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World Development Vol. 33, No. 12, pp. 20292044, 2005

2005 Elsevier Ltd. All rights reserved
Printed in Great Britain
0305-750X/$ - see front matter

doi:10.1016/j.worlddev.2005.06.007

Governing the Coee Chain: The Role of

Voluntary Regulatory Systems
ROLDAN MURADIAN and WIM PELUPESSY
IVO, Tilburg University, The Netherlands

Summary. The coee crisis has coincided with the emergence of a number of voluntary regulatory systems in the global coee chain. The present article explores the advantages and limitations
of such schemes, their impact on the chains governance, and their implications for farmers
upgrading. We conclude that participation in these systems does not ensure a better economic performance, but it may facilitate coordination between roasters/traders and some growers, which
may lead to upgrading opportunities. The paper also explores some possible options for deriving
rents from improved coordination along the coee chain.
2005 Elsevier Ltd. All rights reserved.
Key words coee, global commodity chains, governance, coordination, certication, voluntary
regulatory systems

1. INTRODUCTION
The price collapse witnessed by coee farmers in the last ve years has been characterized
by Osorio (2004), Executive Director of the
International Coee Organization (ICO), as
the worst coee crisis ever seen in terms of
growers incomes. During the 1990s, the
major events aecting the performance of the
global coee industry were the dismantling of
the International Coee Agreement (ICA) and
national coee boards, the boost of Brazilian
coee supply and the entrance of Vietnam as
a leading coee producer. 1 These events underpinned both the conditions for structural global
coee oversupply and a shift in the bargaining
power of agents in the coee chain. The outcome has been a new situation favoring accumulation of rent in the nodes located in
developed countries (Ponte, 2002a; Talbot,
1997a, 2002). There has been a price rebound
in 2005, yet it is too early to know if it will lead
to a long-lasting better price for farmers.
The breakdown of the ICA in 1989 had multiple causes, but probably the most important
ones were the incapacity of members to negotiate a new quota allocation, the lobby actions of
American rms (Acheson-Brown, 2003), and
the inability of producing and consumer coun-

tries to control extra quota coee movements

(Pelupessy, 2001). In response to the post-ICA
price shrink, some of the major coee producing countries formed the Association of Coffee-Producing Countries (ACPC), which
dissolved after the conspicuous failure of its
retention plan.
The interpretation of the relationship between deregulation and the coee crisis would
depend on the theoretical approach adopted
and the main issues for concern. From the
standpoint of economic eciency, the crisis is
an adaptation period that would lead to a more
ecient allocation of resources, as a result of
increased competition and the removal of market distortions, particularly those exerted by
national coee boards. Indeed, the post-ICA
situation has led to better price transmission
between exporters and producers (Krivonos,
2004), which is an indication of larger eciency. However, deregulation has not improved price transmission along the entire
* We would like to thank three anonymous referees,
Rafael Diaz from CINPE-Universidad Nacional (Costa
Rica) and Guillermo Denaux Jr., for their comments on
an earlier draft. Funding by EU/INCO, Contract ICA4CT-2002-10010. Final revision accepted: June 17, 2005.

