technical assistance andtraining. It opened a small of-fice in Chiapas. However, CIsinitial efforts to facilitateFondo Accin funding to thecooperatives were unsuccess-ful, as it was distrustful of thecapacity of the cooperatives to

reimburse loans.Direct Service Provision to

Stimulate the Market

Given the farmers need forfinancial services, CI again as-sumed the role of direct ser-vice provider. In March 2001,CI partnered with Ecologic En-terprise Ventures, Inc., a non-profit environmental fund, to

launch Fondo Eterno-Verde, toprovide loans to the cooperat-ives. CI capitalized the fundwith a loan from the Interna-tional Finance Corporation(IFC).

A training course in businessplanning that started in 2000taught the cooperatives howto prepare cash flows to sup-port their applications to theFund. Farmers began to under-stand for the first time that abusiness plan with a cash flowprojection enabled them tocalculate how much moneythey needed to borrow and


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thereby take more control overthe management of their en-terprises.

The integration ofFondo Eter-no-Verde as a supporting mar-ket actor driven by premiumprices for the coffee enabledits successful operation. Des-pite the tradition of loan de-fault in the community, theFund lent over four consecut-ive harvest cycles, from2000/01 to 2003/04, a total ofU.S. $1,400,000 in pre- andpost-harvest finance to the co-

operatives and received 100percent repayment. Starbucksprovided a partial loan guaran-tee and CI initially recoveredthe principal by prior claim onthe payments Starbucks madefor the coffee. This arrange-ment has been discontinuedbecause the incentive systemdrives timely repayments.

Emergence of Service Pro-

viders

Fondo Eterno-Verde incorpor-ated a savings requirement,which enabled the cooperat-ives to acquire capital and re-duce their future borrowing re-quirements. Building a savingsaccount and fulfilling their re-

payment obligations has alsoenabled the cooperatives toacquire a credit history andbecome viable clients for aprivate financial service pro-vider.

Indeed, Fondo Accin was per-suaded by CIs successful ex-perience to begin lending inthe 2002/03 harvest and tocontinue in 2003/04, providing

about 30 percent of the co-operatives requirements. Ad-ditionally, Fondo Accin parti-cipated in refining the busi-ness planning and credit ap-plication training program sothat it could harmonize its ap-plication procedures withthose ofFondo Eterno-Verde.

2. PRODUCTION TECHNICAL

ASSISTANCE

CI required farmers participat-ing in the project to take partin training courses in qualityand farm management tech-niques, and then to implementthe recommendations in orderto achieve their upgrading tar-gets. In 2000 training was ex-

panded to include businessplanning.

Coffee quality was improvedby controlling coffee diseases,maintaining farm cleanlinessand taking care of the plants.The yields of coffee from thecherry increased from im-proved wet processing tech-niques so that a higher quant-

ity could be processed by thecooperative. Starbucks testedsample quality and providedfeedback to the cooperatives.

Farm Management Plan

and Evaluation

CI designed the projects ex-tension approach around theconcept of setting targets foradopting best practices over aperiod of time that is realistic

and agreed to by each farmer.To remain in the project, thefarmer had to meet an annualtarget. Information about eachfarm and its annual targetswas recorded in a Farm Man-agement Plan and Evaluation,to which all parties had ac-cess. The process has six mainsteps:

1. Collect Global PositioningSystem data to accuratelymap coffee farms.

2. Undertake a diagnosis ofeach farm to assess its cof-fee growing practices, e.g.shade diversity and use oforganic techniques.

3. Develop an annual planwith each farmer to define

short- and longterm targetsto conserve biodiversityand improve production.

4. Evaluate each farmers pro-gress towards targetsthrough an annual on-farmreview to identify chal-lenges, determine trainingneeds and agree on newgoals.

5. Assess the coffee pro-cessing and quality oneach farm every harvestseason to educate farmerson quality control, pro-cessing, managing season-


22/29

al labor and post-harvesthandling.

6. Inform farmers about creditopportunities, contract ob-ligations and risks, training

activities and conservation.

Direct Service Provision to

Facilitate Upgrading

The Farm Management Planrequired carrying out and pro-cessing surveys on all farms insufficient detail to verify manyprocedures and propose im-provements. Two visits were

made each year, one for agro-nomic practices and the otherduring the harvest to checkprocessing practices. The datagathered have been processedand stored, as a valuable re-source for this and other cof-fee projects.

The opportunity of growing theproject that the Starbucks

partnership presented, the factthat CI had specific technicalexpertise in conservation prac-tices and the weakness of thelocal service providers justifiedCIs approach to provide ex-tension and training servicesdirectly, while extending thetimeframe in which the projectcould become sustainable and

move to scale, and also addingto the project cost.

