Sustainable coffee contracts Contracts as a mechanism for improving sustainability in the coffee sector Peter H. May Federal Rural University of Rio de Janeiro UNITED NATIONS ONFERENCE ON TRADE AND DEVELOPMENT SCI Workshop – December Geneva

Sustainable coffee contracts Presentation 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 coffee contracts Sustainable development concept Equity –toward future generations –towards the current generation Participatory processes promoted Environmental values incorporated in economic policies

Sustainable coffee contracts 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

Sustainable coffee contracts Research 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

Sustainable coffee contracts Contract 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

Sustainable coffee contracts Standard coffee contract content Volume Delivery date and port Quality parameters –origin –classification (organic, gourmet...) –impurities No reference to production practices or arrangements (unless organic)

Sustainable coffee contracts Sustainability analysis of current contractual arrangements EXTENT MARKET-DRIVEN High Low Medium High Market penetration High Low (Niche-oriented) Medium (Brand-specific) Low/Medium Mainstream market potential High Low/Medium Medium High

Sustainable coffee contracts Potential for contractual mechanisms to improve sustainability (1) FACTORS THAT REDUCE SUSTAINABILITYPOSSIBLE SOLUTIONSCONTRACTS (Applicability) UNFAVORABLE TERMS OF TRADE Trend toward Decline in PricesLong-term contracts Preferential sourcing Supply control policies Yes No Prejudicial Price/Cost Relationship Differential prices for sustainable production Yes Volatility in PricesLong-term contracts Yes Low Value-Added Systems of nomenclature of origin Specialty coffees Organic coffees Yes Market PowerTransparency along the production chain Yes UNCERTAINTYIn productionAgricultural insuranceYes In tradeLong-term contractsYes In supplyPenalties in contract for non-supply or delay Threat of severance of future commercial relations Yes Yes

Sustainable coffee contracts Potential for contractual mechanisms to improve sustainability (2) FACTORS THAT REDUCE SUSTAINABILITYPOSSIBLE SOLUTIONSCONTRACTS (Applicability) LACK OF CAPITALCrop conversionPreferential and differential credit for producers in process of conversion (multilateral sources) No Expenses to harvestPre-financing on the part of the importerYes POOR ACCESS TO INFORMATION On the marketInformational bulletin / Databanks Marketing training Partially No On pricesInformational bulletin / DatabanksPartially 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 pricing Differentiated income and financing policies Yes No ENVIRONMENTAL IMPACTS Unsustainable production processes Internalization of environmental costs in pricing Differentiated financing policies for environmentally appropriate practices Yes No

Sustainable coffee contracts 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.)

Sustainable coffee contracts Steps to implement “S”-contracts in the coffee sector i) Design and implement product delivery and credit guarantees

Sustainable coffee contracts Thanks for your attention!