Why Coffee Farmers Are Poor

There is a lot of interest in the welfare of coffee farmers in the greater coffee community, from Coffee Roasters, Importers, Exporters, Baristas, Trade Organizations, NGO’s, and Farmer’s Coops. Dozens of organizations and well-meaning individuals dedicate their lives to improving the welfare of the farmer, and many large corporations have also made farmer welfare a priority.

So why does coffee farmer poverty persist? I contend that the coffee farmer poverty exists for two very specific reasons: geography and farm size.

The geography is unfortunate because the conditions that are conducive to growing coffee are also significant barriers to economic development. This makes coffee farming and poverty inextricably intertwined. Until we solve the problem of tropical underdevelopment, coffee farmers will have an income problem. Farm size is potentially an easier problem to solve, and I will outline my thoughts on it below. Both of these problems, however, are structural economic issues rather than a problem of moral failures on the part of the coffee industry.

In this article I will provide evidence of the scope of the problem and along the way, I will challenge what I consider to be two popular misconceptions.

1) that paying more for coffee is a viable solution, and 2) that corporate greed is to blame.

Finally, I conclude with what I believe are sustainable solutions.

The unfortunate truth is that tropical underdevelopment is a persistent problem, and it is much bigger than coffee. However, since coffee is a tropical plant that grows best in mountainous land, poverty in coffee farming is a subset of tropical underdevelopment.

Before we talk about why tropical underdevelopment exists first let me demonstrate the depth of this issue:

The above charts highlight the GDP per capita in temperate zones (along with an estimate of income per capita), vs tropical countries where coffee can be grown.

The average income in temperate zones is some 3-5 times the average income of countries capable of producing coffee. This creates a huge selection bias when looking at coffee farmer income since right off the bat, the pool of people who have the option of becoming a coffee farmer is selected from the poorest countries in the world.

Showing may be better than telling in this case, the below charts illustrate this point.

This suggests that the larger problem that we have to contend with is why tropical countries are economically poorer than their temperate cousins.

Renowned Harvard economist Jeffrey Sachs theorized some causes of this in his 2001 paper, “Tropical Underdevelopment.” He identified 5 key areas that arrest development in these regions #1 of which is technology (especially healthcare and agriculture). Technology developed in temperate regions is ecologically specific and not easily transferred to tropical regions.

Think about something as fundamental as a road. Anyone who has ever driven on a crop tour in a coffee origin knows what roads are like in these areas.

When I lived in Uganda my house was on a horrible paved road with potholes, cracks, breaks etc. Imagine my delight when they paved this road a couple of months after I moved there, “what luck!” I thought. However, within a few short months of heavy rains, the road was a disaster again.

A Typical Ugandan Road

Look at the farming technology in North America and Europe. Large tractors plowing neat rows in giant flat prairies has no equivalent in the mountains of Colombia or India. Only in the plateaus of Brazil is mechanization feasible on any scale in the coffee industry.

Sachs proposed massive increases in foreign aid to bridge the technological gaps and improve good governance in these countries.

He largely succeeded in these efforts. From 2000 to 2015 Foreign Aid doubled, yet the results were not necessarily what we had hoped.

Two of the biggest problems with foreign aid and NGO funding is the problem of destroying local businesses and creating a culture of “Neo-colonialism.”

Regarding the latter, massive amounts of foreign money that funnels into foreign nationals administering it to locals can be a catch-22. Either rich countries do nothing, send money to locals with no oversight, or send money to locals conditionally and get accused of colonialism.

The economic impact of well-meaning aid can also be an issue. The documentary Poverty, Inc. outlines how American food aid decimated the livelihood of Haiti’s rice farmers. When I lived in Uganda, the garment industry was massively disrupted by donations. Everywhere people could be seen sporting cheaply made Western t-shirt donations, “Smith family reunion” or “Tim’s Bar Mitzvah”.

The problem with the top-down approach to aid is that it is so one-sided, it is resources and intentions sent from one place to another. It is not a partnership.

In the coffee industry we are guilty of the top-down approach, but we also have pioneered the bottom-up approach.

The coffee certification industry aims to improve the economic well-being of farmers by engaging directly with farmers on a micro-level. The idea is that if farmer quality and productivity can be improved, the farmer can receive more money and a better livelihood.

This brings us to the 2nd problem of coffee farmer poverty: small farm size. According to the ICO, over 80% of coffee farmers are small holder farmers (less than 2 hectares).

A recent study by Fair Trade International highlights income by farmers with various levels of productivity. With a typical farm of 2 hectares or less, a farmer is making $494 of annual income with a low-productivity farm. If they invest in their coffee and make substantial improvements in yield to 15 bags per hectare, they will still only earn less than $1500 in profit. Even if they were to able to achieve Brazil-level of productivity of 30 bags per hectare, they would still only be earning $2964 per year. That’s 25% lower than the average income in coffee producing countries!

