In an age of increasing interconnectedness, technology and mature capital markets, outcomes naturally trend toward maximum efficiency. But the expediency of pursuing the most efficient outcome in a given scenario means we may fail to adequately consider the temporal necessity of planning for future generations. This might prove inequitable and ultimately unsustainable over the long term. Put simply, does our current system reward short-term solutions at a longer-term, harder-to-quantify cost?
In line with this mode of thought, a necessary guiding hand – the sustainability initiative – has recently garnered increased interest across a range of industries. Central to this initiative is the development of a market-based system of certifications and verifications (together “voluntary sustainability standards” or “VSS”) to reward producers for adhering to a code of sustainable practices. But is a laissez-faire system adequate, or is a top-down approach necessary to overcome the hurdles to a sustainable supply chain?
For green coffee, widely considered a pioneer in the pursuit of sustainability, answering this question is a race against the clock. With new consumer demand expected to create a deficit equivalent to Brazil’s annual production, and palates and preferences pivoting toward specialty varietals, the coffee supply-demand balance looks increasingly fragile on a global scale. In order to meet the quantity and quality of coffees demanded by future generations, we must identify and ultimately overcome the challenges to realizing a fully sustainable supply chain.
Despite the increased level of scrutiny within the narrative, a precise definition for sustainability, somewhat paradoxically, continues to elude the public. In a broad sense, sustainability is about ensuring that a given product will be available at or beyond the amount demanded in perpetuity. As applied to agro-industries and commodities in particular, sustainability aims to alleviate a triumvirate of social, environmental and economic concerns, any of which could drive an imbalance between the demand for a given product – both quantity and quality – and its readily available supply.
Though the sustainability initiative affects every step of the supply chain, energies tend to be focused at initial production – particularly in the tropical commodity sector – where fragmented smallholders face imperfect information and technical training, reduced access to capital and market transparency, and limited bargaining power. By implementing sustainable practices and promoting investment at the farm level – the foundation of the supply chain – it follows that traders, processors, consumers and other downstream players will be better positioned to support the sustainability initiative. While the three pillars of agro-related sustainable development are broadly defined and often overlap one another, they incorporate the following concerns.
- Economic Sustainability: Relative to the rest of the supply chain, farmers may lack the bargaining power to ensure a living wage as well as the technical skills necessary to deploy the risk management strategies necessary to protect that wage. Without knowledge of and/or access to bank credit and hedging derivatives, these individuals are often exposed to falling commodity prices and rising input prices, either of which could negatively impact an undiversified income base. Falling income may prompt substitution to more profitable crops or inhibit planting altogether. The prosperity of the farmer who produces the good is the key to ensuring the sustainability of the good.
- Social Sustainability: Provisions for basic human needs – food, water, shelter, education and healthcare – comprise the social pillar of sustainability. If unmet, producing nations will likely see a generational flight of human capital to cities or occupations that offer a higher living standard and the potential for a more consistent wage. Social aims also encompass gender equality, child labor and other working conditions. If these basic human needs are not met, the supply chain may not be sustainable.
- Environmental Sustainability: In order to protect the ecosystem and ensure the long-term viability of land used for intensive farming purposes, it is critical to provide proper training and education to farmers regarding deforestation, soil degradation and water pollution related to pesticide and fertilizer runoff. Though applicable to farmers, environmental best practices are increasingly aimed at a wider audience in order to reduce the potential impact of climate change on production. Volatile temperatures and rainfall directly inhibit growth and also increase the propensity for disease and pests.
Continuity in a Cup
Following the 1989 collapse of the international quota system and move to a free market, the coffee industry experienced multiple price declines – most notably in 1992 and 2001 – that drove sales prices well below the associated production cost and nearly dismantled the supply chain altogether. As a result of these calamitous events and the heightened attention that followed, coffee has attained a central role within the broader sustainability discussion and is widely regarded as a model for the necessity (and success) of a dedicated initiative.
At the crop level in coffee, there are several agronomic and market structure idiosyncrasies that run counter to long-term sustainability: a three- or four-year crop cycle from planting to harvest wherein supply cannot respond to price movements in the near term; susceptibility to adverse disease, pests and weather conditions; a concentration of supply in emerging markets where political and economic instability may be higher; a fragmented supplier base wherein more than 70% of supply originates from small-scale farmers with no more than a few acres1; and index-linked price formation disposed to volatility, speculative short-selling and potential distortions between fundamentals and prices.
More recently, however, the question of sustainability has grown beyond the crop to encompass a variety of additional concerns related to consumption patterns that are emerging at the macro level and adding additional stress to an already fragile supply-demand balance.
Economic progress in developing countries, including traditional exporting countries, has enhanced consumer purchasing power and increased coffee popularity among cultures previously dominated by tea consumption. As a result, demand for coffee, which averaged 100 cups per every person in the world in 2015,2 is expected to increase an additional 25% over the next five years, according to the International Coffee Organization. All else being equal, the coffee supply chain currently faces a deficit approximate to annual production in Brazil, the world’s largest coffee producer.