2029

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WORLD DEVELOPMENT

chain, and in some respects appears to have

worsened it noticeably (Shepherd, 2004) at the
expense of growers and consumers interests.
This suggests that market failures are still
in place, caused by excessive market control
by intermediary agents (monopsonyoligopoly).
A third reading of the problem is also possible. The coee crisis might be conceptualized as
a governance failure, since (a) the impact of
dismantling the ICA and the national coee
boards was not suciently assessed ex ante;
(b) measures were not taken to prevent the
shocking eects of liberalizing the industry on
the livelihoods of millions of coee growers,
and as a result, the crisis has pulled down thousands of coee farmers below poverty lines
(ECLAC, 2002); (c) very low prices have
aected the capacity of growers to invest in
quality improvement or good maintenance
practices. In addition, in most of the cases,
other institutions did not adopt the quality regulation role of national coee boards after the
liberalization process (Ponte, 2002b). 2 Generalized quality decits and unstable supply of
green coee may negatively aect the economic
performance of roasters in the long run, leading
to a loselose situation; and last but not the
least (d) the response of multilateral and national institutions to the crisis has been slow
and in most cases ineective, mainly due to
the fact that they lack the capacity to implement concerted policies.
The falling leverage of state-driven institutions dealing with transnational policies in the
coee sector has called for alternatives outside
the pubic domain for governing the coee chain
and alleviating the coee crisis (Hillocks, 2001;
Ponte, 2001). In the present article, we examine
the relationship between voluntary regulatory
systems, the governance structure of the coee
chain, and upgrading opportunities for farmers. Some policy options are also explored. Section 2 presents a theoretical framework for
understanding the governance structure of global commodity chains and its relationship with
public or voluntary regulatory regimes. Section
3 discusses the most important voluntary regulation systems in the coee sector. Section 4
assesses the impact of these systems on the
forms of coordination in the coee chain, as
well as the upgrading opportunities they oer
to growers. Section 5 addresses policy options
for improving the position of farmers, while
the last section summarizes the main conclusions.

2. GOVERNANCE, COORDINATION,
AND REGULATION IN
GLOBAL CHAINS
Global commodity chains are border-crossing value adding networks of labor and production processes whose end result is the use of a
nished commodity (Gere & Korzeniewicz,
1994). An essential property of the chain is its
governance structure, which determines to a
considerable extent how resources and gains
are allocated and ow within the chain (Gere,
1994). The overall mode of governance (or driverness) of a chain refers to the extent to which
the leading segment(s) exert control over information exchange and production activities, and
therefore are able to shape the functional division of labor along the chain and to set entry
barriers. This is a key mechanism through
which economic prots may be concentrated
in particular segments (Gere, 2001). Power
is exerted when some lead rms in the chain
are able to set and/or enforce the parameters
under which others in the chain operate (Humphrey & Schmitz, 2001, 2002). The governance
structure inuences the distribution of income
and margins between dierent segments of the
chain, since purposeful market and non-market
(coordination) activities taking place between
dierent rms may be a source of economic
rent.
Gere (1994) has coined two broad categories of governance structures for global commodity chains, namely producer-driven and
buyer-driven. Producer-driven chains refer
to upstream-controlled production systems
common in capital- or technology-intensive
industries. The buyer-driven chains category
is used to describe production networks controlled by downstream-located manufacturers,
large retailers, brand-name merchandisers, or
trading companies, common in labor-intensive
sectors. Normally, the role of TNCs in driving
both kinds of chains is quite signicant. Gere,
Humphrey, and Sturgeon (2005) have extended
these two categories to ve governance types
(market, modular, relational, captive, and hierarchy), stemming from the complexity of information involved in transactions, the extent this
information can be codied, and the capabilities of the suppliers. Ponte and Gibbon (2005)
rightly argue that these types should be considered as dierent forms of inter-segment coordination, instead of a typology of the overall
governance structure of value chains. In fact,
Dolan and Humprey (2004) have shown that

