Participation in Alternative Trade Coffee Cooperatives:
Empirical Evidence from Northern Nicaragua
1. INTRODUCTION AND IDEA OF THE RESEARCH ... 3
2. COFFEE BACKGROUND... 6
2.1. THE COFFEE COMMODITY CHAIN... 6
2.2. COOPERATIVES VS. MIDDLEMEN... 8
2.3. FAIR TRADE AND ITS IMPACT... 10
2.3.1. Higher and more Stable Price... 11
2.3.2. Access to Credit ... 12
2.3.3. Access to Technical Assistance and Quality Improvement ... 12
2.3.4. Obstacles and Problems of Fair Trade... 13
2.3.5. Certified Organic Coffee Production... 13
3. FACTORS IMPACTING ON FARMERS’ PARTICIPATION IN COOPERATIVES... 15
3.1. AGE... 15
3.2. QUALITY... 15
3.3. HOUSEHOLD SIZE... 16
3.4. LEVEL OF FORMAL EDUCATION... 17
3.5.INCOME GENERATED THROUGH COFFEE PRODUCTION... 18
3.6. SIZE OF FARM AND COFFEE FIELD... 19
3.7. PAST EXPERIENCE WITH COFFEE PRODUCTION... 20
3.8. TRUST, HONESTY, COMPETENCE... 20
4. METHODOLOGY ... 22
4.2. VARIABLES... 22
4.2. THE MODEL ASSESSING PARTICIPATION... 28
4.3. THE MODEL ASSESSING TRUST... 30
5. FIELD-STUDY CHRONOLOGY AND DATA ... 31
5.1. PRESENTATION OF THE COOPERATIVES... 31
5.1.1. UCPCO ... 32
5.1.2. CORCASAN ... 33
5.1.3. PRODECOOP... 33
5.1.4. UCA ... 34
5.1.5. Middlemen... 34
5.2. DEFINITION OF SMALL-, MEDIUM AND LARGE-SCALED FARMERS... 35
5.3. DATA COLLECTION... 35 6. DISCUSSION OF RESULTS... 38 6.1. DETERMINANTS OF PARTICIPATION... 38 6.1.1. Education ... 38 6.1.2. Age... 39 6.1.3. Experience... 39 6.1.4. Quality... 40 6.1.5. Vulnerability... 41 6.1.6. Trust... 46 6.2. DETERMINANTS OF TRUST... 48
6.2.1. Determinants of Trust Placed in Cooperatives ... 48
6.2.2. Determinants of Trust Placed in Middlemen... 50
7. CONCLUSION... 51
REFERENCES... 53
APPENDIX ... 58
TABLE A1: BINARY LOGISTIC REGRESSION... 58
Table A1 continued ... 59
TABLE A2: MEAN VALUES... 60
TABLE A3: ORDERED LOGISTIC REGRESSION... 61
Table A3 continued ... 62
1. Introduction and Idea of the Research
Measured in value, coffee is one of the most important commodities that are traded internationally (May et al., 2004). Globally, there are approximately 25 million coffee farmers, 70% of them cultivate coffee on a small scale of less than 10 hectares. Mostly, these are small family plots with an average size of 1 to 5 hectares. Selling coffee is the primary source of income for most farmers (Gresser and Tickel, 2003).
From 1962 until 1989 the International Coffee Agreement (ICA) was regulating the international coffee market. Supply and demand was controlled by producing and consuming countries, thereby successfully establishing a price band that maintained coffee prices between US$1.20 and US$1.40/lb. Oversupply of coffee was limited by export quotas, with national governments buying and holding coffee stocks when national production exceeded those quotas. Consuming countries in turn helped to finance the holding of coffee stocks (Calo and Wise, 2005). In 1989, the United States, being by far the world’s largest importer of coffee, left the agreement. The disintegration of the ICA in coincidence with international market liberalization efforts lead to substantial increases in the global coffee production (Bacon, 2005). New countries entered the international coffee market, most notably Vietnam, growing within ten years from an insignificant coffee exporter to the world’s second largest supplier. Also Brazil increased its coffee output by 56% since the breakdown of the ICA, representing 14 million bags of coffee. Technical innovation led to further increases in production, farmers adopted high-yielding crops and have more pest resistant coffee trees. Furthermore, most workers receive very low wages due to high levels of unemployment and poverty in rural areas, enabling to keep producing even when international prices are low. Since 1989 total international coffee output has grown by approximately 20%, deteriorating the generally unfavourable market conditions (Calo and Wise, 2005). Demand has not increased as quickly as supply, world coffee consumption increased on average by only 1% annually. In OECD countries, which are consuming approximately 70% of world coffee production, demand is more or less stagnant (Brown et al, 2001). Since the abandoning of the ICA prices remained with a few exceptions below the levels prevailing during the ICA period.
Nicaraguan conventional coffee remains within the country. The producer captures approximately 7% of value-added; the remaining 8% is captures by the domestic trader. The international roaster in contrast absorbs 45% and the retailer another 33%.
According to Bacon, “people’s vulnerability to the falling prices depends upon their location in the coffee commodity chain and their access to assets, such as land, credit, employment, and social networks” (Bacon, 2005:503). Being organised in a coffee marketing cooperative decreases farmers’ vulnerability. A considerable number of theoretical works have been published on the interaction of agricultural marketing cooperative and an investor owned firm (IOF) in the past few decades. (Cotterill, 1996; Cremer and Crémer, 1991; Helmberger and Hoos, 1962; Sexton, 1990; Tennbakk, 1992). The major conclusion from the existing research is that a vertically integrated agricultural cooperative markets in equilibrium a larger volume than the private firm and pays its members a higher price for their output supply (Sexton, 1990; Tennbakk, 1992). Albaek and Schultz (1998) conclude that it is always more profitable to be associated to an agricultural marketing cooperative than selling to a for-profit processor1
. Hence, there always is an incentive to join a cooperative. The advantages endowed by cooperatives explain the success of agricultural unions. Albaek and Schultz prognosticate “that in the long run all farmers would be members of the cooperative” (1998:401). The advantages of agricultural cooperatives are even intensified in the case of small-scale coffee farmer cooperatives selling to the alternative trade coffee market (such as fair trade, organically grown etc), as these provide farmers with a higher and more stable income. The theoretical and empirical literature cited above suggest that there are many incentives for the rationally behaving small-scale coffee farmer to become associated to a marketing cooperative with direct export contacts to the alternative trading market. Why then is it that until today not all small-scale coffee farmers became associated to marketing cooperatives?
Recently, there has been a growing interest in the impact of coffee marketing cooperatives supplying the speciality coffee market niches on the livelihoods of small-scale farmers (Bacon, 2002 and 2005, Utting-Chamorro, 2005). However, there has been limited focus on the factors determining a farmer’s decision and motivation to actually join such a cooperative.
First and foremost the purpose of this thesis is to investigate empirically which factors determine participation in alternative trade coffee cooperatives. The main factors investigated are age, level of
1
formal education, experience in coffee cultivation, size of the household, size of the farm and coffee field, income, trust in the cooperative and quality of the coffee output.
