Sustainable Coffee Trade
The Role of Coffee Contracts
by Peter H. May, Gilberto C.C. Mascarenhas and Jason Potts
May 2004
This paper is a product of the
Sustainable Commodity
Initiative, a joint venture of the
United Nations Conference on
Trade and Development and
IISD
© 2004 United Nations Conference on Trade and Development and the International Institute for
Sustainable Development
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This paper was published as part of the Sustainable Commodity Initiative, is a joint venture of the United
Nations Conference on Trade and Development (UNCTAD) and the International Institute for Sustainable
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Table of Contents
1.0
Executive Summary................................................................................................................... 1
2.0
Sustainability in the Coffee Sector: Principal Challenges ........................................................ 3
2.1
Sustainable Development Concepts and Their Application in Agriculture .......................................... 3
2.2
Sustainability in the Coffee Sector ............................................................................................................... 4
2.2.1 Declining Coffee Prices.................................................................................................................................... 4
2.2.2 Price Instability............................................................................................................................................... 4
2.2.3 Low Sectoral Mobility .................................................................................................................................... 5
2.2.4 Poor Access to Credit...................................................................................................................................... 5
2.2.5 Market Power and Distribution along the Supply Chain ................................................................................ 6
2.2.6 Information Asymmetries.............................................................................................................................. 10
2.2.7 Economies of Scale........................................................................................................................................ 10
2.2.8 Inequitable Social Relations .......................................................................................................................... 10
2.2.9
Environmental Impacts................................................................................................................................ 10
3.0
The Relationship between Contracts and Sustainable Development......................................12
4.0
Overview of Select Contracts Utilized in Coffee Trade............................................................14
4.1
Standard Contracts ....................................................................................................................................... 14
4.1.1 The Physical Coffee Market.......................................................................................................................... 16
4.1.2 The Futures Market..................................................................................................................................... 18
4.1.3 Current Mainstream Coffee Contracts........................................................................................................... 20
4.1.4 Premiums for Coffee Quality or Origin.......................................................................................................... 21
4.1.5
Price to Be Fixed (PTBF) Contracts ........................................................................................................... 24
4.2
Alternative Contracts and Arrangements.................................................................................................. 24
4.2.1 The FLO Producer Contract ........................................................................................................................ 24
4.2.2 Starbucks Preferred Supplier Program .......................................................................................................... 26
4.2.3
Utz Kapeh Code of Conduct........................................................................................................................ 29
5.0
Analysis of Existing Coffee Contracts..................................................................................... 30
5.1
Conventional Contracts ............................................................................................................................... 30
5.2
Alternative Contracts.................................................................................................................................... 34
6.0
Conclusions ............................................................................................................................ 38
Appendix I:
Possible Elements for a Sustainable Coffee Contracts Scheme ................................. 43
Sustainable Coffee Contracts – Views from Stakeholders .................................................................................... 46
Possible Clauses to Include in Sustainable Coffee Contracts ............................................................................... 48
Toward Implementation of a Sustainable Coffee Contract Scheme ................................................................... 51
Impacts and Research Requirements for Sustainable Coffee Contracts.............................................................53
Appendix II: Revised Questionnaire: Sustainable Coffee Contracts .............................................. 55
Appendix III:
Bibliography ........................................................................................................... 58
Appendix IV:
Web Sites for Further Information Regarding Contracts Reviewed ...................... 60
1.0
Executive Summary
The coffee sector is widely recognized as being an imperfect market facing considerable sustainability
challenges on the social, economic and environmental fronts. Given the wide array of challenges to
sustainability in the sector, it is of little surprise that a variety of different initiatives, programs and systems
have been developed for dealing with specific pieces of the sustainability puzzle. Somewhat more surprising is
how little attention has been given to the role of contracts in determining the conditions of sustainable
production and trade. To the extent that market power and economic relations are key determinants of the
opportunities for sustainable development among producers, one might expect the contract, as the final
determinant of the social and economic relations between parties along the supply chain, to be a particularly
useful tool for promoting the goals of sustainable development. With this possibility in mind, this paper
provides an overview of the feasibility of using contracts generally, and specific contractual elements in
particular, as instruments to catalyze sustainable development within the coffee sector.
Following an initial overview of the sustainability challenges facing the coffee sector, the paper provides an
overview of the diverse contractual systems currently in use in the coffee sector. This section highlights the
distinctiveness between “conventional” standard form contracts typically used as a basis for transactions in
mainstream physicals and futures markets and “alternative” contracts used for promoting specific
sustainability systems. The overview reveals the important role of conventional contracts in maintaining
stability and predictability in international coffee trade as well as the general disregard which such contracts
have for many of the production and processing methods so critical to sustainable development. An overview
of three alternative contracting systems (Utz Kapeh, Fair Trade and the Starbucks Preferred Supplier
Program) highlights the potential for using price, contract length, risk distribution and preferred supplier
status as tools for reducing producer exposure to the market risks and uncertainties which threaten the
livelihood of millions of small coffee producers around the world.
Following the overview of the different contracting systems currently in use, we analyze the challenges and
opportunities facing the respective systems with a view to extracting key areas for further investigation and
action. Through the analysis we conclude that there are essentially two different routes available for building
sustainability within coffee contracts over the longer term:
1. through the use of market differentiation on the basis of quality characteristics including
sustainability criteria
2. through the integration of sustainability criteria within homogeneous systems of coffee supply chains
Without promoting one vision or another, the paper concludes that the first vision faces significant challenges
based on the current reluctance of consumer willingness to pay more for products differentiated on the basis
of sustainability criteria while the second vision is challenged by the inability and/or unwillingness of industry
players on the consumer side of the supply chain to unilaterally adopt (and pay for) the costs associated with
the adoption of such practices. In both cases, the central obstacles to wider integration of sustainable
contractual practices are the additional costs associated with such practices and the difficulty in assuming such
costs on a unilateral basis in a freely competitive market.
Despite these basic challenges, the paper concludes that there is nevertheless significant opportunity for
promoting sustainability through the use of specific contractual tools which can improve the transparency
and stability of the market situation facing producers where such tools primarily involve a fixed cost
investment. Among the most promising tools identified in the study are:
•
Long-term agreements between producers and buyers so as to permit the planning of
activities at least over a complete harvest cycle;
Sustainable Coffee Trade
The Role of Coffee Contracts
1
•
The use of “price to be fixed” contracts, sellers call in physical contracts with producers and
producer organizations
•
Preferential supplier status in return for commitments to sustainable production practices
•
Adaptations to futures markets (and the respective contracts) enabling enhanced producer
access to risk management tools within such markets
•
Adequate institutional or market-based guarantees to ensure actors honour their contractual
commitments through market volatility;
•
Increased transparency of the price formation process along the supply chain through
enhanced access to information.
•
Pricing differentials in recognition of the socio-environmental benefits associated with
sustainable production practices based on either:
o
The expansion of differentiated, high value markets which integrate sustainability
concepts
o
Explicit recognition of sustainable practices within the quality grading systems used
for futures markets (via a certificates program);
In order to fully take advantage of these opportunities however, it is clear that some level of cooperative
action either between stakeholders themselves or at the public policy level, will be necessary to enable the
development of functional solutions in these areas. As a basis for determining where such cooperative action
should focus among the above list, we conclude by proposing a number of research questions for further
investigation with respect to each contractual element or area.
Sustainable Coffee Trade
The Role of Coffee Contracts
2
2.0
Sustainability in the Coffee Sector: Principal Challenges
2.1
Sustainable Development Concepts and Their Application in Agriculture
Although “sustainability” has been defined in a variety of ways over the past several decades, the Brundtland
Report (1987) has provided the most widely-accepted and enduring definition at the international level.
According to the Brundtland Report:
“Sustainable development is development that meets the needs of the present without compromising the ability of future generations
to meet their own needs. It contains within it two concepts:
• the concept of 'needs,’ in particular the essential need of the world's poor, to which overriding priority should be given; and
• the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present
and future needs."
Since the Rio Earth Summit in 1992, the international community at large has endorsed the conception of
sustainable development outlined in the Brundtland Report—a commitment recently reaffirmed at the World
Summit on Sustainable Development. The report is particularly notable for its insistence on the treatment of
social, economic and environmental pillars of sustainability in an integrated and coherent manner. Given the
often conflicting nature of indicators under different pillars however, it is clear that sustainable development
is less about achieving perfection under any particular pillar and more about achieving balance between the
different elements of sustainability.
The Brundtland definition nevertheless highlights two “guiding themes” which pervade the concept of
sustainable development and its implementation. First, the Brundtland definition emphasizes the concept of
“needs based” development, placing highest priority on ensuring that the needs of those social groups most
vulnerable to economic interaction are met. Second, the Brundtland definition insists on a balancing between
the needs of present and future generations underscoring the importance of seeking systemic long-term solutions
to present problems.
Box 1: Brazilian Definition of Sustainable Rural Development
The Brundtland definition has provided the basis for the development of national
definitions for sustainable development around the planet. Under the auspices of the
Agenda 21 process currently underway in Brazil, sustainable agriculture has been defined
as:
A productive system for food and fibre that guarantees:
a)
b)
c)
d)
e)
f)
long-term maintenance of natural resources and agricultural productivity;
the minimum of adverse impacts on the environment;
adequate returns to producers;
optimization of production with a minimum use of external inputs;
satisfaction of human needs for subsistence and income; and
attendance to the social needs of rural families and communities (Agenda 21
Brasileira, 1997).
The integrated approach and corresponding guiding themes under the Brundtland definition provide a useful
starting point for assessing possible tools for improving sustainability within the coffee sector.
Sustainable Coffee Trade
The Role of Coffee Contracts
3
2.2
Sustainability in the Coffee Sector
As one of the most important commodities in terms of value traded globally, coffee plays a crucial role in the
livelihoods of millions of rural households across the developing world. In addition to the estimated 25
million small coffee farmers who depend directly upon coffee as their primary source of income, coffee
contributes significantly to foreign exchange earnings and plays a leading role in determining opportunities
for employment and infrastructure development in more than 50 developing countries. The breadth and
intimacy of the relationship between coffee producers and a host of intermediary institutions along the coffee
supply chain makes the sector of critical importance to sustainable development at the local, regional and
global levels.
The sustainability of the coffee sector is threatened along each of the pillars of sustainable development. A
brief overview of some of the major challenges faced by the coffee sector provides a broad foundation for
approaching the relationship between sustainability in the coffee sector and the contracting systems used in
the coffee trading system.
2.2.1
Declining Coffee Prices
On a number of occasions over the history of coffee, but particularly over the past few years, coffee
producers have faced grave crises. Since the 1980s, prices received by producers have dropped 70 per cent,
from a level of US$1.20 per lb. to about US$0.50 per lb. in 2002, the lowest level in real terms experienced
over the past century (ICO, 2002).
One of the principal causes of the current situation of economic crisis is imbalance between supply and demand.
Research by the ICO reveals that while supply has grown at an annual rate of 3.6 per cent, demand has only
grown at a rate of about 1.5 per cent/yr (ICO, 2002). Recently this has resulted in an excess stock of over 40
million bags, equivalent to 135 days of global demand. In the 2001/02 harvest alone, with demand for 106
million bags, producers put 113 million bags on the market. While there are many explanations for the recent
trend towards oversupply, some of the principal causes include:
1.
2.
3.
technological innovation permitting increased production on existing coffee farms and
plantations
increased plantings, particularly in Brazil and Vietnam
low rates of global growth in coffee consumption
The effect of oversupply is witnessed most directly at the major coffee exchanges where price discovery for
global coffee markets is achieved. Oversupply over the past several years has drawn coffee prices to their
lowest levels in real terms in more than 70 years (OXFAM 2002). The decline in coffee prices in the
international market, particularly over the past two decades, has had significant impacts on production
technology, the living conditions of small farmers and rural workers, the environment in producing regions
and the balance of trade of the exporting nations.1
2.2.2 Price Instability
The damaging effects of long-term declining terms of trade facing coffee producers are exacerbated by
significant price volatility. Over the past several decades, global export revenues from coffee have fluctuated
1
For example, the imbalance between production costs and prices has brought change in the profile of coffee
production, through migration from more sustainable systems (e.g., shade coffee) to high input production systems
which are more intensive in their use of mechanization, irrigation and pesticides. (See Rice, 1996). In some cases, this
imbalance has given rise to spurious competitiveness, derived from cutting wages (Oxfam, 2002; Contag/CUT/Oxfam,
2002). Since coffee production is labour-intensive, areas where wages are very low can be disguised as relatively “viable”
even when prices are in decline.
Sustainable Coffee Trade
The Role of Coffee Contracts
4
between $5 and $14 billion per annum.2 Price volatility together with rigidities of production and the
consequent distribution of costs, make it extremely difficult for coffee producers and policy-makers alike to
plan optimal production strategies. Meanwhile, fiscal uncertainty at the local and national levels places a
significant constraint on the generation of a stable economic base for development.
Coffee production, as an agricultural crop, is highly variable depending on climatic and other environmental
conditions. Since demand is relatively constant, climatic events significantly impacting overall production tend
to have a corresponding impact on prices. While price volatility has its root in climatic variability, there is
evidence of increasing volatility since the 1980s due largely to:
•
•
•
reduced cooperation at the international level;3
increased speculative activity by large funds in commodities markets;4 and
deregulation in national markets.5
More capitalized sectors with market and information access can protect themselves from price variations and
minimize risk through “just-in-time” strategies, and operations in the futures market through hedging or
options markets. Producers and their organizations in most coffee producing nations, have insufficient
training, capital or even infrastructure to protect themselves via futures markets against harvest and price
variations. These negative factors, besides influencing the cost of capital, represent challenges to investment
and maintenance of coffee plantings through harvest and beyond.
2.2.3 Low Sectoral Mobility
Overall, coffee prices are not linked to the sustainability of coffee production, processing and trading
practices per se. At the margin, where coffee prices do not cover fixed costs, or are even below variable costs,
the activity survives under low productivity, reduced quality and short to medium-term insolvency. The low
mobility of resources and the sector’s relative inability to react in an efficient fashion to market signals
captures many producers in a cycle of impoverishment and insolvency. Poor sectoral mobility is the result of
producer investments (both financial and physical) in long-cycle coffee plantings, low levels of liquidity and
the absence of viable alternatives for diversification. The irresponsiveness of growers to market signals is
further exacerbated by poor access to market information as well as survival strategies which dictate
expansion of production (low cost in the short term) over diversification of production (high costs over the
short term). Those who have invested years of their lives and dedicated much of their land to unprofitable
coffee plantings have little practical alternative than to await better days which is typically only possible at
considerable social cost (May 1994).
2.2.4 Poor Access to Credit
Pre-harvest costs represent a considerable share of expenditures with coffee production. Producers’ lack of
capital to finance these expenditures out of pocket is aggravated by difficulties in securing credit. The risks
prevalent in the coffee market allow credit providers to raise interest rates, or to engage in unscrupulous
business practices which create additional burdens on the economic sustainability of small coffee producers in
particular. Insofar as credit is a tool for enabling diversification along the supply chain in terms of production
2
International Trade Centre, Coffee: An Exporter’s Guide. (ITC, 2002), at 3.
The elimination of economic clauses from International Coffee Agreements since 1989 has reduced the effectiveness
of international cooperation for stabilizing prices. See, for example, Bates (1997).
4 Increased activity by large funds in commodity futures markets over the past two decades has led to a weakening of the
connection between price determination and market fundamentals giving rise to greater price uncertainty (UNCTAD,
1996).
5 Stefano Ponte, The ‘Latte Revolution’? Winners and Losers in the Restructuring of the Global Coffee
Marketing Chain. (Centre for Development Research, 2001).
3
Sustainable Coffee Trade
The Role of Coffee Contracts
5
and processing activities or across products, it can also play an important role in generating greater stability
and revenue returns while reducing vulnerabilities to market variations.
2.2.5 Market Power and Distribution along the Supply Chain
Although there has been a drop in producer prices affecting the value of exported coffee, at the level of largescale distribution and retail sales, coffee revenues have risen. In part, higher consumer prices may be traced to
increased segmentation of markets, the rise of specialty coffees and improvement in soluble coffee quality.
However, even outside of this segment of the market, roasters have been able to maintain or improve
product quality while at the same time reducing raw material costs. Although technological innovations to
improve extraction rates from lower cost robusta varieties (ITC, 2002), may be responsible for part of the
widening gap between producer revenues and roaster/retail revenues, it is unlikely that they fully explain this
trend.
Sustainable Coffee Trade
The Role of Coffee Contracts
6
Box 2: The Varied Impacts of the Coffee Crisis
The coffee crisis today directly affects more than 25 million small farmers world-wide, and indirectly affects
another 125 million people whose lives depend wholly or in part on coffee production, processing and
marketing. In those producing countries most reliant on coffee for export earnings, the price drop combined
with stable or increasing production costs, is tantamount to disaster. In Burundi, for example, nearly 79 per
cent of all exports come from coffee (Table 1). Even countries less dependent on coffee earnings (such as
Mexico where there are 280,000 indigenous growers and Brazil, where upwards of 230,000 small and medium
coffee farmers employ around three million rural workers), are suffering considerably from the crisis.
Table 1: Coffee exports as a proportion of total sources of foreign exchange in principal producing nations –
in per cent (%)
Between 50 and 79%
Between 20 and 32%
Between 11and 19%
Between 5 and 9%
Burundi
Ethiopia
Uganda
Rwanda
Sierra Leone
Nicaragua
El Salvador
Guatemala
Honduras
Madagascar
Colombia
Tanzania
Haiti
Kenya
Congo
Papua New Guinea
Costa Rica
Ivory Coast
Vietnam
Dominican Republic
Brazil
Cameroon
Source: ICO, 2002.
The fall in prices affects different nations in different ways, depending on their level of technological
sophistication and respective production cost profiles:
a) where more modern techniques for productivity enhancement made it possible to reduce
production costs, and where exchange rate devaluation favoured exports, some markets have
been divided by those who can and those who cannot adopt such techniques. Those excluded,
particularly small farmers and rural workers, have faced high unemployment rates; furthermore
modernized production systems tend to be based on high input usage and monocultures, which
have provoked both social and environmental externalities;
b) a gap has arisen within the coffee market awarding producers whose capitalization enabled them
to invest in promotion of specialty coffees (gourmet, organic or otherwise distinguished
characteristics) prized in high value niches; leaving the vast majority in comparably lower valued,
generic markets differentiated only by variety and sometimes by origin and subject to growing
competition;
c) where coffee revenues represent a key factor in household survival, the drop in prices has led to
a decline in expenditure on medical care, education and communication, i.e., poorer living
conditions;
d) finally, where coffee serves as the only source of cash income for small farmers, the current
coffee crisis has led many families to reduce their purchase of basic foodstuffs, to increase their
indebtedness or to abandon farming altogether, contributing to a burgeoning urban crisis in
developing nations
Sustainable Coffee Trade
The Role of Coffee Contracts
7
Indeed there is evidence that this phenomenon can be explained by growing concentration in distribution,
processing and sale of coffee (Talbot, 1997; Morisette, 1997).6 For example, while the termination of export
quotas in 1989 led to a drop in producer prices and in the volume of foreign exchange obtained by exporting
nations, consumers did not experience a commensurate drop in the prices they paid for final products.