GOVERNING THE COFFEE CHAIN

some of these categories can be used to analyze

interactions at dierent points in the fresh vegetable chain between Africa and the United
Kingdom.
The term coordination is often used for
describing non-market relationships between
rms in dierent segments, or between external
(e.g., NGOs) and internal parties in the chain
(Kaplinsky, 2000). For the present article, we
use this concept to describe the exchange of
non-market information, capabilities, and
activities between two segments of the commodity chain that are not linked through ownership. Coordination is meant to ensure
particular product specications, including performance, processes, and logistics. Coordination is likely to arise in commodity chains
involving suppliers in developing countries
and buyers in industrialized countries, since it
is a suitable way to ensure reliable transactions
in the context of high risk, heterogeneous production conditions, technological backwardness, and unstable nancial systems that are
common in developing countries (Hobbs &
Young, 2001).
Inter-segment coordination in commodity
chains may take a large variety of forms, but
the following may be considered as a possible
simplied classication:
Market transactions: Typical arms length
transactions with low or missing coordination; low information exchange, mediated
mainly by prices and standard attributes of
products.
Weak coordination: This category
describes complex but not-so-specic (easy
to codify) information exchange. It is characterized by low monitoring cost for buyers
and low cost of switching to other commercial partners (both for suppliers and buyers).
Strong coordination: Considerable, complex and specic information exchange (difcult to codify), high monitoring and
switching costs (both for buyers and suppliers). In this case, mutual dependence is
likely.
Vertical integration: Complex information
and very specic information (most of the
time secret). Standards, processes, and logistics are controlled through ownership.
The variables we have selected for determining these coordination types are complexity of
information, ownership, and specicity of the
information. Complex information is a condition for coordination, otherwise the interaction
tends to fall in sheer market transactions. Com-

2031

plexity and specicity are two dierent properties of information. Complexity mainly refers
to the number of variables, processes, and standards involved in the specications of the product, as well as the necessary skills to meet them.
Information may be specic to a particular
interaction between two rms, either because
it is dicult to codify or due to particular
requirements from the buyer that only relatively few suppliers are able to meet. Specicity is meant to describe the extent to which
information about product specications is unique to the interaction between two rms/segments.
Contrary to what Gere et al. (2005) state,
we think that the relationship between the degree of coordination and power asymmetry is
not straightforward. Power asymmetry not
only depends on the coordination structure,
but primarily on market concentration and
the degree of specicity of the relationship.
Hence, in market transactions, there might be
high power asymmetry in the case of oligopoly
or monopsony, even though there might be no
coordination. In addition, strong coordination
may entail less power asymmetry compared to
weak coordination if there is mutual dependence, owing to a high degree of specicity.
Furthermore, a higher degree of coordination
may encompass a more unequal distribution
of income along the chain, but also a larger
value added accumulated in those segments
obtaining a lower share of the total retail value.
This occurs if the increase in income size
reaching a segment overcomes its lower share.
The relationship between the action of external (public or private) parties and the chains
governance is considered part of the sociopolitical and institutional dimension of global
commodity chains (Gere, 1999). Relatively
few studies have addressed the eects of voluntary or public regulatory regimes in the governance structure of commodity chains. Gibbon
(2003) examines how public regulatory interventions can lead and have led to a mitigation
of supermarket buyer power to restructure
fresh fruits and vegetable chains. Talbot
(1996, 1997b) described how Third World producing states have inuenced the structure of
the coee chain directly, both through marketing boards and regulation of coee production
and exports. This had often guaranteed a survival income to growers, or at least a larger
share of the retail value allocated to agents in
producing countries. The liberalization process
in the coee sector substantially reduced the

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WORLD DEVELOPMENT

eects of external public actors in the distribution of bargaining power. As a result, the chain
became more buyer-driven. The present mainstream coee chain is characterized by market
transactions between roasters/traders and
growers/processors in the mass segment,
and normally by stronger coordination in the
specialty segment, since coordination is a key
tool for managing quality along the chain.
Ponte and Gibbon (2005) argue that social
conventions, including voluntary regulatory
systems, such as certication schemes, may induce changes in the mode of governance and
degree of driven-ness in value chains. They
point out that the emergence of sustainable
coees may induce a reduction in the degree
of driven-ness, and that specialty coees (based
on geographic indications and particular notions of quality) might generate a move toward
a mode of governance closer to the producerdriven typology, because they may improve
growers positions vis-a`-vis traders and roasters.
The emergence of an impressive variety of
voluntary regulatory systems is a key element
of the current globalization process. As a response to a growing demand for information
about production conditions by wealthy consumers, certication and labeling schemes, code
of conducts and private self-regulation regimes
have appeared in a large list of global economic
sectors. These systems are normally meant to
set quality, social, or environmental standards,
and typically involve a larger degree of coordination, traceability, and monitoring along different agents of the commodity chain. Codes,
certications, and labels are all tools for codifying the information and increasing consumer
condence. They reduce monitoring costs for
buyers and enable suppliers to demonstrate
their skills and standards of production. The result is expected to be an overall reduction of
transaction costs along the chain. Regulatory
systems induce changes in the forms of coordination between dierent segments of the chain.
In principle, voluntary regulatory systems arise
due to a need for larger coordination of activities between dierent agents, in order to meet
standards, and normally result in product differentiation. Private (self-controlled) regulatory
systems should lead to stronger coordination,
since they increase the amount and complexity
of non-market information exchanged. Third
party veried schemes also lead to a larger exchange of information, but at the same time
they increase the ability to codify information

