Reducing Inequalities in the Coffee Value Chain: Threats and Opportunities for Small-Scale Farmers in Central America and East Africa

Abstract

The global trade of agricultural commodities has increased in the last decades, creating economic growth opportunities in many areas of the world. However, for smallholder farmers producing commodities traded in global markets, there is mixed evidence of a positive economic impact, particularly in coffee production. Rural incomes in Central America have remained stagnated and for smallholder coffee producers in East Africa, farm gate prices often do not cover production costs. Poverty and food insecurity are issues impeding development in the region. Yet empirical evidence points at global value chains as a driver for income growth and development in emerging and developing countries. As pointed out in The State of Agricultural Commodity Market 2020 global trade and inclusive, well-functioning markets with lower trade barriers, opportunities for technological upgrading, and access to markets can spur sustainable development. In this chapter, a comparative analysis of the inequalities and factors hindering the economic growth of coffee farmers in Central America and East Africa will be provided.

1. Introduction

Coffee is one of the world’s most traded agricultural commodities. Both in terms of volume and value, it is listed as a top traded commodity, along with corn, wheat, soybeans, and sugar. The global coffee market was estimated to reach a value of US$ 114.1 billion in 2020 [1, 2]. Coffee is produced in the coffee-belt, a region 25–30° north and south of the Equator. About 40 countries in this tropical region grow most of the coffee traded in the world and estimates place 12.5 million farmers, predominantly smallholder farmers, as the main producers of coffee [3] In addition to production, a significant labor force is employed in the coffee sector worldwide. An estimated 125 million people worldwide work directly in the coffee value chain [4]. Most of the coffee production systems are small scale, and most of the coffee is cultivated in plots of land of 5 ha or less [3]. Thus, smallholder farmers are responsible for most of the global coffee production [4]. Large coffee estates of over 50 ha are rather the exception and are found mostly in Central and South America.

Coffee certainly is one of the world’s most beloved beverages, and it is consumed across all geographic regions. Demand is also increasing, driving higher production. From 2008 to 2020, production increased from 8.5 million tonnes to 10.7 million tonnes of coffee beans [5]. Brazil, Vietnam, and Colombia lead the world production of coffee, accounting for 62% of the annual total production [6]. Other producing countries in the coffee bean belt include Central American countries like Honduras, Guatemala, Costa Rica, El Salvador, and Nicaragua. In East Africa, main producing countries include Kenya, Ethiopia, Tanzania, Uganda, and Rwanda. Both of these geographic areas in the bean belt are characterized by having ideal conditions for coffee cultivation, including high-altitude areas, temperatures somewhere between 21° and 29°C and good soils, Arabica coffee plants thrive in these conditions. For these producing countries, coffee is of major economic importance, as the sector is an important source of their export revenue, which can be significant. In Ethiopia, for example, coffee accounts for more than a quarter of the export earnings and in Burundi, coffee represents at least 20% of the national export revenue. In Uganda and Honduras, the coffee export revenue accounts for about 10% of the export earnings [7].

2. Global trends

Despite the economic importance of coffee, most small-scale farmers in Central America and East Africa face similar conditions of poverty. Covering production costs is challenging, and earning a decent income as coffee producers is difficult. The coffee value chain is complex, and multiple interactions take place across several geographical locations, so farmers have no decision power when it comes to issues such as the global market price of green coffee. Although there are some opportunities for economic growth, these are found in certain sectors like specialty, certified coffee but elude most conventional farmers. For the most part of history, coffee has been produced and traded as an undifferentiated commodity. Large companies which sold household coffee brands would buy bulk coffee, and there was little traceability, often not even the country of origin was known, as different lots coming from all over the world would be mixed. Thus, prices would vary according to species (Arabica or Robusta), but the origin was largely unknown by the end consumer.

