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www.uni-goettingen.de/globalfood

RTG 1666 GlobalFood

Transformation of Global Agri-Food Systems:

Trends, Driving Forces, and Implications for Developing Countries

Georg-August-University of Göttingen

GlobalFood Discussion Papers

No. 27

Food Standards, Certification, and Poverty among Coffee Farmers in

Uganda

Brian Chiputwa

Matin Qaim

David J. Spielman

December 2013

RTG 1666 GlobalFood ⋅ Heinrich Düker Weg 12 ⋅ 37073 Göttingen ⋅ Germany www.uni-goettingen.de/globalfood ISSN (2192-3248)

                                                                      

Food Standards, Certification, and Poverty among Coffee Farmers in Uganda Brian Chiputwa a*, Matin Qaim a, and David J. Spielman b a Department of Agricultural Economics and Rural Development, Georg-August-University of Goettingen, 37073 Goettingen, Germany b International Food Policy Research Institute (IFPRI), Washington, DC 20006-1002, USA * Corresponding author; phone: +49-551-3920210, fax: +49-551-3922030, e-mail: Brian.Chiputwa@agr.uni-goettingen.de Summary.— Private standards are gaining in importance in global markets for high-value foods. We analyze and compare impacts of three sustainability oriented standards – Fairtrade, Organic, and UTZ – on the livelihoods of smallholder coffee farmers in Uganda. Using survey data and propensity score matching with multiple treatments, we find that Fairtrade certification increases household living standards by 30% and significantly reduces the prevalence and depth of poverty. For the other two certification schemes, no significant impacts are found. Institutional factors that may explain differential impacts are discussed.

Overly general statements about the effects of standards on smallholder livelihoods may be misleading.

Key words— coffee; smallholder farmers; Organic; Fairtrade; impact; Uganda; Africa JEL codes— I32; L15; O12; Q13; Q17

Acknowledgements:

This research was financially supported by the German Research Foundation (DFG).

Food Standards, Certification, and Poverty among Coffee Farmers in Uganda   Summary.— Private standards are gaining in importance in global markets for high-value foods. We analyze and compare impacts of three sustainability oriented standards – Fairtrade, Organic, and UTZ – on the livelihoods of smallholder coffee farmers in Uganda. Using survey data and propensity score matching with multiple treatments, we find that Fairtrade certification increases household living standards by 30% and significantly reduces the prevalence and depth of poverty. For the other two certification schemes, no significant impacts are found. Institutional factors that may explain differential impacts are discussed.

Overly general statements about the effects of standards on smallholder livelihoods may be misleading.

–  –  –

Food systems around the world are undergoing a rapid transformation, with modern retailers, private standards, and vertically integrated supply chains gaining in importance (Henson, Masakure, & Boselie, 2005; Reardon, Barrett, Berdegué, & Swinnen, 2009). This transformation is partly driven by changing consumer preferences, induced by rising living standards and growing concerns about food safety and the environmental and social consequences of agricultural production (Mergenthaler, Weinberger, & Qaim, 2009; Narrod et al., 2009). What do these trends imply for smallholder farmers in developing countries? On the one hand, farmers may profit from higher prices that are paid for high-quality products. They may also benefit from technical and institutional support that is sometimes provided in integrated supply chains. On the other hand, smallholders may find it difficult to meet the high standards, or they might be exploited by agribusiness companies through monopsony situations or unfavorable contracts.

A growing body of literature has studied related questions in different developing countries.

One literature strand has analyzed the impacts of new supermarket procurement channels on smallholder productivity and household welfare (e.g., Hernandez, Reardon, & Berdegué, 2007;

Neven, Odera, Reardon, & Wang, 2009; Rao & Qaim, 2011; Rao, Brümmer, & Qaim, 2012).