(reducing specicity), thus inducing a weaker

degree of coordination. However, in practice,
the interactions of agents in some third party
voluntary regulatory systems may also entail a
considerable exchange of extra standards
information, creating the conditions for stronger coordination. Extra standards information
refers to critical information involved in the
management of the supply chain, which is not
related to the standards codied in codes/certication protocols. In the case of coee, this includes quality consistency, reliability of supply,
managerial performance, and place of origin of
suppliers.
3. VOLUNTARY REGULATORY
SYSTEMS IN THE
COFFEE INDUSTRY
This section describes the most important
voluntary regulatory systems in the coee sector. Following Gere, Garcia-Johnson, and
Sasser (2001), we may identify four general categories, according to who develops the guidelines.
(a) First party voluntary regulatory systems
An example of a rst party regulatory system
in the coee sector is the Coee Sourcing
Guidelines of Starbucks, which sets standards
for good social and environmental performance. It includes a score system for calculating price premiums to farmers meeting the
standards. Monitoring of Starbucks principles
is carried out by third parties and the costs are
covered by farmers. This code is part of Starbucks preferred supplier program. Growers
able to participate in this program normally obtain considerable price premiums.
(b) Second party
Major food TNCs created the Sustainable
Agriculture Information (SAI) Platform in
October 2002. The ultimate goal of the SAI is
the denition and implementation of commodity-specic guidelines for sustainable agriculture which are harmonized along the food
chain. The platform has worked on the introduction of common and minimum sustainability standards for coee and suitable indicators
for sustainable practices, including social and
environmental concerns. So far, no premium
price is contemplated in this regime. The mon-

GOVERNING THE COFFEE CHAIN

itoring system is not yet established, but it will

likely be based on an independent third party
structure. The SAI platform is running pilot
projects in dierent countries to test the practical implementation of its code. The SAI code
sets minimum good practices, in line with
other voluntary regulatory systems (see below).
(c) Third party
Third party certication schemes are by far
the most important voluntary regulatory systems applied to the coee industry. Even
though some authors state that voluntary certications are a new form of non-tari barriers
(Chang, 1997; Verbruggen, Kuik, & Bennis,
1995), it is usually assumed that they do not
violate the WTO principle of non-discrimination between like products (Shaw & Schwartz,
2002; Tallontire & Bloweld, 2000). In fact,
some agencies consider environmental certications as a means of exports promotion (CEC,
2000). The main goal of certication is to reduce the cost of information about product
attributes reaching nal consumers (Hadeld
& Thomson, 1998). This would enable consumers to vote for alternative production methods (Shaw & Newholm, 2002). Specically,
sustainable certication gives consumers
encapsulated information about production-related credence attributes of products
(Kirchho, 2000; Nada, 2001; Reardon, Codron, Bursch, Bingen, & Harris, 2001). The
underlying assumption is that certied labeling
may aid in solving the market failures arising
from information asymmetries between providers and consumers (Peterman, 2002), while also
allowing rms to gain market share and to
maximize rents (Teisl, Roe, & Levy, 1999).
Third party certication schemes also constitute a central element of the new trend toward
ethical trade (Barrientos, 2000) and consumer activism (Gabriel & Lang, 1995). Green
and ethical consumers typically share the same
social prole as specialty coee buyers (Iyer &
Banerjee, 1993; Wagner, 1997). In addition,
standards and certication schemes should also
be viewed as strategic instruments for inuencing the distribution of value added along the
chain and set inclusion/exclusion thresholds
(Ponte, 2002c). Coee is probably the most
important sector in which sustainable certications have been applied so far. 3 It is noteworthy that the whole aggregated sales of
certied sustainable coee represent less than
1% of the global total coee sales, and that