Second, I will examine if farmers’ vulnerability to fluctuating coffee prices is related to participation in cooperatives. Fair Trade labelling organisations explicitly announce the improvement of the marginal position of small-scale farmers as their primary aim (Bacon, 2005). Many alternative trade export cooperatives have been created to decrease farmers’ livelihood vulnerability to wide commodity price fluctuations and declining relative prices2
. Is it the misery of small-scale farmers pushing them into cooperatives, or rather the attraction of cooperatives pulling farmers into cooperatives? Third, I will analyse in detail if the level of trust placed in cooperatives and middlemen plays a decisive role in explaining participation. A series of binary logistic regression models will be fitted to test for a statistically significant difference among associated and independent farmers with respect to these factors. Furthermore I will analyse which factors influence trust placed in cooperatives and whether vulnerability or overall levels of trust explain differences among farmers. I will therefore fit a series of ordered logistic regression models.
Primary data was collected in the municipality San Juan de Rio Coco, department Madriz in northern Nicaragua throughout March, April and May 2007.
The remainder of this thesis is organized as follows. Chapter 2 gives general coffee background information explaining the coffee commodity chain; highlighting the main differences between cooperatives and middlemen and its impact on coffee farmers’ income; and summarising the Fair Trade and organic coffee channels. Chapter 3 discusses factors that are assumed to impact on farmers’ participation in alternative trade marketing cooperatives. Hypotheses are formulated on how these factors affect participation. The chapter also debates what is affecting trust placed in cooperatives. Chapter 4 explains the methodology used for analysing the data while chapter 5 summarises the fieldwork chronology. Chapter 6 discusses the findings of the data analysis and Chapter 7 concludes.
2. Coffee Background
2.1. The Coffee Commodity Chain
A simplified version of the general structure of the coffee commodity chain is depicted in figure 1 below. Small-scaled coffee farmers live mostly in rural regions, characterised by bad infrastructure. They miss adequate means of transportation, which would enable them to bring their output to larger markets or direct independent processors located at a certain distance. Farmers hence depend on local middlemen or regional cooperatives as purchasers of their raw coffee output, who transport coffee to processing plants.
Coffee export cooperatives are democratic producer organizations, jointly owned and run for the benefits of its members. Most commonly, farmers form regional associations of coffee producers, which throughout this paper will be referred to as level cooperatives. The main task of first-level cooperatives is to produce raw coffee. Due to their regional character, most first-first-level cooperatives are too small to establish direct export links to international (alternative trade) markets. To increase total output and exploit economies of scale, regional cooperatives are integrated into umbrella organisations, commonly known as level cooperatives. The main task of second-level export cooperatives is to process, store and export the coffee output. Often second-second-level cooperatives provide technical assistance, credit schemes and other services to the members of its integrated first-level cooperatives. Associated farmers of a marketing cooperative face equity ownership, generally in proportion to their volume of raw coffee submitted to the cooperative. Export cooperatives selling to alternative trade markets have direct export contacts to licensed international traders and and/or roasting companies based in consuming countries (Milford, 2004). Local exporters are price takers when selling coffee on the international markets, however they possess a certain degree of market power in their raw coffee purchasing operations. Quite often there are only a few middlemen in a region, and according to Nicholls and Opal (2006) it is a common practice that middlemen among themselves do not compete on price. “Competition by buyers is rarely achieved and, thus, farmers receive only one price offer (2006:33-34). Hence, imperfect competition among local exporters implies that farmers are paid less for their produce than they would under perfect competition. Nicholls and Opal conclude that the link between producers and middlemen is one of the most exploitative ones in the whole supply chain.
Producer Private Int-mediary Processing Plant Local Exporter International Trader Roasting Company Distributor Retailer Consumer
The number of international roasters is even more limited and the major five roasting corporations (Kraft, Nestlé, Sara Lee, Procter and Gamble and Tchibo) purchase more than half of total green coffee beans (Gresser and Tickell, 2003). Opposed to the many small-scale farmers in 80 producing countries, the international traders and roasters can exercise a certain degree of monopsonistic power and are able to set the rules of the game. The crucial problem of the coffee commodity chain is the increasing concentration down its value chain that emerged over time. The enormous size of the major coffee roasters creates entry barriers, as they face economies of scale in processing and marketing. All of them have been investing in marketing and branding, sheltering them from price competition. This helps to explain why the gap between retail prices and prices paid to producers have been increasing over the past few decades (Brown et al., 2001). According to Ponte (2001), producers retained about 20% of the final retail price in the 1970s, whereas today the portion amounts to 6% of value-added within the value chain (Gresser and Tickel, 2003).
2.2. Cooperatives vs. Middlemen
Vertically integrated coffee marketing cooperatives pursue different business objectives than middlemen. Comparing the business operations of for-profit intermediaries to that of investor owned firms (IOFs) allows to highlight the main discrepancies between cooperatives and middlemen.
Cooperatives are, like IOFs, property of investors. But investors are also members and hence users of the firm. Membership gives farmers access to services provided, but also the responsibility of controlling the cooperative. Shares are usually distributed according to the one vote per member principle, regardless of volume of raw coffee submitted. Hence, all members have the same incentive and commitment to participate actively in running and managing the cooperative (Albaek and Schultz, 1997). Generated surpluses from exporting are distributed as patronage dividends, usually in proportion to raw coffee supplied. Thus, the more raw coffee submitted to the cooperative, the larger the gain (Milford, 2004). In contrast, IOFs generally distribute surpluses according to capital holdings by investors. Coffee farmers are not shareholders of the for-profit intermediary and will not receive a share of operational surpluses.
The ultimate aim of the cooperative is the promotion of its members. Promotion generally adopts one of two forms, namely either maximisation of total returns to members, or maximisation of total output. The former goal is best pursued by a membership-restricting cooperative, the latter by an open-membership cooperative (Higl, 2003).
A membership-restricting cooperative successfully restricts the number of members and quantities of raw coffee supplied per member. It maximises members’ total returns from both, coffee cultivation and processing and marketing operations. Production of raw coffee is considered as part of its members’ income generation process. The cooperative acts as if production of its suppliers is internal production (Tennbakk, 1992).
An open-membership cooperative neither specifies the number of total members nor the quantities of raw coffee supplied per member. There is no strategic interaction between members to jointly determine the optimal output level at which total returns are maximised. Members make their output decision individually, with the intention to maximize individual returns. They consider that cooperative’s profits are distributed to farmers as patronage dividends. Increasing coffee output submitted to the cooperative also increases the farmer’s share of captured profits. While making their individual output decisions, farmers do not take into account the impact of their behaviour on other members’ profits (Albaek and Schultz, 1998). Production is increased until cooperatives profits are eliminated. This means that net income is higher in membership-restricting cooperatives than in open cooperatives (Sexton, 1990). However, both provide higher net incomes to farmers than for-profit intermediaries do (Tennbakk, 1992), i.e. there is an income gap between associated and independent farmers.
“might lead the profit seeking firm to temper their use of (market) power with prudence” (Helmberger, 1964:616). The middleman is forced to pay a more competitive producer price, more comparable to the price level of cooperatives. Hence, cooperatives correct for market failures, decreasing the market power exerted by middlemen. However, an income gap between associated and independent farmers always persists (Tennbakk, 1992, Albaek et al., 1998).
