What coffee farmers do with certification

This is my third post on Fair Trade this week (see the earlier posts here and here). Having discussed what Fair Trade does for prices (not much) and incomes (also not much), it's worth asking whether there is a better alternative.

In a new paper in the journal World Development (sorry I don't see an ungated version anywhere), Bart van Rijsbergen, Willlem Elbers (both Radboud University in the Netherlands), Ruerd Ruben (Wageningen University), and Samuel Njuguna (Jomo Kenyatta University of Agriculture and Technology in Kenya) compare Utz certification with Fair Trade certification, based on data from 218 coffee farmers in Kenya. Importantly, they use a propensity score matching approach (which I discussed briefly in this earlier post) to make the comparisons.

The key difference between Utz certification and Fair Trade is that Utz focuses on improved agricultural practices (that should result in higher coffee quality), while Fair Trade instead provides a price premium, as discussed in my earlier posts. Some of the surveyed coffee farmers held both certifications, some were Fair Trade only, and some were non-certified. Here's what they find:

Whereas Fairtrade clearly enhances further specialization in coffee production and more engagement in dry coffee processing, Utz-certified enhances input-intensification of coffee production and multi-certification opts for coffee renovation and the diversification of coffee outlets...

...household welfare and livelihood effects of coffee certification remain generally rather disappointing.

Neither certification scheme had much effect on income, mainly because farms only derived one-quarter to one-third of their income from coffee sales, and certified coffee sales were only around one-third of that income.

Which brings me to this other new paper I read today from the journal Food Policy (ungated here), by Wytse Vellema (Ghent University), Alexander Buritica Casanova (CIAT), Carolina Gonzalez (CIAT and IFPRI), and Marijke D'Haese (Ghent University). In the paper the authors use data from coffee farmers in Colombia , where they also note that coffee is only one (of several) income sources for most farm households. Their comparisons rely on cross-sectional mean differences (rather than a matching approach), so their results need to be treated with a little bit of caution.

Again, they find little effect of coffee certification (this time the certification is mostly Starbucks C.A.F.E. and Nespresso AAA) on household incomes. However, what caught my eye about the paper was the discussion of income and substitution effects for coffee farmers:

Having farm certification reduced income from on-farm agricultural production [MC: excluding coffee production] and agricultural wage labour, likely indicating re-allocation of resources away from these activities. Such re-allocation of labour is driven by substitution and income effects. As total household labour is fixed, increased returns to one activity cause households to substitute labour away from other activities. Households are most likely to substitute labour away from activities with low return or which are considered less ’satisfying’... Income effects lead to an increased consumption of leisure, reducing overall hours worked. The negative combined impact on incomes from on-farm agricultural production and agricultural labour shows that substitution effects dominate income effects.

As we discuss in ECON100, because with certification coffee production is more rewarding farmers reallocate their labour time to that activity and away from farming other products and from agricultural wage labour (substitution effect). Higher income from coffee leads them to consume more leisure, reducing their labour allocation to all farming activities (income effect). The overall effect on farm household income is negligible (Vellema et al. note that coffee income increased, but overall income did not).

One last point is important here. There appears to be an increasing proliferation of certification schemes, and many farmers hold multiple certifications (in the Vellema et al. paper, about 29% of the sample held two certifications, and 6% held three certifications). For farmers, the marginal benefit of an additional certification probably decreases as they get more certified (since a good proportion of their crop is able to be sold through their existing certified channels), while the marginal cost probably increases (the opportunity costs involved with spending time maintaining multiple, and possibly conflicting, certifications). I wonder, what is the optimal number of certifications for a given coffee farmer?

Read more:

• Fair trade, coffee prices, and farmer incomes
• Sustainability labels do matter

Fair trade, coffee prices, and farmer incomes

This is my second post on Fair Trade (see my earlier post here). Having established in the previous post that sustainability labels matter for consumers (at least according to the study I reviewed in that post), the question is whether Fair Trade matters for farmers. Does it increase the prices they receive by enough to offset the certification costs? Does it increase farmer incomes?

The basic mechanics of the Fair Trade pricing system work like this: farmers receive a stated minimum price for coffee or the market price, whichever is the greater. They also receive an additional premium, which is to be used only for social or business development purposes, as democratically determined by members of each cooperative.

A recent paper (ungated longer and earlier version here) by Alain de Janvry (UC Berkeley), Craig McIntosh (UC San Diego), and Elisabeth Sadoulet (UC Berkeley) argues that easy (not quite free) entry into the supply of fair trade coffee eliminates any premium that coffee producers receive from being Fair Trade certified. Since the barriers to entry into Fair Trade production are relatively low, if the Fair Trade premium is high many producers seek to become certified, competing with the existing suppliers for a limited market for Fair Trade coffee, and reducing the proportion of each supplier's coffee that is sold at the Fair Trade premium (effectively reducing the average price received).

This outcome is driven by the actions of the certifiers. Because the certifiers only source of income is to provide certification, the incentive is for them to over-certify relative to the number of certified farmer cooperatives that would maximise farmer profits. Since the farmers pay for the certification, de Janvry et al. argue that the result is:

...that the price premiums in the FT system have largely flowed toward certifiers rather than producers as intended by the consumers of FT coffee.

They demonstrate their results using data from Coffeecoop, a Central American association of coffee cooperatives where all coffee is Fair Trade certified, over the period 1997 to 2009. However, because not all Fair Trade certified coffee is sold as Fair Trade, the authors can compare Fair Trade prices with non-Fair-Trade prices for the same batch of coffee, which allows them to control for quality (which is an important determinant of coffee prices).