2033

about 45% of current Fair Trade coee is also

certied organic (Giovannucci, 2003). The following part of this section will address the main
advantages and shortcomings of each of the
better-known third party certication schemes
in the coee industry.
(i) Fair Trade
The main goal of Fair Trade certication is
to guarantee a minimum price at the farmer
level by charging a price premium to consumers.
It also aims to shorten the chain by excluding
middlemen in producing countries (Pelupessy
& van Tilburg, 1994) and to promote long-term
relations between suppliers and buyers. It targets smallholders associated in cooperatives
and provides a xed and high price premium
to farmers, particularly in periods of price
depression. The Fair Trade movement is in a
transition toward a more intensied mainstreaming of its products, through conventional
and costly marketing tools (Taylor, 2005).
A remarkable feature of the current Fair
Trade scheme is that it has been unable to certify the total production of registered organizations. Currently, there are more than half a
million producers registered at FLO. However,
according to Global Exchange, the volume of
the total sales of certied Fair Trade coee
was only 13.6% of the total production of registered producers in 2001. This reveals a large
gap between potential and actual certied sales.
The studies assessing the local impact of Fair
Trade certication in producing countries in
general agree that it has been benecial for producers in terms of income generation, organizational skills, capacity building, and resilience to
external shocks (Bacon, 2005; Boot, Wunderlich, & Bartra, 2003; Murray, Raynolds, &
Taylor, 2003; Nelson, Tallontire, & Collinson,
2002; Zadek & Tin, 1996). However, the creation of dependency and the extent to which it
may subsidize inecient and sub-standard producers have been raised as major potential
shortcomings of the Fair Trade scheme (Pelupessy & Thielen, 1989; Tallontire, 2002; Thomson, 1999; Zehner, 2004). Furthermore,
according to some authors, the mainstreaming
of the Fair Trade scheme creates contradictions
with its philosophical foundations, built on an
alternative value system for framing consumerfarmer relations (Marsden, Banks, &
Bristow, 2000; Raynolds, 2002; Renard, 2003).
Mendoza and Bastiaensen (2003) report, as
did Pelupessy and Thielen (1989), that there is
no signicant dierence between Fair Trade

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WORLD DEVELOPMENT

and conventional chains in regard to the distribution of income between the segments in producing and consuming countries. One of the
explicit goals of Fair Trade advocates is to correct market distortions (Winnet & Oram, 2002).
Nevertheless, both the concessions required by
the mainstreaming process and the apparent
inability to revert current power asymmetries
in the coee chain question the capacity of
the scheme to meet this objective. Basically
what the Fair Trade system does is to enlarge
the total income size of the chain, by means
of asking a price premium to consumers.
Consumer behavior is probably the most critical factor determining the reach of certication
schemes involving price premiums to consumers (Strong, 1997). This point is critical since
in those countries where the Fair Trade movement is better developed, it is facing a market
glass ceiling of about 3% (Giovannucci,
2003). This ceiling is in part explained by the
well-documented gap between awareness and
action among potential green or ethical
consumers (Browne, Harris, Hofny-Collins,
Pasiecnik, & Wallace, 2000; Childs & Whiting,
1998; Sedjo & Swallow, 2002; Shaw & Clarke,
1999; Tallontire, Rentsendorj, & Blowed,
2001). Furthermore, since the main force steering coee consumers decisions to buy in the
specialty segment is taste, and as the quality
of Fair Trade coee is reported to be very
inconsistent (Boot, 2002), the consumer typically has to face a trade-o between good feelings and good taste when buying Fair
Trade. On the other hand, Fair Trade coee
is generally too expensive to successfully compete in the mass segment. The lack of a consistent quality policy and its xed premium may
impose some intrinsic limitations on the market
share of Fair Trade coee. Moreover, consumers tend to be less keen on responding to product attributes referring to distant public goods.
Due to this limitation, labels demanding a price
premium from consumers may be a poor means
for addressing externalities in public goods
(Golan, Kuchler, & Mitchell, 2001).
(ii) Organic
Organic certication sets rigorous standards
for recycling wastes, reducing water pollution,
chemical inputs, erosion, and improving soil
quality. Dierent kinds of transaction costs
are the main sources of entry barriers to organic certication (Barret, Browne, Harris, & Cadoret, 2001; Udomkit & Winnett, 2002).
Furthermore, there is a decit of international