Another reason for the disparities in the profit distribution have to do with the governance of the coffee value chain and the complexity of interactions, where numerous buyers and sellers transform coffee at different points and over various geographic areas. Farmers play a limited role in the transformation of coffee. They harvest the coffee, then bring it to a collecting and processing point. Not all farmers dry the coffee themselves. In Central America, these mills where coffee is first dried are known as “beneficios” or in East Africa, “wet mills.” The main activity is to remove the pulp, wash, and dry the coffee. These facilities are usually located in convenient locations for further transformation, and that includes rivers and towns so the coffee can be transported easily from these points. Not all coffee growers are in the proximity of these stations, and some might face difficulties to bring the coffee to these mills. In Central America, some middlemen collect the coffee and bring the freshly picked coffee cherries to the “beneficios.” Once the coffee is received at the collection points or the beneficios or wet mills, farmers receive their payment for the coffee sold. Already at this point, traceability may be an issue, if there is no system in place to separate coffee by lots and location. Once transported to the beneficio and processed, the coffee beans from different regions are blended. In some cases, the mixing of lots might promote a uniform quality of coffee, combining the characteristics and flavor profiles of the different regions [8]. From there, the coffee is taken in charge by an exporter, who usually bring the coffee to another location to either further process the coffee or store it for export. In Central America, the export process is done through larger coffee importers or through the large coffee producer associations, which have established commercial links to large international coffee traders. These two parties take care of the transportation of the coffee from the beneficio or mills to the destination country, sometimes even to the buying roasteries. The roasting is usually done in the country of arrival, and the coffee is sold to local buyers, retailers, hotels, restaurants, or cafes, which handle of the distribution to the final consumers.

Global coffee consumption has steadily increased in the last decades, but there are variations across different regions. While coffee consumption has increased in Europe, North and South America, and Asia, it had remained stagnant in Central America and decreased in Africa. Industrialized counties experienced great changes in consumption patterns of coffee. Up until the 1980s, coffee was mainly consumed as a plain black cup of coffee, and there was little differentiation in origins, roasting or flavors. This has now changed and a multitude of forms, flavors, and origins, stemming from the coffee shop culture dramatically evolved since them. In parallel to the changes in consumption, ICO [9] reported an increase of 2% annually since 1990. Prices per cup of coffee have also increased, and consumers pay much more per cup of coffee than they did in 1990 [10]. Home consumption of coffee also evolved and so did the market, which now offers a wide range of coffee machines, brewers, presses, kettles, pots, and pour-over glassware which are much more sophisticated than the simple percolator commonly found in homes in the 1980s. The changes in coffee consumption patterns and the new trends for more differentiated coffee did not, however, lead to an increase of farm gate prices paid to the coffee farmers. Farmers in Central America have faced severe crises such as the coffee crisis of 2001 which severely impacted the region. East Africa experienced a similar stagnation during this time (Figures 1 and 2).

Figure 1.

Prices paid to producers in central American countries 1990–2019 (Source: [6]).

Figure 2.

Prices paid to producers in Ethiopia and Uganda 1990–2019 (Source: [6]).

The consequences of low farm gate prices are a huge burden for farmers, particularly small-scale farmers, because as farm incomes decline, livelihoods are increasingly at risk. Such low incomes make it impossible for small-scale farmers to invest in the modernization of farms and even less in good agricultural practices which may lead to a more sustainable coffee production [11]. By and large, small-scale farmers in Central America and East Africa are finding it impossible to buy the very basic inputs to sustain the current coffee yields. In instances where inputs such as fertilizers are not subsidized, farmers have limited opportunities to pay for these inputs, especially with the current increased prices of fertilizers. In the last three decades, the average prices paid to the producers have fluctuated and in the 2010s, higher prices were paid to producers (Figures 1 and 2). However, prices have since dropped, making it difficult for the small-scale farmers in Central America and East Africa to make a profit in coffee production, especially since the 2021/2022 season, where the prices for fertilizers increased by up to 80% [12]. At the farm level, these increases in the prices of fertilizers mean that production costs will barely be covered if the coffee prices do not increase.

