Sustainable coffee contracts Contracts as a mechanism for improving sustainability in the coffee...

Sustainable coffee contracts

Contracts as a mechanism for improving sustainability

in the coffee sector

Contracts as a mechanism for improving sustainability

in the coffee sector

Peter H. MayFederal Rural University of Rio de Janeiro

UNITED NATIONSONFERENCE ON TRADE AND DEVELOPMENT

SCI Workshop – December 8-9 2003 - Geneva


Presentation topicsPresentation topics

Sustainable development concept Challenges for the coffee production sector Research question posed by SCI participants Current standard and alternative contracts and arrangements

in the coffee sector– contract systems we reviewed– sustainability aspects they address

Potential applicability of contractual mechanisms to address sustainability in the coffee sector

Coffee sector stakeholders’ views (survey results) Possible actions to implement “S”-contracts aiming to

improve sustainability in the coffee sector


Sustainable development conceptSustainable development concept

Equity

– toward future generations

– towards the current generation Participatory processes promoted Environmental values incorporated in

economic policies


Challenges for sustainable development in the coffee sector

Challenges for sustainable development in the coffee sector

Unfavorable terms of trade Uncertainty Poor access to information Lack of capital Deficient infrastructure Inequitable social relations Environmental impacts


Research question posed by SCIResearch question posed by SCI

How can contracts be designed to ensure the economic viability of social and environmentally

adequate production practices?

Analyse standard and alternative coffee contracts and arrangements to assess the extent they contribute to enhance sustainability in the coffee sector

Suggest components of contracts for sustainable coffee production and trade involving multiple stakeholders


Contract systems reviewedContract systems reviewed

“Standard”– ECF 2002 European Coffee

Contract– Green Coffee Association

Contract – Physical coffee– “C” and “Mini-C” contracts for

arabica futures –NYBOT– LIFFE Exchange Contract nº

406 Robusta Futures– Bolsa de Mercadorias e

Futuros – B&MF (Brazil) Futures (robusta, arabica) Options ( “ “ )

“Alternative”– FLO small farm organisation

coffee standards

– FLO generic standards for hired labour

– Starbucks Preferred Supplier Green Coffee Purchasing Pilot Programme

– Utz Kapeh Code of Conduct


Standard coffee contract contentStandard coffee contract content

Volume Delivery date and port Quality parameters

– origin– classification (organic, gourmet...)– impurities

No reference to production practices or arrangements (unless organic)


Sustainability analysis of current contractual arrangements

Sustainability analysis of current contractual arrangements

ALTERNATIVE CHARACTERISTICS OF COFFEE CONTRACTS STANDARD

FAIR TRADE STARBUCKS UTZ KAPEH

DRIVERS SUSTAINABILITY DIMENSIONS

Market price and product quality

driven

Socially driven; ILO principles;

Process -oriented

Environmentally and quality

driven

Code of Conduct Eurep -GAP

SA 8000

ECONOMIC CRITERIA Qual ity and origin (Must)

Obligatory (Must)

Obligatory (Must)

Enforced (Should)

Long -term contracts No Yes Yes Yes Preferred suppliers No Yes Yes Yes

Differential pricing Product and origin related

Floor price Point system for price differential

Sustainabil ity differential

Community premium No Yes No No Advance on sales No Yes No No Coverage of certification costs No Yes No No Traceability and transparency Low High High High

SOCIAL CRITERIA Not Included (Free)

Obligatory (Must)

Included (Should)

Obliga tory (Must)

Salaries and benefits No Yes Yes Yes Labour conditions No Yes Yes Yes Living conditions No Yes Yes Yes Gender equity; respect minority rights No Yes Not specified Not specified Restriction on child labour use No Yes Not specified Yes

Dem ocracy and community self -management

No Yes Not specified Yes

ENVIRONMENTAL CRITERIA Not Included (Free)

Included (Should)

Obligatory (Must)

Obligatory (Must)

Water management No Yes Yes Yes Soil conservation No Yes Yes Yes Forests and biodiversity No Yes Yes Yes Pest control No Yes Yes Yes Energy use No Yes Yes Yes Waste management No Yes Yes Yes

EXTENT MARKET -DRIVEN High Low Medium High

Market penetration High Low

(Niche -oriented) Medium

(Brand -specific) Low/Medium

Mainstream market potentia l High Low/Medium Medium High


Potential for contractual mechanisms to improve sustainability (1)


FACTORS THAT REDUCE SUSTAINABILITY POSSIBLE SOLUTIONS CONTRACTS (Applicability)

UNFAVORABLE

TERMS OF TRADE

Trend toward Decline in Prices Long-term contractsPreferential sourcing

Supply control policies

YesYesNo

Prejudicial Price/Cost Relationship

Differential prices for sustainable production

Yes

Volatility in Prices Long-term contracts

Yes

Low Value-Added

Systems of nomenclature of originSpecialty coffeesOrganic coffees

YesYesYes

Market Power Transparency along the production chain

Yes

UNCERTAINTY In production Agricultural insurance Yes

In trade Long-term contracts Yes

In supply Penalties in contract for non-supply or delay

Threat of severance of future commercial relations

Yes

Yes




FACTORS THAT REDUCE SUSTAINABILITY POSSIBLE SOLUTIONS CONTRACTS (Applicability)

LACK OF CAPITAL Crop conversion Preferential and differential credit for producers in process of conversion

(multilateral sources)

No

Expenses to harvest Pre-financing on the part of the importer Yes

POOR ACCESS TO INFORMATION

On the market Informational bulletin / DatabanksMarketing training

PartiallyNo

On prices Informational bulletin / Databanks Partially

DEFICIENT INFRA-STRUCTURE

Lack of resources to support production, infrastructure and

marketing

Price premium for community development

Differentiated credit lines of collective infrastructure (multilateral sources)

Yes

No

INEQUITABLE SOCIAL RELATIONS

Inadequate salaries and working conditions; sexual discrimination;

child labour

Internalization of social costs in pricingDifferentiated income and financing

policies

YesNo

ENVIRONMENTAL IMPACTS

Unsustainable production processes

Internalization of environmental costs in pricing

Differentiated financing policies for environmentally appropriate practices

Yes

No


Stakeholder feedback: most viable “S” contract elements

Stakeholder feedback: most viable “S” contract elements

Producer commitments environmentally sound management practices compliance with national labour laws

Buyer commitments for observance of socio-environmental criteria

long-term contracts preferred supplier status pay a premium

Source: Coffee sector stakeholders’ responses (20% of 65 participants in Feb.)


Steps to implement “S”-contracts in the coffee sector Steps to implement “S”-contracts in the coffee sector

Actions to implement sustainable coffee contract scheme SHORT-TERM

MEDIUM-TERM

a) Invite negotiating partners to the table IMMEDIATE

b) Achieve consensus on definition of sustainable coffee

c) Define parameters for price differentials (sustainability gradients)

d) Define long-term contract provisions and pre-harvest financing

e) Priority for purchase of sustainable coffees

f) Establish basis for third-party certification

g) Evaluate potential for a global reference label

h) Create mechanisms for traceability and transparency

i) Design and implement product delivery and credit guarantees


Thanks for your attention!Thanks for your attention!

[email protected]

Sustainable coffee contracts Contracts as a mechanism for improving sustainability in the coffee...

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