They show that:

...the nominal premium was quite significant in the years 2001 to 2004 with low NYC price, reaching an average of 60c to 64c per pound over a market price of 63c per pound but falling to 5c to 9c per pound over a market price of 126c per pound from 2006 to 2008, even though the social premium in these years should have been at least 10c per pound.

That seems quite good overall, until you consider what happens to the proportion of coffee sold as Fair Trade, where they confirm that the sales share moves inversely with the Fair Trade premium (i.e. when the premium is high, the cooperative is able to sell a lower share of coffee as Fair Trade). The overall result is that:

The average effective premium over the thirteen years of our data is 4.4c per pound over an average NYC price of 107c per pound, and only 1.8c per pound over the last five years, 2005 to 2009.

And when they consider the costs of certification, which they estimate at 3c per pound:

...the average result of participating in the FT market has been only 2.5c per pound for the whole period of observation and with a loss of 1.2c per pound over the last five years.

You may consider that as only one result based on a single case study, and while it looks at prices at the cooperative level, it doesn't look at the effects at the farmer's level.

Ana Dammert and Sarah Mohan (both Carleton University) recently reviewed the literature on the economics of Fair Trade in the Journal of Economic Surveys (ungated earlier version here). They point out that establishing the impacts of Fair Trade for farmers is not straightforward - there is likely to be a selection bias, since farmers who expect to do well out of certification are more likely to choose to become certified. Few studies have accounted for this well, and those that have done have mostly used some form of propensity-score matching, where they essentially compare farmers that are certified with those who aren't but otherwise look very similar to the certified farmers (e.g. same size farm, same land quality, same education, same farm assets, etc.).

In terms of these higher-quality studies, the one study using this approach to look at prices found no evidence of increases in prices received by farmers. And for incomes, there are some gains but those gains are small relative to alternative income generation activities for rural dwellers like migration or employment in the rural non-farm economy. Having said that, they also find that:

Another strand of the literature accounts for selection bias and shows that Fair Trade producers have better assets, higher rates of savings and higher levels of animal stocks and perceive their land as having high renting value...

That is difficult to reconcile with little increase in incomes. So, it's possible that there are small gains for coffee farmers from Fair Trade certification. However, it's hard to say that those gains justify the much higher prices that coffee consumers pay (although the consumers do receive a 'warm glow' benefit as well).

Finally, maybe some of the other labelling initiatives are better for farmers than Fair Trade? Consumers were willing to pay more for Rainforest Alliance labelling than Fair Trade, after all. I'll return to this last point in a future post.

Read more:

• Sustainability labels do matter

Sustainability labels do matter

I've been reading a few papers on aspects of Fair Trade recently (I'll blog some of them over the coming days). Like many economists, I'm not sold on the positive effects of fair trade - but more on that later. In this post, I want to focus on this recent paper by Ellen Van Loo (Ghent University), Vincenzina Caputo (Korea University), Rodolfo Nayga Jr. and Han-Seok Seo (both University of Arkansas), and Wim Berbeke (Norwegian Institute for Bioeconomy Research), published in the journal Ecological Economics (sorry I don't see an ungated version anywhere).

In the paper, the authors do a couple of interesting things. First and foremost, they use discrete choice modelling (a type of non-market valuation technique, where you repeatedly present people with different hypothetical options, and they choose the option they prefer - a technique I've used for example in this paper (ungated earlier version here), and in a forthcoming paper in the journal AIDS and Behavior that I'll blog about later), to investigate people's willingness-to-pay (WTP) for different sustainability labels on coffee. The different labels they look at are USDA Organic certified, Fair Trade certified, country-of-origin labelling, and Rainforest Alliance certified. If people truly value these difference labels (presumably because of the certification), then they should be willing to pay more for products that have them.

Second, the authors use eye-tracking technology to follow which characteristics of the products people pay the most attention to when making these hypothetical choices. Eye-tracking involves following the movement of the eyes so that you can identify where the subject is looking, and for how long they are concentrating on elements they are looking at. I'd say it's quite an exciting thing to do in the context of discrete choice modelling, since there is always the change that people don't pay attention to all of the attributes of the hypothetical products (or scenarios) they are presented with.

Anyway, the authors found a number of things of interest, starting with:

When evaluating the coffee attributes, participants attached the highest importance to the flavor followed by the price, type of roast and in-store promotions... the sustainability labels are perceived as less important compared to other coffee attributes, with USDA Organic and Fair Trade being more important than Rainforest Alliance.

They also discovered there were three distinct types of consumers:

1. "Indifferent" - consumers who didn't pay attention to either price or sustainability labelling (9.9% of the sample);
2. "Sustainability and price conscious" - consumers who attached a high importance to both sustainability labelling and price (58.0% of the sample); and
3. "Price conscious" - consumers who attached a high importance to price but not sustainability labelling (32.1% of the sample).

The eye-tracking results confirmed that the consumers who said they attached higher importance to sustainability labelling (or price) did indeed pay more attention to those attributes when selecting their choice in the discrete choice exercises. But did they want to pay more for them? The authors find that:

USDA Organic is the highest value attribute [among the sustainability labels]... followed by Rainforest Alliance and Fair Trade...

USDA Organic had the highest WTP among all the sustainability labels examined, resulting in a WTP premium of $1.16 for a package of 12 oz. This is followed by the Rainforest Alliance label and the Fair Trade label ($0.84 and $0.68, respectively).

So, people are willing to pay more for sustainable coffee. How does that compare with what they actually pay though? The authors note:

The actual price premium for coffee with a sustainability label ranges from $1.5 to $2.3/12 oz. when comparing coffee products with and without the label from the same brand.

Which suggests that the retailers are over-charging for these sustainable coffee products, relative to what the average consumer is willing to pay. However, the results overall do suggest that sustainability labels do matter. It doesn't tell us whether that is a good thing overall though - a point I'll no doubt come back to later.