Development of Private

Sector Service Providers

So that CI could withdraw fromdirect service provision assoon as possible and dissemin-

ate best practices morewidely, it began to identify andtrain best practices promotersin the communities where theproject worked. These pro-

moters were selected for theirexpertise and standing in thecommunity, and includedsome technical staff of the co-operatives.

To make the training of pro-moters more sustainable, CIintroduced and oriented ElColegio de la Frontera Sur

(ECOSUR). This new local part-

ner adopted a farmer fieldschool methodology that builton farmers knowledge andtaught them to understandproblems and the range ofsolutions available. The trai-ning program, called Escuelasde Campo y Experimentacin

para Agricultores (ECEA), com-bined classroom field trials of

best practices on model farmsin each of the communitiesparticipating in the projectwith classroom courses inShade Canopy Diversificationand Management; Soil FertilityManagement and Conserva-tion; Integrated Pest and Dis-ease Management; and Har-vesting, Processing and Post-Harvest Handling. After com-pleting the course and an ap-prenticeship program with anextension service provider, thenew trainers provide these ser-vices to farmers independentlyin their communities.

In the 2001/02 harvest, CI ne-gotiated with the cooperativesthe payment of fees for the ex-tension services through themechanism of a levy on each

bag of coffee sold. This levyyielded U.S. $52,000 in 2003.

This mechanism was an im-portant step in transparency.Hitherto, cooperatives had de-ducted from the price paid tofarmers the cost of servicesprovided by technical staff; butno information was provided tofarmers about those costs. The

new system made the pricingof services explicit and encour-aged farmers to evaluate theusefulness of services theywere receiving from both CIand the cooperative technicalstaff.

E. IMPROVING THE BUSI-

NESS ENABLING

ENVIRONMENT

1. LOCAL ENVIRONMENT

CI, Starbucks and the El Tri-unfo Biosphere Reserve man-agement shared an interest inreducing threats to the biod-iversity of the Reserve by facil-itating higher farmer earningsthrough the promotion ofshade coffee practices thatprotect habitat for native spe-cies, prevent soil erosion andenable agricultural productionto grow without destroying theenvironment.


23/29

The policy environment playedan important facilitating role inthis project. The Reserves ad-ministrators strengthenedfarmers understanding and

acceptance of the value of thenatural environment, reinfor-cing their economic motivationto adopt the best practicesthat conserve it.

The Mexican government alsohas introduced a program en-abling the community pro-moters to become accreditedextension service providers

and charge for their services

CI aimed to demonstrate thatmanaging land for biodiversityis compatible with improvinglivelihoods for coffee farmers.CI and the Reserve collabor-ated on studies of vegetationpatterns and deforestation inEl Triunfo. CI also included the

Reserves authorities in theproject planning process tobuild understanding of variousstakeholders interests and todebate issues of difference.

The process of agreeing onbest practices contributed sub-stantially to improving rela-tions between farmers and theReserve. The practices prohib-

ited any community with a co-operative participating in theproject from having a loggingcontract. The Reserves 2003-2008 management plan incor-porates the best practices asone of eight development prin-

ciples, an indicator of lever-aging the projects successfrom one site to a larger land-scape in the buffer zone of theReserve that includes other

coffee communities where theproject is not working directly.

2. INTERNATIONAL ENVIR-

ONMENT

The most important aspect ofthe business enabling environ-ment for the Chiapas coffeeproject, however, was not localbut international. The success

of the project relied on: (1) theexistence of a large, influentialand well-resourced privatesector firm to establish andascribe value to an exclusivebrand; and (2) a credible non-governmental organizationwith expertise in conservationto develop and verify compli-ance with a set of conserva-

tion best practices.

F. SOCIO-ECONOMIC IM-

PACT OF THE PROJECT

CI commissioned socio-eco-nomic studies in 2001, 2002and 2003. The consultant in-terviewed farmers individuallyand carried out a series of par-ticipatory workshops. The keyfindings, taken from the 2003report, are as follows:

Adoption of Best Practices

Nine recommended practicesare being implemented by themajority of beneficiaries (more

than 60 percent), as well asbetween 20 and 40 percent ofnon-beneficiaries. Practicallyall coffee producers, both be-neficiaries and non-beneficiar-

ies, have implemented threeof the conservation practices:separation of pulp withoutthrowing it in the rivers, shademanagement and tree plant-ing.