Based on price series for roasted and ground (R&G) coffee during the coffee market cycle from 1975/76 to
1993/94, Talbot (op. cit) calculates that the producers’ share of final coffee retail prices fell from 30.4 per
cent in 1975/76 to 16.8 per cent in 1993/94. Thus, while producer states were capable of retaining a
substantial share of the rents throughout the 1980s through tariffs and supply management, this share
dropped to nearly zero in the period immediately following the termination quotas. Over the same period, the
share of surplus accruing to consumer countries grew from 46.8 per cent to 76.3 per cent (Figure 1), most of
which accrued to traders and roasters, suggesting some ability to influence price at the retails level.
Box 3: The Role of Rents in Determining Distribution Along the Coffee Supply Chain
The distribution of surplus value accruing along the coffee chain can be classified in three categories: resource
rent, strategic rent and monopoly rent (Talbot, 1997). Resource rents occur where scarce or location specific
resources generate comparative advantages for coffee production in one area over another. That is,
depending on climatic variation, soil fertility, product quality or the methods employed, coffee growers can
secure different levels of surplus from their production at a given farm-gate price. Product pricing
differentials associated with product quality and market valuation can create competitive differentials between
coffee producers, as well as affect their relative capacity to react to price oscillations.
Strategic rents, on the other hand, typically result from market regulation, such as evidences by governmental
or multilateral supply agreements which allow higher prices to be obtained than those that might occur were
the market purely competitive in nature.7 Strategic rents for coffee producers were created during the period
in which the economic clauses of the International Coffee Agreement (ICA) were in force. The system of
quotas effectively constrained supply so as to enable producers to retain value, an outcome which would not
be available short of strategic intervention in the global market.
Monopoly rents arise when a given economic actor controls a specific link in the supply chain giving rise to
an ability to influence market prices. If market power allows certain players to raise consumer prices
(monopoly or oligopoly) and, as a result, consumers purchase a lower volume of coffee, both producers and
consumers can be expected to suffer reduced welfare. If market power allows buyers to drive down supply
prices (monopsony/oligopsony), there may be a loss of surplus upstream along the productive chain,
affecting raw material producers and suppliers in general.
6
Globally, in 2000 the top 10 roasters accounted for an estimated 63 per cent of all processed coffee sales. Similarly the
five leading green coffee traders accounted for 40 per cent of global green coffee imports (ITC, 2002).
7 The coffee market is competitive in supply, but not in agglomeration or distribution, a characteristic common in
sectors characterized by (relatively) homogeneous products whose supply is disorganized, and in which producers are
therefore forced to behave as price-takers.
Sustainable Coffee Trade
The Role of Coffee Contracts
8
Figure 1: Rents in the coffee value chain: 1975-1994. Based on data in Talbot (1997)
90
termination of ICA quotas
% of retail price in consuming countries
80
70
monopoly rents
60
50
40
strategic rents
30
20
10
19
75
/
19 76
76
/
19 77
77
/
19 78
78
/
19 79
79
/
19 80
80
/
19 81
81
/
19 82
82
/
19 83
83
/
19 84
84
/
19 85
85
/
19 86
86
/
19 87
87
/
19 88
88
/
19 89
89
/
19 90
90
/
19 91
91
/
19 92
92
/
19 93
93
/9
4
0
Coffee Year (Oct-Sept)
Consumer Countries
Transport costs and losses
Producer countries
Growers' share
It is nevertheless important to distinguish between the ability to influence consumer prices and the ability to
influence prices paid to producers. Although recent history provides circumstantial evidence of roaster
influence on retail prices, there is no corresponding evidence of roaster influence on world market prices—
largely due to the fact that the industry concentration present in the coffee physicals market, is not reflected
in the coffee futures markets (where the benchmark for prices for green coffee are established).8 In the
futures market, roasters, traders, and investors interact creating a far more competitive environment than that
found at any particular segment of the supply chain alone.
Nevertheless, the ability of industry players to capture an increasing portion of the consumer dollar, suggests
that they also have the capacity to play a meaningful role in the rectification of the growing distributional gap
along the supply chain, if not unilaterally, at least as a group. Indeed, there are many factors which suggest
that such a strategy is not only in the interests of sustainable development as such, but actually in the business
interest of industry itself. Under current economic conditions industry may increasingly be faced with:
instability in supply, leading to continuation of cycles of high prices followed by crisis, with the
possibility of periods of insufficient supply and the need to increase costs of carrying stocks,
contrary to a “just-in-time” strategy;
overall reductions in product quality, in which producers lack a price stimulus to adopt adequate
production and processing methods (although the industry has combated this by adoption of
new blends and quality grading methods);
8
It should be noted however that other players along the supply chain may have the power to impose monopsonistic
pricing due to their controlling a specific link along the supply chain. The infamous “coyotes” of Latin America are well
known for their ability to offer reduced prices to producers due to an absence of competing buyers and market
information. Exporters which offer the sole market for a producing community or region may also have the capacity to
exercise price influence at the local level.
Sustainable Coffee Trade
The Role of Coffee Contracts
9
negative image of the industry arising from campaigns and boycotts by consumer organizations,
resulting in potential loss of market share or brand reputation;
loss of market share to first movers who adopt partnerships with producers and environmental
organizations based on price-differentiated or other market access incentives.
The development and implementation of mechanisms for equalizing market power along the supply chain
can play a role in protecting against certain negative impacts on business.
2.2.6 Information Asymmetries
Inadequate information reduces the ability of producers to negotiate with other actors in the value chain in
the short-run while making it difficult to respond to market conditions appropriately over the long term.
There is considerable asymmetry in the circulation and appropriation of market intelligence throughout the
coffee value chain (UNCTAD, 2003). On the demand side, industry depends significantly on its ability to
predict changes in the market for its own strategic planning and marketing strategies. Within the context of
multi-national corporations, the resources available for generating market information are substantial and far
outweigh those of producers. On the production side, in addition to the persistent lack of information due to
inadequate communications infra-structures, there is also a lack of training to interpret information that is
currently available.
2.2.7 Economies of Scale
Around 70 per cent of all coffee producers are small in scale, though the farm size and coffee growing areas
differ greatly among producer nations (OXFAM, 2002). The small size of the production unit presents
significant challenges in operating within the market, negotiating favourable terms of trade and in building
competitiveness in commoditized markets.
Although producers have long recognized the value in consolidating marketing and processing activities
through producer organizations, the ability of producers to take advantage of such systems is confronted by a
variety of obstacles ranging from political pressures to geographical isolation. Where cooperatives and other
producer associations do exist, their strengthening through managerial training and capacity building can
improve the organization and quality of production thus enhancing the relative bargaining power of their
smallholder members in a highly competitive market.
2.2.8 Inequitable Social Relations
Social sustainability in coffee production is precarious, whether due to poor incomes, low wages for rural
workers, unhealthy or unsafe working conditions. Unequal pay scales and a double or even triple workday for
women and widespread use of child labour are rampant among rural households who desperately need more
hands to help increase their incomes, however marginal their contribution. Low prices for coffee perpetuate
these patterns, aggravated by failure of workers to organize collective bargaining strategies or of small farmers
to undertake associative production organization (CUT/Contag/Oxfam, 2002). Regardless the presence of
inequitable national employment conditions, the international market structure reinforces inequity in terms of
trade, as the spread between producer and market prices continue their upward trend in most major traded
commodities (Morisette, 1997).
2.2.9
Environmental Impacts
Although traditional coffee farming systems have relatively low-level environmental impacts, efforts over the
past several decades to increase productivity have intensified the negative impacts of coffee production on
the natural environment considerably. Public policy aimed at increasing productivity in Latin America in
particular, has led to substantial transition from traditional shade-grown production to “sun” coffee or
Sustainable Coffee Trade
The Role of Coffee Contracts
10
“mono-culture shade” coffee.9 In Colombia, for example, it is estimated that 68 per cent of the total area
devoted to coffee production has been converted to “technified” systems of agriculture (also known as
“modern” or “High External Input Systems of Agriculture”) over the past 30 years (Rice and Ward, 1996).
Such production methods pose clear dangers to the environment through the synthetic external inputs and
reduced biodiversity they typically introduce. The traditional sites of coffee production around the world
make environmentally-intensive production techniques particularly dangerous to environmental integrity—
not just for local ecosystems but also for the planet at large. More than 80 per cent of the 11.8 million
hectares devoted to coffee production around the world are planted in areas of former or current rainforest
(Halweil, 2002). Coffee is currently grown in 13 of the world’s 25 biodiversity “hotspots”—areas of high
biodiversity importance and vulnerability.
Figure 2: Number of different bird species by coffee production method (Peru)
Research comparing the biodiversity of high input and traditional shade coffee farms has found significantly
higher flora, fauna and mammalian diversity in the latter. In Latin America, a 50 per cent reduction in avian
biodiversity has been observed under sun growing conditions. In addition to aggravating soil erosion, reduced
forest cover associated with sun and monoculture production reduces overall carbon sequestration. The shift
from “diverse shade” systems to “monoculture shade” systems has been estimated to have resulted in a
reduction of carbon stocks by 30 to 50 per cent in within coffee plantations in Latin America.10
Coffee hulling can also have considerable impacts on the environment. Wet processing techniques, which are
used for approximately 40 per cent of global production, generate wastewater with a Biological Oxygen
Demand (BOD) of up to 150 g/l (EDE Consulting, 2001). The discharge of large quantities of waste-water in
9Different
forms of coffee production form a gradient between sun and shade-grown systems. At least five general types
of coffee production systems have been identified: traditional; traditional poly-culture; commercial poly-culture; shaded
mono-culture; and sun. The “traditional” and “traditional poly-culture” systems utilize the original forest canopy while
the commercial and shade mono-culture varieties utilize commercially-introduced shade cover. See Faminow and
Rodriguez (2001). The average rate of conversion to shade monoculture and sun coffees for Northern Latin America as
a whole has been estimated to be 40 per cent (Rice and Ward, 1996).
10See PROCAFE, “Differentiating Salvadorian Coffee. Paper presented at the World Bank, October 2001 cited in
Kristina Sorby, Background Paper to World Bank Agricultural Technology Note 30, “Toward More Sustainable Coffee”
(World Bank, 2002). The role of coffee production as a stimulus for deforestation is not, of course, limited to Latin
America Research commissioned by UNCTAD on the environmental effects of coffee production in the Ivory Coast
concludes that coffee has played a major role in reducing the country’s forested land from 16 million to three million
hectares (Seudieu, 1993).
Sustainable Coffee Trade
The Role of Coffee Contracts
11
the first stage of coffee berry processing leads to reduced oxygen levels in water. This can threaten many
forms of marine life.
Table 2: Biological Oxygen Demand (BOD)
3.0 The Relationship between Contracts and Sustainable
Development
The above overview of the breadth of sustainability issues facing the coffee sector as a whole points towards
a wide variety of causes of reduced social, economic and environmental sustainability for the sector including:
•
•
•
•
•
•
Mismatched supply and demand
Market instability
Inequitable market power
Information asymmetry
Limited access to finance and capital
Under-provision and conservation of social and environmental public goods
At first glance, the relationship between such a diverse range of factors and contractual arrangements is,
perhaps, less than obvious. Sustainability relates to activities all along the supply chain, including activities
throughout the market as a whole, whereas contracts are typically designed to manage the relations between
two specific parties along the supply chain. If many of the sustainability challenges facing the coffee sector are
“macro” in character and dispersed throughout the coffee market, the contract, as a tool for managing one
relationship along the supply chain would appear to be an inopportune tool for either guiding, motivating or
implementing sustainable production and trading practices across the sector as a whole.
In a certain sense, this initial reaction is well founded. It is clear that individual contractual relations alone
cannot be expected to have major impacts on the macro-economic forces of supply and demand. Contractual
form will not resolve the current economic crisis and is unlikely to provide a major force towards the
development of well established producer organizations. However it is equally evident that contracts, may,
through their substantive terms, influence actions which extend far beyond the specific parties to a contract.
The current growth in a variety of certification systems for sustainable coffee is evidence of the potential role
of contracts as enforcement tools for the implementation of sustainable practices both at the producer level
as well at the processing and trading nodes of the supply chain. Another key feature of the contract of sale is
that it effectively establishes the economic relations between parties. In a sector where the economic
conditions facing producers is considered to be one of the primary obstacles to sustainability and distribution
of revenues along the supply chain and tend to favour those on the consumption side of the bargain, the
potential of contracts as a tool for improving sustainability within the sector cannot be rejected a priori.
The law of contract traditionally has its moral grounding in the theory of “freedom of the will.” Throughout
the 18th and 19th centuries, contracts were regarded as tools for preserving the individual rights of free
economic actors and, in so doing, formed the basis of modern free market economies (Kennedy, 1976).
Sustainable Coffee Trade
The Role of Coffee Contracts
12
Under this conception of the purpose of contracts the law focussed on contractual enforcement, having little
to say about the content of contracts or context within which contracts were formed. Taken literally, any
agreement between two parties justified the support of the law. Over the course of the 20th century, however,
the impact of the social and economic context upon contractual formation became increasingly acknowledged
both by regulators and the courts as critical to ensuring that the formation and enforcement of contracts
forwarded overall social and economic welfare.11 The main basis for this change in approach was the
observance of disparities in social and economic power giving rise to contracts which so absurdly favoured
one party over another that they could barely be considered to have been “freely accepted” by the
disadvantaged party. The recent history of contract law thus points towards a systemic realization of the
fundamental importance of social and economic relations in the determination of contractual outcomes
which promote maximum social welfare.
The disparity in size and power between small producers and the purchasers of their coffee may be
substantial and in such cases, the inherent disparity in bargaining power in the formation of any given
contract may lead to systemically inequitable results. As a justification for the following analysis, however, one
need not assume as much. Instead a mere recognition of the fact that contracts do reflect a formalization of
economic relations between two (or more) parties and that such relations play a critical role in determining
the opportunities for sustainable development available to the rural poor, is sufficient to warrant an
investigation into the potential of contracts for promoting sustainability within the coffee sector.
Although contracts necessarily imply obligations between buyers and sellers, we shall, for the purposes of the
remainder of this paper focus on ways in which the contractual process undertaken by buyers may serve as a
means to improve the economic sustainability of producers. The purpose of adopting such a focus is not to
ignore or suggest priority over the essential undertakings which producers must also make in the
implementation of sustainable supply chains, but rather to avoid the detailed and technical discussion on the
appropriate social and environmental standards associated with such producer undertakings. The point of
departure for our analysis takes, as a given, the necessity of producer commitments to sustainable production
practices (leaving the definition of such practices to the side),12 and focuses on the question of how
contractual elements might be able to ensure a more sustainable economic setting for producers who do in
fact adopt sustainable practices. More specifically, our question is, whether or not (and if so, to what degree)
contracts or contractual systems can promote:
1. price undertakings by purchasers which cover the social and environmental costs of production
2. price stability for producers (in return for adopting socially and environmentally sustainable
production practices)
3. improved access to finance or capital for producers (in return for adopting socially and
environmentally sustainable production practices)
4. greater value retention (more equitable distribution of the gains from trade) for producers (in return
for adopting socially and environmentally responsible production practices)
5. improved market access and economic security for producers (in return for adopting socially and
environmentally responsible production practices)
6. improved market information for producers (in return for adopting socially and environmentally
responsible production practices)
In considering the possible role of contracts in addressing these diverse issues, we consider the current state
of several contractual systems currently in use by various actors in the coffee sector.
11 Common Law has established the “doctrine of unconsciounability” to deal with egregious differences in contracting
power. See, for example, Lord Denning’s leading decision in Lloyds Bank v. Bundy [1975] QB 326, [1974] 3 All ER 757.
12 The content of socially and environmentally production practices is a discussion which has reached fairly advanced
levels through a variety of different labelling and certification systems for sustainable coffee. Given the complexity of
that discussion, we leave it to the province of standard-setting organizations, rather than treating it further in this paper.
Sustainable Coffee Trade
The Role of Coffee Contracts
13
4.0
Overview of Select Contracts Utilized in Coffee Trade
There are essentially two types of contractual arrangements that are adopted today in international coffee
trade, which, for lack of more refined terminology, may be described as “standard” and “alternative”
contracts. The former are traditionally adopted by the mainstream market and consist of basic norms that
regulate transactions in the physicals and futures markets. These norms treat the characteristics and quality of
the product, as well as aspects associated with marketing and delivery. Their objective is to provide greater
security and predictability to buyer-seller relations, specifying the agreed upon quality, term, delivery location
and price. In these contracts, characteristics associated with production processes are only relevant to the
extent that they affect coffee quality.
A number of alternative contracts, besides considering product characteristics, go beyond this by also
specifying non-product related Process and Production Methods (PPMs) on the basis of social,
environmental and economic objectives. Such contracts seek to proactively promote specific conceptions of
social justice, environmental quality and economic viability in production systems, responding at least in part
to the sustainability criteria described above.
4.1
Standard Contracts
The standard contracts used in coffee trade seek to guarantee purchase and sale of the product in markets
characterized by great distance from exporter to importer and South-North trade relations. The
standardization of contracts and terms of sale permit greater security in coffee marketing insofar as they
stipulate elements such as product quality, price, quantities, shipping period and legal validity of the
transaction. Figure 3 below provides an overview of the general structure of the coffee market chain.
Standard coffee contracts may be directed toward either physical or futures markets. In the case of the
physicals market, sellers and buyers enter into an agreement that implies delivery of a determined volume of
coffee, of a specific quality, in a specified time frame, whose price may be previously fixed or adjusted later, as
in the case of PTBF (price to be fixed) forward contracts. Physical contracts allow sellers and buyers a greater
degree of freedom to negotiate scheduling, product characteristics and ports of origin and destination to suit
their specific needs. In this market, both sales for immediate delivery (spot) and those for the future (forward
contracts) are treated as physical market transactions, as long as the negotiators undertake the transaction
between themselves, through contracts and without intermediation of other institutions such as the futures
market. Positions in the futures market serve as a basis for negotiations of physical contracts, but do not
constitute actual operations in the physical market, as described below.
Sustainable Coffee Trade
The Role of Coffee Contracts
14
Figure 3: General structure of the coffee market chain.