harmonization in regard to organic standards

(Allen & Kovach, 2000), which has led to a proliferation of certiers, and might imply the
adoption of several seals if producers are to
gain access to dierent foreign markets. Organic certication oers a exible premium to the
farmer, depending on market interactions between buyers and suppliers, as do the rest of
voluntary regulatory systems (except Fair
Trade) in the coee sector.
Organic certication has been criticized for
altering traditional governance practices in rural communities by imposing paper burdens and
externally designed procedures and practices
(Mutersbaugh, 2002). This imposition of strategies, codes, and auditing methods designed
by agencies in the industrialized world has been
identied as one of the main challenges facing
voluntary regulatory schemes (Hughes, 2001).
Moreover, the reduction of agrochemical inputs as a result of the coee crisis may facilitate
the transformation from conventional to organic production and thus increase competition
in the organic segment. In fact, current premiums are covering transformation costs, but
not much more, according to some analysts
(Giovannucci, 2003; Lynbk, Muschler, & Sinclair, 2001). Notwithstanding these problems,
there is evidence showing that in some cases
adopting an organic certication has had positive eects on farmers environmental and economic performances (Bacon, 2005; Bray, Plaza,
& Contreras, 2002; Nigh, 1997).
(iii) Shade grown
The environmental impacts and benets of
the coee chain are accumulated in producing
countries (Daz, 2003). Coee can be cultivated
under a large variety of conditions and agricultural methods. Production systems range from
the most traditional (shaded) one to the sun-exposed and intensively managed mono-crop
plantation (Gobbi, 2000; Moguel & Toledo,
1998). In comparison to sun-exposed plantations, traditional plantations may hold more
biomass (Peeters, Soto-Pinto, Perales, Motoya,
& Ishiki, 2003), serve as a bigger carbon sink
and cheap energy source (rewood), allow larger leaf water retention during the dry season,
reduce the incidence of weeds, and increase
the eectiveness of microbial and parasitic
organisms against coee pests (Staver, Guharay, Monterroso, & Muschler, 2001). In addition, shade plantations require fewer
agrochemicals (MacVean, 1997) and are an
important biodiversity holder (Faminow &

