Who benefits from rapidly increasing Voluntary Sustainability Standards (VSS)?

Evidence from coffee in Ethiopia

Bart Minten, Mekdim Dereje Ermias Engida

Seneshaw Tamru

Addis – EDRI October 17, 2014

1

2

1. Introduction

• Growing emphasis on Voluntary Sustainability Standards (VSS) practices globally, in response to social/environmental pressure

• Consumers willing to pay higher prices for products that guarantee:

- Product origin- Fair prices to producers- Ethical standards of production/processing- Environmental sustainability- Safety and quality safeguards

3

1. Introduction

• Coffee the leading agricultural commodity to apply different VSS

• Relatively few studies that examine the impact of VSS arrangements on coffee producers

• Mixed findings: some positive (Ruben and Fort; 2012; Wollni and Zeller, 2007); some no effect (Jena et al., 2012; Cramer et al., 2014)

• Few studies in Africa where VSS uptake low

4

1. Introduction

• Look at Ethiopia’s coffee sector; Coffee most important export product; Coffee 25% of its foreign exchange earnings; 4 million coffee farmers are involved

• Will study at how benefits of VSS are distributed along the value chain, based on data from exporters, cooperatives, traders and producers

2. VSS in coffee

• Most important ones: 1/ Fair trade; 2/ Organic; 3/ Rainforest Alliance; 4/ Utz Capeh; 5/ 4 C (“Common Code for Coffee Community”) Association; 6/ CAFÉ (Starbucks); 7/ Nespresso AAA

• Independent certification for most; not for 4C; (6) and (7) private standards

• Often double certification: 42% of Fair Trade is also organic

2. VSS in coffee• Fair trade and organic VSS first ones, but

quickly losing market share (2013)• More certified coffee produced than sold

Fairtrade

Organic

Rainforest Alliance

Utz certified

4C Association

CAFÉ practices

Nespresso AAA

0 500 1000 1500 2000 2500

Verified-certified soldVerified-certified produced but not sold

1000 Metric Tons

2. VSS in coffee• VSS rapidly taking off in the world (VSS made

up globally 4% in 2005, now it is almost 20%)• Low and slow in Ethiopia

2005 2010 20150

5

10

15

20

Ethiopia World

%

3. Data

• Producer survey fielded in February 2014:- Focus on the major 12 coffee producing zones. 5 strata based on the 5 coffee varieties of Ethiopia- Total of 1,600 coffee farmers were randomly sampled with an even distribution among each variety (320 farmers each strata)- Detailed information on coffee marketing • Producer prices from sample of cooperatives/traders;

copied prices from “record book”; 148,558 purchase transactions over a nine-year period

3. Data

• Export transaction census:- July 2006 until June 2014- Obtained from the Ministry of Trade- Information contains price, weight, quality indicators,

quantity, type of exporter and VSS certification - 35,471 observations

4. VSS certification in Ethiopia: Total exports

• VSS certified coffee’s share small; not growing• Makes up 75% of exports of cooperatives

Quantity coffee exports Certified coffee

Total By Share TotalShare

(%) By cooperatives By non-Coope-ratives

Coope-ratives in of total

% of coop.'s

Coope-ratives

year tons tons % tons exports tons exports tons

2007 156,157 7,541 4.8 6,352 4.1 5,708 75.7 644

2008 170,433 7,242 4.2 5,210 3.1 4,011 55.4 1,199

2009 111,035 7,690 6.9 4,541 4.1 4,277 55.6 264

2010 199,478 10,703 5.4 9,438 4.7 8,922 83.4 516

2011 160,523 10,302 6.4 8,475 5.3 7,552 73.3 923

2012 192,150 11,073 5.8 9,494 4.9 8,351 75.4 1,143

2013 172,247 10,460 6.1 8,482 4.9 7,487 71.6 995

4. VSS certification in Ethiopia: Types• One-third of cooperatives VSS certified• Double certification common: 80% of Fair

Trade also organic; 98% of Organic also Fair Trade

Number of certified primary cooperatives

Number of Type of VSSCooperative primary Any VSS Organic Faitrade Rainforest Utz

unionscoope-ratives Certifcate Alliance Capeh

Sidama 47 42 39 41 3 5Yirgacheffe 26 26 26 26 3 2Oromia 250 41 24 41 3 3Limmu Inara 27 16 16 5 0 0Wolaita Damota 42 10 10 0 0 0Kaffa 34 19 18 15 0 0Bench Maji 39 3 3 0 0 0Total 465 157 136 128 9 10