Coffee
Consumer
Retailer
Restaurant
Supermarket
Café
Distributor
Roaster
Instant Coffee
Broker
International
Trader
Coffee Marketing
Board
Domestic
Exporter
Consumer
Green
Instant
Roaster
Coffee
Industry
Grinder
Curing Plant
Huller
Domestic trader, agent
Cooperative/Farmer group
Smallholder
Inputs
Workers
Producers
Estate farmers
Nature
Capital
Technology
Nation
Culture
Sources: Adapted from Talbot (1997), Ponte (2001), Ponciano et al (1995)
Sustainable Coffee Trade
The Role of Coffee Contracts
15
4.1.1
The Physical Coffee Market
In physical contracts, the principal market agents are exporters (sellers) and importers (buyers). Their
arrangements may also involve auxiliary agents such as brokers, trading houses, agents, shipping companies,
among others.
The principal export pathways in physical coffee trade are by the direct method or indirect sale via agents, and
intermediary sale via Trading Companies. In the direct approach, the exporter will have already chalked up
some previous experience with international transactions and thus is able to carry out all the necessary
procedures, beginning with research on prices and potential buyers through to the actual negotiation. Direct
exporters must be able to follow the market, command of the English language and be knowledgeable of
forms of negotiation and export instruments. In indirect sales through agents, an intermediary in the country
of origin or overseas carries out the negotiation in the name of the exporter, with a commission for services
paid to the agent once the negotiation is concluded. Exporters who lack experience in trade or whose
infrastructure is deficient often deal through a Trading Company to reduce risk rather than adopting direct or
indirect methods.
In distinct contract forms, the responsibility for payment of costs associated with transport, insurance and
delivery defines the commercial terms of trade, which are standardized in the coffee market. Figure 4
describes the principal forms of coffee contracts initiated in producing countries, and the principle
responsibilities of sellers (exporters, producers, traders) in each transaction, vis-à-vis transactions costs and
transport.
Figure 4: Sellers’ responsibilities for costs of transactions in the international coffee trade.
Operation
FOB
FCA
CFR
CIF
DAF
EDK
Packaging
Pre-Transport
Export Formalities
International Insurance
Handling upon Shipment
X/B
X/B
International Transport
Handling upon Arrival
Export Formalities
Post-Transport
Shaded areas define sellers’ responsibility according to contract. X/B = Joint responsibility of Seller and Buyer.
FOB – Free on board; FCA - Free-carrier; CFR – Cost and Freight; CIF – Cost, insurance and freight; DAF –
Delivered at Frontier; EDK – Ex-dock.
Sustainable Coffee Trade
The Role of Coffee Contracts
16
There are a number of distinct means of payment for coffee sold in the physicals market. The mode of
payment adopted depends in part on the degree of confidence between the parties and on the condition of
the market. In periods of oversupply, for example, exporters are often obliged to facilitate payment terms for
the importer. The principal modalities adopted in the coffee trade are “payment net in cash against
documents” (NCAD), whether on arrival or first presentation, and payment against a letter of credit (L/C).
Although advance payment for export goods is an option, it is rarely adopted in coffee transactions, since it
implies payment prior to embarkation and thus represents a high risk to the buyer. Such a payment term may
be adopted in cases in which there is interest in financing the exporter, whether at the time of harvest or on
acquisition of the product. A partial prepayment for pre-harvest costs may be desirable to stimulate adoption
of sustainable production practices.
Payment terms of NCAD on arrival imply a risk for the exporter, since payment is only effectuated on receipt
of the product in the destination. Risks related to shipping delays, nonpayment by the buyer and customs
determinations (which affect sales to the United States, for example) that put the seller at the mercy of the
courts in the buyer country are pertinent to these operations. In the modality “NCAD on first presentation,”
the exporter issues a letter of exchange that will be sent to the bank in the importing nation, together with the
embarkation documents. The importer is only able to retrieve the documents necessary to assure delivery of
goods if it signs a commitment with the negotiating bank to cover the exchange call when this is presented.
The letter of credit (L/C) is the modality of sale that offers the greatest guarantees both to the exporter and
the importer, functioning as an international order of payment emitted by a bank, at the request of the
importer and in favour of the exporter, who is paid once the negotiating terms are complied with. The L/C
can be issued either for immediate or suspended payment. The drawback is that it can imply additional
banking charges and guarantees required by the bank (ITC, 2002).
Figure 5 provides a flowchart of direct coffee negotiation between exporter and importer, as an example of
transactions in the physicals market, sale FOB and adopting the L/C as a payment instrument.
Sustainable Coffee Trade
The Role of Coffee Contracts
17
Figure 5: Flowchart of a hypothetical coffee negotiation in the physicals market,
direct FOB sale through Letter of Credit.
(1) Negotiation
Exporter (E) and Importer (I) negotiate a coffee sale.
E issues a pro forma invoice
Negotiation between E & I referring to conditions of delivery,
scheduling and credit, based on the invoice
E receives confirmation of his order and signs the contract
(2) Opening of Credit
I opens letter of credit in name of a Bank of Issuance (BI) in the
destination country
BI advises the exporter's Bank (BE) of the existence of the credit,
under conditions stipulated in the contract
BI advises E of the existence of the credit and the conditions to be
complied with
(3) Coffee Embarkation
E provides for coffee dispatch and embarkation (in accordance with
FOB conditions)
E embarks the coffee for destination of I
(4) Documents and
Credit Utilisation
E receives bill of lading and prepares remaining documents for
negotiation with BE
BE examines the documents, and if they are in order, pays E in the
case of immediate sale
BE issues documents to BI
BI delivers documents to I and reimburses BE
(5) Coffee Retrieved
from Customs by I
I pays customs duties and retrieves the coffee
Source: Informe BB, 2001.
4.1.2
The Futures Market
Physicals markets, particularly in the case of agricultural commodities, demonstrate substantial variability in
prices due to specificities characteristic of risks and imbalances in supply. For this reason, coffee producers
are unable to predict the price their product will receive when harvested months hence, making it difficult to
predict the appropriate level of costs and financing necessary over the production cycle.
On the buyer’s side, there is a persistent risk of insufficient supply of a particularly desired quality of the
product at the moment when it is most in demand, as well as a risk of having to purchase the raw material at
prices in excess of projected price levels. The roaster thus has to assume additional costs associated with
storing preventative stocks; while the producer lives in fear of a drop in price at the moment his product is
ripe. In part, these problems are resolved through the presence of futures and options markets for coffee.
The sine qua non for the existence of a futures market is the existence of a physical market with sufficient
volume of product with well-defined standards, a large number of competing participants in a market with
Sustainable Coffee Trade
The Role of Coffee Contracts
18
significant price fluctuation and volatility (ITC, 2003). These conditions are clearly present in the case of
coffee.
Actors in the futures market include speculators, pension and investment funds, as well as importers and
exporters. In these exchanges prices are negotiated for a determined volume of coffee of known quality
delivered on a given month in a given locale. These values are determined through auction on the trading
floor of the exchange. Besides serving as a buffer to risk for participants in the production and marketing
chain, futures markets also have the advantage of signalling prices and trends in the market and establishing
quality standards that then go on to be used throughout the industry.13
One important use of futures contracts is to reduce risk associated with variation in the prices of coffee and
offer greater stability to agents in a coffee transaction, avoiding the need to incur costs of carrying stocks.
Futures contracts are negotiated in commodities exchanges, their principal requirement being that the coffee
be available physically in some place in the future, through standard contract specifications concerning the
month of delivery and prices practiced (ITC, 2002). Negotiators in this market are more interested in risk
management (hedge operations) or in simple speculation. A futures contract “is a standardized legal
commitment to deliver or receive a specific quantity and grade of a commodity or its cash equivalent on a
specified date and at a specified delivery point” (ITC, op cit., p.171).
In the futures market, trading agents negotiate obligations for delivery of a standardized product on a
determined date (future position). Nevertheless, the volume of a given physical product negotiated is quite
small; futures markets transact as much as eight times the physically available volume of a given good. The
important thing is the commitment to honour these contracts, which most often occurs through purchase
and sale of other contracts for future positions on these or other goods, substituting for those originally
settled. In this market, buyers and sellers are more interested in managing risks (hedging) or speculation than
in the physical coffee transaction itself. In few cases are sellers and buyers interested in the actual physical
delivery of goods.
In this market, buyers and sellers are involved in hedging operations. Hedging is a strategy of transferring risks
between agents. It implies entering into contracts for purchase or sale of coffee in the futures market against
positions negotiated in the physicals market. In synthesis, this refers to the purchase or sale of a futures
contract whose value is similar to a particular physical transaction, so that an eventual loss owing to price
fluctuations is compensated by gains in the futures market, arising from the same price fluctuations. Similarly,
if price variation would have yielded a net gain for the investor, the futures market annuls these gains.
It is thus clear that the physicals and futures markets are complementary rather than substitutes for each
other. Hedging is the instrument that links them, acting as an anchor against price volatility in the physicals
markets. Their correlation should be high since both markets are informed by conditions of production,
income, complementary and substitute goods. However, their variations are increasingly linked to the
expectations of agents and the action of speculators, which makes hedging bear some margin of risk, while it
cushions market agents against future losses.
Price variations in coffee impose the need for guarantees (leveraged instruments) to assure that commitments
between buyers and sellers are honoured. Both parties to the futures transaction must deposit in escrow
about 10 per cent of the value of each lot they negotiate, which is covered on a daily basis with cash, titles,
bank operations, etc. Since these deposits normally exceed marketing margins, hedging is often beyond the
financial capacity of many smaller scale producers and exporters.
13 A complete description of the roles of these agents and the structure of the futures market can be found at the sites of
the principal exchanges (e.g., NYBOT, LIFFE, BM&F) or in ITC (2002).
Sustainable Coffee Trade
The Role of Coffee Contracts
19
Barriers to entry in this market include little understanding of the dynamic variables of the market
environment (information access), the size of minimum transactions required, the lack of modern
infrastructure and a shortage of trained personnel dedicated to following and predicting market performance.
Even where futures contracts do not imply large volumes (e.g., “mini-C”14 Arabica or ECF robusta contracts)
such barriers make it difficult for sellers to access the hedging mechanism of the futures market, through
which they could guarantee harvest prices. Exporters in developing countries are also penalized by their
difficulties in accessing futures markets, resulting in their need to seek joint ventures or merger with northern
traders to benefit from such instruments.
On the buyer’s side, complications also arise from entry into the futures market, due to the limitations
associated with their ability to negotiate only the point of delivery of the future product through such
contracts. Given their level of standardization, buyers in the futures market do not have the option of
demanding determined quality characteristics of the product (although many roasters are adapted to this by
blending), and may not know the origin or quality of the product until its actual delivery.
Options markets constitute an alternative to the futures market, in that the buyer or seller has the right but
not the obligation to actually purchase or sell the product. To provide this option, a premium is paid over the
demand price. If at the moment of purchase the market price is below that defined in the option contract, the
buyer can exercise his right to purchase the product from another source, avoiding exercise of the option, but
he must still pay the premium. Producers are rarely able to enter into options contracts due to the lack of an
auction infrastructure (and in some cases lack of appropriate legislation) to enable them to exercise this
instrument. The payment of security premiums is made difficult by their lack of capital after many years of
low revenues.
4.1.3
Current Mainstream Coffee Contracts
The most widely used contracts that have become a reference in physical coffee transactions are the Green
Coffee Association (GCA) Arabica contract chiefly aimed at the American market, and the European Coffee
Federation ECC contract, aimed at the European market. These contract systems differ primarily on coffee
species (Coffea arabica vs C. canephora), rather than other aspects of the transaction.
The coffee contracts analyzed below refer to transactions in the physicals and futures markets, as follows:
Physicals markets:
•
Green Coffee Association Contracts Terms and Conditions – norms for coffee marketed in
the USA;
•
European Contract for Coffee (ECC) / European Coffee Federation (ECF) – norms for
coffee markets in the European Union;
•
Contract for Arabica coffee made available by the Bolsa de Mercados e Futuros (BM&F), São
Paulo, Brazil.
Futures markets:
•
Coffee “C” Rules and Mini Coffee “C" Rules (NY Board of Trade-NYBOT)15
14The
New York Board of Trade introduced the “Mini C” contract in 2003 specifically with the purpose enabling smaller
roasters and producers to have access to the benefits of the futures market.
15 The difference between C and Mini-C is the quantity of green Arabica coffee that represents a formal lot and
scheduled futures months. The former amount is for lots of 37,500 pounds, and the latter, 12,500 pounds; the scheduled
months for Mini-C are those immediately before C contract months; in these contracts coffee is priced in a US$
cents/pound basis.
Sustainable Coffee Trade
The Role of Coffee Contracts
20
•
Exchange Contract nº 406 Robusta Coffee Futures Contract: (A) Contract Terms and (B)
Administrative Procedures (London International Financial and Futures Exchange LIFFE/EURONEXT)16
•
Contracts for buying and selling coffee on the BM&F (São Paulo): futures contract for Arabica
coffee; option to buy a future lot of Arabica coffee; future sales contract for Arabica coffee;
future sales contract for Robusta (Conillon) coffee; option to buy a future lot of Robusta
Conillon coffee; and a contract for option to sell a future lot of Robusta Conillon coffee.
The aforementioned standard green coffee contracts have some of the following common features:
4.1.4
•
They are based on the quality of the product or on marketing functions, primarily linked to
delivery period, quality, packaging, means of transport, purchase and sale documents, insurance
and export/delivery expenses;
•
They are applicable to the commodities market, operating at great distance (physicals) and
based on the impersonal nature of relations between buyers and sellers (physicals and futures);
•
Characteristics linked to production processes or origin of the product are only referenced
when they affect the quality of coffee as defined by classification systems;
•
Price relations are solely determined by market mechanisms, although these mechanisms
enable speculation on the part of economic agents, particularly in the futures markets;
•
Price premiums or discounts are determined as a function of determined origins (linked to
quality) and vary with oscillations in supply or demand.
Premiums for Coffee Quality or Origin
The two coffee species marketed internationally, Arabica and robusta, have their quality determined by
environmental conditions in which the crop develops, and by the process of harvesting, post-harvest
treatment and processing through which berries are transformed into green coffee. The environment is
important to coffee characteristics, particularly temperature, rainfall and altitude. Within a given environment,
quality depends mostly on the primary processing stage, which is differentiated in two processes. In “wet
processing,” mature fruit are harvested, depulped, fermented and washed, and afterward dried, hulled and
polished. Such washed coffee (Mild or Washed) is considered of better quality. The process is usually
performed with Arabica coffees. In the dry method, the berries after being harvested are dried and later
hulled using appropriate machines. When this method is used, the resulting product is called Hard Arabica or
Robusta. These types of coffee are marketed separately in international commerce and are priced accordingly.
The ICO classifies coffees for export by type. The principal types are: Mild Arabica (Colombian Milds and
Other Milds), Hard Arabica (Brazilian Naturals) and Robusta (Several Origins), the price declining from first
to last in this listing (Table 3).
16
The LIFFE Robusta Contract, issued on February 11, 2002, is on five metric ton (1 t=1000 kg=2,200 lb) lots, priced
on a US$/t basis.
Sustainable Coffee Trade
The Role of Coffee Contracts
21
Table 3: Coffee types commercialized in the international market
General
Mild Arabica
Type
Principal Producing Countries
Colombian Milds
Colombia, Kenya and Tanzania
Other Milds
Guatemala, Mexico and India
Hard Arabica Brazilian Naturals Brazil and Ethiopia
Vietnam, Brazil, Ivory Coast
Robusta
Several Origins
Indonesia and Uganda
Source: Ponte, S. (2001).
International traders are typically concerned with characteristics such as uniformity and consistency of green
coffee. It is also essential to be aware of the species, the type of processing (wet or dry) and the coffee’s
region of origin. Traders also rely on the official classification (official grade standard) which may vary with
origin, but generally refers to the size of the beans, their density, format and number of defects found in a
sample. Some roasters insist on pre-sampling with the aim of testing the intrinsic value of coffees, a
characteristic that is not evaluated according to official classification procedures. This practice is principally
reserved for those coffees with greater value, such as the Arabicas.
The differences in value for Arabica and robusta coffees, following the norms of the “C” contract (New
York) and Robusta 406 (London), depend primarily on the number of imperfections found, the origin and
port of destination. These criteria are summarized in Box 2.
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The Role of Coffee Contracts
22
Box 4: Price differentials in the coffee market.
Differentials for the “C” Contract in Arabica Coffees
a) Imperfections: differential of 10 points for each imperfection below the basis. No deliveries will be
permitted for coffee containing more than 15 full imperfections, or 23 imperfections; except in case of
Colombian coffee, no delivery containing more than 10 full imperfections below the basis shall be
permitted.
b) Differences in value between various grades and growths (in points)
Basis: Mexico, Salvador, Guatemala, Costa Rica,
Nicaragua, Kenya, New Guinea, Tanzania, Uganda and
Panama
Colombia
Honduras
Venezuela
Burundi, India, Rwanda
Peru
Dominican Republic, Ecuador
India
Burundi and Rwanda
Basis (pts)
Basis + Peru and
Honduras
+200
-100
-100
-300
-100
-400
+200
-100
-400
-100
-300
c) Differentials in value between delivery ports (points)
Basis: New York District Ports
Minus 125 points: New Orleans, Miami, Antwerp, Hamburg/Bremen, Houston (after 2005)
Differentials for the Robusta Coffee Futures Contract – no. 406
a) Main origins of coffee (tenderable): Angola, Brazilian Conillon, Cameroon, Central African
Republic, Ecuador, Ghana, Guinea, India, Indonesia, Ivory Coast, Liberia, Malagasy Republic, Nigeria,
Philippines, Republic of Zaire, Sierra Leone, Tanzania, Thailand, Togo, Trinidad, Uganda, Vietnam.
b) Grades tenderable:
Type 1: up to 150 defects per 500 g at basis.
Type 2: from 151 to 250 defects per 500 g at a discount of US$15 per tonne.
Type 3: from 251 to 350 defects per 500 g at a discount of US$30 per tonne.
Type 4: from 351 to 450 defects per 500 g at a discount of US$45 per tonne.
Coffee containing more than 25 per cent passing through screen 14 round and less than 10 per cent passing
through screen 12 round shall be tenderable at a discount of US$60 per tonne.
Sustainable Coffee Trade
The Role of Coffee Contracts
23
4.1.5
Price to Be Fixed (PTBF) Contracts
Contracts for physical delivery of coffee at a future date may specify a specific price for the coffee at the time
of contractual formation, or they may agree to fix the price at a later date based on the world market price at
that time. The use of a flexible pricing strategy, through such “Price to Be Fixed” or PTBF contracts helps
the contracting parties to match their hedging activities with existing commitments and thus can result in cost
savings through reduced transaction costs. At the limit, some PTBF contracts allow one of the parties to
unilaterally determine when the price will be fixed thus giving them still greater flexibility in their risk
management strategies. When one of the parties has the right to unilaterally determine the time for fixing the
price of the contract the contract is referred to as a PTBF “seller’s call” or “buyer’s call”—depending upon
which party is delegated this right in the contract. In most cases, PTBF contracts are “buyers call” and used in
favour of roasters (ITC, 2003).
