Research reveals coffee industry’s economic model is not viable for all

New research commissioned by the Global Coffee Platform, IDH and Solidaridad finds that though there is enough value for everyone to make a profit in the coffee supply chain, this profit rarely reaches farmers. The report is an invitation to coffee companies to explore options for alternative value distribution that contributes to higher farmer income.

“Current value distribution makes coffee production economically unviable for most farming families and the planet,” said Annette Pensel, Director Global Coffee Platform. “This challenges the ambition of the coffee industry to become sustainable. We invite the coffee sector to rethink the value system and act collectively to secure its future.”

Figure 1: Costs, profit margins, taxes and net farmer income for a kilo of branded ground coffee.

The grounds for sharing

The research ‘The grounds for sharing; a study of value distribution in the coffee industry’ finds that the evidence is clear:

1. Value concentrates away from farmers and further down the value chain – from importer to retailer.
2. Family labour is undervalued. Labour is the largest share of farm costs for smallholders, but it is often unpaid and unaccounted for – meaning farmers’ “margins” can seem higher than they are which hides the problem.
3. There is no quick fix. Alongside important sector efforts to increase farmer profitability, it’s about creating value distribution mechanisms and enabling trading conditions that account for the diversity and complexity of the coffee industry.

Figure 2: Net profit margins per coffee product

Coffee companies are not only exposed to the complexity of doing business in low income countries, but together they also risk contributing to sustained poverty among smallholder coffee farmers. 

“The study found that the economic model for smaller family farms is not including one of the main costs: family labor. Without a proper valuation of family labor, it is near impossible to fully reward farmers for their coffee,” said Andrea Olivar, Strategy Director Solidaridad Latin America. 

“The long term impact of underpaying smallholder and family farmers ultimately affects the whole industry, and it will take an economic perspective to systemically and sustainably fix the issue.” 

Industry talks proposed

Farmer prices are disconnected from consumer prices, and there are a lack of mechanisms to distribute value. It’s hoped these findings will form a starting point to secure commitments from the sector on sourcing principles that enable better value distribution. The three organisations will be seeking agreement from industry leaders to take part in joint discussions with a commitment to these ambitions.

“Two key interventions are needed; sector commitments on sourcing practices that enable value redistribution, and supply chain partnerships that design and implement mechanisms for adding, creating, and transferring value,” said Tessa Meulensteen, Director Agri-Commodities IDH. “With the right mechanisms, companies can more easily comply with due diligence and reporting requirements, and ensure a sustainable supply of coffee in the long run.”

The precise mechanisms will be discussed with the industry, but could include established value distribution principles that account for the diversity of farmers and origins.

Download the full report here.  

For more information please contact Mette-Marie Hansen: hansen@idhtrade.org