Profitability

As a result of increased har-vests and price developments,the profitability of a hectare of

coffee in 2003 was 6,754pesos (U.S. $570) for benefi-ciaries and 5,368 pesos (U.S.$453) for non-beneficiaries.

Well-being

The study considered diet andhousing. Meat consumptionshows a slight increase overthe three years for both bene-

ficiaries and non-beneficiaries.88 percent of beneficiaries and71 percent of non-beneficiarieshave a cement floora meas-ure of improved housing condi-tions.

Total Income

Beneficiaries in 2003 had anaverage yearly net income of$36,392 pesos (U.S. $3,071).

Non-beneficiaries obtained$20,392 pesos (U.S. $1,721).

7 The Herald, August 23, 2004


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III. CONCLUSIONS AND LESSONS LEARNEDA. THE ROLE OF THE

LEAD FIRM

The Chiapas coffee projectdemonstrated the importanceof creating a partnership withthe lead firm very early in or-der to create the market in-centives for changing behaviorin the value chain. Farmersmust perceive realistic marketopportunities if they are to

commit to spending time inproject planning and adoptingpractices that cost themmoney and effort. Starbucksplayed four critical roles in theChiapas coffee project.

1. PROVIDED MARKET DE-

MAND

Starbucks provided market de-mand for the finished product,paying a premium for the at-tributes of generating conser-vation benefits in the produc-tion community. A general in-crease in world coffee priceswould most likely reduce thedifferentiation between pricesavailable to farmers from reg-ular and specialty coffee andmake the adoption of best

practices less attractive tothem. The project is stronglyplaced to respond to thateventuality through the in-formation it has generatedabout costs, through Star-bucks commitment to main-

taining the transparent valuechain model, and its willing-

ness to increase the amountof coffee that it will buythrough the PSP system.

2. REQUIRED

STRENGTHENED AND

TRANSPARENT LINKAGES

Starbucks created the require-ment to address traditional in-efficiency and lack of transpar-

ency in the value chainbetween cooperatives andtheir members and betweenfarmers or their cooperativesand processors/traders.

3. PROVIDED SERVICES

It provided services to the co-operatives to transfer know-ledge in several areas.

Coffee Quality

Starbucks expertise in coffeetasting (cupping) provided in-formation on cup quality andcoffee flavor profiles. Farmerscan achieve quality improve-ments through receiving feed-back on samples and marketinformation. Upgradingthrough improved quality con-trol systems and processingtechnology enables farmers toproduce a high quality, con-sistent product that over-comes irregularities inherentin a system depending onmany small production units

with differing infrastructureand production practices. Con-

versely, inconsistency in cof-fee cup characteristics dis-courages coffee roasters frombuilding on the trend of devel-oping single origin coffee thatcommand a higher price.

Export/Import

Starbucks Coffee Trading Com-panys expertise in contract

negotiation, transportationand customs procedures facil-itated market access and en-abled it to develop a transpar-ent supply system in the PSPand C.A.F.E. Practices.

Product and Market Devel-

opment

Starbucks developed a productspecifically for the project and,through its own stores and re-tail business partnershipsoverseas, promoted it in NorthAmerica, Asia and Europe.

4. PROMOTED SUSTAIN-

ABLE COFFEE

Starbucks promoted to the in-dustry greater environmentaland social sustainability in cof-

fee producing countries by set-ting the example. Its commu-nications through public rela-tions, media campaigns, webpage design and retail promo-tions to promote ShadeGrown Mexico built aware-


25/29

ness among consumers aboutthe issues of environmental,economic and social sustain-ability in coffee producing re-gions.

The model for inter-firm trans-actions that the project de-veloped responds to increas-ing demand for companies tomanage their supply chains.Many companies have begunworking on codes of practicebut these are often criticizedfor not being subject to inde-pendent audit and failing to

address key issues of poverty,environmental degradationand social inequity. The fairtrade movement, writing onthe Common Code for the Cof-fee Community states, Fewfarmer associations have been

involved in the processthe

code can be misused too eas-

ily for advertising purposes of

the companies involvedwithout addressing the root

causes of the coffee crisis.8

The transparency in the valuechain that the Chiapas coffeeproject created involved farm-ers in all stages of planningand implementation anddemonstrated its ability to de-liver economic benefits tofarmers, as well as conserva-tion benefits for the land-scape.

USAID required CI to under-take an independent evalu-ation of the project in 2003 as

a condition of its grant. CI alsocontracted a consultant tomake a socio-economic as-sessment of the projects im-pact with an award from IFC.