4.2
Alternative Contracts and Arrangements
Three types of contracts are analyzed below regarding alternative contracts and certification schemes: one
referring to the marketing of so-called fair trade coffee, according to the norms of the Fair Trade Labelling
Organizations International (FLO), a contractual arrangement referring to a pilot project initiated by
Starbucks Corp., seeking to implement sustainable production processes with preferred suppliers, and the
Code of Conduct developed by Utz Kapeh Foundation. This analysis is based on the following documents
(see Annex 2 for Web sources):
4.2.1
•
Fairtrade Labelling Organizations International (FLO) Producer Contract; and Fairtrade
Standards for Coffee (Fair Trade Labelling Organization-FLO) (FLO criteria);
•
Starbucks’ Pilot Program for Preferred Suppliers, Green Coffee Purchasing Guidelines and
System for Independent Verification (Starbucks Corp.) (Starbucks’ criteria); and
•
Utz Kapeh Code of Conduct and Procedures (Utz Kapeh Procedures).
The FLO Producer Contract
The fair trade system represents the most obvious and direct attempt to adjust the conventional contractual
form in an effort to provide additional economic benefits to producers. The first fair trade labelling initiative
with clear sustainability criteria for coffee dates back to the formation of Max Havelaar Holland in 1988.
Today, there are about 100 fair trade importers in 18 European nations, as well as in other countries such as
Australia, Canada, Japan and the USA. In Europe, fair trade products are commercialized in about 64,800
sales points and annual revenues surpass Euro 260 million.
Although fair trade labelling is now available for several different agricultural products17 coffee represents the
largest and most mature fair trade market. From April 1997, all commercial labels adopting fair trade
principles in 16 countries began to be coordinated by FLO. Sales of fairtrade coffee reached 14.4 million kg
in 2001 (ITC, 2002).
Despite the expansion of trade and the value this initiative represents for small producers in the South, fair
trade commerce still constitutes a very small niche market, absorbing only 0.02 per cent of all international
trade (Bowen, 2001). For some products, however, this line has achieved a fair market penetration, as is the
case with bananas, which commands a 15 per cent market share in Switzerland.
17 Current certifiable agricultural products, other than coffee, through FLO include tea, cocoa, honey, bananas, mangoes,
orange juice and sugar.
Sustainable Coffee Trade
The Role of Coffee Contracts
24
FLO criteria are associated with certifiers’ verification that producer organizations observe international
standards and labour conventions, as a basis for progress toward conditions that have been defined
specifically with reference to fair trade in coffee (FLO, 2003). These criteria are summarized as follows.
Social development
In the area of social development, FLO standards relate to requirements in four areas: a) development
potential; b) small farm target; c) democracy, participation and transparency; and d) non-discrimination.
These may be summarized as follows:
Development potential: producer organization should be able to demonstrate that their revenues from
fair trade will be used in the effective promotion of small farm socio-economic development.
Small farmers targeted in FLO commercial transactions are classified as such if they are not
“structurally dependent on permanent hired labour, managing their farm mainly with their own and
their family’s labour-force” (FLO, 2003, p. 3).
Democracy, opportunities for participation and transparency aims at self-management and participative
enterprise management, as adopted in voting systems and General Assembly participation.
FLO standards also require compliance with ILO Convention 111 prohibiting discrimination among workers.
It is worth noting that although ILO core labour standards form a central element in FLO criteria across
agricultural products, they arguably play a role of lesser importance in certified coffee by virtue of the fact
that FLO criteria only permit small holder producers with little to no hired labour supply in the fair trade
market at present.18
Environmental development
Environmental protection is sought as an objective of production practices, adapting or converting
cultivation methods to incorporate Integrated Crop Management, which seeks avoidance of excessive use of
pesticides and the adoption of natural disease and pest protection. FLO encourages progressive adoption of
organic fertilizers and natural soil fertility maintenance. As minimum requirements, producers should obey
national and international norms regulating use, management, storage and destination of pesticide containers,
the protection of water resources, preservation of virgin forests and natural ecosystems, and should adopt soil
protective cultivation techniques. Regarding the use of pesticides, it is explicitly prohibited that none be
applied whose use has been the object of explicit warnings by international agencies (WHO and FAO) or that
are on the PAN “dirty dozen” listing.
Economic development
FLO standards apply to production of both Arabica and robusta coffees. As a starting point, fair trade coffee
contracts follow the same conditions specified in standard contracts. Price specification is based on international
standards, including adoption of “price fixation at seller’s call” (that is, the futures market is used as a reference
point for pricing). Once fixed, prices cannot be modified by either of the parties. Arabica prices are defined
on the basis of the “C” contract in the New York Board of Trade, while robusta pricing is based on the
LIFFE “LCE” contract, which we have described above as the standards in the market.
However, in addition to this, the FLO system adds a number of specific criteria as a means to guarantee that
producers receive stable and “fair” economic conditions. The fair trade coffee criteria attempt to do this by
requiring buyers to provide specific economic benefits to producers through the contract in order to have
coffees labelled as “fair trade”. The key fair trade economic criteria include:
18
Personal Communication with FLO, 2004.
Sustainable Coffee Trade
The Role of Coffee Contracts
25
•
•
•
•
Provision of a floor price which the purchaser must ensure to the producer or producer
association (see table 4 below)
Where the market price exceeds the FLO floor price, buyers must pay a premium (US$0.05
per lb.)19
Pre-financing of production by advancing up to 60 per cent of the fixed or reference price (if
requested by producers)
Long-term buyer/seller relations, beginning with one harvest cycle
Although these benefits are typically referred to as fair trade “requirements,” the pre-financing and long-term
relations elements of the fair trade system have, by default, remained largely optional within the system.20
Table 4: Minimum prices and premiums for coffees negotiated through the FLO contract
system in US$/lb.
regular
Central America, South America,
Mexico, Africa, Caribbean Area
Asia
Washed Arabica
1.26
1.24
Non-washed Arabica
1.20
1.20
Washed Robusta
1.10
1.10
Non-washed
1.06
1.06
Robusta
Type of coffee
certified organic
Central America, South America,
Mexico, Africa, Caribbean Area
Asia
1.41
1.39
1.35
1.35
1.25
1.25
1.21
1.21
Source: FLO Web site (2003).
4.2.2 Starbucks Preferred Supplier Program
In 2001 Starbucks Corp. began a pilot program for linking preferred supplier status with performance along
social and environmental criteria. The Starbucks model is notable for its specification of an explicit but scaled
19The
rationale for the premium is twofold: (i) to ensure stability within the fair trade system by retaining supply in time
of high world market prices and (ii) to encourage and enable economic development and diversification among
producers. If prices are left open under contract, the parties are expected to negotiate guarantees for any advances
received. Contract terms are to remain in force up to three months after harvest. If the coffee remains in storage for a
longer period, the importer is required to cover additional storage, interest and insurance charges.
20In a 2001 study of North American importers of fair trade coffee, a vast majority indicated that they did not provide
pre-financing for their fair trade coffee purchasers and would not be able to if so requested. See Potts (2003)
Sustainable Coffee Trade
The Role of Coffee Contracts
26
premium for the adoption of specified practices at the farm level making it fundamentally a “market-driven”
model. Below is a brief overview of the features of the pilot program.21
The purpose of the “Starbucks Green Coffee Purchasing Program” is…
to encourage continuous improvement in sustainable coffee production. Our ultimate goal is to
create a fully sustainable coffee production supply chain... The ultimate goal would be to have all
sustainability factors included in the cost of production, and therefore, covered through our outright
pricing program. (Starbucks, 2001, p. 2).
21The
pilot program is finishing in 2004. A modified version is expected to form the basis of Starbuck’s purchasing
strategy from 2004 onward.
Sustainable Coffee Trade
The Role of Coffee Contracts
27
The essential features of the pilot program include:
a) Specific requirements regarding quality;
b) Price incentives, based on a point system for social, environmental and economic criteria (see
Table 5);
c) Option to treat as preferred suppliers producers who participate in the program, at least throughout
the period of the pilot program;
d) An independent system of verification.
Quality requirements limit this program to Arabica coffees, with “zero defects in grade, good even colour,
and consistent bean size.” As flavour requirements, they should be characteristic of their region of origin, as
well as “perfectly clean cup, with medium to heavy body and excellent aroma. All washed coffees must be of
Good Hardbean or better density and have good acidity” (Starbucks, 2001, p. 4).
Price incentives allow an increment of up to US$0.10/lb., for a total of up to 100 points, at the rate of
US$0.01/lb. for each 10 points, so as to encourage gradual improvement in sustainable production practices.
Each of the criteria listed in Table 5 are described in greater detail in the company’s guidelines (Starbucks,
2001). These indicators closely follow some FLO standards, but the point system places a greater weight on
environmental than on social concern. Coffees with organic certification receive an additional premium of
US$0.15/lb. Preferred supplier status is only conferred on those suppliers who attain the full 100 points on the
scale.
Although the Starbucks model does not specify floor prices, the quality requirements for such coffees earn
them a healthy premium over world market prices on the conventional market.22 Over the course of its
experience with the pilot program, Starbucks reports that its conferral of preferred supplier status is a far
more important driver for bringing producers to adopt the sustainable practices outlined in its preferred
supplier program than the actual premiums associated with such practices.23
Table 5: Starbuck's point system for preferred suppliers.
ENVIRONMENTAL IMPACTS
Soil management
5
Water reduction
5
Clean water
5
Water buffer zone
5
Forest and biodiversity
5
conservation
Use of shade
5
Energy use
5
Pest management
5
Accepted agrochemical
5
Waste management
5
Sub-Total
50
SOCIAL CONDITIONS
ECONOMIC CONCERNS
Wages and benefits
10
Health and safety
10
Living conditions
10
30
Transparency from
supplier to farm level
20
20
Source: Starbucks, 2001.
22
In its 2002 Annual Report (http://www.starbucks.com/aboutus/CSR_FY02_AR.pdf), Starbucks informs it does not
use the “C” contract or NYBOT pricing as a guideline, but rather purchases coffee at “outright” prices that averaged
US$1.20/lb. in FY2002.
23 Personal communication with Sue Mecklenberg, February 2004.
Sustainable Coffee Trade
The Role of Coffee Contracts
28
4.2.3
Utz Kapeh Code of Conduct
The Utz Kapeh (“good coffee” in Mayan) Foundation, with headquarters in the Netherlands and Guatemala,
certifies coffees according to its own Code of Conduct, as well as offering to serve as an interlocutor in
negotiations between producers and buyers, although it neither interferes in such negotiations nor in the
related commercial transactions. Utz Kapeh also supports projects involving conversion of traditional coffee
plantations to those that adopt sustainable production criteria specified in its Code of Conduct, through
partnerships to seek project finance. According to its mission statement, the foundation serves “to enable
coffee brands to credibly and transparently demonstrate their commitment to sustainable development at the
producer level.” (Utz Kapeh Procedures, 2003:1)
Utz Kapeh adopts the EUREP-GAP (The Euro Retailer Produce Working Group) sustainability criteria, a
standard-setting body for international certification and procedures for good agricultural practices (GAP),
which many European retailers have begun to require of their suppliers (Giovanucci, 2003). In addition to
this, the Utz Kapeh standard included standards for labour conditions and workers’ rights (based on ILO
standards) throughout the supply chain.
As regards production processes, the Utz Kapeh Code of Conduct treats primarily the following concerns:
•
•
•
•
•
•
•
•
•
Maintenance of agricultural registration
Traceability
Soil management care
Use of fertilizers and irrigation
Crop protection
Hygiene
Worker safety
Prevention of environmental and human contamination from planting through post-harvest
Destination and recycling of crop residues and toxic product containers
With regard to labour conditions, the Code of Conduct provides specific rules regarding protection of
workers’ welfare and health (Utz Kapeh Procedures, 2003). As regards the offsite environment in
complement with the onsite practices, rules seek to avoid deforestation, agricultural impacts on the
environment and wildlife as well as promote efficient energy use.
The foundation’s strategy is to add value to those coffee brands that display the Utz Kapeh label, indicating
adherence by producers and market agents along the coffee commercial chain to its Code of Conduct. This
includes a commitment by buyers to enter into long-term commercial relationships with producers.
Participants in these agreements sign a letter of intent and enter into a licensing agreement with Utz Kapeh to
allow use of the label by registered producers, exporters, traders and roasters.
Utz Kapeh adheres to the principle of market-based pricing, avoiding the use of a floor price approach,
although it recommends that buyers pay a “Sustainability Differential” to producers at times of low prices.
This differential is not fixed but rather defined through free negotiation among sellers and buyers in reference
to the value the Utz Kapeh label is perceived to add to their products. When prices for Arabicas are below
US$0.70/lb in the NYBOT “C” contract, Utz Kapeh recommends its accredited buyers pay a premium of
US$0.07/lb for washed Arabicas and $0.04 for unwashed. In the case of robustas, referenced by the London
market, when prices drop below US$650/ton Utz Kapeh recommends premiums of US$0.05/lb and
$0.03/lb, respectively, for washed and unwashed robustas (Giovanucci, 2003). It is not clear how Utz Kapeh
actually monitors or enforces the application of its recommended premiums. Producers pay the costs of
certification, although in low-price periods, the foundation expects buyers to contribute to part of these costs,
although it is not always clear that this expectation is fulfilled. Utz Kapeh Foundation lists 28 suppliers as
having adhered to its programme, in several Latin American countries, as well as Uganda, Vietnam and
Sustainable Coffee Trade
The Role of Coffee Contracts
29
Indonesia. Nine roasters/traders/exporters have used to the label and its associated Code of Conduct (Web
site viewed at 14 Nov. 2003).
5.0
Analysis of Existing Coffee Contracts
Understanding the prospects for using or adapting elements of standard and alternative coffee contracts with
a view to promoting greater sustainability in coffee production and trade necessitates the simultaneous
consideration of three related issues:
• The social, environmental and economic conditions of coffee production;
• The transaction costs associated with the adoption of specific contractual practices; and,
• The specific relationship between contractual form and the economic circumstances of producers
In our analysis below we consider these issues with respect to the standard and alternative contractual
elements.
5.1
Conventional Contracts
Standard contract instruments used in the coffee trade as currently formulated do not specify differential
market access or offer premiums associated with the environmental or social context of production. In order
to incorporate such characteristics, they would require adjustment (see Table 6). Nevertheless, these
instruments contain the basic mechanisms that govern long-distance commercial relations and represent a
reference point for the definition of tangible product quality standards. Standard contract instruments
establish a transparent and predictable playing field among parties interacting across nations and supply
chains and, as such, play a critical role in ensuring the overall efficiency and functioning of the coffee trading
system. The standard contract instruments thus help to promote the overall economic sustainability of the entire
coffee trading system.
With respect to the specific objective of ensuring that the prices paid to producers cover social and
environmental costs associated with coffee production standard contracts do not, in and of themselves, play
any direct role at present. However, the trading of coffee and coffee futures on the basis of such contracts, by
fulfilling the price discovery role on the world market, does play a critical role in determining the baseline
prices received by producers for their products. Moreover, the fact that the price discovery mechanism on the
futures market currently distinguishes between different grades of coffee (based primarily on physical
characteristics)24 through the allocation of differentials, suggests that it may also be capable of providing a price
discovery mechanism for characteristics related to “sustainable production practices” as well. Although the
exact mechanisms for enabling such an outcome would depend upon a variety of circumstances, such a
system would depend upon the fulfillment of the following pre-requisites:
• A clear and internationally recognized definition of sustainable practices must be identified
• A credible and dependable system for verifying compliance with identified sustainable practices
• Industry must show a willingness to, or demonstrate an actual practice of, paying some level of
differential for coffees being produced under such terms.
24It
is important to distinguish between differentials between spot and future market prices and differentials on the futures
market itself between different grades of coffee. The former entails a degree of speculation and variability that the latter
does not. For the purposes of our analysis we only consider differentials based on coffee grade on the futures market.
Sustainable Coffee Trade
The Role of Coffee Contracts
30
Provided that such pre-requisites actually are met, it is conceivable that the futures market, based on the
allotment of “sustainability certificates” could provide a tool for creating transparency and stability in the
provision of premiums (and thus market incentives) towards the adoption of sustainable production
practices. While futures contracts could conceivably play such a role, there are considerable limitations to the
full functioning of such a system.
In the absence of an internationally agreed upon definition or ranking of sustainable production and trading
practices and the instruments for identifying them on the market prevents the ability to create a market
around such practices. To date there have been many attempts to establish definitions of sustainability for the
coffee sector with the result being the establishment of several different, and often competing definitions.
Although there are growing signs of a potential for convergence of standards,25 or at least the establishment
of common baselines for the sector,26 the actual implementation of standards in light of regional differences
is far from self evident.
Monitoring compliance with standards is also a costly affair. In a context where one of the primary objectives
is to generate greater resources for producers up the chain, there is considerable reluctance to invest the
requisite resources in the administration of comprehensive verification systems. Although the development of
the new ECOPS system for tracing coffee (and other commodities) traded through NYBOT27 promises to
significantly reduce monitoring costs associated traceability through the introduction of electronic records,
the costs associated with monitoring actual practices at the farm level can be expected to be significant. The
exploration of shared auditing and verification procedures such as those being explored by the International
Social and Environmental Accreditation and Labelling Alliance (ISEAL) could provide an important tool in
reducing such costs at the farm level through increased economies of scale in auditing process.28
Industry or consumer willingness to pay more for sustainable coffees is necessary to ensure the eventual
functioning of the futures market since such markets depend fundamentally on high levels of liquidity for
their operation. Spotty or ad hoc use of sustainability as a purchasing basis prohibits the effective functioning
of a futures market incorporating sustainability concepts. There are essentially two ways in which differentials
for sustainability might be formally recognized through the futures market: 1. through the establishment of a
parallel market based on a novel “Sustainability Contract” (“S-Contract”) or 2. through the allocation of a
differential for coffee traded according to standard form contracts but accompanied by a “sustainability
certificate.”
A parallel to the first option is provided by recent explorations towards the establishment of a “Quality
Contract” or “Q Contract” by the Coffee Quality Institute (Margaret Swallow, Coffee Quality Institute,
personal communication March 2004). The advantage of this approach resides in the ability it gives the
architects of the system to redesign the contract from the bottom up in a comprehensive manner as well as
the independence which such a market, once established, can have from the conventional futures market
(e.g., has the potential to function independently from the “C” market. The disadvantage resides in the fact
that an entirely new market must be created, and corresponding liquidity generated, in order to enable such a
system to work. Moreover, the independence from the C market also reduces the “stability” of any
differential between an S-Contract market and the conventional market.
