The Coffee Value Chain in Guatemala: A Case Study of Fair Trade

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Student Research Reports, Summer 2007

 

Coffee cherries are harvested once a year. The higher coffee is harvested, the better quality coffee has. Guatemala's altitude and latitude makes its coffee unique in flavor. The price at which it can be sold depends on the world coffee market, quality, and production characteristics.
Coffee cherries are harvested once a year. The higher coffee is harvested, the better quality coffee has. Guatemala's altitude and latitude makes its coffee unique in flavor. The price at which it can be sold depends on the world coffee market, quality, and production characteristics.

The Coffee Value Chain in Guatemala: A Case Study of Fair Trade
By Rosangela Bando

Fair trade promises to help coffee farmers to improve living conditions, but how the fair trade value chain is compared to a non fair trade value chain in Guatemala remained a question to be explored. I concluded that fair trade demand is not large enough to make a difference on the choices that small farmers in Guatemala have when selling their coffee.

Rural markets in developing countries lack market conditions such as perfect information and access to financial markets. These market failures may diminish the benefits that farmers would otherwise obtain from trade and deter their progress out of poverty. Fair trade is proposed to address these market failures by setting a price floor for the goods produced by rural farmers. If the market price reflects market power instead of productivity of farmers, then this market distortion may not necessarily bring a negative effect. My research provides a quantitative decomposition of the price margin, and an analysis of the competitive structure of the markets along four complete value chains of coffee, one fair traded and three non fair traded.  I interviewed four small producers, a cooperative, a local intermediary, two medium and two large producers, one local roaster, one transport services representative, two exporters, a federation of cooperatives and two experts from the government office of coffee. The value chains I present are case studies that pretend to illustrate how price distribution may occur in Guatemala.

Coffee goes through several processes before it is ready to be brewed. Coffee cherries are harvested when they are red. The seeds are taken out of the pulp and then washed. The resulting seeds are covered by a small cover. At this stage coffee is called parchment. Most coffee producers in Guatemala trade with coffee at this stage. Then processing mills take the green beans out of the parchment. Green coffee is then traded in the international market. Roasters in the consuming country import green coffee, roast it and sell it to the final retailers.
Coffee goes through several processes before it is ready to be brewed. Coffee cherries are harvested when they are red. The seeds are taken out of the pulp and then washed. The resulting seeds are covered by a small cover. At this stage coffee is called parchment. Most coffee producers in Guatemala trade with coffee at this stage. Then processing mills take the green beans out of the parchment. Green coffee is then traded in the international market. Roasters in the consuming country import green coffee, roast it and sell it to the final retailers.

A product is Fair Trade certified if it meets the Fair Trade Criteria. Fair trade criteria were designed so as to empower farmers and farm workers to help them get out of poverty and protecting the environment. Fair trade also requires freedom of association, safe working conditions, direct trade and the development of projects. The fair trade certification guarantees a floor price of US$1.21 /lb of green coffee and a US¢5/lb premium. For a farmer in Guatemala to be able to sell coffee under fair trade conditions, he must belong to a cooperative that meets the fair trade criteria and is audited by transfair . 

I started my research by interviewing one of the biggest coffee cooperatives in the country.  FEDECOCAGUA is a cooperative composed by over 148 cooperatives dispersed in all Guatemala. More than 100,000 people depend directly on coffee sold through this cooperative. Small farmers that belong to a cooperative in FEDECOCAGUA can sell their coffee to the world. FEDECOCAGUA sells their coffee to whoever offers the best price. But Guatemalan coffee faces high competence. If FEDECOCAGUA raises its prices or adds trading conditions, clients can easily buy coffee from Mexico, Colombia or other Central American countries. The price at which they sell is determined by the New York Board of Trade prices. The exporter at FEDECOCAGUA explained us that coffee is traded in terms of differentials. A differential is the difference in dollars between the market price and the price at which a bag of 100 pounds of coffee is sold.  This difference depends on the quality of coffee, its characteristics and its certifications. Coffee certifications are related to environment friendly production processes, organic production, high quality and social responsibility like fair trade.