3. The coffee value chain in Central America

Coffee is one of the top agricultural sectors in Central America, and in El Salvador, Honduras, and Nicaragua, it is the main agricultural export and second largest agricultural export in Guatemala and Costa Rica. In all countries, coffee is the main source of rural employment. An estimated 1.2 million people are directly employed in the coffee sector in Central America [9]. Although large estates, usually family owned, do exist in Central America, most of the production takes place in small-scale family farms. In rural areas where coffee is cultivated, poverty still prevails [13, 14, 15]. Farm gate prices are low and part of the problem of low income has to do with one main payment made to producers during the harvest season only. Fluctuating international market price patterns negatively impact farmers. In 2018, market prices dropped 30% below the average, which meant that farmers were not able to cover production costs. Such low incomes have long-lasting consequences which keep farmers poor. They are unable to make proper investments to boost productivity or implement sustainable production practices. Coffee farmers in this region are susceptible to climate change risks, which will likely impact their livelihood and in general, the future of coffee production [16].

In terms of climate change impact, the region, which in part lies in the dry corridor of Central America, is one of the most affected areas by climate change [17]. Rising global temperatures can affect coffee yields [9]. Higher temperatures are severe challenge for Arabica coffee production. To produce coffee, specific ecological and meteorological conditions are necessary. Temperature should ideally range between 15 and 23°C. In 2019, hydric stress severely affected fruit formation in coffee farms in some areas of Central America, thus lowering yields [18]. The already established high-altitude coffee areas will no longer find the ecological conditions needed to maintain that quality, thus pushing the agricultural frontier to higher-altitude regions. If coffee production expands to higher-altitude areas, protected forest areas will be affected. In the lowlands where coffee is also cultivated, higher temperatures and dry spells will likely result in lower yields.

In addition to increasing temperatures and droughts, sever climate events such as hurricanes have also significantly impacted smallholder coffee producers. Extreme impacts such as tropical storms and hurricanes with strong winds and torrential rainfall destroy coffee plantations. In November 2020, when the coffee harvest was about to start in the region, Hurricanes Eta and Iota, two category 5 and 4 hurricanes unprecedently hit the area in the lapse of 2 weeks. Coffee farms in Nicaragua, Honduras, and Guatemala were destroyed, decreasing the yields for the season. The hurricanes also caused severe infrastructure damage, and roads, bridges, and farm infrastructure, disrupting the harvest, processing, and transportation of coffee.

In Central America, coffee provides employment to the rural population. Climate change impacts are also a factor contributing to the outmigration of people from the region [19, 20]. Because coffee employs workers permanently but also temporarily, these workers are more prone to find employment alternatives elsewhere and some people abandon the region altogether. Permanent labors are more likely than temporary farmworkers to be formally registered, earn minimum wage, and have some degree of social security coverage, which is required by law SCA [21].

4. The coffee value chain in East Africa

In East Africa, small-scale farmers play a great role in coffee production. In Ethiopia, up to 70% of the total production is in the hands of smallholder farmers [22] and in countries like Rwanda and Burundi, most producers are small scale. As mentioned previously, farm gate prices are a major concern for farmers, as market prices locally and internationally are low and rarely cover the production costs. Even for farmers in cooperatives this remains a major challenge in the sector. In addition, there are infrastructural challenges affecting farmers. For farmers in remote areas, it is a challenge to bring coffee to collection centers, especially in areas with poor roads and infrastructure. For land-locked countries like Rwanda, Uganda, and Burundi, exporting coffee becomes more challenging, as lories must move the coffee through other countries, either Kenya or Tanzania, before it reaches the port for shipment. Again, the lack of proper roads and infrastructure is a major hurdle.