25The International Social and Environmental Accreditation and Labelling Alliance (ISEAL) has provided a forum for
discussing issues of possible convergence between three different coffee standards systems (Rainforest Alliance
Certified; FLO; and IFOAM).
26 The Common Code for the Coffee Community has set itself a mandate to have a draft baseline code for the
mainstream coffee sector by September 2004.
27 Although not specifically intended for tracing production and trading practices, it is expected that the system could
deal with such variables quite readily. (Paul Fisher, Personal Communication, March 2004).
28 ISEAL through the Social Accountability in Sustainable Agriculture project, has undertaken a process of identifying
areas where the auditing and monitoring systems of different standards initiatives might be harmonized and combined.
With this prospect efficiencies and economies of scale to farm level auditing as such might be possible.
Sustainable Coffee Trade
The Role of Coffee Contracts
31
By contrast, the advantage of using existing conventional contracts accompanied by a sustainability certificate
(the second approach) is its reliance on an existing market system and infrastructure which provides both a
degree of liquidity insurance as well as predictability relative to conventional market prices (since differentials
for quality on the futures market are determined outright). Given the minor levels of trade in sustainable
coffees at present, the importance of stability and the infra-structural costs associated with establishing an
entirely new market, the latter option would appear to be a far more plausible route over the short to medium
term.
Even under the more simplified certificate based differential system, significant challenges to meeting the
third pre-requisite exist. On the one hand, many industry players maintain that higher prices cannot be
offered for “sustainable” coffees in the absence of a consumer willingness to make the distinction between
such coffees in their own purchases. However, despite a plethora of surveys suggesting such a willingness on
the part of consumers, actual consumer practice suggests quite the contrary.29 Although consumers may be
willing to pay some level of premium for socially and environmentally produced coffee, in the face of other
“unsustainable” brands, there is no reason to expect consumer “willingness to pay” to equal the actual social
and environmental costs of production, and considerable economic grounds for expecting the contrary. The
creation of a consumer driven differential for sustainable coffee is subject to very real public goods problems
which create disincentives to the payment of premiums for such practices on a unilateral basis.30 On the other
hand, coffee consumption as a whole is widely recognized as being substantially price inelastic, suggesting that
consumers may be willing to assume higher prices for coffee (to cover the costs of sustainable production)
without significantly reducing their consumption.31 The only solution to such challenges may well be group
action by large industry players which effectively eliminates the “choice” for unsustainable coffee or the
creation of a policy environment which corrects for the incentives towards less expensive “unsustainable”
forms of production.32
It should also be noted that although industry players may have significant sway in the behaviour of futures
markets, there is little evidence that any single company has the ability to control prices on such markets. This
suggests that the futures market may actually play a neutralizing role with respect to the economic market
power of individual firms at the level of price formation. Of course, companies are nevertheless free to, and
indeed do, use their market power in the determination of physical contracts for actual delivery. The fact that
such prices tend to be referenced on the futures market, suggests a retention of some level of competition on
the supply side (e.g., although their may be evidence of monopolistic pricing, there is little indication of
monopsonistic pricing at the macro-level).
Besides their important role as the home of price discovery for international coffee trade, the risk
management role of future markets also offers potential opportunities for improving the economic
sustainability of producers. However, a lack of specialized training, information infrastructure and, most
importantly, of capital, makes it difficult for farmers to take advantage of this “service” offered by futures
markets. At present, volume restrictions still restrict the risk management features of futures market
transactions to large producers or producer organizations. On the other hand, the benefits of hedging
29
See, Krier (2001) for example, at p. 14 accessed at http://www.eftadvocacy.org for an indication of the discrepancy
between “willingness to pay” on surveys and actual market shares for fair trade coffee in the European context.
30 Acting as rational actors faced with products of differing price ranges and no guarantees that other consumers are
paying higher prices for “sustainable coffees,” any given consumer can be expected to opt for an individual welfare
maximizing option, which is to say, select the least expensive product.
31 Maizels has calculated long run demand elasticities for coffee consumption in Europe and North America to be
between .1 and .2. See Maizels et al, 1988 cited in ICO, “Environmental Issues Relating to the Coffee Chain Within the
Context of Trade Liberalization, Through a Life Cycle Approach” (London, ICO; 2001).
32 Group action among competitors, specifically on issues related to price formation are highly susceptible to violation of
competition law in both Europe and the United States. Approval or adoption of coordinated activity by the ICO may be
necessary to enable such group activity within the context of existing competition laws. See Jason Potts, “Multistakeholder Collaboration for a Sustainable Coffee Sector: Meeting the Challenge of U.S. Anti-trust Law” (IISD; 2004).
Sustainable Coffee Trade
The Role of Coffee Contracts
32
activities by buyers could conceivably be “passed on” to producers through the formulation of long term
contracts (made possible by a buyer’s own hedging operations). The International Task Force on Commodity
Risk Management (ITF) has begun exploring ways for enabling producers to more effectively take advantage
of existing futures markets through a number of pilot projects.33 Various administrative features associated
with the contracting system on the futures market may or may not promote the ability of producers in being
able to take advantage of such markets. The recent development of the Mini-C is one example of how an
administrative adjustment can positively alter the accessibility of benefits for producers and producer
organizations.34
With respect to conventional physical contracts, long term contracts and PTBF contracts (“sellers call”), offer
potential tools for integrating greater revenue stability and predictability for producers. Long term contracts
with outright pricing offer one of the most direct instruments for providing producers with predictable and
stable revenues. Many companies apply long term contracts but only under very specific conditions largely
due to the inherent risk associated with long term commitments in volatile markets and poor enforcement
mechanisms. Industry players on the consumption side of the market frequently cite the difficulty in
enforcing fulfillment of long term contracts with producers and producer organizations when market prices
rise above those specified in the contract.
The promise of long term contracts primarily lies in the fact that such contracts introduce a degree of stability
within an otherwise unpredictable market. Obviously the longer the length of a given contractual arrangement
the greater its stabilizing effect. However, as contract length is increased, so too is the risk of default from
either side. When current market transactions diverge significantly from contractual terms, either party will
have strong incentives to default. Combining this with a very loose enforcement structure at the local level in
many coffee producing countries, means that such contracts suffer high risk exposure. Indeed, the possibility
of default may represent the most significant cost and thus barrier to the adoption of such contracts since
price change issues can presumably be protected through hedging operations by purchasers. This explains the
limited application of such tools in well established relationships between supply chain partners at present. It
is conceivable, however, that given the appropriate incentives and infrastructural support (perhaps in the
form of guarantee funds), the long term contracts could be rendered a viable tool for enhancing the stability
of returns for producers.
As noted above, the PTBF sellers call contract allows the seller (and thus potentially producer organizations)
to decide at which market price level, a contract will be fixed. Although this “option” doesn’t fully
compensate for the risk features of the market, it does provide producers with more flexibility than may
otherwise be available by accepting prices as coffee is delivered.
A particularly appealing feature of this mechanism is the fact that it doesn’t, in principle, necessitate any
additional cost burden on buyers already involved in hedging practices since it merely entails a shifting of
hedging activity to respond to seller decisions on time and date of setting the price. One of the limitations
facing the use of such contracts at the producer level is that, as a matter of course, roasters are less inclined to
negotiate such contracts, thus limiting their applicability at present.35 Although some roasters working
proactively in the area of sustainable development, such as Green Mountain Coffee Roasters,36 have in fact
experimented with using the PTBF sellers option contract as a tool for improving producer autonomy in the
pricing function on select contracts, the feasibility of wider adoption of such contracting practices,
particularly at the roaster and trader levels is an area worthy of further investigation.
33
For updates on ITF activities, visit the Task Force Web site at http://www.itf-commrisk.org/index.htm.
The “mini-C” contract, introduced in 2003 specifically to enable smaller players to participate in trades, has had only
limited success to date, due to an overall lack of liquidity on the Mini C market. (Personal Communication with Ted
Davis, NYBOT, March 2004).
35 ITC, Coffee: An Exporter’s Guide (Geneva: ITC, 2003) at 199.
36 Conversation with Jon Weitenstein, Green Mountain Coffee Roasters, March 26, 2004.
34
Sustainable Coffee Trade
The Role of Coffee Contracts
33
Such contracts do not, of course, provide the same stability as outright pricing itself, and thus may be less
preferable than outright contracts depending on the expected price levels. The fact that PTBF contracts still
involve considerable risk exposure means they would probably need to be mixed with outright price contracts
in order to provide noticeable benefits. At the very least, PTBF seller’s call contracts offer more flexibility
than simply accepting the market price at the time of delivery of contract formation.
Finally, it should be noted that even without any duration over time or flexibility for producers to fix price,
the existence of contracts as such, requiring delivery at a specific point in time, can provide an important
source for leveraging financing from other sources as a form of collateral. To the extent that financing is
considered a major obstacle to the development of more sustainable systems of production in the coffee
sector, this may represent an important tool for consideration under the context of sustainable contracts. In
order to extend this “benefit” of contracts, it may be worthwhile considering how contract systems can be
used to establish rights and obligations between producer organizations and exporters, or between producer
organizations and roaster/buyers directly—and how such contracts can be used to generate collateral
financing.
5.2
Alternative Contracts
Based on our overview of the sustainability challenges facing the coffee sector, the alternative contract
schemes surveyed offer the most direct instruments for linking the three pillars of sustainable development
within the contractual mechanism. Each of the three alternative models makes explicit reference to social,
economic and environmental practices within the context of a whole system approach. This feature makes
such contract schemes particularly compatible with the vision of sustainable development outlined by the
Agenda 21 process.
Although each of the three alternative systems surveyed above offers some level of economic benefit to
producers in return for the adoption of sustainable production practices, the degree and nature of such
benefit varies considerably (see Table 6). Arguably, the most promising system in terms of explicit benefits
delivered to individual producers and producer organizations is the FLO system. With obligatory premiums
and a minimum floor price which more or less guarantees production costs are covered regardless of market
conditions, producers would appear to have access to the economic security requisite for long term
sustainable development. The FLO pricing system, however, is faced with many challenges at a more practical
level including:
•
•
•
•
No recognition of price distinctions for difference in quality
No recognition of distinctions in the cost of production between different regions
Persistently low market shares
A potential for exacerbating oversupply and pricing pressures throughout the coffee sector
In fact the four practical “challenges” which face the fair trade system are linked to the fact that the fair trade
pricing attempts to step outside of market forces in the determination of a “sustainable price.” Although it
would appear that the dysfunctional nature of the coffee market under the status quo demands a departure
from strict market outcomes, the fair trade system is clearly exposed to severe market pressures by virtue of
the degree and depth by which it does so. The market has, in effect, framed fair trade sales within its own
boundaries by primarily generating fair trade sales only to high or “specialty” quality coffee markets. As a
result, the robusta and mainstream markets for fair trade coffee remain disproportionately underdeveloped.
Again, one of the principal causes for this can be traced to the public good problems which also face the
development of meaningful premiums for sustainable coffees on futures markets.
Sustainable Coffee Trade
The Role of Coffee Contracts
34
Even if fair trade were not faced with the market pressures at present, the adoption of the floor price model
without some form of internalized limits on individual production (and access to the fair trade system) would
almost certainly provoke oversupply thereby aggravating the levels of prices outside of the fair trade system.37
Fair trade is also unique for its insistence on the provision of advance payment on coffee purchases and the
establishment of long-term relations with producers. The fact that neither of these instruments has been
adopted throughout the fair trade system itself raises questions as to their adoptability on a widespread basis
for the sector as a whole—although there may be opportunities for implementing such practices at the global
level through the development of an appropriate infra-structure, supply chain operations and through
economies of scale.38 In the case of advances on the value of contracts to cover production costs through to
harvest, the distribution and cost of assuming risk for advance payment will be critical to determining overall
viability. In order to make such systems operational, institutional guarantee mechanisms and/or improved
access to hedging instruments may be necessary, through legislation or asset-based guarantee funds.39
The Starbucks preferential supplier program addresses some of the challenges facing the fair trade system by
replacing a fixed floor price mechanism with a combination of “outright,” long term contracts and
“sustainability premiums” based on the degree of compliance with specified sustainable practices. The use of
outright long-term contracts provides a modicum of stability and predictability for producers, without
allowing producers to become complacent on issues of quality or other market trends. Meanwhile, the scaled
sustainability premium, allows producers to benefit from the premium without being obliged to adopt an
entire set of criteria all at once—a feature which clearly improves the accessibility of the system for poorer
producers. The conferral of preferred supplier status adds yet another layer of economic stability for
producers who have demonstrated high levels of compliance with the Starbucks sustainability criteria by
providing them with partial guarantees to market access. Moreover, to the extent that the Starbucks preferred
supplier program consolidates long-term supply relations, the possibility for offering advances on the value of
future sales may be more easily assured—although no such criteria is included in the Starbucks system as
applied at present. Overall, the near integration that occurs in the process of adopting preferred suppliers may
also more readily allow the internalization of the costs of sustainable production requirements through price
differentials and brand valuation in the market.
Although the Starbucks model appears to address some critical challenges facing the fair trade system with
respect to underlying market forces, this model too is faced with challenges of its own. On the one hand, one
cannot overlook the fact that Starbucks serves a particularly high value segment of the coffee market,
allowing it the luxury to pay higher prices to producers and absorb other costs associated with the promotion
of sustainable practices more or less unilaterally. The situation of Starbucks is thus quite distinct from that
facing traditional mainstream coffee retailers, traders and roasters. On the other hand, although it would
appear that the Starbucks pricing of US$1.20 lb signifies a price which largely covers the full costs of
sustainable production, it is neither clear how such a figure is arrived at, nor that it could/would be provided
37
It should be noted that even in the ICA system, besides the presence of a price band, there were two regulatory
mechanisms: quotas and buffer stocks. The first limited the growth in supply and the second reduced price peaks by
liberating stocks.
38 For example, current mainstream trading structures, in emphasizing the homogeneity of coffee “as commodity,”
reduce the need for direct knowledge on coffee origins or strong relations with specific suppliers on the ground.
Continued differentiation in the coffee market on the basis of origin and/or a large scale shift in the nature of relations
between buyers and sellers, could conceivably reduce the costs associated with long terms relationships with producers.
39 In Brazil, for example, the Bank of Brazil provides a guarantee on availability of Arabica coffees anticipated from
producers or through auction, using the Cédula do Produto Rural (CPR), which may also be based on dollar values for
exports, charging a 0.6 per cent fee on market value for the guarantee. The Belgian parliament has also approved the
formation of a guarantee fund for providers of advance payments under the fair trade system. See Jason Potts, Fair
Trade Policy in Consuming Countries, Developing Strategies for Greater Market Penetration (Equiterre, 2003).
Sustainable Coffee Trade
The Role of Coffee Contracts
35
over the long term under conditions of tightening competition.40 That is, as a discretionary benefit, it is not
clear how the outright pricing is, or would be, linked to the actual costs of sustainable production over the
long term. Finally, the value of “preferred supplier status” only exists when there is less coffee available from
such suppliers, than is actually demanded by Starbucks. Within a saturated market, preferred suppliers have
no guarantee of a market for their products.
The Utz Kapeh model, on the other hand, offers the benefits and disadvantages associated with a still more
flexible model for sustainability in the sector. Although some of the specific social and environmental
requirements are clearer in the Utz Kapeh system than those identified under the fair trade system, the
economic rewards associated with the adoption of such practices are far less transparent than those provided
under either the Starbucks pilot program or the fair trade system. The advantage of having recommended,
rather than obligatory, premiums associated with compliance relates to the flexibility it allows for different
supply chains to establish their own pricing mechanisms based on their respective costing structures and
business practices. The disadvantage, of course, is that such flexibility offers little in the way of substance to
rectify the market’s tendency to undervalue the social and environmental goods associated with sustainable
production. At best, it is unclear how effective the process of moral suasion adopted by Utz Kapeh is in
promoting actual practice. Perhaps even more problematic in the case of the Utz Kapeh model, is the absence
of any effort to actually “identify” the costs of sustainable production. Although all of the alternative systems
fall short on this particular aspect, the Utz Kapeh model, offering the lowest and most indeterminate pricing
premiums for “sustainable coffee” is clearly the most vulnerable to under-pricing sustainable practices. The
fact that producers must assume the costs of certification can only be expected to exacerbate this threat.
40
Both with regard to the FLO floor price and the Starbucks differential pricing policy, there is a paucity of information
to determine if these systems effectively cover production costs. The determination of the cost of producing sustainable
coffee represents an important challenge and research issue, so that parameters and indicators can be devised to enable
ongoing and simplified monitoring of these costs.
Sustainable Coffee Trade
The Role of Coffee Contracts
36
Table 6: Comparative analysis of standard and alternative coffee contracts based on sustainability and marketdriven criteria.
CHARACTERISTICS OF
COFFEE CONTRACTS
DRIVERS
SUSTAINABILITY
DIMENSIONS
ECONOMIC CRITERIA
Long-term contracts
Preferred suppliers
Differential pricing
Community premium
Advance on sales
Coverage of certification costs
Traceability and transparency
Compatibility with mainstream trade
channels
Impacts on macroeconomic
conditions
Market penetration
Mainstream market potential
SOCIAL CRITERIA
Salaries and benefits
Labour conditions
Living conditions
Gender equity; respect minority
rights
Restriction on child labour use
Democracy community selfmanagement
ENVIRONMENTAL
CRITERIA
Water management
Soil conservation
Forests and biodiversity
Pest control
Energy use
Waste management
Sustainable Coffee Trade
The Role of Coffee Contracts
ALTERNATIVE
STANDARD
Market price and
product quality
driven
FAIR TRADE
Socially driven;
ILO principles;
Process-oriented
Quality and
origin (Must)
No
No
Obligatory
(Must)
Yes
Yes
Product and
origin related
Floor price
No
No
No
Low
STARBUCKS
Environmentally
and quality
driven
UTZ KAPEH
Code of
Conduct EurepGAP
SA 8000
Sustainability
differential
Yes
Yes
Yes
High
Obligatory
(Must)
Yes
Yes
Point system
for price
differential
No
No
No
High
Recommended
(Should)
Yes
Yes
High
Low
Moderate
Moderate
Moderate
Low
Low
Low
High
Low
(Niche-oriented)
Medium
(Brandspecific)
Low/Medium
High (this is the
mainstream...)