Another literature strand has studied the direct and indirect effects of GlobalGAP and other private standards in horticultural export channels on small-scale producers (e.g., Maertens & Swinnen, 2009; Asfaw, Mithöfer, & Waibel, 2010; Carletto, Kirk, Winters, & Davis, 2010;

Colen, Maertens, & Swinnen, 2012). Most of these studies show that poor rural households can benefit from modern supply chains through own participation as producers or through labor markets.

However, the number of standards is growing, and different standards may have different impacts. Hence, overly general statements about the welfare effects of standards for smallholder farmers may not be justified. Especially for luxury foods – such as coffee, tea, or cocoa – retailers and manufacturers are increasingly using sustainability oriented standards and labels to differentiate their products and fulfill objectives of corporate social responsibility.





This trend is supported by non-governmental organizations and independent certification bodies (Liu, Byers, Giovannucci et al., 2008). For coffee, the global market share of products with sustainability certification – such as Organic, Fairtrade, UTZ, or Rainforest Alliance – has doubled from 4% in 2006 to 8% in 2009; it is expected to grow to over 20% in the next couple of years (ITC, 2011). Especially in rich and emerging countries, a rising share of consumers is willing to pay more for foods that are labeled to be sustainably produced. For coffee and other tropical products, this also involves consumer perceptions to contribute to improved livelihoods of smallholder farmers (Basu & Hicks, 2008; Elfenbein & McManus, 2010).

However, actual evidence about producer benefits is mixed (ITC, 2011).

Several studies have explored the impacts of different sustainability standards on coffee producers in developing countries. Impacts of Fairtrade, Organic, and other certification schemes were analyzed in Nicaragua (Utting-Chamorro, 2005; Bacon, 2005; Valkila & Nygren, 2009; Beuchelt & Zeller, 2011), Mexico (Jaffee, 2008; Barham, Callenes, Gitter, Lewis, & Weber, 2011), and other countries in Latin America (Raynolds, Murray, & Taylor, 2004).

Some of these studies are qualitative in nature. Others used quantitative techniques but without accounting for non-random selection of farmers into certification schemes, so the impact estimates may be biased. There are also a few quantitative studies that tried to control for selection bias, but most of these studies focused on only one certification scheme. Arnould, Plastina, & Ball (2009) evaluated the impact of Fairtrade certification on coffee farmers in Peru, Guatemala, and Nicaragua, using a multi-stage sampling procedure. Ruben & Fort (2012) also focused on Fairtrade, evaluating impacts in Peru with propensity score matching techniques.

Bolwig, Gibbon & Jones (2009) analyzed impacts of Organic certification in Uganda, and Wollni & Zeller (2007) looked at specialty coffees in Costa Rica; both studies used Heckman selection models. Jena et al. (2012) evaluated the impact of coffee certification on smallholder farmers in Ethiopia; their sample included Fairtrade and Organic farmers, but the results were not disaggregated by certification scheme. We are not aware of studies that compared impacts of different certification schemes in the same context, using quantitative techniques and controlling for selection bias. Such comparison could help to better understand how differences in the institutional design of standards and certification schemes affect smallholder livelihoods.

Here, we address this research gap by analyzing and comparing impacts of three sustainability oriented certification schemes – namely, Fairtrade, UTZ, and Organic – on household living standards and poverty among smallholder coffee producers in Uganda. We use household survey data collected in 2012 and employ a propensity score matching approach with multiple treatments to control for observed heterogeneity between different groups of farmers. We also test for the potential role of unobserved heterogeneity. The estimation results suggest that there are indeed significant differences in impacts between certification schemes.

–  –  –

Fairtrade, UTZ, and Organic are among the most important sustainability oriented standards in the global coffee market. Recent trends in the global trade of coffee under these standards are shown in Figure 1. All three are relevant for smallholder farmers in developing countries, and all three have social and environmental objectives. For smallholders to be certified under any of these standards, they need to be organized in farmer groups or cooperatives.