4. VSS certification in Ethiopia: Which coffee?

• Often argued that VSS certified coffee is lower quality coffee

• Run probit model; Positive associations with VSS certification:

- Strong effect of origin: Coffee from Sidama +- Cooperatives and private commercial farms +

(compared to parastatals and private exporters)- Better quality and washed coffee• In Ethiopia, better coffee is more likely to be

certified, possibly because of third-party assessment

5. Methodology

• Hedonic price methodology: Food price is a function of characteristics of the product (varieties, post-harvest technologies, and VSS certification)

• Estimation strategy at different levels of value chain:

Where p is price; VSS is dummy of VSS certification; X other determinants of prices; α buyer fixed effects; η monthly fixed effect; ν stochastic error term

jtmt

t

mj

j

mijt

i

mjt

mjt XVSSp **** 43210

6. Quality premiums VSS certification: Export level• Premiums over the years 2006 to 2014 88 Usc/lb• However, no control for quality; need regressions

0

.00

2.0

04

.00

6.0

08

.01

Den

sity

0 200 400 600US cents/lb)

non-certified certified

• 5 specifications (VSS certification always significant):1. Period 2006-2014; all exporters: pooled

specification: 22.17 USc/lb2. Period 2006-2014; all exporters: fixed effects by

exporter: 15.33 USc/lb3. Period 2006-2014; only cooperatives; fixed effect by

exporter: 11.47 USc/lb4. Period 2013-2014; all exporters; fixed effect by

exporter: 10.59 USc/lb5. Period 2013-2014; only cooperatives; fixed effect by

cooperative: 13.66 USc/lb

6. Quality premiums VSS certification: Export level

% of farmers… Non-certified cooperative

VSS Certified cooperative

All cooperatives

Option to sell to cooperativesFarmer that sold cooperatives

215

1815

4019

Cooperatives buy:- Red cherries only- Dried cherries only- Both red and driedTotal

304822

100

9019

100

622215

100Cooperatives’ price for red cherries are:- Higher- Lower- The same- Do not knowTotal

353

4516

100

4739123

100

4328227

100

6. Quality premiums VSS certification: Producer level• Some background information

• 5 specifications (from section 5 model):1. Period 2003-2012; all producers; all forms

(red/dry/beans); pooled: 0.94 USc/lb (significant)2. Period 2003-2012; all producers; red cherries;

pooled: 1.56 USc/lb (significant)3. Period 2003-2012; all producers; red cherries; fixed

effect by producer: 0.13 USc/lb (not significant)4. Period 2003-2014; cooperatives only; red cherries;

fixed effect by exporter: 0.09 USc/lb (not significant)5. Period 2011-2012; only cooperatives; red cherries;

fixed effect by cooperative: -0.26 USc/lb (not signif.)

6. Quality premiums VSS certification: Prod. level

• However, VSS certified cooperatives more likely to pay out second payment and/or dividend; underestimation of benefits

% of farmers… Non-certified cooperative

VSS Certified cooperative

All cooperatives

who received a second payment

8 55 44

If received, … (Birr/kg) 0.9 0.8 0.9

Who received a dividend 11 27 23

If received,… (Birr) 885 217 240

Who received a second payment or dividend

13 66 53

6. Quality premiums VSS certification: Producer level

• Include second payment in price obtained from producer survey 2014

6. Quality premiums VSS certification: Producer level

0.0

5.1

.15

.2.2

5D

ensi

ty

0 5 10 15Birr/kg)

cert. coop non-cert. coopnon-coop

• Use data from the producer survey of 2014; three specifications for prices paid for red cherries:

1. Price at transaction only: difference cert. vs. non-certified cooperatives: 0.44 USc/lb for red cherries (non significant with F-test) (confirms results of the previous time series analysis)

2. Combine first and second payment: difference certified vs. non-certified cooperatives : 0.82 Usc/lb (significant with F-test)

3. Combine first, second, and dividends: difference certified vs. non-certified cooperatives : 0.80 Usc/lb (significant with F-test)

6. Quality premiums VSS certification: Producer level

• How much of export premium transmitted:- Premium of 0.80 USc/lb at the producer level for red cherries- Times 6 to get at clean green beans (processing ratios): converts to 4.6 USc/lb.- Compare to 13.7 USc/lb. at the export level (fixed effect; for the most recent period)- Transmission of 33% of the export premium to the producer

6. Quality premiums VSS certification: Producer level

• Two-thirds of the quality premium not transmitted. Where did it go?

1. Overheads. 30% of premiums goes to unions, to pay for doing deals, aggregation, etc. Certification costs. 3 USc/lb (about 20% of the premium). Sometimes paid by unions; sometimes by primary cooperatives.