Conclusion:
Albaek and Schultz (1998) conclude that it is always more profitable to be associated to an agricultural marketing cooperative, than selling to a for-profit processor. Hence, at all times there is an incentive to join a cooperative. The monetary advantages provided by cooperatives explain the success of agricultural unions. Albaek and Schultz prognosticate, “that in the long run all farmers would be members of the cooperative” (1998:401). Monetary advantages are further intensified in the case of coffee export cooperatives selling to alternative trade markets with Fair Trade and organic certifications. Alternative trade export cooperatives provide their members with higher and more stable incomes than conventional coffee export cooperatives do. Hence, the income gap between associated and independent farmers is further amplified.
The cited literature suggests that rationally behaving small-scale coffee farmers will become associated to alternative trade export cooperatives. Why then is it that until today not all small-scale farmers joined a cooperative?
2.3. Fair Trade and its Impact
The Fair Trade movement began several decades ago as a result of efforts from alternative trade organisations (ATOs). At the end of the 1980s, the ATOs started to label Fair Trade products in order to broaden their availability and making them obtainable in supermarkets. In 1997 the Fairtrade Labelling Organisations International (FLO) was established, an umbrella association consisting of 20 labelling initiatives, such as for instance Max Havelaar or TransFair.
The Fair Trade movement seeks to improve the economic position of disadvantaged farmers (Murray et al., 2004). It “is a trading partnership based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South” (IFAT, 2004, cited from Bacon 2005:500)
small-scaled3
. The remainder of this chapter summarises the main advantages Fair Trade certified export cooperatives provide to its members.
2.3.1. Higher and more Stable Price
Coffee importers buying Fair Trade coffee must purchase directly from grower associations and have to rely on purchasing agreements lasting for more than one harvest cycle. Importers have to guarantee the FLO minimum price, a floor price fixed at US$ 1.21 per pound of Arabica coffee since 1989, plus 5 cent premium. If international coffee prices exceed the floor price, importers have to pay the international market price plus the 5 cent premium. The social premium has to be invested in social development projects by the cooperatives.
The international market price for coffee fluctuates severely. More often than not the international market price for conventional coffee remains below the Fair Trade minimum price, causing a price gap between fairly traded and conventional coffee.
Figure 2: Arabica Coffee Market Price: Fair Trade vs. Conventional Coffee
Source : FLO International4
The floor price ensures that farmers earn a sufficient income to cover production costs and maintenance of their families.
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FLO requires from its Fairtrade-certified cooperatives that more than 50% of total output must be produced by small producers. Small producers are those that are not structurally dependent on permanent hired labour, managing their farms mainly with their own and their family labour force. 4
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A major critique on the floor price of Fair Trade coffee argues that it “is a fundamental hindrance to the efficient functioning of the free market” (Nicholls, 2006:42). During rich coffee harvests with high output surpluses supply exceeds demand and the price has to adjust to return the market towards equilibrium. If however a supply shock occurs and prices are kept artificially high due to the imposed floor price, producers cannot sell their entire surplus crop since there are not sufficient buyers at such high prices. As a result there is a waste of product that could have been sold if the price was allowed to decline. This argument can currently be invalidated by the fact that Fair Trade does not account for more than 1% of the total coffee market (Nicholls, 2006). Thus, Fair Trade coffee cannot be seen as a price setter. Nevertheless, there are remarkable increases in sales volumes of speciality coffee in general and of Fair Trade coffee in particular. 24,222MT of FLO certified coffee was sold in 2004. Within one year the volume sold increased by almost 40% and amounted to 33,991MT in 2005 (FLO, 2006)5
. As Fair Trade market shares continue to increase, the imposed floor price might indeed create market distortions. Accordingly, it will be necessary to change the current fair trade system by making it more flexible during supply shocks. Nicholls and Opal (2006) suggest an abolition of the whole system once fair trade achieved a certain market share. They recommend the “sophistication of the price floor mechanism by offering different floors based on quality and origin. This would give buyers more options for offering Fair Trade-labelled product whilst remaining competitive on price” (Nicholls and Opal 2006: 42).
2.3.2. Access to Credit
Most rural regions in developing countries do not have competitive financial markets. Small-scale coffee farmers often rely on direct credit from local middlemen, charging skyrocketing interest rates. In contrast, export cooperatives often have access to formal credit institutions and can distribute loans at going rates to its members. Being Fair Trade certified increases a cooperative’s access to formal credit institutions due to their improved image (Murray et al., 2003). In addition, Fair Trade requires importers to provide up to 60% of the contract value in advance and at going interest rates.
2.3.3. Access to Technical Assistance and Quality Improvement
Only few small-scale farmers working independently have access to external technical assistance and training, helping to improve the quality and yield of the crop. Farmers have only a limited understanding of what coffee consumers and the respective international coffee vendors demand.
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“The majority of growers (…) have rarely tasted their own export-quality coffee. They do not know what a “speciality” coffee should taste like and rarely can explain the production and mill factors that contribute to quality” (Lyon, 2002:21). Long-term relationships between cooperatives and importers increase quality by providing feedback. Feedback is channelled from the importer to the cooperative and thus to the farmer, strengthening their ability to compete in the international coffee markets. Fair Trade enables cooperatives to provide a technical assistance team, teaching farmers in coffee tree management, soil fertility and conservation, pest management, harvesting techniques etc. (Murray et al., 2003).
2.3.4. Obstacles and Problems of Fair Trade
As mentioned, Fair Trade provides farmers with an above conventional coffee market price. International coffee prices are fluctuating and market prices for conventional coffee reach, at least sometimes, the Fair Trade floor price. Farmers’ commitment to Fair Trade channels is weak if international coffee market prices increase above the minimum floor price (Murray et al., 2003). Producer will defect from Fair Trade channels and also from their cooperatives, once the price gap between the cooperative’s Fair Trade price and the market price for conventional coffee declines (Lyon, 2002). “If members market their coffee elsewhere, it can lead to cooperative’s failing to meet their contractual obligations, which can result in de-certification from Fair Trade” (Murray et al., 2003:17).
Currently, more coffee is produced under Fair Trade certifications than actually sold to the Fair Trade market. If farmers defect from Fair Trade, the current over-supply could be reversed, leading to inadequate supplies. Under such a scenario, Fair Trade brokers will not be able to supply the demanded coffee and accordingly buyers will leave the market. In a subsequent downturn of conventional coffee prices, cooperatives might not be able to find Fair Trade buyers, or as a worst case, not even a Fair Trade market. Fair Trade therefore requires loyalty and commitment from both, producers and buyers to ensure a stable system providing the mentioned benefits.
2.3.5. Certified Organic Coffee Production
certification obligations require intensive shade regulations, pruning and renovation of the coffee plants, and bi-annual clearing of the under brush (Calo and Wise, 2005).
The organic niche market is growing significantly, having average annual growth rates of 12-20% (Calo and Wise, 2005). Until recently, demand for organic coffee was still exceeding supply. In the past years, however, demand and supply have become more balanced. Organic premiums have declined as supply increased, although average quality has been improving over time (Ponte, 2004). The price for conventional organic coffee discloses a high variation and depends mainly on quality. Organic coffee generally yields a premium of US$ 0.10 to 0.50 per pound above the market price for conventional coffee. Organic certification does not impose a minimum floor price, as in the case of Fair Trade. When international market prices for conventional coffee are high, organic prices are higher. However, when international coffee prices are low, as during the coffee crisis years 2001-2004, organic prices can fall below the costs of production. This represents an especially burdensome problem, since organic coffee is much more expensive to produce; it requires up to three times the labour of a moderately-tended conventional coffee plot (Calo and Wise, 2005). Most farmers being associated to a certified organic coffee cooperative are also certified by Fair Trade schemes (Milford, 2004). In the case of organic Fair Trade coffee a premium of US$ 0.15/lb above the Fair Trade prices is paid. Hence, the price is fixed at a minimum of US$ 1.41/lb (Calo and Wise, 2005) Being certified by both schemes provides long-term price stability which the organic premium cannot match alone.
