The Coffee Trade Nothing Fair About It

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DEEPER TROUBLES

On my way home from speaking with Carlos, I saw a sign posted by another large Antigua Valley plantation advertising that they were buying local coffee fruit. In addition to growing their own fruit, many plantations buy from local small farmers in order to maximize the benefits of exportation through economies of scale. I asked Luis what the going rate was for coffee fruit. He reported that it was Q1.60 (20 U.S. cents) per pound. The current price is 10 centavos lower than it was last year, even though Guatemala’s 2008-2009 crop is small. (The cost of fruit in the Antigua Valley further demonstrates the limited value of Fair Trade certification. It takes approximately 5.5 pounds of coffee fruit to make one pound of green coffee. Therefore, selling a pound of coffee at the Fair Trade Certified price of $1.35 would only enable the plantation to cover the cost of purchasing the raw product, let alone the cost of processing the fruit.)

Let’s put this in perspective. In 2008 Guatemala exported 97% of its coffee harvest. Thirty-five percent of that harvest went to the United States, the largest importer of Guatemalan coffee. Starbucks, who reported a profit of $315.5 million in 2008, retails its Antigua Valley Roast for $10.65 per pound. Caribou, the second largest coffee house in the United States, retails its Guatemalan Roast for $11.19 per pound. Peet’s Coffee & Tea retails its Guatemala San Sebastian Roast for nearly $14 per pound. On average it takes 7.5 pounds of coffee fruit to make one pound of roast coffee. By these numbers, the farmer is receiving, at most, 14% of the end product revenue sold by the pound. Sold by the cup that number drops to below 1%.

One might assume that the discrepancy between the percentage of revenue received by the farmer and the percentage of revenue received by the processor or roaster is as a result of the intensive work involved in processing and roasting green coffee, but that is not true.

After gathering detailed data from Luis and Mario’s experiences, I calculated that there are, over the four years of a coffee-growing cycle, approximately 715 hours of labor invested in the cultivation, processing and roasting of one cuerda of coffee – the equivalent of 2,500 pounds of coffee fruit, 455 pounds of green coffee, or 333 pounds of roast coffee. Of these hours, 536 (75%) are spent on the planting, weeding, fertilizing, spraying and harvesting. Additionally, 168 hours (23%) are spent processing the fruit into green coffee beans. The processing of fruit to green bean coffee involves removing the fruit from the seed, fermenting the seed, drying the seed, removing the husk of the seed and hand sorting the beans. Eleven hours (2%) are spent roasting the beans.

Any way you count those beans, the farmer ends up doing 75% of the work and receiving 14% of the profits. To someone concerned with fair trade, those numbers might just leave a bitter taste.

Which begs the question that led Jorge and his friends to the Anacafé offices: If processing and roasting coffee is where the profit can be made, then why don’t more farmers do it?

As outlined at the beginning of this piece, bureaucracy can be a headache of its own, but simply financing a processing plant is a nearly insurmountable problem for many small coffee producers. In order to process coffee fruit one needs a pulpero, the machine that removes the fruit from the seed. A small pulpero costs about $500. To remove the husk from the bean one needs a trilladora, which costs about $3500. To dry the coffee one needs access to a sun drenched patio. Labor and materials for a small patio, about the size of Luis’, would cost $800. Recall that minimum wage in Guatemala is equal to $1715 per annum.

For reasons that will be explored, finding capital to finance such purchases is out of reach for most small producers in Guatemala. The United States Small Business Administration Agency applies an interest rate of between 8 and 13% to micro-loans. In contrast, the Guatemalan bank, Banrural, charges 24.5% interest on a loan of Q5,000 ($635) – the capital a farmer would require to purchase a pulpero. Unfortunately, charitable lending institutions provide no better alternative. The average interest rate charged by lending institutions who partner with KIVA – an organization which sources international micro-loans for distribution by field partners in Guatemala and other developing countries – is 23.16%. Further, the average size of KIVA’s micro-loans is $430, far below what would be needed by a small coffee producer to install a processing plant (www.kiva.org/about/aboutPartner?id=113).

In addition to high interest rates, providing collateral also presents a challenge to small producers seeking financing. Over the past few years Jorge has met several small producers who, lacking other assets, had guaranteed their loans with their land titles. Putting land titles up as collateral is, quite clearly, an enormous risk for subsistence agriculture families.

Skill-development is another challenge. It takes time and effort to learn the art of coffee processing. Anacafé runs courses for small producers. These courses are often facilitated by large plantations throughout Guatemala. The advantage of this model is that it increases access for small producers who would find it difficult and costly to travel to Anacafé’s offices. The disadvantage is that the plantations often take the opportunity to promote their proprietary agricultural products to the farmers. Mario and Humberto told me that proprietary products tend to be either more expensive or of a lower quality than their generic equivalents. Humberto also said that he didn’t feel comfortable attending Anacafé training sessions held at large plantations because he felt pressured to sell that plantation his coffee fruit.

Humberto told me that one of his family members recently attended an Anacafé course. While the content of the course was useful – it focused on the value-added components of coffee production – Anacafé told participants that the value of green coffee was $1.52 per pound, which is well below the market value of Strictly Hard Bean Arabica grown in the Antigua Valley. The Anacafé representative facilitating the course offered to buy the producers’ green coffee at the reduced price.

Even if a small producer is able to buy the equipment and receive the necessary training, market access is still a significant barrier for small coffee producers in Guatemala. There is no international market for coffee fruit and there is no rational local market for green coffee. Leaving aside the offer by the Anacafé representative to buy green coffee at a $1.52 per pound, Mario told me that when he had attempted to sell his green coffee locally the best offer he received was 76 cents a pound, a price significantly less profitable than if he had sold the coffee as fruit to a larger plantation with access to international markets. Clearly, being able to process and roast coffee and enter export markets is critical for enabling small producers to reach buyers who will pay a fair price for their product.

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