Low
Medium
High
Not Included
(Free)
No
No
No
Obligatory
(Must)
Yes
Yes
Yes
Recommended
(Should)
Yes
Yes
Yes
Obligatory
(Must)
Yes
Yes
Yes
No
Yes
Not specified
Not specified
No
Yes
Not specified
Yes
No
Yes
Not specified
Yes
Not Included
(Free)
No
No
No
No
No
No
Recommended
(Should)
Yes
Yes
Yes
Yes
Yes
Yes
Obligatory
(Must)
Yes
Yes
Yes
Yes
Yes
Yes
Obligatory
(Must)
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
High
37
6.0
Conclusions
Over the past decade the markets for sustainable coffees have grown considerably, giving rise to an awareness
of sustainability issues throughout the coffee industry. With the rise of specific markets for “sustainable”
products, some consumers have demonstrated a willingness to pay higher prices for coffees that purport to
meet sustainable characteristics. The demonstration effect obtained in marketing these coffees can stimulate
changes in the pattern of demand, potentially leading to an expansion of the breadth and scope of consumer
willingness to pay premiums for such practices. However, the success of sustainable coffees to date as a
market concept has essentially been limited to specialty and other high value differentiated markets. A crucial
challenge facing the integration of sustainability concepts within mainstream trade channels is to determine
how sustainable practices can spread to mainstream channels in the context of product homogeneity typified
by such markets.
On the basis of our analysis above, it is clear that the effective implementation of a contracts scheme that
ensures some level of benefits to producers in return for the adoption of sustainable production practices also
entails significant costs. One of the major questions in assessing the viability of any particular system of
benefits relates to the distribution of costs and developing effective mechanisms for internalizing such costs
without relegating them to niche markets alone. While we cannot pretend to provide an answer as to the
appropriate distribution of such costs between public authorities, consumers, retailers, roasters and traders,
what is clear, is that such costs must be borne primarily by players on the consumption side of the supply
chain. At the moment, however, the majority of costs associated with adopting sustainable production
systems are still assumed by producers, with only modest price premiums as compensation. There is also
considerable evidence that consumers alone will not lead the market to a widespread system of differentials
for sustainable coffee. These two “facts” would appear to suggest a role for the systematization or
institutionalization of rewards for sustainable production practices at the sector-wide level. Indeed, short of
sector wide agreement, or corresponding policy instruments, competitive pressures are likely to drive
premiums (and related economic benefits) out of the market or reduce them to levels which fail to cover
actual costs (associated with sustainable production).
There are two distinct ways of envisioning change towards the systematization of sustainability criteria in
contracts across the sector. On the one hand, it may be possible to identify broad-based sustainability
guidelines which are sufficiently generic that they are, in fact, applicable across the entire coffee sector at
relatively low cost. Such a system would be most conducive to taking advantage of existing standard contracts
and corresponding futures markets. Moreover, it is conceivable that a premium or differential could be built
into such a system drawing from the existing regime of conventional contracts and trading exchanges. Sectorwide action on such standards could lead to some level of differentiation (and thus higher prices) for products
identified as sustainable under such a system. On the other hand, it may be desirable to emphasize
differentiation in quality across the mainstream sector (in the way which the specialty market does), using
sustainability concepts as a point of differentiation. To the extent that a differentiated market can draw higher
revenues from sales, it also has a greater capacity to distribute resources to producers (e.g., Starbucks model).
Under such a system, outright contracting and more substantial premiums for producers are clearly more
feasible. The existence of differentiated markets may also be more conducive to direct and long-term relations
which may bring additional benefits to producers.
The main challenges facing the first vision are (i) the adaptation of concepts which are traditionally perceived
as “specialty” differentiators, to the structures and market conditions present within a homogenous
commodity market and (ii) the ability to derive significant benefits for producers out of such a market. The
main challenge facing the second vision is the overall interest of consumers in adopting a more costly
“differentiated” market. To the extent that the coffee market is currently divided between the two
approaches, it will be critical to ensure that both means are implemented in ways which are mutually
supportive. Although both approaches are worthy of promotion, the first approach relies on existing infrastructure and market structure most directly and thus would likely pose far lower transaction costs.
Sustainable Coffee Trade
The Role of Coffee Contracts
38
There are also numerous general sustainability issues which contracts, as such, cannot be expected to resolve
in any significant manner. These include:
1. Improving the sustainability of contracts cannot resolve the current crisis of oversupply
confronted by the sector.
a.
Contracts in themselves cannot facilitate market expansion although current and potential demand may
be expanded by creation of promotional programs stressing consumption of sustainable coffees
or improving the image of the coffee sector;
b. Higher producer prices should not be anticipated without a corresponding valorization of the final product –
although it is likely that some resources may be available from monopoly rents accrued along the
supply chain, long-term price improvement depends in large measure on market valuation of
sustainable practices by consumers, industry and/or policy;
2. Contracts alone cannot assure the systemic or structural changes necessary to shift
regional or national living conditions towards greater sustainability;
Sustainable contracting, despite potential improvement in practices along supply chains and
incomes does not necessarily guarantee that producers are concomitantly transformed in terms of
their overall access to technology, infrastructure, education, credit, diversified and multifunctional
activities needed to attain a sustainable rural sector. Although linking contractual obligations to
substantive social and environmental performance criteria can help attain this outcome, a broader
supportive policy framework is also necessary.
3. Creating standardized contractual elements and instruments presupposes a search for
means to reduce transactions costs, but the integration of sustainability criteria is likely
to increase transaction costs to some degree;
a.
Safeguards are needed against increased transaction costs, which can occur both ex-ante (information
gathering, negotiations and closing the contract provisions) and ex-post (opportunistic behaviour
against honouring commitments).
b. The degree of product specificity militates against reduction in transactions costs. Standard coffee contracts
and Incoterms are examples of contractual structures that respond well to these objectives.
c.
Excessively complex instruments and those that would demand complex and expensive infrastructure for their
implementation should be avoided, to ensure the greatest possible participation by producers and
industry.
Despite the significant challenges facing the use of contracts and related instruments as tools for delivering
benefits to producers adopting sustainable practices, it is clear that contracts can deliver a wide range of
economic benefits, not only through their price determinations but also through a variety of other relations
and commitments which are often settled within contracts and which address critical sustainability issues
facing the most vulnerable producers along the chain. Although there are significant challenges in integrating
any of the specific contractual criteria associated with “alternative” contract schemes, or even a recognized
differential system within mainstream contracting schemes, there may be particular hope in the use of nonprice related tools such as long-term relationships and preferred supplier relationships since the costs
associated with such benefits can be reduced over time through broad-based infra-structural change (e.g., the
costs associated with such instruments are primarily fixed in nature). Similarly, the costs associated with
awarding differentials for recognized sustainable practices may also be reduced through the adoption and
implementation of standards systems which are widely recognized by players throughout the industry. In
short, economies of scale, structural development and standardization are likely to be key factors in bringing
sustainable contracts to the coffee sector on a widespread basis.
Sustainable Coffee Trade
The Role of Coffee Contracts
39
Based on our survey above, some of the more promising “contracting tools” and complementary instruments
for consideration in further investigation in this area include:
•
Long-term agreements between producers and buyers so as to permit the planning of
activities at least over a complete harvest cycle;
•
The use of “price to be fixed” contracts, sellers call in physical contracts with producers and
producer organizations
•
Preferential supplier status in return for commitments to sustainable production practices
•
Adaptations to futures markets (and the respective contracts) enabling enhanced producer
access to risk management tools within such markets
•
Adequate institutional or market-based guarantees to ensure actors honour their contractual
commitments through market volatility;
•
Increased transparency of the price formation process along the supply chain through
enhanced access to information.
•
Pricing differentials in recognition of the socio-environmental benefits associated with
sustainable production practices based on either:
o
The expansion of differentiated, high value markets which integrate sustainability
concepts
o
Explicit recognition of sustainable practices within the quality grading systems used
for futures markets (via a certificates program);
In order to fully assess the potential and overall viability of specific contractual elements as tools for
improving the financial position of producers adopting sustainable practices further research is clearly
necessary. Some specific questions which such research will need to answer include:
•
•
•
•
•
What are the specific impacts of different contractual instruments/elements on producer
sustainability?
What are the fixed costs associated with switching to a system based on specific criteria on a
widespread basis?
What are the variable costs associated with switching to a system based on specific criteria
on a widespread basis?
How do specific circumstances associated with regions and supply chains impact the above
questions?
How can the additional costs associated with improved financial security for producers be
spread across all players on the consumption side of the supply chain in such a manner as to
avoid any specific groups, players or consumers from having to bear such costs unilaterally?
Ultimately, sustainability needs to be understood as a dynamic process requiring continual improvement. On
the one hand, this implies gradual adaptation towards identified sustainable practices in response to the socioeconomic, environmental, cultural and policy endowments of each producing country—the ideal being to
gauge progress rather than to come up with a package of rigid standards. On the other hand, this implies a
continual elevating of the bar and the avoidance of complacency.
Moreover, sustainability in coffee production cannot depend solely upon supply chain standards and supply
chain decision-making. Producing and consuming countries alike should strive to create compatible
infrastructures of technical assistance, research and production support, as well as other income related fiscal
Sustainable Coffee Trade
The Role of Coffee Contracts
40
policies for creating an environment favourable to sustainable production practices. Meanwhile, diversified
development strategies are critical elements of strategies for reducing the resource depletion and financial
insecurity associated with high levels of dependency on monocrop agricultural practices.
Given the crisis that continues to affect coffee producing countries, and considering that most income
generated in the coffee production chain migrates to those sectors at the end of the chain in consuming
countries, policies to support sustainable coffee production should begin in consuming countries, whether
through individual consumers, states, corporate leadership or multilateral assistance toward improving the
terms of trade. Ultimately, we can expect it will take proactive efforts from all players along the supply chain
in order to avoid the perverse incentives generated by persistent market failure. The fact that costs must be
shared among agents along the supply chain in order to render them financially viable in a competitive market
setting, provides a strong argument for public policy support toward the overall promotion and
implementation of contracting practices which favour sustainable trade and production.
Sustainable Coffee Trade
The Role of Coffee Contracts
41
Table 7: Applicability of contractual mechanisms to address coffee sustainability.
FACTORS THAT REDUCE SUSTAINABILITY
Trend toward Decline in Prices
UNFAVOURABLE
TERMS OF TRADE
Prejudicial Price/Cost
Relationship
Volatility in Prices
INEQUITABLE
SOCIAL RELATIONS
ENVIRONMENTAL
IMPACTS
Supply control policies
Differential prices for sustainable
production
Long-term contracts
The Role of Coffee Contracts
Yes
In production
In trade
Long-term contracts
Yes
In supply
Penalties in contract for non-supply or
delay
Threat of severance of future
commercial relations
Yes
Crop conversion
On the market
Lack of resources to support
production, infrastructure and
marketing
Preferential and differential credit for
producers in process of conversion
(multilateral sources)
Pre-financing on the part of the
importer
Informational bulletin / Databanks
Marketing training
Informational bulletin / Databanks
Yes
Yes
No
Yes
Partially
No
Partially
Price premium for community
development
Differentiated credit lines of collective
infrastructure (multilateral sources)
Yes
Inadequate salaries and working Internalization of social costs in pricing
conditions; sexual
Differentiated income and financing
discrimination; child labour
policies
Yes
Unsustainable production
processes
Internalization of environmental costs
in pricing
Differentiated financing policies for
environmentally appropriate practices
Sustainable Coffee Trade
Yes
Yes
On prices
DEFICIENT INFRASTRUCTURE
Yes
Yes
No
Transparency along the production
chain
Agricultural insurance
Expenses to harvest
POOR ACCESS TO
INFORMATION
Long-term contracts
Preferential sourcing
Yes
Yes
Yes
Market Power
LACK OF CAPITAL
CONTRACTS
(Applicability)
Systems of nomenclature of origin
Specialty coffees
Organic coffees
Low Value-Added
UNCERTAINTY
POSSIBLE SOLUTIONS
No
No
Yes
No
42
Appendix I:
Scheme
Possible Elements for a Sustainable Coffee Contracts
This section draws from a survey process launched across members of the coffee supply chain in an effort to
determine what the initial elements of a sustainable contract scheme might include. Although our analysis
above concludes that the establishment of an outright system of “sustainable contracts” is not the most
plausible approach for bringing sustainable practices to the mainstream sector over the short term, the main
content of the overview is equally applicable to a certificate based system.
Our study has underlined the importance of economic viability as a key variable to assuring broader socioenvironmental sustainability in this enterprise. Economically sustainable coffee production depends on
producer price levels being commensurate to the costs of production, and also being sufficient to permit
growers to adopt social and environmentally sustainable production systems over time. It also requires that
producers be assured of some level of security, and that they can obtain market access and resources for longterm financing prior to harvest. Arrangements of this nature, directed toward sustainable coffee, can be
characterized as economically viable production systems. This viability arises from commercial relations
that internalize their social and environmental benefits, and responds to the financial needs of the production
system. In regard to contracts, the principal indicators include:
a) long duration – establishment of long-term contracts for international coffee marketing, initially
focused on a 3-year horizon, but progressively expanding to five years, to reflect coffee
maturation periods;
b) priority in supply – preference in commercial relations to producers of sustainable coffee that are
organized in associations;
c) compatible pricing – prices that cover production costs, internalize social and environmental
costs/benefits and provide rural producers and workers with a decent standard of living;
d) production financing – financing or prepayment systems in contractual terms, allowing the producer
to incur expenses prior to harvest;
e) transparency and traceability – progressive achievement of transparency in commercial transactions,
and establishment of chain-of-custody approaches to trace products through the value chain.
With regard to the social arena, criteria that could be included deal with socially just and equitable
production relations – obeying local laws, but in the medium and long-term adopting universal principles
and ethical standards of conduct. As indicated above, improvement in social equity is likely to be more readily
attained when economic conditions of producers are improved. However, increased price alone cannot assure
better distribution of the benefits to all stakeholders in a given supply chain (e.g., women and children). More
direct targeting may be required to overcome existing inequities and inappropriate labour practices. Indicators
that reflect a basic point of departure for these relations and that can become the object of contractual clauses
include:
a) dignity in social relations of production, reflected in payment of salaries in accordance with the laws of
the source country;
b) satisfactory labour conditions and safe working environment;
c) equity in gender relations, both in regard to salaries and to opportunities for contributing to decisionmaking;
d) elimination of child labour practices or of systems of voluntary participation that do not harm the
freedom of children to develop, their leisure and education;
e) democracy, independence and non-discrimination, in social relations, in associative enterprises of
producers and rural workers.
In the environmental arena, coffee production should demonstrate efficient and sustainable use of natural
resources and employ technologies that reduce environmental and health impacts, as well as conserving
natural ecosystems and biodiversity. Such systems can be characterized as environmentally appropriate
processes, which, at the contract level, can be specified according to the following indicators:
Sustainable Coffee Trade
The Role of Coffee Contracts
43
a) soil management: protection, conservation and preventing erosion;
b) water management: avoiding pollution arising from production processes, as well as from coffee
processing;
c) conservation of natural resources: forests, soil cover and biodiversity in production areas and their
environs;
d) integrated pest management: avoiding use of prohibited pesticides and using only those that are
indispensable, adopting organic production patterns as a target;
e) efficient energy use, promoting utilization of local and regional materials;
f) recycling and treatment of residuals arising from production and processing of coffee.
The challenge in this arena is that while some environmentally appropriate measures may be feasible within
the framework of current production cost structures, improved management of natural resources and reduced
use of agrochemicals will, at least at the outset, typically require an increase in financial outlays.
These criteria, grounded in the social, environmental and economic dimensions of sustainability, form a
conceptual basis for the analysis of some of the currently applied contract systems adopted in international
coffee trade. To enhance production sustainability through contracts, these three dimensions need to be
considered in a balanced and integrated framework. However, the economic dimension, as the financial basis
for elevating socio-environmental sustainability, bears an evident primacy—particularly with respect to
contractual relations. Improved prices, net revenues, reduced production costs, and uncertainties, are essential
to enabling enhanced access to sustainable development overall. Only from this point of departure can
producers be charged with adopting improvements that will enhance the environmental and social
dimensions. (i.e., economic sustainability is thus a prerequisite for promoting broad based sustainability) Our
perspective, therefore, is that contracts must first improve the terms of trade and features that enhance the
ability to plan ahead, before we can expect other dimensions to be addressed.
On the basis of the above discussion, Table 8 summarizes the principal criteria that could serve as a basis for
analysis of current contracts and for developing a sustainable contracts scheme for coffee, in the context of
negotiation among all stakeholders in the productive chain.
Considering that negotiations along the productive chain of coffee occurs between agents with extreme
asymmetries in information and market power, we will emphasize the need for greater specificity of assets
(product, processes and impacts), reduction in uncertainties (long-term contracts, building less impersonal
relationships) and a greater frequency of transactions (as in preferential raw material supply schemes).
Commitments are needed to address those factors that contribute to current unsustainability in the coffee
system. On the supply side, changes are needed to promote continuous adaptation to sustainable approaches,
from a social and environmental perspective. Sustainability must be perceived as a process and not an end,
and must be adapted to the distinct conditions in each producer country, with progressive observance of
universally recognized codes of conduct such as the ILO norms, the UN Human Rights Charter and the
Convention on Biological Diversity.
It is also critical to keep in mind that the constraints facing producers should not be unreal or excessive,
becoming an additional burden on the productive sector and acting as a barrier to entry in trade relationships,
which would deepen the disadvantages already faced by coffee producing nations. It may be preferable to
begin with minimum standards that can be applied to the majority of producers and then implement a
process of continual improvement.
Sustainable Coffee Trade
The Role of Coffee Contracts
44
Table 8: Examples of possible themes for improving sustainability in the coffee sector through contractual terms
Criteria
Specification and objectives
ECONOMIC
Reduction of uncertainty and variability in prices; coverage of social and environmental benefits inherent to the production process;
greater access to markets and to information; greater equity, transparency and collaboration along the productive chain; pre-harvest
financing
Long-term contracts
Contracts valid for at least three and preferably five years.
Preferred suppliers
Priority for acquisition from associative entities engaged in production of sustainable coffees.
Differential pricing
Payment of a premium over conventional market prices, reflected in a percentage of sales value, as a means of remunerating social and
environmental benefits in production of sustainable coffees.
Community premium
Payment of a premium over conventional market prices, reflected in a percentage of sales value, as a means of supporting strategies for capacitybuilding and community development.
Advance on sales
Advance payment of a percentage of the contracted sales value with the objective of financing production up to the time of export.
Coverage of certification costs
Payment of third party certification costs, when required as a condition of sale.
Traceability and transparency
Visibility, on the part of producers, consumers and society in general, of the structure of prices, costs, marketing margins and of production,
processing and industrialization processes from field to consumer.
Product quality
Adoption of ICO Resolution 407 to improve coffee quality and pricing.
SOCIAL
Improvement in quality of life of producers, workers and their communities; legally based labour relations; democracy, equity and
participation, respecting gender differences and minorities; restriction in child labour; development and autonomy of associative and
community organizations.
Salaries and benefits
Payment of salaries and benefits to workers in accordance with national law.
Labour conditions
Safe and healthy work environments; use of protective equipment in activities that impose risk on workers’ health.