3. Factors Impacting on Farmers’ Participation in Cooperatives
3.1. Age
Age is directly related to farmers’ attitudes towards risk aversion, flexibility to adapt to new market opportunities and/or openness towards innovation. The perception of risk and risk aversion is negatively related to age (Dohmen et al., 2006), i.e. older people tend to be more risk averse than younger. Alternative trade cooperatives are regarded as a mechanism to reduce a farmer’s risk and vulnerability, offering more stable and mostly higher incomes (Bacon, 2005; Utting-Chamorro, 2005). Thus, if farmers participate in cooperatives to reduce exposure to low and fluctuating coffee prices, then older farmers will be more likely to join a cooperative.
Contrarily, age is negatively related to flexibility and adoption of innovations (Diederen et al., 2003). If Fair Trade and organically grown coffees and membership in cooperatives are considered as innovations, then younger farmers are more likely to join a cooperative. Furthermore Diederen et al. (2003) argue that “older farmers have a shorter time horizon and be less inclined to invest in novelties” (2003:41). The marginal benefit derived from participating in cooperatives decreases with age due to the shorter time horizons. Incurred expenses from joining, such as administrative procedures and mandatory group meetings or entry requirements, are however the same, regardless of time horizons. Costs also accrue if farmers switch to alternative production practices, such as Fair Trade or organic, deterring entry for farmers with very limited time horizons.
For small-scale coffee farmers, the time horizon argument is more important than the risk aversion argument. Risk aversion is a general poverty problem and most poor producers are highly risk-averse (Nicholls et al., 2006). Almost all small-scale coffee farmers in rural Nicaragua are poor, most of them living in subsistence. Hence:
H1: Younger farmers are more likely to become associated to a cooperative than older farmers.
3.2. Quality
parchment coffee to green coffee and brings return business” (Bacon, 2002:16). Continuous quality improvements helped Nicaraguan export cooperatives to become known for the delivery of outstanding quality. Prices for their conventional coffee output are often negotiated outside of international coffee markets. Because quality is positively related to market access and prices export cooperatives demand high quality beans with few defects from their members.
Independent farmers are less constrained to produce a high quality output. Volatility in coffee prices hinders them to predict the price level their output will yield when harvested month later. Consequently it is almost impossible to predict the appropriate level of cost and financing over the production cycle (May et al., 2004). In addition, independent farmers miss long-term relationships with established traders. Selling on the local spot market exhibits the problem of asymmetric information, reducing the ability of producers to efficiently negotiate with other actors in the value chain. Quality on the spot is hard to quantify by the purchasing party and small coffee farmers are often in a weak bargaining position.
A quality gap between associated and independent farmers is likely to exist, being partially due to cooperatives’ politics of demanding a high quality coffee output and providing price incentives to do so. I.e. the quality gap increases over time with associated farmers gaining experience in cooperatives. However, if farmers differ in quality levels before joining, it can be expected that producers with relatively higher levels are more likely to become associated. Farmers with low quality levels might feel overstrained by the cooperatives’ quality demand. In contrast, producers with relatively higher quality levels feel more able to satisfy cooperatives’ quality obligations. Altitude is a good proxy to measure quality as height improves the climatic conditions for coffee cultivation (Bacon, 2005). The amount of imperfect beans contained in the raw coffee output when submitted to cooperatives and middlemen is another proxy.
H2: Farmers with relatively higher quality levels of raw coffee are more likely to become associated to alternative trade marketing cooperatives.
3.3. Household Size
remunerated in cash and thus does not incur direct financial expenses. Organic production is therefore likely to be more attractive to farmers with larger households and abundant labour. In contrast, farmers without abundant labour in their household are more likely to reject from organic cultivation. This in turn withholds them the price premium paid for organic coffee, making them less probable to opt for joining an alternative trade marketing cooperative.
Furthermore family size is often a main determinant for household poverty in developing countries (Orbeta, 2005). The more family members being directly dependent on cash income generated through coffee sales, the larger the household’s vulnerability to fluctuating coffee prices and hence the stronger the incentive to become associated to a cooperative providing higher and more stable prices. Accordingly:
H3: Farmers with relatively larger households are more likely to become associated to a cooperative.
3.4. Level of formal Education
Farmers with relatively higher level of formal education are more likely to reasonably assess the costs and benefits of cooperatives and feel confident to correctly evaluate the consequences of a long lasting contractual relationship with a cooperative. In contrast, farmers who hardly can read might feel more exposed, as contractual information can only be assessed orally. Hence, it can be assumed that farmers with relatively higher levels of formal education are more likely to become associated to a cooperative.
However, level of formal education also determines if farmers can engage – at least potentially – in alternative cash income generating activities. This holds especially true for income generating activities outside agriculture (Bezemer et al., 2004). Relatively lower levels of education are likely to increase farmers’ dependency on coffee sales and hence vulnerability on fluctuating coffee prices. Alternative trade marketing cooperatives decrease farmers’ vulnerability and are therefore likely to be most valued by the most marginalized and exposed coffee farmers.
3.5. Income generated through coffee production
Income Share
Farmers generating all or relatively larger shares of total cash income from coffee sales are exposed to fluctuating coffee prices. These farmers are the most likely to appreciate higher and more stable price levels provided by alternative trade marketing cooperatives, to actively decrease their risk and vulnerability to volatile prices.
Furthermore, it can be expected that farmers generating only a limited fraction of total monetary income through coffee sales, regard the effort and costs of joining a cooperative as too high. Accordingly:
H5: Farmers with relatively larger shares of cash income generated through the production of coffee are more likely to become associated to alternative trade marketing cooperatives.
Income Sources
Many cooperatives help their members to diversify income, as an alternative buffer against volatile agricultural prices (Aranda and Morales, 2002). However, none of the cooperatives included in this research directly helped their members to diversify income sources so far. Currently, the UCPCO6 is trying to establish contacts to international importers of certified Fair Trade bananas. Bananas are grown within the coffee plots and are mostly used for self-consumption, as local market prices for fruits are extremely low. However, the UCPCO’s effort of diversification started only recently and has not been accomplished so far.
In general it can be assumed that each additional income source shelters farmers from exposure to volatile coffee prices, i.e. vulnerability decreases. Clearly this depends to a large degree on the sources’ possibility to generate cash income. Vending further agricultural produce is often a less successful strategy to reduce vulnerability than diversifying into off-farm activities (Bezemer et al., 2004). Hence:
H6: Farmers with no or relatively few cash income sources next to coffee sales are more likely to join alternative trade marketing cooperatives.
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Income frequency
Income frequency refers to the number of times a year the farmer receives a cash income. If income is received irregularly, such as for instance only once or twice a year, it increases the need to rely on a stable and predictable price level. Hence, I expect that income infrequency is positively related to participation in alternative trade cooperatives.