2. Cooperative decides on use of budgets. Mostly investments in communal assets such as schools, roads, etc. but also offices, cars, etc.

3. Repayments of debts. Bought coffee at too high a price; price dropped and losses were incurred. Also loans for wet mills that have to be repaid.

6. Quality premiums VSS certification: What explains the gap?

7. Do VSS achieve other objectives?

• On top of economic sustainability, VSS designed to improve environmental, labor, and social environments.

• First, qualitative information: What do farmers see as advantages of having access to certified and non-certified cooperatives?

• Second, quantitative information: 1/ OLS regression comparing certified and non-certified cooperatives; 2/ matching exercise

7. Do VSS achieve other objectives?

Non- Cooperatives coops. Non-cert. Cert.Major reasons why farmer chose this buyer in 2013 red cherries' sales transaction:"He gives higher price" 22.3 42.9 11.6"He accepts large quantities" 0.4 0.0 0.4"He accepts small quantities" 3.3 0.0 0.6"He gives advances when needed or lends money" 3.7 0.0 0.4"He pays immediately" 12.2 1.2 0.7"He is close by" 25.5 11.9 1.8"There is no real difference with other buyers" 22.1 2.4 0.6"There is only a single buyer" 1.4 0.0 0.2"I trust his weighing" 2.0 4.8 0.6"The buyer is a relative" 2.5 0.0 0.0"He buys at the farm gate" 3.1 0.0 0.0"Buyer has the needed inputs" 0.1 0.0 0.0"Because of advantages of being a member" 1.2 35.7 83.3"Other" 0.4 1.2 0.0Total 100.0 100.0 100.0

7. Do VSS achieve other objectives?

Cooperatives All

Non-

certified Certified

For those having option to sell to cooperatives

Main advantages of selling to a cooperative:

"They provide higher prices" 49 52 50

"They provide credit" 25 14 19

"They provide advice" 44 61 53

"They provide inputs" 41 11 24

"They pay immediately" 58 22 38

"They are close by" 55 58 56

"They do not cheat with weights" 67 55 61

"They pay dividents/second payments later" 42 80 63

7. Do VSS achieve other objectives?

• Are production practices different for VSS certified farmers? Look at 1/ yields; 2/ extension visits; 3/ use of compost; 4/ use of mulching; 5/ use of stumping

• More significant adoption of stumping by VSS certified households (both in OLS and matching)

• More significant adoption of compost by VSS certified households (both in OLS and matching)

• No significant influence on other indicators (extension visits; mulching; yield)

7. Do VSS achieve other objectives?

• Are organic production practices different for VSS certified farmers? Look at 1/ use of chemical fertilizer; 2/ use of pesticides-herbicides

• Adoption of inorganic inputs is overall low: 6% uses chemical fertilizer; 2% uses pesticides-herbicides

• Overall not much effect of VSS certification on these indicators; we find significant reduction in case of matching and chemical fertilizer use

7. Do VSS achieve other objectives?

• Are child labor indicators different for VSS certified farmers? Look at 1/ dummy of child labor use; 2/ share of child labor in total labor use

• Descriptive statistics: 30% uses child labor at some point; 6% of total labor use in coffee production

• Overall not much effect of VSS certification on these indicators; we find significant reduction in case of matching and share of child labor in total labor use

7. Do VSS achieve other objectives?

• Are schooling indicators different for VSS certified farmers? Look at school-age children in school

• Descriptive statistics: 65% of school-age children are in in school

• No effect in the OLS model; we find significant increase by 7% in case of matching

• In general, some evidence that there are other benefits from being a member but results not that strong

8. Conclusions• VSS quickly taking off in global value chain• Adoption of VSS certification in Ethiopia is low (5% of

exported quantity) and has grown slowly over time• Significant quality premiums at the export level,

leading to additional export income of 2 million USD per year; If more done, export earnings would go up: e.g. if 25% VSS certified coffee from Ethiopia, 10 million USD per year extra.

• Find that one-third of quality premiums of 13.7 USc/lb of higher export prices go to producer

8. Conclusions• Median coffee farmer in Ethiopia sells 400 kgs of red

cherries equivalent; If all sold certified and all sold as red cherries, it would increase his income with 144 Birr per year or 7.5 USD per year…; Even if assumed complete efficiency (100% transmission), increased annual income of 20 USD per year…

• This low number, combined with implementation costs, might explain low growth in adoption of Fair Trade in Ethiopia;

• Other VSS - not going through cooperatives - are currently constrained because of the market institutional set-up (ECX).