Living conditions
Rural producers and workers living conditions are adequate.
Gender equity and respect for minority
rights
Equitable treatment to women and minorities, enabling participation and non-discriminatory employment access and pay.
Restriction on child and forced labour
Restriction to child labour as a criterion of social progress.
Democracy, freedom of association and
community self-management
Right to participate in decision-making, self-management of associative organizations and autonomy of community enterprises.
ENVIRONMENTAL
Adoption of production systems designed to conserve and restore environmental quality and biodiversity, and reduce or eliminate
contamination with chemical substances harmful to workers, consumers and the environment.
Water management
Production and processing techniques that reduce water pollution; conservation of headwaters, riverbanks and lakeshores; watershed protection to
avoid sedimentation.
Soil conservation
Production systems protect soil, avoid erosion and maintain fertility and microbial organisms.
Forests and biodiversity
Protect and conserve forests and natural ecosystems seeking maintenance of ecological equilibriums and biodiversity.
Pest control
Adoption of integrated pest management systems, seeking to minimize use of pesticides, with the goal being organic production.
Energy use
Efficient use of energy and non-renewable natural resources; priority to alternative sources of energy over polluting sources or those that require
external inputs.
Waste management
Progressive adoption of technologies for pollution prevention; adoption of residuals reuse and recycling from coffee production and processing.
Sustainable Coffee Trade
The Role of Coffee Contracts
45
Sustainable Coffee Contracts – Views from Stakeholders
As part of the research undertaken for this study, an e-mail survey questionnaire was sent to participants in
the online Sustainable Coffee Discussion Group during July-August 2003. Of about 65 stakeholder
representatives who participated in the initial Geneva workshop, the response rate to the survey was 20 per
cent, well distributed among stakeholder categories.41 Unfortunately, the views of producers themselves were
not well represented, although organizations that provide support to coffee cooperatives and producer
associations offered their views, defending the needs of smallholder coffee growers.
The vast majority of respondents affirm the validity of efforts to introduce what was termed an “S” contract,
corresponding with sustainable development objectives, with the following provisos:
•
•
•
•
Sustainable coffee contracts should be flexible and oriented toward stimulating long-term
buyer-seller relations;
But they should also be objective and concrete, following conventional market practice, if
they hope to enter into the mainstream market;
Contracts should be linked with third-party certification (“sustainability is a condition, not a
merchandise”); and
Contracts will not supplant the concurrent necessity for supply management to counter
unstable and declining commodity prices.
When asked what clauses or themes should be included in contracts, most respondents considered the
elements below to be most feasible for inclusion in a Sustainable Contract System (see questionnaire in
Annex 1).
1. Buyer commitment to pay a premium based on costs associated with implementing specified
sustainable production practices
2. Buyer commitment to enter into long-term contracts with producers implementing specified
sustainable production practices
3. Buyer commitment to offer preferred supplier status to producers meeting specified
sustainable production practices
4. As a condition for entry into such contracts, producers are expected to commit themselves
to environmentally sound management practices
5. Producer commitment to compliance with national labour laws and ILO core labour
standards
The remaining items proposed as possible elements in “S” contracts were perceived as either exceedingly
controversial or with “low” or “no” feasibility for inclusion in such a system (see Annex for full listing of
clauses suggested in questionnaire). These included the use of fixed minimum prices to ensure sustainable
producers’ basic costs are covered; offering of credit or advance payment to sustainable producers; and
making available information on market conditions to producers.
Respondents’ affirmed the difficulties in establishing an appropriate minimum price level that could defray
the costs of transition to sustainable production systems, although all recognize that such conversion
represents a cost that must be assumed somewhere along the value chain, or through indirect funding
41
The respondents included representatives of industry organizations, exporters, traders, roasters, certifiers, sectoral
development authorities, NGOs, foundations/donors, policy analysts and consultants. All but one respondent had
participated in the February seminar in Geneva. Responses to an initial draft survey were later merged with those to a
more complete version transmitted over the discussion group list, and therefore some questions were not answered by
all survey respondents.
Sustainable Coffee Trade
The Role of Coffee Contracts
46
instruments. The relationship between coffee quality as defined by existing contracts and price structures, and
that assured by socio-environmental variables needs to be sorted out, as is the need to find ways to internalize
unpriced values of environmental services. Can price premiums for environmentally friendly coffee pay for
these services (e.g., clean water, soil erosion control)? How can they be made complementary with other
mechanisms (e.g., incremental cost financing schemes such as the GEF)?
Are preferred purchase schemes of any use without a premium? Although preferred purchasing may
stabilize long-term buyer-seller relations, respondents feel they need to be tied to specific pricing
arrangements to allow the producer to invest in production system improvement. Participants feel the need
for an objective assessment of the Starbucks’ experience with preferred supplier relationships.
Transparency in market information is a public good that is rarely provided by market actors. While the
respondents did not rank this element highly as an element to be assured in contracts, they do feel
transparency is called for in market practice, and that producers rarely have access to sufficient information to
guide their decisions. Who is to provide this service and how to get it to producers represents an important
theme for further work on market intelligence in the coffee industry.
Pre-harvest credit represents another aspect that was controversial for respondents. While some feel buyers
should not be made responsible for assuming such risks, others feel there is a real need for timely financing,
depending on interest rates and repayment terms. Whether national and/or multilateral financing agencies can
assume credit risk in such a highly volatile market is another question. To what extent are buyers willing to
commit themselves to a long-term relationship with producers, and is this a good means to secure such a
relationship? “If we want producers to be sustainable, shouldn’t we have asked them to invest in this when
the price conditions were good rather than in crisis?”
The need to abide by labour laws and internationally adopted labour standards is a fairly unanimous element
for contract observance among respondents, but is more appropriate when considering contract relations
with cooperatives or firms than with smallholders. Again, these represent additional costs to the producer
that require some means to defray with pricing and/or credit.
When asked who should bear the costs for conversion of production systems to a sustainable footing,
although by no means unanimous, respondents affirmed that producers would undoubtedly bear a share of
the costs, though not necessarily in cash. However, there was a clear consensus that such conversion is a
responsibility of other actors in the value chain as well. Most felt that the producing country government
should have a role in making this possible, while importers and roasters were also identified as key candidates
for assuming part of this burden. Nearly all felt that consumers and consuming country governments would
have to foot a good share of the bill (most suggested the greatest share of the burden be on consumers).
Multilateral agencies would also be called upon to support producers to undertake this conversion.
To a similar question regarding the incidence of costs for validation and monitoring of compliance with a
sustainable contract scheme, respondents indicated their awareness that independent certification is an
essential feature of building confidence in sustainable coffee production and trade. Although initially
producers and their associations would bear these additional costs, depending on the efficiency of the market,
such costs could be passed along the value chain and eventually be borne by consumers. Although
governments and multilateral agencies may contribute to the success of accrediting and launching validation
mechanisms, in the long run these systems must be self-perpetuating. One respondent recommended the
adoption of spider graphs to show degree of compliance with sustainability criteria, and facilitate comparison
over time to demonstrate progress. There was also some criticism of the retention of part of price premiums
in the hands of certifiers, often based in consuming nations.
Sustainable Coffee Trade
The Role of Coffee Contracts
47
Possible Clauses to Include in Sustainable Coffee Contracts
As was discussed in section 2 of this study, contracts alone cannot assure all preconditions for sustainable
coffee production and trade. However, formal contracts for sustainable coffee supply would represent an
important first step toward resolving some of the gravest problems that the sector confronts, including
uncertainty, high level of price fluctuation, disadvantageous price/cost relationship from the grower’s
perspective, lack of pre-harvest financing and poor working and environmental protection conditions.
From the buyers’ side, long-term relationships with growers allowing purchase of a product of specified
quality would permit greater supply chain management and the possibility to associate brands with
reputational characteristics arising from social responsibility and avoiding association with a bitter taste of
social inequality or environmental destruction. Long-term partnerships are sought to promote efficiency and
welfare gains for all stakeholders.
Finally, from the consumer’s perspective, the contract approach should allow clear identification of a
sustainable product through a globally recognizable label or labels assuring traceability along the chain of
custody. Greater availability of such products in the market at competitive prices would improve consumers’
surplus and in the medium and long-term would stimulate a greater consumption of better quality coffees.
The proposal for a contract scheme that is adapted to the mainstream coffee market (i.e., market-driven) and
that simultaneously stimulates sustainable production, trade and consumption implies the need to implement
criteria adaptable to diverse countries, production systems and types of farmers. Contractual elements should
not be excessively rigid as regards minimum requirements or those related to progress toward sustainable
production and trade. Rigidity would act more as an instrument of exclusion, by imposing greater costs than
those already faced in a crisis context. Yet minimum criteria will be necessary, associated with initiatives such
as ICO Resolution 407 regarding quality parameters, aiming toward creation of value in consumer perception.
Standardization of sustainable coffee quality characteristics is also essential from the buyer’s perspective. This
makes necessary the establishment of standards regarding the delivery of sustainable coffees in the agreed
quantity, quality and timing. Given the specificity of the product and the lack of a futures market that can
buffer supply risks, contract instruments should provide a degree of standardization so as to avoid later
problems of arbitration and high transactions costs in long-distance trade. In the long-run such
standardization could permit sustainable coffees also to be traded in futures markets.
Based on the above principles, the following contract elements are proposed for consideration by
stakeholders, subject to legal review and sectoral impact assessment:
a) Long term contracts between producers and buyers
Contracts should serve as the basis for the creation of long-term relationships between coffee buyers and
sellers. Commitment at least over one full harvest cycle would permit a greater specificity of the quality of
products and processes, so as to ensure availability of coffees adequate to suit market demand and specialized
blends. For growers too, this will ensure a greater capacity to plan and obtain production financing as well as
secure access to market channels for sustainable coffee. Long term contracts act as a basis to initiate this
relationship, since over time reduced transactions costs, building mutual trust and economies of learning can
create value and serve as the bases for continuity in trade relationships.
b) Price differentials for sustainable coffee, associated with a point system
Measuring sustainability in coffee production implies the need to distinguish between use of technologies that
offer greater or lesser environmental quality and protection over downstream uses of natural resources. These
practices constitute additional costs, if only in terms of learning or management associated with these
Sustainable Coffee Trade
The Role of Coffee Contracts
48
practices. But in fact the market penalizes these more sustainable producers since the socio-environmental
costs associated with conventional practices are not internalized in producer prices.42
The costs of conversion and their respective benefits suggest the need to find means to internalize these
costs.43 One means to do so is that of defining price differentials under contract, following a point system
similar to that used for gauging product quality, thus serving as a means to motivate production system
improvement. It must be remembered however, that any such system would likely require some form of third
party validation to maintain effectiveness and credibility.
c) Preferred supplier status for sustainable coffee growers
Preferred supplier status may be incorporated in mainstream contracts, imputing social responsibility on firms
that opt to include sustainable coffee growers in their portfolio of suppliers. Preferential treatment may vary,
such as in the case of Starbucks,’ according to a point system associated with level of socio-environmental
sustainability, while observing quality criteria common in standard contracts. Preferential purchase relations
allow a measure of flexibility to adapt production processes to achieve the stipulated levels over time.
d) Pre-harvest payment or credit for growers
As a perennial crop subject to biennial variation in productivity, coffee growing represents a long-term risk
prone investment. The grower must confront a long waiting period before reaping returns from new planting.
Most producing countries lack adequate credit infrastructure. Insufficient resources and poor timing in release
of funds, high costs of working capital, lack of real guarantees (other than the land itself) and the predatory
actions of unscrupulous middlemen all add risk to taking credit.
Sustainable coffee contracts can be associated with a number of credit options to cushion production risk:
a) pre-financing of a proportional value of the contract, paid upon product delivery;
b) using the contract as a loan guarantee, providing access to differentiated credit terms in domestic
markets; 44
c) access to international financing obtained through multilateral channels and directed toward
sustainable coffee production.
e) Buyers’ assistance toward certification costs
Because coffee characteristics are not differentiated by the way the product was produced, third party auditing
and/or certification is a virtual pre-requisite to linking contractual benefits to non-product related PPMs. This
will require that stakeholders agree on a minimum set of easily verified objective indicators that will permit
efficient and low cost certification, preferably engaging national accredited certifiers and local inspectors.
The current economic crisis in the coffee market and low grower capitalization, would suggest that most
certification costs be paid at the outset by buyers at the moment they enter into a pre-harvest credit
agreement with growers. Alternatively, buyers could contribute to a general fund for sustainable coffee
production, which would manage the process. To reduce the costs of such a scheme, producing nations and
certifier groups could contribute toward the creation of the necessary accreditation infrastructure, and furnish
logistic support.
42 This refers both to cases in which producers rely on high input levels to achieve greater productivity and in those in
which costly inputs are substituted by natural resource exploitation beyond sustainable levels, whose opportunity costs
are not reflected in product prices (Karp, 1994).
43 In the long run adoption of sustainable production practices may become less onerous (depending on the production
system and region under consideration). This is true because there may be economies in conservation, when a certain
number of producers in a given region adopt similar approaches, as well as to thresholds in natural systems, in which a
modest improvement may provide substantial biophysical benefits to local ecosystems and producer communities at low
cost.
44 For example, in Brazil there exists an export advance scheme (ACC) in which the exporter can receive funds against
the value of a sale contract at concessionary interest rates.
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The Role of Coffee Contracts
49
f) Improving traceability and transparency along the supply chain
Traceability of product origin and of production processes, as well as transparency with respect to the
formation of prices and marketing margins, are considered desirable features for a sustainable contract
regime. Traceability is linked with product certification, for the chain of custody of coffee produced in
sustainable production systems should assure that it is not adulterated with non-sustainable coffees, creating
confidence in brand representations to that effect to the consumer.
Transparency along the production and trade chain will provide information that may permit producers,
buyers and consumers to assess the extent to which international exchange relations promote social equity,
one of the three pillars of sustainability. Such transparency can also enable monitoring of price differentials
for sustainably produced coffees.
g) Product quality standards consistent with ICO Resolution 407
Sustainable coffee contracts should be based on current standards of classification and quality
(product/origin related) as traditionally defined by the market. The ICO proposal for a minimum quality
standard for coffee for the international market would serve as a basic reference within this framework. To
this would be added elements that would differentiate the product as to attributes of the production process,
long-term agreements, supplier preference and so on.
h) Producer commitment to environmentally sound practices
Commitment to environmentally sound production practices is one of the cornerstones of the “S” contract
scheme. However, it would be counterproductive to impose a series of complex norms, difficult to adopt
from the outset of such a scheme, as this would create barriers to entry and limit the prospects for
mainstreaming sustainability. It would therefore be prudent to establish initial minimum standards based on a
consensus among stakeholders. These would serve as the basis for defining criteria and norms for
certification.
Further studies of adaptability, impacts and associated costs among different producer nations and among
production organizations, would allow specific norms to be calibrated so as to better respond to mainstream
market demands as time goes by.
i) Commitment to national labour laws and progressive adaptation of ILO rules
Stakeholders who responded to our survey were fairly unanimous that adherence to labour laws should
represent a core aspect of sustainable coffee contracts. However, there is considerable variability among
national labour codes with respect to salaries, benefits, safety in the workplace, remuneration of women’s
work, child labour, unionization, labour rights, etc. Given such variability, the International Labour
Organization (ILO) has established codes that have been increasingly treated as universal.45 Nevertheless,
total exclusion of child labour, for example, may not be acceptable from the perspective of rural households.
It could be more important to ensure that children be enabled access to quality education but that they also
be free to assist their families at harvest time.
In any case, these conditions cannot be resolved by coffee contracts or by the price producers receive for
their product, but rather by the presence of adequate national legal protections and social programmes that
45
The ILO Labour Codes, adopted in as many as 185 distinct United Nations Conventions
(http://www.ilo.org/ilolex/english/convdisp1.htm), have been consolidated by the business-oriented Ethical Trade
Initiative (ETI - http://www.ethicaltrade.org/pub/publications/basecode/en/index.shtml) into nine “Base Code”
criteria, as follows: (i) Employment is freely chosen; (ii) Freedom of association and the right to collective bargaining is
respected; (iii) Working conditions are safe and hygienic; (iv) Child labour shall not be used; (v) Living wages are
paid; (vi) Working hours are not excessive; (vii) No discrimination is practiced; (viii) Regular employment is
provided; (ix) No harsh or inhumane treatment is allowed
Sustainable Coffee Trade
The Role of Coffee Contracts
50
respond to these issues. Sustainable coffee contract provisions should include observance of national labour
codes and provide for compliance with ILO codes as a requirement demonstrating adequate progress toward
sustainability. These concerns should be resolved through establishment of a relevant standards-setting body
that can resolve competing views on this theme.
j) Delivery guarantees linked to production variation and credit
Coffee production is exposed as much to risk from price variation as it is from natural and managerial
processes affecting productivity. Even with long-term contracts assuring sustainable supply from collective
producer organizations, the buyer is not always assured delivery according to the agreed parameters of
quantity, quality and timing. This can occur as a result of the previously mentioned risks as well as from
organizational problems among producers, the fidelity of their associates to collective contracts, as well as by
opportunistic response to better price offers from intermediaries. Over time contract clauses would need to
ensure adequate protection for buyers, possibly through the development of improved legal mechanisms or
credit guarantees.
Toward Implementation of a Sustainable Coffee Contract Scheme
To implement a contract scheme for sustainable coffees would require a number of preparatory activities as
well as support infrastructure. Most importantly, it would require the involvement of all stakeholders in the
production and trade chain in negotiations to define contract provisions and put them to test in practise.
Before going any further, it will be necessary to create the preconditions for such contracts to function, based
on clear, recognized definitions, standards, criteria and negotiated solutions. Necessary actions in this regard
should be prioritised within the short- and medium-term. Short-term actions could be accomplished within a
1-2 year period, while medium-term actions would require a longer time frame.
In the short-term, negotiations should be initiated to define the bases for these contracts, using available
information and rapid appraisals to address uncertainty. Provisional establishment of “S” contracts would
follow, providing an opportunity to test the mechanism on a trial basis in a variety of contexts. The feedback
from these initial experiences could then be complemented by more detailed studies, which would provide
results in the medium-term, to allow adjustment in contract provisions for longer-term adjustment. Table 9
below lists the principal stages in this process, and suggests a possible order of implementation. Further
details on the proposed actions are provided below.
Table 9: Actions and time frame for implementing sustainable coffee contracts
SHORTActions to implement sustainable coffee contract scheme
TERM
Invite negotiating partners to the table
MEDIUM
-TERM
IMMEDIATE
Achieve consensus on definition of sustainable production practices
Define parameters for price differentials (sustainability gradients)
Define long-term contract provisions and pre-harvest financing
Priority for purchase of sustainable coffees
Establish basis for third-party verification
Evaluate potential for a global reference label
Create mechanisms for traceability and transparency
Design and implement product delivery and credit guarantees
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The Role of Coffee Contracts
51
a) Who is at the table in sustainable coffee contract negotiations?