H7: Farmers with relatively less frequent incomes are more likely to become associated to alternative trade marketing cooperatives.
3.6. Size of Farm and Coffee Field
Although alternative trade networks (and especially Fair Trade) aims to work with marginal producers, it is this marginality hindering farmers to actively participate in these channels (Raynolds, 2002). Many cooperatives have minimum volume requirements, deterring entry for the smallest producers. Furthermore, farmers with tiny coffee plots may regard the effort of joining alternative trade marketing cooperatives as too high. Accordingly, it is unlikely that the smallest among the small-scale coffee farmers regard cooperatives as a cost-effective alternative to the local middleman. However, none of the alternative trade export cooperatives included in this research have minimum volume requirements and thus do not exclude small coffee farmers. The smallest farmer surveyed for this research has a coffee field of 0.5 manzanas, being equivalent to 0.35 hectares. Being small, however, also reduces farmers’ bargaining power on the local market, due to limited output volumes. Hence, the smaller the coffee farmer the higher his exposure and vulnerability to market power exerted by middlemen.
Furthermore, small coffee fields mostly do not return sufficient income to justify investment in farming equipment. Being associated to a cooperative provides the opportunity to jointly purchase equipment, such as for instance pulping machines. In addition, farmers with tiny coffee fields are likely to be the poorest producers, lacking financial resources to purchase chemical fertilizers and pesticides. Switching from passive to active certified organic cultivation increases yields and prices and is more profitable than for producers applying chemicals in their production processes.
3.7. Past Experience with Coffee Production
The impact of past experience with coffee production on participation in export cooperatives is not straightforward. On the one hand, farmers cultivating coffee for generations might feel conservative towards cooperatives, as they are used to working independently. On the other hand, farmers coming from a traditional coffee family are less likely to abandon coffee production during the next coffee price crisis. Accordingly, they might appreciate marketing cooperatives as a means to increase and stabilise income from coffee sales, enabling them to keep their coffee plots existing during periods when the local market price for conventional coffee drops below production costs.
H9: Farmers cultivating coffee in the second or third generation are more likely to become associated to alternative trade marketing cooperatives than first generation coffee farmers.
3.8. Trust, Honesty, Competence
Trust between people is a crucial concept in the general literature about social capital. Trust is an “expectation that one will not be exploited by another. This expectation is based in part on the perception of the trustworthiness and competence of the entities in whom trust is placed” (James and Sykuta, 2006:136). Both, trustworthiness and competence are necessary conditions for trust to arise. Trustworthiness refers to the trustee’s motivation or intention to behave in the truster’s interest, while competence refers to his abilities to actually do so. If either perceived trustworthiness or competence is low, trust might not be present.
Trust placed in cooperatives
Trust is high in those cooperatives promoting a perception of equality among members, whereas greater heterogeneity of member interests has a negative influence on organisational trust. Fair Trade labelling organisations require cooperatives to be run democratically and transparently, increasing the likelihood of equal treatment among members. Furthermore, small-scale coffee farmers can be considered as a relatively homogeneous group with respect to interests that shall be fostered in cooperatives. It can thus be assumed that perception of equality and equal treatment is high in alternative trade marketing cooperatives.
H10: Farmers placing relatively higher levels of trust in cooperatives are more likely to become associated to alternative trade marketing cooperatives.
Trust placed in co-farmers
Secondly, I will analyse the relationship of trust between members of a cooperative. Producers tend to deviate from Fair Trade and their cooperatives if the price gap between Fair Trade and conventional coffee declines. The cooperative might lose its fair Trade certification if it fails to meet its contractual obligations as too many farmers market their coffee to local middlemen. Hence, individual members failing to submit their output to the cooperative are a hazard to their co-members. All members will be excluded from alternative trade markets if the cooperative loses its certifications. Mutual trust among members that no one will defect from supplying to the cooperative is a key determinant for participation.
Furthermore, control inspections to verify that farmers stick to the obligations defined in specialty coffee certification contracts occur mostly via a random sample of the whole cooperative population (Rice, 2000). Farmers do not only have to commit to the defined obligations themselves, but also have to trust that co-members of the cooperative will commit as well. If a randomly inspected farmer is found to deviate from the cultivation obligations, the entire cooperative will be excluded from the alternative trading register.
H11: Farmers placing relatively higher levels of trust in co-farmers are more likely to join alternative trade marketing cooperatives.
Determinants of trust
channels target the most vulnerable coffee farmers, reducing their risk to volatile coffee prices and I expect that vulnerability is positively related to participation. Hence, it can be inferred that the most vulnerable farmers are also anticipating the largest gains from correctly trusting in cooperatives, i.e. vulnerability impacts positively on trust placed in cooperatives. However, what I am driving at here are not the determinants of participation (the main building block of this thesis), but rather which factors influence trust placed in cooperatives. I will fit four ordered logistic regression models with trust placed in cooperatives and trust placed in middlemen being the respective dependent variables. I expect that trust is related to some factors which in turn influence participation in cooperatives. This approach is a two-stage explanation of participation. Whereas in the first stage I will directly assess factors influencing participation, the second stage evaluates how trust influences these factors. If it turns out that trust in cooperatives and vulnerability are indeed main determinants for participation, I prognosticate that vulnerability is also a main determinant for trust placed in cooperatives to arise.
H12: Vulnerability to fluctuating coffee prices is positively related to trust placed in cooperatives.
4. Methodology
Primary data for this study was collected in a fieldwork, being described in chapter 5. In the remainder of this chapter I describe the construction of the variables used in the subsequently illustrated regression models.
4.2. Variables
ASSOC: The variable evaluates if farmers are associated to a cooperative or rather operate independently. Associated farmers are coded with a one, independent farmers operating are coded with a zero.
HH-SIZE: The variable measures how many persons are living in the household, being dependent on cash income from coffee cultivation. The variable assumes a value equivalent to the number of persons living in the household. Its value ranges from two, being the smallest household in the sample, to eleven, being the largest household in the sample.
GEN: Evaluates past experience, i.e. since when the family has been cultivating coffee. Focus is not on a specific year in which some relative started coffee production, but rather in which generation coffee production is today. The variable assumes a value of one if the respondent’s parents did not cultivate coffee. It assumes a value of two, if coffee cultivation is in the second generation, and a value of 3 if it is the third or more generation.
Being in the second generation does not necessarily imply that the respondent inherited the farm from his parents. Many farmers were borne and raised by coffee farmers, but bought their own farm some time ago.
EDU: The variable is based on the respondent’s highest level of formal qualification. I developed four categories: No education at all and cannot read or write; primary school (not necessarily completed) or can write and read a bit; secondary school (not necessarily completed); post-secondary education such as university. According to the category each farmer was assigned a value of one (lowest category) to four (highest category).
FARM: Farm size is measured in manzanas, an official unit of measurement in Nicaragua. One
manzana is equivalent to 0.7 hectares. Many coffee farmers have, apart from their coffee plot, a
small field for other agricultural production such as beans, vegetables etc., mostly used for self-consumption. Some also have mountain area in their farm, which is not used for any agricultural production. Total farm size ranges from 0.5 manzanas to 40 manzanas.
FIELD: This variable refers to the size of the coffee-field, and is measured in manzanas. The variable ranges from 0.5 manzanas to 30 manzanas.