On the second week I traveled to San Pedro Necta in Huehuetenango. San Pedro Necta is a small town where one of the cooperatives that belong to FEDECOCAGUA has its headquarters. We interviewed the manager of the cooperative. He explained us how they sell their coffee to whoever offers them the best price. They could sell to FEDECOCAGUA or to other exporters. They offer their members discounts at the local hardware store, give them access to credit and provide technical assistance. This cooperative buys coffee from members and nonmembers, but gives preferential rates to members. 

In the same town, I interviewed three small farmers. I was surprised to find that most of them did not know basic information on their coffee production like total production or average costs. They explained that their wives and children help them pick and clean the coffee cherries. They do not have any record of time or money invested on the process. Small coffee producers can sell to an intermediary who pays in cash, the cooperative that gives them credit before they have the production or the exporter who may also provide credit or give better prices. Each farmer told me that at the end of the day, the prices they got for their coffee depended on coffee prices. They understood that prices fluctuated but they did not understand that prices were linked to the international coffee market. They told me they preferred to sell to the intermediary because they could get cash immediately, but when they needed credit, they had to fix part of their production to the cooperative.

Small coffee producers can access premiums on coffee price based on certifications, like fair trade, by joining a cooperative. Cooperatives provide access to credit and marketing and technical assistance.  Large producers try to improve the coffee produced or the coffee process to obtain certifications and therefore a better price. Small farmers have to join a cooperative in order to have access to these differentiated markets.
Small coffee producers can access premiums on coffee price based on certifications, like fair trade, by joining a cooperative. Cooperatives provide access to credit and marketing and technical assistance. Large producers try to improve the coffee produced or the coffee process to obtain certifications and therefore a better price. Small farmers have to join a cooperative in order to have access to these differentiated markets.

We also talked to large coffee producers. Large producers try to get certifications so as to sell their coffee at better prices or differentials. But getting certified can be expensive and some of the producers do not have enough capital to improve their production techniques. Large coffee producers that have properties at high altitudes strike to improve the quality of coffee. Then coffee can be sold as high quality coffee. The best coffee can enter the national competition “cup of excellence” where coffee is bid, and the coffee with the highest bid wins the competition. We talked to the winner of “cup of excellence” last year. He said that only a small share of his production is sold under the bidding price and that Guatemalan coffee producers face high competence by producers in other countries. Large non fair trade exporters were not open to sharing information. They only told us that they sell as a function of coffee prices and that they buy from whoever wants to sell. They emphasized they have high quality controls and that their clients have the best terms in terms of prices and credit. 

I learned that fair trade does not make a big difference to farmers, because the demand for fair trade coffee is not high enough to pay for the cooperative fees. Large coffee producers that do not benefit from fair trade certification look for alternative certifications so as to find market niches in a highly competitive market. I want to conclude by stating a table that contrasts how different production size and quality affects the value chain and prices. This table states the price in dollars for coffee at each state in the value chain.


State of Coffee

Pounds

Small Organized FT

Small 
Non Organized

Medium  
Certified

Large -
cup of excellence

Parchment

156

102

102

117

 

Parchment

156

120

114

114

214

Parchment

156

 

 

 

 

Green

125

129

126

139

233

Green

125

148

145

158

 

Green

125

 

358

303

328

Green

125

 

378

498

539

Roasted

100

525

415

515

 

Roasted

100

900

1. TransFair USA, is a nonprofit organization and one of twenty members of Fairtrade Labelling Organizations International (FLO). Transfair is the only third-party certifier of Fair Trade products in the United States.

2. Federación de Cooperativas Agrícolas de Productores de Café de Guatemala.

3. Cooperativa San Pedro Necta R.L.

4. Out of 500 pounds of cherry coffee you can get about 100 pounds of parchment coffee. Out of 125 pounds of parchment coffee you get 100 pounds of green coffee. Out of 125 pounds of green coffee you get around 100 pounds of roasted coffee. To avoid confusion I decided to keep the prices needed to pay for the volume of coffee needed to have 100 pounds of roasted coffee at the end of the value chain.

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