Both studies interviewed anumber of farmers and con-cluded that the main motiva-tion for the farmers was theprice premium that they ob-tained from Starbucks, Ac-cording to the socio-economic

studies and what was seen in

the field, the advantages of

Conservation Coffee for the

environment have not yetbeen internalized fully price

is still the main, if not sole,

motive.9

B. SUSTAINABLE SUP-

PORTING MARKETS

The Chiapas coffee project hasdemonstrated that farmers liv-

ing below the official povertyline will pay fees for servicesto upgrade in response toprice incentives and thatprivate service providers canenter the market to make im-pacts more sustainable.

1. DIRECT SERVICE DELIV-

ERY

Where services were essentialto the projects success, butno provider could be identifiedsuch as was the case withfinancial servicesCI had totake direct responsibility forproviding them in order toprime the pump. The project

made a sustained commit-ment to providing vital ser-vices that were unavailablewhile simultaneously buildingthe market. CI set standards

for service provision and en-sured that independent pro-viders had the capacity andknowledge to provide them.

Farmers will pay fees for ser-vice only after, and not before,the project demonstrates thevalue of the services to beprovided. Fees must be basedon realistic cost analysis and

phased in as the clients per-ceive their value. It is helpfulto have such fees embeddedin the agreement with the buy-er, rather than have the ser-vice providers collecting feesdirectly from the small farm-ers.

Smallholders need a range of

services in order to upgrade,which may be unavailable orof poor quality. Without directdelivery of services by an im-plementing partner, smallhold-er upgrading to meet the newconservation standards wouldnot have been possible.However, direct service provi-sion raises significant exitchallenges.

2. IMPORTANCE OF HORI-

ZONTAL LINKAGES

In remote rural locations, thelack of communications facilit-ies and infrastructure makestransaction costs higher and


26/29

service provision slower. Bothfactors discourage service pro-viders from entering the mar-ket and will require the projectto provide services for a

longer time than would be re-quired in other environmentswith better enabling conditionsfor enterprise development. Insuch a context, strong hori-zontal coordination is a priorityin order to develop a demandof sufficient scale to attractservice providers.

Investments in increasing the

efficiency of inter-firm relation-ships, both among producersand between producers, buy-ers and service providers, gen-erate efficiencies essential toincreasing the productivity andcompetitiveness of the in-dustry.

3. IMPORTANCE OF VERTIC-

AL LINKAGESThe existing relations with thetarget group in the area of im-plementation are a strong de-terminant of service providersability to enter the market. Re-lations are unfortunately oftendominated by mistrust and theperception that poor com-munities cannot meet sophist-

icated market standards.These factors slow down theprocess of achieving sustain-able service delivery. Strength-

ening transparent vertical link-ages is key.

C. PRECONDITIONS TO

VALUE CHAIN

INVESTMENTS

The success of the Chiapascoffee project is largely theresult of an MSE upgradingprocess driven by a private-sector lead firm. Market lead-ers with the capital, skills, in-centives and commitment toinvest in upgrading value

chains that incorporate largenumbers of smallholder produ-cers can greatly accelerategrowth and productivity.

Private sector market leadersare more likely to invest in up-grading a value chain incor-porating large numbers ofsmall firms when they are ableto maintain some level of ex-

clusivity in the market channeland a share of the consequentpremiums. In this case, thiswas achieved by establishinga unique brand.

CI has played a crucial role infacilitating the relationshipbetween Starbucks and AMSA,and between AMSA and thecoffee cooperatives. It estab-lished the best practices andprovided services necessaryfor upgrading where marketswere weak or missing. CI con-tinues to validate the best

practices, facilitate cooperat-ives negotiations with serviceproviders and clients, andmonitor export performance.In the absence of an imple-

menter on the ground, it ishighly unlikely that such rela-tionships could have been es-tablished or maintained.

Private sector market leaderwillingness to invest in up-grading particular value chainsis more likely to occur in thepresence of a facilitating entityable to take responsibility for

strengthening the organiza-tional capacity of participatingsmallholders and reducing therisk of noncompliance with es-tablished agreements.

D. CHANGES IN POWER

AND BENEFITS

By developing a product with

attributes derived from theplace and method of produc-tion, the dynamics of thepower relationship betweenthe smallholder farmers andthe importer/roaster werechanged in favor of the farm-ers. As a result, the benefitflow to the farmers also in-creased.

8 Fair Trade Advocacy Newsletter,September 2004, distributed by IFAT

9 Zettelmeyer, 2004


27/29

REFERENCE LISTAustin, James E and Cate Reavis, Starbucks and Conservation International,

Harvard Business School, Case Study N9-303-055, October 2, 2002.