YIELD: Measures output per hectare in quintales of green coffee per manzana. One quintal is equivalent one hundred pound. The variable’s value ranges from two to 30. Yield fluctuates substantially among farmers, depending on access to inputs and whether they use chemical fertilizers or adopt organic cultivation.
IMPERF: The variable is based on the number of imperfections the coffee output has when submitted to the cooperative or the middleman. I created three categories: farmers submitting coffee with many imperfections; farmers submitting coffee with few imperfections and farmers submitting coffee without any imperfections. The first category was assigned a value of three, the second category a value of two, and the third category a value of one. Note that lower values imply that associated farmers submit a higher level of quality, as their output contains fewer imperfections.
ALT: The variable indicates the height of the farm above sea level. It assumes a value equivalent to the altitude of the coffee field and ranges from 750 to 1800.
INC-SOURC: Measures how many cash income sources a farmer has next to coffee cultivation. I assigned a value equivalent to the number of cash income sources to the variable. I.e., if coffee sales was the only source of cash income, the variable adopts a value of one. Farmers having one additional source generating cash income – such as sales of other agricultural output, running a kiosk or having a permanent salaried work off-farm etc. – were assigned a value of two and so on. Note that the variable does not differentiate between sources generating income on a regular basis (such as monthly) and sources generating cash income only once or twice a year. Being employed as a teacher with a monthly salary has thus the same loading as selling once a year some hens or beans. Neither does this variable reveal the share of total income generated through other income sources. The variable adopts a value between one and four.
OFF-FARM: The variable analyses if farmers participate in any rural non-farm activities generating a cash income. The variable adopts a value of one if the respondent has additional sources of cash income next to coffee that are not directly related to any agricultural activity. It adopts a value of zero if the farmer has no cash income generated in off-farm activities.
interviewed could neither estimate precisely how much cash income they earn throughout the year. This holds especially true for farmers with other agricultural output sales next to coffee, often with variation in total quantities sold and fluctuating local market prices. Assessing the variable was thus not always trouble-free and often required a sure instinct and basic calculations. Therefore the value of the variable is – at least for some cases – rather a rough estimate than a precise declaration. The value of the variable ranges from 10, indicating that up to ten percent of annual income is generated through coffee sales, to 100, indicating that total cash income is obtained from coffee sales. A value of 20 indicates that between 10 and 20 percent of annual income is generated through coffee sales etc.
INC-FREQ: Respondents were asked how much of their annual cash income they receive in each month of the year. Based on the responses, I constructed a measure evaluating income frequency. Assessing this variable was not straightforward either, many farmers did not keep track in which months they receive a cash income. Many could neither safely state if they receive a cash income three or four times a year. To smooth out this difficulty – at least as far as possible – I constructed the following six categories: Farmers stating that they receive a cash income once or twice a year were assigned a value of one, farmers indicating that they receive a cash income three or four times a year were assigned a value of two; farmers stating that they receive a cash income five or six times a year were assigned a value of three, and so on. I.e., I embraced cash income on a bimonthly basis, making the estimation more accurate. The variable assumes a value between one and six. However, the variable does not reveal how much cash income is received each month. A farmer having some cash income each month might still receive a large fraction of total annual cash income in only one or two month of the year.
PRICE-COOP: Respondents were asked if they believe that the cooperative returns a fair value to its suppliers, measured as prices paid to producers, technical assistance provided etc. Responses were measured on an inverted five-point Likert-scale, ranging from one, i.e. “I strongly do not believe so”, to five, i.e. “I strongly believe so”. Note that this is a very subjective ranking and does not reflect the actual price paid to the producer.
strongly believe so”. It has to be mentioned that the local market price for conventional coffee has been extremely high in the past few month and when collecting primary data.
TRUST-MEM: Respondents were asked to what extent they believe that associated farmers are working with an effort comparable to the respondent’s own effort on his plot in order to conserve or increase the quality of the coffee output.
I established three categories: category one files farmers believing that other members of the cooperative do not work with the same effort on their plots, but rather with less effort. A value of one was assigned to this category. The second category files respondents believing that other members work with the same effort on their plots; I assigned a value of two to these cases. Category three files those respondents, indicating that associated farmers work with an effort exceeding his effort on their coffee fields. I assigned a value of three to this category’s cases. The variable thus ranges from one to three. Farmers responding “don’t know” are considered as missing.
TRUST-IND: Respondents were asked to what extent they believe that independent farmers are working with an effort comparable to the respondent’s own effort on their coffee fields in order to conserve or increase the quality of the coffee output. As before, I created three categories: respondents believing that independent farmers work with less effort on their coffee fields; with the same effort; or with an effort exceeding the respondent’s effort. I assigned a value of one to category one cases, a value of two to category two cases and so on. The variable thus ranges, theoretically from one to three; however no respondent was filed to category three.
COM: Respondents were asked to what extent they believe that the cooperative as an entity has the competence and capacity to work efficiently. Responses were measured on an inverted five-point Likert-scale, ranging from one, i.e. “I strongly do not believe so”, to five, i.e. “I strongly believe so”. The variable thus adopts a value between one and five.
T&H-COOP: Respondents were asked whether they believe that the cooperative as an entity operates for the benefit and interest of the small- and medium-sized farmer. Furthermore respondents were asked if they believe that the employees of the cooperative are honest. Responses to both questions were measured on an inverted five-point Likert-scale, ranging from one, i.e. “I strongly do not believe so”, to five, i.e. “I strongly believe so”.
The variable assumes the value of the weighted mean of the two responses, whereas both answers have the same weight. If respondents answered “don’t know” to one of the two questions, the variable assumes a value equivalent to the response to the other question. The variable thus assumes, theoretically, a value between one and five. However, it has to be mentioned that the variable assumes two as the lowest value in the sample.
T&H-MID: Respondents were asked whether they believe that the local middleman is operating for the benefit and interest of the small- and medium-sized farmer. Furthermore respondents were asked if they believe that the middleman is honest. Again, responses to both questions were measured on an inverted five-point Likert-scale, ranging from one, i.e. “I strongly do not believe so”, to five, “I strongly believe so”.
The variable assumes the value of the weighted mean of the two responses, with both answers having the same weight. If a respondent answered “don’t know” to one of the questions, the variable assumes a value equivalent to the response to the other question. The variable thus assumes a value between one and five. In contrast to the variable T&H-COOP, the variable T&H-MID uses the whole range of values.
4.2. The Model Assessing Participation
To gain a better understanding of how the most central factors influence farmers’ participation in alternative trade cooperatives, I fitted a series of binary logistic regression models. The models adopt the following general form:
(1) logit (pi) = ln(pi/1-pi) = 1X1,i + …+ nXn,i
The dependent variable is dichotomous and adopts a value of 1 (being associated) with a probability of p1, or the value of 0 (operating independently) with a probability of 1-p1. Note that X1,i is set equal to one for all i to yield the intercept of the constant in the model. In total I fitted the following five models to investigate determinants of participation, ASSOC being the dependent variable. The results are summarised in table A1 in the appendix.