–  –  –

Fairtrade certification and labeling systems for coffee were launched in 1988 by the Fairtrade Labeling Organization (FLO) with the aim of improving the livelihoods of smallholder producers and cushioning them from volatile market prices. Fairtrade certification can only be attained by smallholder producer organizations that are farmer managed, transparent, and founded on democratic principles. Democratic principles require that leaders are elected by all members of the organization. The Fairtrade label guarantees producers a minimum floor price, whenever the international free market price falls below a certain threshold. In addition, a Fairtrade premium is paid to the producer organization to be used for capacity building, community development, and related projects. Producers have to ensure good labor conditions for workers, including payment of minimum wages, no child labor, and measures to reduce occupational health hazards. There are also specific rules for environmental protection, including practices for sustainable soil and water management and safe use of pesticides and fertilizers (Fairtrade, 2011). The most important markets for Fairtrade coffee are the United States, United Kingdom, Germany, France, and the Netherlands (ITC, 2011).

The UTZ labeling system (formerly known as UTZ Kapeh) is a more recently founded standard. It was established in 1999 by the Ahold Coffee Company, a Dutch roaster, but is now used by other European coffee companies and restaurant chains as well. The primary focus of UTZ is on traceability and sustainable production processes, based on Good Agricultural Practice (GAP) as specified by GlobalGAP. The GlobalGAP standard requires producers to comply with the labor laws concerning wages and working hours, and to handle agrochemicals responsibly, as stipulated by the International Labor Organization. The UTZ label does not guarantee a minimum price to producers, nor does it provide any premium or protection against price volatility. It is mandatory for UTZ certified farmers to be trained in GAP. The idea is that this training will contribute to higher coffee yields, better quality, and thus higher prices. The official website says: “Through the UTZ-program farmers grow better crops, generate more income and create better opportunities while safeguarding the environment and securing the earth’s natural resources” (UTZ Certified, 2013). Blackmore et al. (2012) argue that the certification process is less bureaucratic for UTZ than for other sustainability oriented standards, which may be one reason for the rapid expansion of this standard. The Netherlands is the biggest consumer of UTZ certified coffee; around 30% of all coffee consumed in the Netherlands has the UTZ label (ITC, 2011).

The Organic standard follows the principles of health, ecology, fairness, and care. Certified farmers have to use production methods based on traditional and scientific knowledge that maximize farm soil fertility and enhance biodiversity. The use of inorganic inputs such as synthetic fertilizers and chemical pesticides is strictly prohibited. Organic certification requires farmers to strictly follow organic production guidelines for a minimum period of three years (referred to as the conversion period) before getting full certification, thus making it one of the most stringent among the voluntary standards (Coulibaly & Liu, 2006). Prices paid for Organic coffee are usually higher than for uncertified coffee. The international guidelines for Organic farming are set by the International Federation of Organic Agriculture Movements (IFOAM), an organization based in Germany with affiliated organizations in over 100 countries. In addition, some countries and companies use their own organic standards, which are similar to the IFOAM guidelines but may differ in certain details.

A fundamental difference between the three standards is that Fairtrade and Organic provide price bonuses in comparison to free market prices, while UTZ does not. Fairtrade provides a minimum guaranteed price that is above the average cost of production and independent of the prevailing international price, while the Organic price is usually above the prevailing international price, but not necessarily above the average cost of production. Hence, the social sustainability component has a higher weight in Fairtrade than in the other two standards.

–  –  –

We model farmers’ participation in a particular certification scheme in a random utility framework. Utility,, is determined by a set of socioeconomic variables and contextual factors, X, which also influence the farmers’ ability and willingness to participate in certification. The farmer is assumed to maximize utility

–  –  –

We postulate that coffee farmer will participate in a certified coffee market j if and only if the utility derived is greater than the utility that results from accessing an alternative

–  –  –

∗ ∀ (2)

–  –  –

utility maximizing behavior of farmers can be represented as ∗ 0 (3) ∀ If we assume a linear relationship, I* can be written as (4) where β is a vector of coefficients to be estimated, and u is a vector of random disturbances of the unobserved factors affecting the participation decision.



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