Further complicating this deficit, consumers – particularly those in the U.S. – are demanding a finer cup, increasing the uptake of so-called specialty coffees. According to the National Coffee Association, the percentage of U.S. adults drinking specialty coffee on a daily basis nearly quadrupled to 34% between 2000 and 2015.3 Specialty coffees inherently require more intensive husbandry and capital commitments from farmers as well as topographical characteristics – including shade, moisture and elevation – unique to few producing areas.
In order to meet the growing consumer demand for coffee across the globe and the shifting preferences in the developed world, it is critical to not only onboard additional acreage but to also provide producers with the proper training, technology and incentives to enhance productivity and meet the rigorous set of hurdles required to cultivate gourmet flavor profiles. Given the coffee sector’s capacity to create economic value from crop – it comprises more than 20% of export income in Guatemala, Honduras and Nicaragua and over 50% in Burundi, Rwanda and Ethiopia4 – to cup – 1.6% of U.S. GDP in 20155 – the sustainability initiative has drawn the focus of members at all levels of the supply chain.
The Landscape of Sustainable Coffee Initiatives
Unfortunately, diagnosing the challenges to sustainable production is far simpler than prescribing a working solution. At present, a handful of not-for-profit organizations offer eponymous certification programs – Fairtrade Certified, Organic, Rainforest Alliance, UTZ Certified and Smithsonian Bird Friendly – to reward producers for implementing a given set of sustainability standards across the aforementioned economic, social and environmental pillars. Certification is voluntary and, upon successful audit by accredited third parties, commonly rewarded with premium pricing. These programs not only play a critical role in transmitting value to customers, but also provide auxiliary services to producers in the way of farmer training, market access and broader supply chain transparency.
Though all certifications aim to ensure the longevity of the coffee supply chain (as well as that of other agricultural commodities), each emphasizes a unique path in achieving that unified goal. Far from exhaustive in name or description, the following standards bodies are the most recognized among those with on-product labeling.
Fairtrade International (FLO and FLO-CERT; Fairtrade) has traditionally focused on alleviating poverty at the cooperative level by pairing smallholders with pre-crop financing and directly influencing the sales process. Fairtrade certification mandates $1.05 and $1.40 per pound price floors for washed Robusta and Arabica coffees, respectively (additional 30-cent premium for organic varietals), and includes an additional 20-cent fixed social premium to be used for reinvestment in local communities.
International Federation of Organic Agriculture Movements (IFOAM; Organic) certifies that a given product has been produced in an ecologically sound manner, as the “health of individuals and communities cannot be separated from the health of ecosystems – healthy soils produce healthy crops that foster the health of animals and people.” Organic husbandry prohibits pesticides and synthetic fertilizers, mandates actionable plans for the prevention of soil erosion and incorporates a number of other processes to conserve biodiversity. Though not guaranteed unless double-certified with Fairtrade, organic coffees often earn a 10% to 15% premium relative to nonorganic equivalents.6
Rainforest Alliance builds on IFOAM, taking a more holistic approach to sustainable development at the community level. In addition to a broad set of environmental protocols, this certification focuses on labor conditions, including age and wage requirements, access to health and educational services, occupational safety programs and nondiscriminatory labor and hiring policies. Though not guaranteed, these coffees often earn a 5% to 10% premium beyond uncertified equivalents.7
UTZ Certified also takes a more holistic approach to sustainability, mandating a scaling system of environmental standards, farm professionalization and worker health and safety. Though not guaranteed, these coffees often earn a 2.5% to 5% premium beyond uncertified equivalents.8
As an alternative to the aforementioned on-product certifications, the 4C Association offers a verification-based program that establishes a baseline of sustainable practices from which producers can pivot to compliance with more rigorous standards. Verification, though encompassing similar processes to certification, is noncompetitive, does not carry a consumer-facing label, is not meant to serve as a reference for external stakeholders and solely acts to enhance the supply and uptake of all verified and certified coffees. A handful of for-profit institutions have also developed their own sustainability and quality improvement programs (for example, Starbucks’ C.A.F.E. Practices program and Nespresso’s AAA Sustainable Quality guidelines), for which purchases under other certifications often comply.
An Imperfect Approach
The aforementioned programs, in addition to direct partnerships between certifiers and major roasters, have been critical in expanding the footprint of the sustainability initiative within the coffee industry. As testament to this finding, the production of certified and verified coffees increased from 15% to 40% of global production between 2008 and 2012, making coffee the single most saturated agricultural commodity in terms of standard-compliant production.9 Despite the broad reach of VSS, however, producers – especially those from the poorest brackets – often fail to realize the intended benefits of implementing sustainable farming practices, which could ultimately inhibit progress toward a fully sustainable supply chain.