Model 1: ln(p1/1-p1) = 11CONSi + 12AGEi + 13IMPERFi + 14HH-SIZEi + 15EDUi +
16INC-SHAREi + 17INC-FREQi + 18WORKi + 19FIELDi + 110GENi
Model 2: ln(p1/1-p1) = 21CONSi + 22AGEi + 23AGE2i + 24IMPERFi + 25COMi +
26T&H-COOPi + 27T&H-MIDi + 28HH-SIZEi + 29EDUi + 210INC-FREQi +
211INC-SOURCi + 212FARMi + 213GENi
Model 3: ln(p1/1-p1) = 31CONSi + 32AGEi + 33ALTi + 34TRUST-MEMi + 35TRUST-INDi
+ 36HH-SIZEi + 37EDUi + 38INC-SHAREi + 39OFF-FARMi + 310WORKi +
311GENi + 312YIELDi + 313PRICE-COOPi + 314PRICE-MIDi
Model 4: ln(p1/1-p1) = 41CONSi + 42AGEi + 43AGE2i + 44ALTi + 45IMPERFi + 46COMi
+ 47HH-SIZEi + 48EDUi + 49INC-SHAREi + 410FIELDi + 411GENi + 413ORGi
Model 5: ln(p1/1-p1) = 51CONSi + 52HH-SIZEi + 53INC-SHAREi + 54INC-SOURCi +
55OFF-FARMi + 56WORKi + 57FIELDi + 58YIELDi + 59ORGi
experience in cooperatives. For instance, all variables representing trust are likely to be biased due to associated farmers’ experience and will be discussed in more detail in the next chapter.
Model one includes only those variables that are not subject to the suspicion to alter with experience in cooperatives. Model two, three and four add variables assessing farm size, trust, quality, income, yield, prices and organic production. While fitting the models I paid attention to including variables assessing trust, income, farm size, experience, household size, education and quality in each model; i.e. that a certain net effect of all factors investigated is always present. It was impossible to include all variables in one model, since some variables are correlating with each other. To overcome this difficulty, each of models two, three and four incorporates only a few proxies of each factor. The decision which variables to include in each model is based on eliminating multicollinearity among variables. I ran a variance inflation factor analysis (VIF) for each model, eliminating variables with VIF values exceeding 5, which was set as the cut-off point. Model 5 includes those factors being a good indicator of farmers’ vulnerability to fluctuating coffee prices. Again, variables with VIF values exceeding 5 were deleted from the model, eliminating multicollinearity among variables.
Note that there are scale unit differences between the independent variables; comparing values of the coefficients is thus not meaningful. Results are rather discussed on basis of the signs of the coefficients. The coefficient estimates represent the statistical association between the independent variables and farmers’ decision to join a cooperative.
The following table describes mean values for some selected variables. A more detailed summary of mean values for all variables is found in the appendix in table A2. I generally used all available cases for calculating mean values, i.e. due to missing cases the underlying sample size may vary slightly from variable to variable.
Table 1: Mean values
Variable Mean Value Variable Mean Value
Comparing the mean values of the various variables on a discrete level, and severally for independent and associated farmers, allows to make conclusions about differences in the mean value.
4.3. The Model Assessing Trust
To identify the determinants of trust placed in the middleman and trust placed in the cooperative I fitted four ordered logistic regression models. Model 6 and 7 incorporate T&H-COOP and model 8 and 9 T&H-MID as the dependent variables. Using STATA as the statistical computer software, the models adopt the following general form:
(2) Logit (p1) =ln(p1/1-p1) = 1 – (1X1,i + …+ nXn,i )
Logit (p1+ p2) = ln((p1+ p2)/(1-p1-p2) = 2 – (1X1,i + …+ nXn,i )
…
Logit (p1+ p2 +…+ pn) = ln ((p1+ p2 +…+ pn)/(1- p1- p2 -…- pn)) = j – (1X1,i + …+ nXn,i )
= ln (pij/1-pij) = j –(1X1,i + …+ nXn,i )
and p1+ p2+ ...+ pn+1 = 1
Ordered logistic regression models the cumulative probability of being in a certain response category and simultaneously estimates multiple equations. The number of equations it estimates equals the number of categories in the dependent variable minus one. T&H-COOP has 7 response categories (2; 2.5; 3; 3.5; 4; 4.5; 5) and T&H-MID has 9 response categories (1; 1.5; 2; 2.5; 3; 3.5; 4; 4.5; 5). Note that the number of intercepts for each model equals the number of categories in the dependent variable minus one.
Model 6: ln (pij/1-pij)) = 0iCONS – (61ASSOCi + 62HH-SIZEi + 63EDUi + 64INC-SHAREi
+ 65INC-SOURCi + 66OFF-FARMi + 67WORKi + 68FIELDi + 69GENi +
610YIELDi + 611ORGi + 612PRICE-COOPi + 613PRICE-MIDi)
Model 7: ln (pij/1-pij)) = 0iCONS – (71AGEi + 72ALTi + 73iIMPERF+ 74COMi + 75
T&H-MIDi + 76TRUST-MEMi + 77TRUST-INDi + 78ORGi + 79PRICE-COOPi +
Model 8: ln (pij/1-pij)) = 8iCONS – (81ASSOCi + 82HH-SIZEi + 83EDUi + 84INC-SHAREi
+ 85INC-SOURCi + 86OFF-FARMi + 87WORKi + 88FIELDi + 89GENi +
810YIELDi + 811ORGi + 812PRICE-COOPi + 813PRICE-MIDi)
Model 9: ln (pij/1-pij)) = 9iCONS – (91AGEi + 92ALTi + 93iIMPERF+ 94COMi + 95
T&H-MIDi + 96TRUST-MEMi + 97TRUST-INDi + 98ORGi + 99PRICE-COOPi +
910PRICE-MIDi + 911OFF-FARMi)
Regression models 6 and 8 assess the influence of farmers’ vulnerability on trust placed in cooperatives and middlemen. Models 7 and 9 analyse how overall levels of trust and monetary benefits influence trust placed in cooperatives and middlemen. Table A3 in the appendix summarises the results.
Multicollinearity among variables was again ruled out by VIF analysis, using a value of 5 as the cut-off point.
5. Field-study Chronology and Data
5.1. Presentation of the Cooperatives
The following is a brief description of the four alternative trade marketing cooperatives that were investigated throughout this research. All cooperatives are located in the municipality San Juan de Rio Coco, department Madriz in the northern highlands of Nicaragua. The region suffered especially hard during the civil war years of the 1980s. Most farms were abandoned during that period and almost all economic activity came to a halt. Until today the existing infrastructure is only marginal, aggravating the coffee farmers’ access to the local coffee markets. However, this region is – next to Jinotega and Matagalpa – one of the most important coffee producing regions in Nicaragua.
5.1.1. UCPCO
UCPCO (Unión de Cooperativas Productoras de Café Orgánico) means “Union of Organic Coffee-Producer Cooperatives”. The UCPCO is a second-level cooperative and was founded in 1993 by its 6 first level cooperatives. Last year all coffee producers from the regional branch office of UNAG7 joined the UCPCO and started submitting their coffee output, increasing total member number from 158 to 286. Before that, the number of members has been relatively stable over the past years. All members of the UCPCO have to be associated to one of the six first-level cooperatives or to the regional branch office of UNAG. Members have to supply their coffee output to the cooperative, i.e. coffee cannot be sold on the local market if the price is considered to be better.