Big Companies Agree to Set Standard, Joint Press Release, September 10,2004, in Seattle Times, September 21, 2004.

Conservation International. 2001. Conservation Principles for Coffee Produc-tion.

Conservation International. 2003. Program of Training and Accreditation inProviding Technical Assistance Services for Conservation Coffee.

Giovannucci, Daniele. 2001. Sustainable Coffee Survey of the North Americ-an Specialty Coffee Industry. Specialty Coffee Association of America andNorth American Commission for Environmental Cooperation.

Giovannucci Daniele, with Freek Jan Koekoek. 2003. The State of SustainableCoffee, A study of Twelve Major Markets.

Haase, Harris. 2003. Sustainability and Financial Independence Analysis ofthe Conservation Coffee Project in Chiapas, Mexico. Final Report, EMDAPAssignment.

Madrigal, Adriana. 2004. Eterno Verde: Lessons Learned from the Coffee Fin-ancing Experience in Chiapas, Mexico.

Martnez, Ivia. 2002. Introductory Business Planning for Cooperatives.

Millard, Edward. 2004. Creating Market Incentives for Farmers to Adopt BestPractices. Paper for Eco-Agriculture Conference, Nairobi, September2004.

Millard, Edward. 2003. Business Planning for Environmental Enterprises.Pact Publications (also published 2004 by Pact in Spanish.)

Oxfam International. 2002. Mugged: Poverty in your Coffee Cup.

Schmitz, Hubert. 2004. Local Upgrading in Global Chains: Recent Findings.Paper for DRUID Summer Conference.



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Schmitz, Hubert and John Humphrey. 2002. How Does Insertion in GlobalValue Chains Affect Upgrading in Industrial Clusters? Regional Studies,Vol.36.9,pp.1017-1027.

Scientific Certification Systems, 29th March 2004, CAF Practices Program

Overview. Starbucks Coffee Company Preferred Supplier Program.

van Leeuwen, Arthur C J. 2003. Socio-Economic Monitoring: Household LevelImpacts of Conservation Coffee Production of the Conservation Coffee Pro-ject in Chiapas, Mexico.

Zettelmeyer, Winfried and Alan Maddison. 2004. Agroforestry-based enter-prise development as a biodiversity conservation intervention in Mexicoand Ghana. Final Evaluation Report, USAID/PVC Matching Grant NumberFAO-A-00-00-00012-00.

Web Sites

BDS Information Exchange www.bdsknowledge.org

Conservation International www.conservation.org

Consejo Mexicano de Cafs www.cafesdemexico.com/consejomexicanode-cafe

Financial Times www.ft.com

IFAT www.ifat.org

Rainforest Alliance www.rainforest-alliance.org

SCAA www.scaa.org

Scientific Certification Services www.scscertified.com

Starbucks www.starbucks.com

Transfair www.transfairusa.org

SUSTAINABLE COFFEE

22
http://www.bdsknowledge.org/http://www.conservation.org/http://www.cafesdemexico.com/consejomexicanodecafehttp://www.cafesdemexico.com/consejomexicanodecafehttp://www.ft.com/http://www.ifat.org/http://www.scaa.org/http://www.starbucks.com/http://www.transfairusa.org/http://www.bdsknowledge.org/http://www.conservation.org/http://www.cafesdemexico.com/consejomexicanodecafehttp://www.cafesdemexico.com/consejomexicanodecafehttp://www.ft.com/http://www.ifat.org/http://www.scaa.org/http://www.starbucks.com/http://www.transfairusa.org/


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Accelerated Microenterprise Advancement Project (AMAP) is afour-year contracting facility that USAID/Washington and Missionscan use to acquire technical services to design, implement, or evalu-ate microenterprise development, which is an important tool for eco-nomic growth and poverty alleviation.

For more information on AMAP and related publications, please visitwww.microLINKS.org.

Accelerated Microenterprise Advancement Project

Contract Number: GEG-I-00-02-00016-00Task Order: Knowledge and PracticeContractor: ACDI/VOCAOlaf Kula, Program ManagerTel: (202) 879-0213E-mail: [email protected]

Edward Millard is the senior enterprise advisor at Conservation Inter-national.

Conservation International is a non-profit organization based inWashington, DC, dedicated to conservation of the environment.

ACDI/VOCA is a private, non-profit international development organiza-tion based in Washington, DC.
http://www.microlinks.org/http://www.microlinks.org/

Documents

mR 45 - Sustainable Coffee: Increasing Income of Small-Scale Coffee Farmers in Mexico Through Upgrading and Improved Transparency in the Value Chain