Working Through Challenges in Coffee
Bolivian coffee farmers and cooperative managers gathered around wooden tables in the airy building and listened with rapt attention to the trainer. Few of them had extensive experience with the topic at hand – risk management strategies and contract negotiation – but all of them understood the importance following a difficult 2010 coffee harvest.
In the past year, prices for coffee more than doubled to a 14-year high. Intense speculation and lower than expected harvests in key Latin American countries were the main triggers of the increase.
While high prices can be good for some farmers, gains are often wiped out by smaller harvests and higher costs of production driven by increases in fuel, food and fertilizer costs. In spite of the current high prices, the real price of coffee, accounting for price inflation, is barely above prices achieved 30 years ago.
The market volatility also puts many cooperatives in jeopardy.
In the run-up to the annual coffee harvest, traders negotiate with cooperatives and sign contracts based on estimates of how much coffee will be available. As 2010 wore on, cooperatives that had fixed prices earlier in the year watched prices zoom to nearly USD3 per pound and were caught in a battle to buy coffee as their members took advantage of market prices and sold to middle men instead.
Many of these cooperatives could not fulfil their contracts and defaulted, sending ripples through the supply chain all the way to coffee counters where consumers found higher prices for their cappuccinos.
The risk management and contract negotiation training in Bolivia in May was designed to help cooperative managers avoid similar problems during the 2011 coffee harvest. The training was run by Jos Algra, of Twin Trading and sponsored by Fairtrade International as part of the Coffee Action Plan introduced in November 2010.
As of June, Fairtrade has provided training to 70 percent of the cooperatives in Bolivia, 50 percent of cooperatives in Peru, and has plans to conduct further trainings in Indonesia, Colombia and East Africa in the fall.
“Our members need to understand the procedures for selling coffee and the risks of defaulting on contracts,” said the president of one cooperative at the training. “Before fixing a price, we need to have half of the harvest in hand to guarantee that we can deliver on our promises.”
Cooperatives and traders around the world were hit by defaults, but the impact was seen most acutely in Bolivia, Peru and Indonesia.
As part of a mediation process introduced in the Fairtrade Coffee Action Plan, traders that suffered a default on a coffee contract can qualify for product substitution, a special exemption to help traders and cooperatives clear up contract difficulties and stay in the Fairtrade system.
Product substitution means a trader is allowed to purchase coffee from an alternative source and sell it as Fairtrade. Within 12 months of that purchase, the trader must purchase an equal amount of Fairtrade coffee and sell it as non-Fairtrade coffee. This helps ensure that the Fairtrade benefits continue to reach producers. It also helps cooperatives clear up contract problems. If a cooperative representing local interests goes out of business, individual farmers could be left to fend for themselves.
Product substitution is a temporary adjustment only available to traders who enter the mediation service offered by Fairtrade International for contracts signed before 31 March 2011. Fairtrade will work with traders and cooperatives on a case-by-case basis to reach a mutually beneficial solution and closely monitor all transactions. Currently the substituted volume of coffee accounts for less than 0.5 percent of annual Fairtrade coffee imports.
Beside the mediation service, Fairtrade has made advances on the Coffee Action Plan, including:
- Price and Premium Review – Fairtrade International conducted a review of the Fairtrade Standard for coffee and made significant increases to Fairtrade Minimum Prices and Premiums. All changes went into effect on 1 April 2011. Read about the changes here.
- Updated Trade Standards – Updated trade standards released with the revised coffee standard aim to address risk management, pricing and speculation issues among traders and cooperatives.
- Producer Certification Fund (PCF) – The PCF, which was established in 2005, is open to cooperatives needing support for Fairtrade certification costs.
- Industry Engagement – Meetings with all sides of the industry were held at the Specialty Coffee Association of America’s annual expo in mid-April 2011. Coffee workshops were held for traders/licensees and national Fairtrade organizations in Belgium, France and the Netherlands. Fairtrade also attended the Specialty Coffee Association of Europe’s annual conference in June.
- Funding Alternatives – Work continues to secure and structure funding to improve access to pre-financing and productivity investments for producers.
- Producer Hotline – A risk management and contract negotiation hotline managed by independent coffee experts has been set up to support producers and traders.
Fairtrade International continues working closely with producers and traders to ensure stable, long-term relationships that continue to benefit all in the system.
As Jos Algra brought the training to a close in Bolivia, the general manager of a cooperative noted: “This has been very good for all of us, a large number of who are new and didn’t know much about commercialization or the risks. We now understand how to find solutions to the problems of last year at an organizational level.”