There are no insurmountable entry requirements, hindering farmers to join the cooperative. New members have to pay a deposit of 500 Cordoba, a security that is reimbursed with withdrawal from the cooperative. Fair Trade and organic certification obligations require farmers to keep account of weekly working hours. Farmers have to write down explicitly which activity they did on their coffee plot when and how many hours they devoted to the it. Furthermore, during harvest periods, they have to record how many labourers they employed and how much coffee each worker harvested on a daily basis. However, even though these obligations are not new, most farmers miss to keep accurate records.
The aim of the UCPCO is to foster, strengthen and amplify organic coffee production in the region. Consequently, all members are certified as producing Fair Trade and organic. All coffee output is exported to the alternative trade market niches in the United States and Germany. The volume of coffee exported in 2007 was 4857.14 quintales, generating an income of 778,292.33 US$ (after commission and interest payments). All business operations are completely financed by surpluses generated from exports. The UCPCO paid its members 2250 Cordoba8
(127.59 US$) per quintal in 2007. Furthermore members receive technical assistance regularly.
The cooperative is run in a democratic and transparent manner. Each basis cooperative is electing its own president, on a one vote per member basis. The presidents of the basis cooperatives elect the management and president of the second-level cooperative.
The management of the UCPCO changed after a few troublesome years in January 2007. It was claimed that the former management was not really working in the interest of the producers. No one
7 UNAG (Unión Nacional de Agricultores y Ganaderos) is the largest agrarian union of small- and medium-sized producers, existing at a national level.
8
Cordoba is the Nicaraguan currency. The official exchange rate US$/C$ on May, 1st
was able or willing to provide me with more detailed information about the kind or impact of mismanagement of the former management. However, the new management seemed to leverage the cooperative again.
5.1.2. CORCASAN
CORCASAN (“Cooperativa Regional de Cafetaleros de San Juan de Rio Coco”) means “Regional Cooperative of Coffee-Producers in San Juan de Rio Coco”. Its total member number increased from 171 to 246 in the last year. The primary cause for new farmers joining the cooperative is not based in higher and more stable prices due to selling to Fair Trade and/or organic markets, but rather due to a food donation programme called PMA9
. Before starting with the PMA programme, the total number of members remained relatively constant over time. However, the manager of the cooperative was not able to provide me with more accurate information how many members entered or left the cooperative in the past few years.
Total coffee output increased from 7,800 quintales in 2005/06 to 10,300 quintales in 2006/07. All members have the Fair Trade certification, 68 members have the certification for organic coffee and 57 members produce under the Rainforest Alliance certification. The final price paid to consumers in the accounting year 2006/07 was 2000 Cordoba (113,42 US$) for Fair Trade and 2300 Cordoba (130.43 US$) for fairly traded organic coffee. Farmers submitting Rainforest Alliance coffee received the Fair Trade price, as certification expenses still absorb any market premiums paid under this certification scheme. All farmers received 1850 Cordoba in December 2006 when submitting their coffee crop to the cooperative. The remainder is paid as a final liquidation in June 2007.
In contrast to the UCPCO, the CORCASAN has no first-level cooperatives, it is rather a unification of many individual farmers.
5.1.3. PRODECOOP
PRODECOOP (“Promotora de Desarrollo Cooperativa”) means “Promoter of Cooperative Development” was founded in 1992 to improve the situation of small coffee producers. The cooperative works throughout northern Nicaragua and has a regional branch office in the
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department San Juan de Rio Coco with 530 members. All members produce Fair Trade coffee and 260 members additionally hold the certification for organic coffee. Total coffee output in 2006/07 was 20,000 quintal, half of it being organic. PRODECOOP paid its members 2000 Cordoba (113.42 US$) for their Fair Trade coffee and 2220 Cordoba (125.89 US$) for organic coffee.
5.1.4. UCA
UCA San Juan de Rio Coco (Union de Cooperativas Agropecuarias) has 228 members, 36 of them being women. All members produce organic Fair Trade Coffee. The UCA pays its members 2250 Cordoba (127.59US$) per quintal. According to the management, the total number of member increased by about 20 percent in the past two years. It provides its members with technical assistance.
5.1.5. Middlemen
In San Juan de Rio Coco there are two big for-profit exporters, operating at a national level. CISA Exportadora was founded in 1952 and is one of the Nicaraguan leaders in green coffee exports. CISA owns four large estate farms that hold different speciality coffee certifications, such as Rainforest Alliance certification or Utz Kapeh. However, independent small-scale farmers selling their raw coffee output to the regional branch office are not cultivating under any certification schemes.
Exportadora Atlantic is the largest national coffee exporter, negotiating 25% of national exports10 in 2004. Like CISA, Exportadora Atlantic has a regional branch office in San Juan de Rio Coco, to which independent farmers submit conventional coffee. El Gallo is the third middlemen based in San Juan de Rio Coco. All have proper processing plants, processing the raw coffee output to its final export stage. None of these exporters are coming to the farm gates, instead farmers have to transport their local coffee output to their respective offices in the city of San Juan de Rio Coco. Furthermore, there is a local intermediary purchasing raw coffee output to sell it to CISA and Atlantic for a small charge and often coming to the farm gates. He also purchases unprocessed raw coffee (not hulled dried cherries).
The fieldwork was conducted during low season, about 2 month after coffee harvest. All middlemen were not working and the respective branch offices were closed. Hence I could not get hold of more detailed pricing information from the respective middlemen themselves. However, most farmers provided me with relatively accurate prices received. The harvest period in the considered region
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lasts from November till January. On average, all middlemen paid producer prices ranging from 1400 Cordoba to 1800 Cordoba per quintal of green coffee, whereas prices in January were higher than in November.
5.2. Definition of Small-, Medium and Large-Scaled Farmers
The thesis refers to small and medium sized coffee farmers. Different definitions to classify farmers as small-, medium- or large-scaled co-exit. The Nicaraguan ministry of agriculture (MAGFOR) uses total coffee output per farm as a key attribute for classification. According to their definition, farmers are referred to as small if they produce up to 100 “quintal” of green coffee on their farm. A medium sized farm produces between 100 and 300 “quintal” of green coffee. A farm is considered as a large plantation if more than 300 “quintal” of green coffee are produced.
Other definitions use the size of the farm or the coffee field for classification. There is no one-best solution how many hectares a farm can have to be classified as being small. According to a report published by Consumers International (2005), farmers having 10 hectares or less are regarded as small. Medium-sized farms have 10 to 50 hectares and large plantations more than 50 hectares. From my point of view, using the size of the coffee field is the most plausible and intuitive characteristic to file farmers into one of the three mentioned groups. In this thesis only farmers with a coffee field of less than 30 manzanas are included, being equivalent to approximately 21 hectares.
5.3. Data Collection
Before the actual field study was conducted, the most relevant factors/variables influencing farmers’ participation in alternative trade coffee cooperatives were identified and discussed theoretically. Nicaragua was chosen as the geographical context for the research. While still being in Germany I established contact with the second-level cooperative UCPCO. I contacted MITKA11
, one of the main importers of the UCPCO’s coffee output located in Berlin, to get general information about cooperatives in Nicaragua. MITKA imports Fair Trade and organic coffee from a few cooperatives in Nicaragua and El Salvador and maintains constant and personal contact with these cooperatives. Anne Loewisch, manager of MITKA visits those cooperatives every two years, and left for the biannual encountering in January 2007. She took along an application from me,
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