This bring us to ...

Misconception #1: Paying above market price as a viable solution for the problem of coffee farmer poverty.

There are several problems with this, but the first is an ethical one. When you pay an additional fee over and above the market price for coffee, you are essentially giving a donation. You’re saying, here’s 2.50 for the coffee, and here’s a little something extra because I think that you need it.

This doesn’t make sense philosophically. If you think about it in terms of need, increasing your pay to one farmer does nothing for the thousands of other poor farmers and other economically depressed people of that country. Does the coffee farmer in Chiapas deserve your charity more than an urban orphan in Mexico City? How do you even know that the farmer you are buying from is poor? Should you only buy from poor farmers? What if quality is important to your business?

In addition to the philosophical problem is a more practical one. When you are paying above market price, you are effectively paying a voluntary price floor. This destroys demand and incentivizes production.

Even if these altruistic prices were to catch on, and everyone starts paying above market prices to farmers for their coffee, the economic problem is compounded. When other local farmers see that coffee farmers are earning more from coffee than they are making in other crops, they will switch what they are doing to coffee farming which increases supply.

The problem is that demand does not increase along with the supply. In fact, demand would decrease. Since everyone is now paying more per pound for coffee, we would not be able to afford to buy as much coffee as we were previously.

For example, if a company had a $10k budget to buy coffee annually and the market price is $2/lb then you can buy 5,000 lbs of coffee. If you raise your price to 2.5/lb you can now only buy 4,000 lbs of coffee. That’s a 20% reduction in demand!

Globally, an increase in supply and a reduction in demand has a very specific effect: it lowers prices. Farmers with a surplus of coffee on their hands would start undercutting each other to sell their excess coffee which would drive down prices.

This is not a theoretical exercise, this is very real in the coffee world.

Just ask anyone who buys Fair Trade Coffee. Fair Trade Coffee does exactly this. Fair Trade guarantees a minimum price for coffee which is a voluntary price floor. However, this creates a disconnect in supply and demand because every farmer wants a guaranteed minimum price, but not every consumer wants to pay a minimum price.

Because there are more sellers than buyers, this actually creates an environment where Fair Trade certified farmers may not want their neighbors to get certified with Fair Trade because it creates competition for the small group of buyers.

I should point out that I applaud Fair Trade’s commitment to improving the lives of the coffee farmer. They have a large staff of experts and dedicated individuals that has done great work at origin and also funded important research. I wish them every success in their goal to improve the livelihood of the farmer.

However, rather than raising the price for the farmer, there is a simpler solution: increase the size of the coffee farm. This is the natural trend of developed economies.

Small holder farming is practically by definition, a subsistence living. If we care about the farmers, we should not be encouraging them to be better farmers, we should be encouraging them to sell their farms and learn more lucrative work.

Larger farms would enable the remaining farmers to enjoy better livelihoods and the departing farmers would be free to pursue a lifestyle that’s less work with better pay. Larger farms would also facilitate more consistent social, environmental and quality standards.

Now I’m not suggesting that this is an easy solution, especially for farmers leaving perhaps the only living they have known. Perhaps leaving land that has been in the family for generations. I don’t envy anyone having to make those decisions. At the same time, if coffee origins are going to develop economically, then we should not be encouraging them to stay on small holder farms with barely livable earnings.

Colombian Coffee Farmer

This is where the foreign aid and investment could be useful is if it partners in developing the economies of these countries for mutual benefit. Developed economies provide more opportunities for their citizens aways from the farms. This will require reciprocal partnerships.

Reciprocity is the key here in both the top down and bottom up approach for meaningful development.

Certifications are great way of fostering reciprocity because they facilitate trust. Fair Trade USA is successful as a certification because it certifies reciprocal value. Fair Trade adds value to the consumer in the form of traceability and quality. They add value to the farmer in increased productivity and higher premiums. They add value to the trade in providing a new product to sell.

However, paying above market prices to farmers outside of certification is not a viable solution, even so-called "living wage" calculations.

If you are interested in improving the welfare of coffee farmers, your money would be more effective if pooled with others and sent as a donation to an organization that specializes in economic development. Just make sure that you choose one that focuses on building reciprocal partnerships.

One of the most useful NGOs in the coffee world, that I have had experiences with, is Rainforest Alliance. RFA makes sure to partner with local people to lead projects and the RFA certification has a wholistic approach. Getting certified with RFA improves the quality of the coffee, is good for the environment, and improves the productivity of the farmer.