In an initial phase of negotiations, it would be appropriate to limit the scale and number of inquiries in
producing countries by focusing on associative coffee enterprises actually or capable of becoming engaged in
international trade, large estate farmers, exporters, agents and trading companies. On the buyers’ end,
importers, roasters, distributors and consumer organizations should be included. The Sustainable Commodity
Initiative, which already includes a lively cross-section of the industry, would be a logical starting point.
b) Consensus on “sustainable coffee production and trade”
The need to define what is meant by sustainable coffee production is one of the principal challenges that
confront the sector. Even when we agree that sustainability should respond to economic, social and
environmental dimensions, there is a tendency to give different weights to each of these parameters in
practice. Coffee production itself occurs under a tremendous range of conditions, with variable productivities
of the factors of production placed at its disposal.
Sustainability is perceived as a process rather than a condition that once achieved is then possible to maintain
under stable conditions. Nevertheless, the complexity of adapting coffee contracts to a range of processoriented conditions would be contrary to the simplicity we are seeking in establishing a mainstream system.
The existing profusion of coffee labels adds to the consumer’s confusion at the moment of purchase, about
what kind of product she is acquiring, making it difficult to affirm that her act represents an effective source
of support to sustainable coffee growers. This problem also allows free riders to profit and/or gain brand
reputation from insufficiently proven assertions about the product they are promoting.
A global sustainable coffee label accredited by an appropriate independent multilateral organization could
help to arrest this confusion among consumers and serve as a justification for price differentials at the point
of sale. Roasters and distributors would also be able to benefit by adding a sustainable quality feature to
coffee brands they market. Such a scheme could surely recognize regional distinctions in coffee quality and
origin, but offer a unified sustainability assessment.
c) Sustainability gradation for price differentials
To establish criteria for sustainable coffee contracts requires first of all that minimum criteria associated with
socio-environmental factors be defined on a consensual basis. Once these are defined, it will probably be
necessary to negotiate a point scale for these criteria that may be associated with price differentials. Most
social and environmental attributes may be scaled according to Yes/No criteria: producers either do or do
not use such and such practice, but there are some that may require more subtle gradation (producers
practice, commit themselves to adopt over x years, or do not practice). The respective weights accorded any
given attribute and its gradation would need to be determined, associated with cost, difficulty of adoption,
and off-site versus productivity effects among other factors.
The critical issue in such negotiation is that of identifying what incentive is needed in the price structure to
motivate producers in more sustainable direction. A fundamental criterion for this is that the price received
by producers adequately remunerates the factors of production employed.
d) Long-term contract provisions provide pre-harvest financing
Sustainable coffee production should assure that the term of grower-buyer relations permit a minimum of
planning in response to the perennial nature of the crop. Long-term contracts will necessitate establishment
of legal criteria and associated guarantees. The minimum duration of a contract should be one full harvest
cycle, being extensible for longer periods, depending upon the agreement between buyers and sellers.
In consideration for pre-harvest production costs and credit restrictions in producing countries, the
possibility of pre-financing could be explored with buyers, donors and/or multilateral finance agencies.
Sustainable Coffee Trade
The Role of Coffee Contracts
52
Producers may more easily access domestic financing if long-term contracts stipulate a reference price level as
a contract guarantee.
e) Prioritize sustainable coffee buying
It would appear in the interests of sectoral representatives to give some priority in initial stages of defining the
contract scheme, to purchasing coffees with sustainable characteristics as a means of signalling interest and
expanding this segment. Preferred supplier relationships could be established at the outset, combining both
the potential for long-term supply agreements and sustainable production practices.
f) Third-party verification systems
Quality characteristics distinguished in standard coffee contracts cannot be used to discriminate sustainably
grown coffees, as these do not have distinguishing features in the product, but rather must be discriminated
as to production system of origin. To confidently offer a label of sustainable source requires independent
certification procedures. Such procedures should also include chain-of-custody measures or traceability to
ensure that sustainably labelled coffees arrive at the point of consumption free of adulteration.
Certifiers and certification criteria must be accredited according to internationally recognized norms, and
must be acceptable to both parties in a given contract. To ensure traceability, certifiers should also be
associated with similar agencies in the destination countries. In the case of sustainable coffee certification, a
number of recognized independent certifiers for both organic, fair-trade, shade-grown coffees etc. already
exist. For application to mainstream markets, it would be necessary to find ways to reduce transactions costs,
and achieve economies of scale in verification methods, perhaps by using a sample-based inspection system
on producers contributing to a given lot for a producer cooperative. NGOs and governmental agencies might
be called upon to assist in certification processes in coffee growing areas.
h) Transparency and traceability along the value chain
The following concerns should be addressed in contract provisions, designating those responsible at each
stage of the value chain:
a) Price differentials should be transmitted through to the base of the chain, benefiting producers and
their associations;
b) Downstream agents in the chain should seek means to reduce transactions costs, and become longterm partners in the supply chain;
c) Maintenance of the integrity and originality of each lot sold as sustainable coffee, avoiding mixture
with conventional raw materials;
d) Third party certifiers or an equivalent mechanism should monitor the chain-of-custody.
i) Delivery and credit guarantees in long-term contracts
To avert or cushion against losses due to uncontrollable factors affecting harvest variability, an insurance and
credit guarantee scheme associated with long-term sustainable coffee contracts may be necessary. Producing
countries would be responsible for developing the legal infrastructure that would enable such risks to be
covered, as well as to offer the necessary guarantees for buyer-seller transactions. An alternative or
complementary system could be developed through a common fund administered by a multilateral coffee
trade body, financed by a percentage of coffee purchases.
Impacts and Research Requirements for Sustainable Coffee Contracts
To conclude this initial discussion of priorities for implementation of a sustainable coffee
contract regime, we suggest several lines of necessary further investigation that would support
such a regime in practice. These include the need to assess production costs associated with
internalization of socio-environmental attributes, as well as the extent to which consumers are
willing to pay more for coffees certified to possess such attributes. Such studies will permit a
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The Role of Coffee Contracts
53
better assessment of the potential for market clearing for sustainable coffees, if markets can be
made more efficient and competitive. Finally, we suggest the need to investigate the prospects
for establishing sustainability as a criterion for futures contracts for coffee as a hedge against risk
for both buyers and sellers.
a) Assess costs of coffee production associated with sustainability
Coffee production and maintenance costs vary considerably among producing countries and regions, as well
as between principal cultivars and processing techniques (wet/dry). These costs, where registered, are
assessed according to different accounting systems, and include different elements. This diversity becomes
even more complex when we add to conventional practices those features that make coffee production
sustainable. We therefore propose the realization of an ample comparative study of production costs, seeking
to identify the additional costs associated with sustainability attributes, as a basis for defending price
differentials and establishing benchmark conditions for investment in production system improvement and
enhancement. At a more aggregate level, it will be important to detect the effect of sustainable coffee supplies
on global coffee production and trade. Such an assessment could be made using econometric simulation
techniques, within a broader integrated supply chain analysis. But the global impact of a contract scheme
would only be possible to evaluate once such contracts had been introduced and become part of the
mainstream supply system.
b) Assess willingness to pay of consumers for sustainable coffees
Supply of sustainably produced coffees, depending on the price differential to the consumer, will affect
product demand and the potential for market growth. Experience with organic produce suggests that initial
price differentials may be high, but as more and more organic growers enter the market, these margins decline
due to competition, leading to a more homogeneous final consumer price. Differential attributes become a
factor in market segmentation, but not necessarily restrict demand to narrow niches.
To assure successful market penetration for sustainably produced coffees, major distributors and purveyors
will need to engage in promotional and educative campaigns with the aim of informing the greatest number
possible of consumers regarding the socio-environmental benefits derived from purchasing these products.
But propaganda and promotion should be matched with evaluation of consumers’ willingness to pay for
sustainable coffees vis-à-vis conventional brands.
c) Evaluate the potential for futures markets for sustainable coffees
As the market for sustainable coffees expands, and the attributes of such coffees are standardized in longterm contract provisions, the potential for establishment of “S” contract futures and options markets
becomes more tangible. The hedge offered by futures trading could eliminate part of the risk for both buyers
and sellers arising from price fluctuations in physical coffee transactions (PTBF). It could also overcome
eventual supply deficits arising either from uncontrollable risks or opportunism on the part of suppliers. An
evaluation and trial of these potential hedge opportunities would necessarily occur further down the road,
once sustainable coffee contracts had been fully institutionalized at a physical level.
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The Role of Coffee Contracts
54
Appendix II:
Revised Questionnaire: Sustainable Coffee Contracts
Based on the SCI workshop: “Sustainability in the Coffee Sector: Exploring Opportunities for International
Cooperation Towards an Integrated Approach” (held in Geneva on Feb. 17-18, 2003), follow-up interchange
among participants defined high-priority options for research, impact assessment and action. Among these,
participants identified the importance of issues related to contractual terms such as price, length of term, risk
distribution and other tied arrangements.
Please provide us with some information about yourself:
1)
What segment of the supply chain or stakeholder group do you represent? (e.g., producer
association, broker, distributor, roaster, etc.) __________________________
2)
Did you participate in the initial Geneva seminar?
3)
Do you think there is a role for the development of a system of “S-contracts” (sustainable
coffee contracts) for the coffee sector which could serve as a reference in much the same way
as existing model contracts for the coffee sector?
Yes ( ) No ( )
a. Yes ( ) No ( )
b. Please explain your response:
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The Role of Coffee Contracts
55
Feasibility for inclusion within
Sustainable Contract System
4) If a model S-contract were developed what types of
clauses or themes do you think would be most
HIGH
appropriate for coverage in such a contract:
MEDIUM
LOW
NONE
a
Main issues/restrictions/opportunities for
consideration in adopting these clauses or
themes:
• Buyer commitment to pay minimum fixed prices based on
social, environmental and economic costs of production to
producers who meet specified sustainable production practices
• Buyer commitment to pay a premium based on costs
associated with implementing specified sustainable production
practices
• Buyer commitment to offer preferred supplier status to
producers meeting specified sustainable production practices
• Buyer commitment to enter into long-term contracts with
producers (implementing specified sustainable production
practices)
• Buyer commitment to provide essential market
information to producers (implementing sustainable
production practices)
• Buyer commitment to provide pre-payment or credit to
producers (implementing sustainable production practices)
• Producer commitment to environmentally sound
management practices (e.g., integrated pest management etc.)
• Producer commitment to compliance with national labour
laws and ILO core labour standards
Others: ______________________________________
____________________________________________
Please elaborate on your response to question 4, above:
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5. Considering the need to improve sustainability in the coffee value chain, please indicate the relative contribution needed by different actors in the
supply chain to support coffee contracts in the following contexts:
5.1 Who should bear additional costs associated with ( ) Producers: ________%
( ) Producing country government _______%
conversion to sustainable productions systems?
( ) Importers ________%
( ) Consumers ________%
( ) Consumer country government ________%
( ) Multilateral trade organization ________%
( ) Other. Who?___________ and________%
5.2 Who should bear additional costs associated with ( ) Producers: ________%
validation mechanisms (e.g., certification…) and with the ( ) Producing country government _______%
maintenance of sustainable coffee production systems?
( ) Importers ________%
( ) Consumers ________%
( ) Consumer country government ________%
( ) Multilateral trade organization ________%
( ) Other. Who?___________ and________%
Remarks:
If you can spare us the time, we would very much appreciate if you could please detail your responses, in the below spaces:
A) Why would certain sustainability principles be more or less difficult to implement through a contract system?
B) What other tools and instruments (e.g., certification infrastructure and consumer confidence in specific labels) are necessary to
achieve such objectives?
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Appendix III: Bibliography
Agenda 21 Brasileira. 1997. Agricultura sustentável. Brasília: Ministry of the Environment.
Bates, R. 1997. Open-Economy Politics: The Political Economy of the World Coffee Trade. Princeton: Princeton
University Press.
Bowen, B. 2001. Let’s go fair. In: Fairtrade Yearbook. London, EFTA.
Comércio Exterior. 2001. Informe BB. Edição Especial. Brasília: Banco do Brasil.
CUT / CONTAG / OXFAM. 2002. Café do Brazil: o sabor amargo da crise. Brasília.EDE Consulting. 2001.
“Coffee and Environment: Study of Environmental Issues Relating to the Coffee Chain Within a Context
of Trade Liberalization Through a Life-cycle Approach.” ICO.
Fairtrade Labelling Organizations International (FLO). 2003. Fairtrade standards for coffee; FLO producer
contract; Generic fairtrade standards for hired labour. (see Web site listing in Annex 2).
Faminow, M.D. and Rodriguez, E.A. 2001. Bio-diversity of Flora and Fauna in Shaded Coffee Systems. CEC.
Giovannucci, D. 2003. The State of Sustainable Coffee: A survey of twelve major markets. Philadelphia, PA.
(http://www.iisd.org/publications/publication.asp?pno=579).
Goulet, D. 1997. Desenvolvimento autêntico: fazendo-o sustentável. In: C. Cavalcanti (ed.) Meio ambiente,
desenvolvimento sustentável e políticas públicas. São Paulo: Cortez.
Halweil, B. 2002. “Why Your Daily Fix Can Fix More than Your Head.” World Watch Vol. 15. No.3
May/June 2002.
Sachs, I. 2000. Caminhos para o desenvolvimento sustentável. Rio de Janeiro: Garamond.
ICO. 2002. The global coffee crisis: a threat to sustainable development. International Coffee Organization,
London.
ITC (International Trade Centre). 2002. Coffee; an exporter’s guide. Geneva, UNCTAD/WTO.
Kennedy. 1976. Form and Substance in Private Law Adjudication 89 Harv. L. Rev. 1685.
Kotler, P. 1999. Kotler on Marketing: how to create, win and dominate markets. New York: The Free Press.
Krier, J-M. 2001. Fair Trade in Europe 2001: Facts and Figures on the Fair Trade sector in 18 European countries.
EFTA.
May, P. 1994. Environmental factors in coffee and cocoa production in Brazil. Geneva, UNCTAD.
Morisette, J. 1997. Unfair trade? empirical evidence in world commodity markets over the past 25 years.
Unpublished paper. The World Bank.
OXFAM. 2002. Europe and the coffee crisis: a call for action. London, Oxfam.
Ponciano, N.J.; Rezende, A.M.; Campos, A.C. 1995. A competitividade do café brasileiro no mercado
internacional. Congresso Brasileiro de Economia Rural, 33, Curitiba. Anais...Brasília: SOBER.
Ponte, S. 2001. The ‘Late Revolution’? Winners and Losers in the Restructuring of the Global Coffee Marketing Chain.
CDR Working Paper 01.3. Copenhagen: Centre for Development Research.
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The Role of Coffee Contracts
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Potts, J. 2003. Policy Tools for Sustainability: Building the Market for Fair Trade Coffee (Executive Summary).
Equiterre.
Rice, R. & Ward, J. 1996. Coffee, conservation, and commerce in the western hemisphere; how individuals and institutions
can promote ecologically sound farming and forest management in northern Latin America. Washington, D.C.,
Smithsonian Migratory Bird Center/Natural Resources Defense Council.
Rice, R., A.M. Harris & J. McLean (eds.) 1994. Proceedings of the 1st Sustainable Coffee Congress. Washington,
D.C., Smithsonian Migratory Bird Center.
Seudieu, D.O. 1993. L’impact de la production et de la yransformation du café, du cacao et du riz sur
l’environment en cote d’ivoire. UNCTAD/COM/24, Geneva.
Talbot, J.M. 1997. Where does your coffee dollar go?: the division of income and surplus along the coffee
commodity chain. Studies in Comparative International Development Spring, 32(1): 56-91.
UNCTAD. 1996. New types of Non-trade Related Participation in Commodity Futures Markets.
UNCTAD/COM/83. Geneva.
UNCTAD. 2003. Why develop an international knowledge management portal on commodity related-information?
http://r0.unctad.org/infocomm.
Williamson, O.E 1985. The economic institutions of Capitalism. New York: Collier-Macmillan Publishers.
World Commission on Environment and Development (WCED). 1987. Our Common Future.
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Appendix IV: Web Sites for Further Information Regarding
Contracts Reviewed
“C” and “Mini-C” contracts for Arabica futures – New York Board of Trade (NYBOT) -http://www.nybot.com
LIFFE Exchange Contract nº 406 Robusta Coffee Futures Contract (A) Contract Terms (RCFC/A) and
(B) Administrative Procedures (RCFC/B) - http://www.liffe.com/trade/specs/406coffee.pdf
ECF 2002 European Coffee Contract: http://www.ecfcoffee.org/Downloads/Webiste%20Contracts%20ECC%202002.pdf
Green Coffee Association Contract – Physical coffee: http://www.green-coffeeassoc.org/images/finaldraft402.pdf
Bolsa de Mercadorias e Futuros – B&MF (Brazil): http://www.bmf.com.br/
Contract for Availability of Arabica:
http://www.bmf.com.br/pages/Contratos1/ContratosAgroCafeDisponivel1.stm
Futures Contract for Arabica:
http://www.bmf.com.br/pages/Contratos1/pdf/Agropecuarios/Cafe_arabica_futuro_24-04.pdf
Altered by OC 069/2003-DG, 30/6/2003:
http://www.bmf.com.br/pages/informes1/junho_2003/OC069-2003.pdf
Contract for Option to Buy on Futures of Arabica:
http://www.bmf.com.br/pages/Contratos1/pdf/Agropecuarios/Cafeserialcompra.pdf
Contract for Option to Sell on Futures of Arabica:
http://www.bmf.com.br/pages/Contratos1/pdf/Agropecuarios/Cafeserialvenda.pdf
Futures Contract for Robusta Conillon:
http://www.bmf.com.br/pages/Contratos1/pdf/Agropecuarios/CafeConillonFuturo.pdf
Contract for Option to Buy Futures of Robusta Conillon:
http://www.bmf.com.br/pages/Contratos1/pdf/Agropecuarios/CafeConillonCompra.pdf
Contract for Option to Sell Futures of Robusta Conillon:
http://www.bmf.com.br/pages/Contratos1/pdf/Agropecuarios/CafeConillonVenda.pdf
FLO small farm organization coffee standards http://www.fairtrade.net/pdf/sp/english/coffee%20.pdf
FLO generic standards for hired labour: http://www.fairtrade.net/pdf/hl/english/generic.pdf
Starbucks Preferred Supplier Green Coffee Purchasing Pilot Programme
http://www.celb.org/pressreleases/PreferredSupplier.pdf
Utz Kapeh Code of Conduct http://www.utzkapeh.org/Utzkapeh/ukwebsite.nsf/portal?Openframeset
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