A major barrier to entry originates from the tradeoff that producers face when seeking verification or certification: increased capital commitments at the outset for economic gain over the long term. Compliance with VSS magnifies production costs due to enhanced labor practices, environmental husbandry and regular audit and evaluation fees. In theory, certification signals a higher quality and standard of care to consumers, rewarding producers with premium pricing, that, when combined with higher yields and more efficient farm management, should more than offset these costs. In practice, however, standard-compliant coffee production outpaces associated demand, and a material portion is not sold as certified or verified, which reduces the supposed benefits of premium pricing and market access for sustainable producers and potentially creates an additional obstacle – beyond access to initial capital – for producers not yet adhering to VSS.
Though multi-certified coffees may distort the figure, it is estimated that just 25% of VSS-compliant coffee produced in 2012 was actually sold as such.10 Broadly speaking, the supply-demand mismatch stems from a lack of uniformity across coffee quality and flavor profiles, which, due to the inherent role of preference at the consumer level, implies that a given bean cannot fulfill all sales contracts and that sustainably produced coffees may fail to achieve strong cupping scores. In order to overcome this natural bottleneck and capture excess supply, major roasters must continue to integrate sustainable initiatives within their sourcing practices, and the sector as a whole must further educate and involve retail customers – the ultimate determinants of coffee consumption.
By the same token, many of the existing verifications and certifications do not guarantee a minimum sales price, leaving farmers exposed to commodity price movements. Of important note are the 2002/2003 and 2012/2013 harvests, where the combination of price volatility and steady or rising input costs drove sales prices well below the associated production cost, affecting producer livelihood – and subsequently coffee quantity and quality – across a handful of countries. Unfortunately, price floors are imperfect tools for protecting smallholder income: When prices fall below a floor, it is ultimately the consumer’s decision to bear a higher cost of purchase or substitute toward a cheaper, uncertified alternative.
Looking at sustainability intensity, or the degree to which a country’s aggregate production comprises standard-compliant coffees, VSS adoption is particularly concentrated among the largest coffee producers – Brazil, Vietnam and Colombia – and countries in Latin America. In contrast, mid-tier producers across Southeast Asia and Africa, with the exception of Kenya and Tanzania, tend to be underrepresented. It follows that successful VSS implementation favors first-mover countries and those with capacity for commercialization, and that marginalized producers in peripheral countries may need additional support to overcome barriers to entry when pursuing sustainable farming practices.
A common problem with VSS and other attempts at solving the sustainability question in the coffee sector is the tendency for market forces to allocate the greatest benefit to those producers that can provide standard-compliant coffees at the lowest cost, which, more often than not, coincides with the subset of producers who have access to the most resources and stand to benefit the least from VSS on a relative basis.11 This paradox raises the question of whether certifications – whose uptake is dictated by downstream consumers (“the market”) – are the right approach to developing a sustainable supply chain that ultimately starts at the farmer level.
This is not to say that VSS are ineffective. In fact, quite the opposite is true. Following a wide-ranging study conducted from 2009 to 2013, the Committee on Sustainability Assessment (COSA) reported that, among a sample of 18,000 farms across 12 countries, certified coffee farms, on average, experienced enhanced economic and environmental performance. However, the concept of sustainability is dynamic, and VSS, rather than adopting a one-size-fits-all approach, must be flexible with respect to local context and involve concomitant investments of time and money in order to achieve a lasting impact. The challenge for certifiers and others involved in the coffee sector is to expand upon and improve the existing blueprint in order to capture producers that either did not benefit from implementing VSS, or, in some cases, were unable to enter the market altogether.
Regardless of whether verifications and certifications are the perfect solution, or even the “right” solution, it is clear that VSS have made a meaningful contribution to ensuring a sustainable coffee supply chain. Beyond their positive impact at the farmer level, VSS, through roaster partnerships and on-product labeling, have helped to raise consumer awareness of sustainably produced coffees. Improving the mechanics and implementation of VSS are critical to ensuring the program’s success; however, consumers, by way of purchasing patterns, will ultimately decide the fate of the sustainability initiative, notwithstanding its ultimate form. With sweeping change to palates and preferences in mature coffee markets and entirely new loci of consumption coming online over the next few years, this phenomenon will ring truer than ever. In order to overcome the economic, social and environmental challenges that threaten producers’ ability to meet the quantity and quality of coffees that the world demands, every step of the value chain, from crop to cup, must act cohesively.
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1 Source: Hivos, IUCN NL, Oxfam Novib, Solidaridad and WWF, “Coffee Barometer 2014.”
2 Conversion rate of 1 pound of coffee to 36 cups; excludes shrinkage during roasting.
3 For more information on U.S. premium coffee consumption, see the December 2015 Commodity Markets Update article, “The Continued Rise of Premium Coffee in the U.S.: Will It De-Commoditize Coffee?”
4 Source: Hivos, IUCN NL, Oxfam Novib, Solidaridad and WWF, “Coffee Barometer 2014.”
5 Source: National Coffee Association.
6 Source: ENTWINED, Finance Alliance for Sustainable Trade, IDH, International Institute for Environment and Development and International Institute for Sustainable Development, “The State of Sustainability Initiatives Review 2014.”