Market prices and fluctuations in international prices are felt by small-scale farmers in countries that depend highly on coffee exports as a source of income, such as Burundi, Uganda, and Honduras. Low farm gate prices coupled with higher production costs have resulted in losses or unsustainably low earnings [23, 24, 25]. Smallholder farmers lack the experience and knowledge to mitigate the price risks and are unable to cope with market fluctuations.

In East Africa as in Central America, coffee farmers are in the most vulnerable position in the value chain. Low farm gate prices and price volatility affects them severely. The C-price, along with certain factors that lead to great variability, influence farm gate prices in producing countries, and farmers cannot exert any influence or change these prices. Agricultural policies implemented by governments (i.e., coffee funds, subsidies) can make a huge difference in producers’ livelihoods [26], but evidence suggests that paying a living income can improve the situation in the long term [27].

Development agents, NGOs, and other entities are actively promoting the transformation in the sector by advocating for the payment of a living income to farmers, particularly coffee farmers in East Africa. Living Income is the net annual income required for a household in a particular place to afford a decent standard of living for all members of that household. Just like the living wage in the garment sector, the living income discussion is gaining momentum globally among donors, NGOs, and governments. Therefore, living income is a critical issue that needs to be addressed in depth and discussed to find solution. Earning a living income means that the farmer will be able to provide basic but decent food to the household, provide basic decent housing according to the area standards, and provide basic health care and basic education for the children.

East African coffee farmers and their families live well below recognized living income benchmarks. Prices are a major issue affecting farmers, as the long-term nominal price of coffee in the futures market has remained roughly the same for over 40 years, resulting in a significant decrease in farmers’ purchasing power. High population densities in smaller countries like Rwanda and Burundi mean that there is a continuously decreasing farm and plot size. Fragmentation of farm plots result in lower incomes for farmers [28].

5. Promoting sustainability and reducing inequalities in the coffee value chain

Sustainability in the coffee sector should not only be approached from an environmental perspective, but also an economic and social perspective. The farmers’ livelihoods need a stable source of income for proper investments to be made in good agricultural practices which will ensure higher productivity and sustainability in the long run. This is only possible with a fair and stable income which allows the farmers to have the necessary resources to make investments. The discussion around living incomes for farmers in commodities like coffee have the objective to promote a decent standard of living. A decent income allows for social targets such as reducing child labor to decrease. In addition to these economic and social benefits, living incomes allow for environmentally detrimental practices such as deforestation to be reduced, because an economic viability is the catalyst for the sustainability of the entire coffee sector (Coffee Development Report, 2019).

Climate change hotspots and changing climatic conditions will render some coffee-growing regions no longer suitable [29, 30]. Global climate models used to explore three climate scenarios show that highly and moderately suitable Arabica coffee-growing environments around the world will decrease by 50% and 30%, respectively, by 2050 [30]. Central America is one of these areas where coffee production will be affected [31]. Without investment and a secure flow of economic resources in the sector, climate change mitigation strategies are impossible to reach for most small-scale coffee farmers in Central America and East Africa.

Coffee farmers will need to adapt to less predictable growing conditions and more extreme climatic events. Climate resilience requires the right investments at the right time, as coffee cultivation requires long-term planning. Most of today’s production comes from smallholder farmers with fewer resources to cope with shocks, making them more vulnerable to climate change. Some countries have implemented strategies to mitigate climate change effects in their coffee sectors. Important adaptation measures implemented include planting improved coffee varieties or hybrids that have a higher drought tolerance or adopting more sustainable farming practices, like shade-grown coffee to reduce temperatures or mulching to maintain soil moisture [32]. The adoption of voluntary standards and certifications is another sensible strategy for farmers. Most farmers producing certified coffee must adopt good agricultural practices, and in most cases, they are trained by cooperatives, private sector actors, and other entities to comply with the specified practices to maintain the label. Improved practices often result in higher yields, which is beneficial to farmers. Certified farmers are also paid a premium for their coffee, which eases some of the economic pressures most of them face when making farm-level investments [27].