RFA is a model for NGOs to be involved in creating positive, reciprocal change across a supply chain. Consumers like the RFA concept (and the cute little frog) and are happy to support it. Trade likes the focus on ethics and a sustainable supply chain, and the farmer likes it because it improves their knowledge, income, and quality.

The key concept that drives the success of the RFA model is the certification of reciprocity across the supply chain. It implies multiple levels of responsibility from every participant.

If there is one thing that I learned in my time as a physical trader it is the value of reciprocity. You learn quickly that your word is your bond and that you will be held accountable for what you say. People don’t like to be given something for nothing. There is no ownership in it. A mentor once told me that, something given for free is not valued by the recipient. Think of the difference in ownership between a child who is given a bicycle by their parents vs one who saves money for their first bicycle.

This brings me to ...

Misconception #2: corporate greed is a significant cause of coffee farmer poverty

Let me point out, that I’m not denying that corporate greed exists, on the contrary I think it is a global constant. In other words, corporate greed is no greater in the coffee market than any other market. Greed isn’t the right word here either, it’s really profit-seeking.

The purpose of a for-profit corporation is to make profits. A corporation is not serving its shareholders if it is not trying to maximize profits. Profit seeking, however, is not an excuse to behave unethically.

Are coffee corporations behaving unethically? Without a doubt, some corporations are. At the same time, it is also true that coffee corporations have been intimately linked to socially ethical practices and for longer than many other businesses (“before it was cool”).

Global Coffee Giants like ECOM, Neumann, Volcafe and Sucafina all boast front and center sustainability strategies. ECOM Sustainable Management Services was founded in 2006 to “align with its core strategy of sustainable and efficient use of natural resources.

A field network of more than 1,100 agronomists and staff provides various services to farmers to increase their profitability, while ensuring better quality and traceability for buyers in each of ECOM’s supply chains.”

As of 2018, Neumann has invested over 10m dollars in sustainable initiatives and provided 10s of million more in financing to suppliers, local traders, farmers and farmers coops.

Volcafe Way founded in 2014, focuses on training farmers to improve their profitability.

Sucafina pioneered the Farmer Connect platform to provide end to end traceability in coffee sales. Consumers can use the platform to see where their coffee came from, what the working conditions are, and even make a donation to the farmer.

Blaming corporations and traders is easy, and it is the one that people intuitively want to be true. A giant, behemoth of a corporation in a large glass building in NYC, filled with suits and ties is a really convenient bad guy.

However, caricatures don’t address the heart of the issues, and if we want to understand this issue, we have to be willing to look at the facts…wherever that may lead.

Corporations aren’t pursuing sustainable business strategies with farmers purely out of the goodness of their hearts.

Corporations, like people, are powered by incentives. Incentives drove ethical considerations in innovations and reinvestments. Corporations want sustainable supply chains, and to serve the consumer; and consumers want ethically sourced coffee.

I like to end my articles on a high, with an uplifting conclusion, but I think more appropriate here is a word of caution.

It would be comforting to say something like this: it is up to us, the consumers to improve the conditions of the farmer! You need to buy certified coffee, hold companies responsible for buying ethically sourced coffee, and lobby your government to increase foreign aid!

This is comforting because it implies we have agency over this problem. We just need to do better.

But look at these numbers. Tropical underdevelopment is not going to be solved by giving coffee farmers just a few more cents per pound. It is going to be solved by technological innovation and economic development.

Coffee might be the answer to this problem, but not in the way that you might think.

Coffee was responsible for the enlightenment. Coffee houses replaced the pub as a social meeting place. Unlike drinking beer, drinking coffee fosters clarity. It enables people to be analytical, to think clearly, and to contemplate complex issues. We in the coffee industry, should look at the problem honestly, and think about how to solve in partnership with those we want to help.

I believe in reciprocity. In my own business, I offer value wherever I can, and my clients compensate me for that. For the coffee industry, I believe that reciprocity is important for another reason, it fosters equality. Reciprocity is sustainable because it assumes a transaction between equals.

17th century British Coffee House

I support sustainability. I support certification programs like RFA. I believe in behaving ethically, it is the foundation of my course on coffee trading.

However, what I think will really enact meaningful change in the tropical world, is reciprocity.

Reciprocity includes all parts of the supply chain: the consumer, the trade, and the producers.

Reciprocity is sustainable. Reciprocity means engaging with others in repeated interactions over the long term, and not prioritizing short term gain nor one-sided goals. Reciprocity is where we engage in trade and commerce and camaraderie with others because it is mutually beneficial.

No relationship, no industry, no business (no matter how profitable) is sustainable unless it is founded on mutual benefit and respect.