A critical factor to keep in consideration when addressing the farm-level sustainability of coffee farmers is the fact that 75% of the global coffee production is exported to international markets. The total generated value was US$20 billion on average in the period 2015–2020 [3]. Because most coffee is exported as green unprocessed coffee beans, farmers capture less value, while roasters and retailers in importing countries capture the largest share of the value addition. The Coffee Baraometer (2020) estimates that the average green coffee export value accounts for less than 10% of the US$200 to US$250 billion of revenues generated in the coffee retail market. In 2020, coffee prices dropped to 30% below the average price level reported over the past 10 years [11]. A study conducted in 13 countries indicates that coffee producers’ average annual income decreased significantly in 2017–2018 [9]. The proportion of farmers living below the extreme poverty line of US$1.90 per day has increased significantly, and in countries like Nicaragua, by as much as 50%. Such low prices impact farmers, and coffee production is not economically viable for most coffee farmers. For the “typical” small-scale coffee production system in East Arica and Central America with lower possibilities of investment, the impact of low prices is high. For high-productivity countries where the more productive farms remain profitable, these fluctuations in prices have a negative impact, but the situation will never be as grave as it is for the smaller-scale, resource-poor farmers who cannot make the very basic investments. An example of the effect can be explained as follows:

“In 2019, with an average price of US$1.80 per kg of green coffee, a Colombian producer with 4.3 hectares coffee land could only reach a living income with a production of 1.46 metric tons per hectare [33]. Even under a very optimistic scenario with a simultaneous increase in yield and farmgate prices, a producer with a small plot of land would not reach an income level above the poverty line [34]. The development of economically viable coffee production is vital to many countries’ efforts to combat extreme poverty [35]. Although Africa accounts for about 10 percent of global coffee production, these figures understate the importance of coffee production in terms of its contribution to a country’ GDP, rural employment, tax incomes and export earnings. For instance, in Ethiopia and Burundi coffee is the largest single exported product by percentage in 2019” [3].

For coffee production to remain viable in the long term, these inequalities must be addressed. In both Central America and East Africa, smallholder coffee farmers do not have the means to adopt critical measures to mitigate climate change impacts or cope with an international market system which offers them little to no opportunity to have a profitable coffee production system. Sustainability can only be reached by minimizing the inequalities in the sector, and this can only be achieved by channeling more monetary resources to farmers through a transparent and fair pricing system.

6. Conclusion

Coffee is an important agricultural export for countries in Central America and East Africa. It is a sector which provides critical export revenues for the economies of these countries and employment in the rural sector. The numerous challenges smallholder coffee farmers face must be addressed in a coherent way to guarantee the sustainability of coffee as a global value chain. Because the governance structure of this value chain gives producers in developing countries no opportunity to influence or improve a situation such as market price, there only possibility to reduce inequalities and mitigate further risks associated with low incomes is through a combination of public and private sector initiatives to ensure a better distribution of gains from farm to retail. Market-driven initiatives such as sustainable sourcing and the implementation of voluntary sustainability standards can have a better effect if the right public policies and regulatory options are complimentary. Otherwise, a redistributive effect of profits trickling down to farmers is unlikely.

It is imperative to reduce the inequalities in this business for coffee to be sustainable. Better prices paid to farmers can help them cope with climate change impacts which will likely become a more critical issue in Central America and East Africa. Institutional coordination at the country level is important to help coffee farmers adapt and cope with the challenges mentioned in this chapter. Key stakeholders such as research organizations, local government institutions, producer associations, traders, exporters, buyers, and civil society organizations all have a specific role and sphere of action to address the needs in the sector. Through coordinated efforts among different stakeholders in the value chain, necessary changes can be implemented. The adoption of climate change mitigation strategies will only be successful through engagement among all stakeholders because smallholder coffee farmers cannot achieve these goals on their own.