GOVERNING THE COFFEE CHAIN

Rodrguez, 2001; Greenberg, Bichier, CruzAngon, & Reitsma, 1996; Johnson, 2000;
Perfecto, Rice, Greeberg, & van der Voort,
1996). In addition, shade increases fruit weight
and bean size, as well as improves bean appearance, acidity, and body of the brew (Muschler,
2001). Traditional shaded coee plantations are
generally environmentally and quality superior
in comparison to intensive and sun-exposed
ones. Nonetheless, after a threshold level, there
is a negative relationship between shade cover
and yields (Soto-Pinto, Perfecto, CastilloHernandez, & Caballero-Nieto, 2000), which
constitutes the major incentive for transformation from shade-grown to sun-grown coee.
The term coee as habitat has been used to
describe the role of coee plantations in providing the above-mentioned environmental services (Rice, 2003). There are two certication
schemes that take into account the degree of
shade in coee plantations: the Bird-Friendly
and the Rainforest Alliance. The Bird-Friendly
label is the most rigorous environmental certication scheme in the coee sector, since it combines organic standards with shade cover and
species richness. The Rainforest Alliance is a
comparatively looser certication scheme,
which integrates environmental and social concerns. Whereas the Bird-Friendly certication
targets as buyers the numerous North American birdwatchers and bird lovers, Rainforest
Alliance aims to enlarge the actual impact of
the scheme in the shortest period of time, by
means of encouraging its adoption among large
coee estates. Therefore its standards are basically restricted to complying with local laws,
the adoption of good practices for management
of agrochemicals and wastes, and keeping a
minimum cover of trees. These standards are
very much in line with those in the Starbucks
code, the SAI code, and Utz Kapeh (see below).
There has been a clash between both schemes,
which are both blamed for being misleading
(Tangley, 1996).
Both of the shade-grown certication systems
share a common challenge: the diculty of
communicating a relatively complex property
of coee cultivation (shade) and its very relevant environmental implications to the general
public. Lay consumers are usually not able to
process complex or profuse information
embodied in environmental or similar labels
(Aldrich, 1999; Karl & Orwat, 1999; Morris,
Hastak, & Mazis, 1995). This fact probably restricts these initiatives to a very particular market niche, characterized by well-informed

2035

green consumers. Even though TNCs such

as Lavazza, Kraft, and Procter and Gamble
have recently started to buy Rainforest Alliance
certied coee, the market share of both initiatives is still very small. Both schemes oer exible price premiums to farmers, depending on
the market context.
(iv) Utz Kapeh
Utz Kapeh originated as an initiative of some
large Guatemalan coee producers and the
Ahold Coee Company. Later, the organization became an independent Guatemalan/
Dutch NGO. This scheme has developed a set
of standards for third party coee certication,
formally equivalent to the EurepGAP, a certication system for the sourcing of fruit and vegetables led by European retailers. Utz Kapeh
states that it is a response to the low levels
of market penetration of organic and Fair
Trade products. The emphasis of the Utz
Kapeh code is on compliance with local labor
and environmental laws and good management
practices in estates. This system oers a little
price premium to farmers (depending on the
market context) and is focused on consolidating the adoption of the label by large retailers
and roasters. In only a few years, Utz Kapeh
has been very successful in incorporating a considerable number of new buyers and suppliers
in dierent regions of the world. European demand for this label is increasing rapidly. For
example, Douwe Egberts and Aholdaltogether accounting for about 75% of the Dutch
markethave adopted the scheme. This is expected to increase its market share to around
15% in The Netherlands. 4 Utz Kapeh basically
works as an instrument for gaining market access at the farmer level and as a marketing tool
for retailers and roasters.
(v) Fourth party
The Common Code for the Coee Community (4C) initiativelaunched in January
2003is an attempt to create a fourth party
(multi-stakeholder) voluntary scheme. This initiative is led by the German Development
Cooperation Agency (GTZ) and the German
Coee Association (DKV). Its Steering Committee is composed of major stakeholders in
the coee industry. Like the SAI platform, 4C
aims at developing a global code for the sustainable growing, processing, and trading of
mainstream coee, but it involves other agents
in the coee chain, apart from TNCs. Members
of the SAI platform (Nestle, Kraft Foods, Sara

2036

WORLD DEVELOPMENT

Lee, and Tchibo) took part in the agreement on

a common code reached among 4C members in
September 2004. Signatories will have to pay
minimum salaries, abandon child labor, allow
trade union membership, and stick to international environmental standards on pesticide
and water pollution. Hence, the code stresses
compliance with ILO regulations and good
environmental practices, very much in line with
the minimum standards shared by Utz
Kapeh, Rainforest Alliance, the Starbucks
code, and the SAI code. The initiative is currently undertaking pilot projects for testing its
practical implementation in dierent countries.
When fully implemented, the code is expected
to cover 80% of the coee industry. Monitoring
and auditing will be carried out by third party
bodies, and the costs will be probably covered
by farmers. No price premium to farmers is contemplated in the code, nor are measures foreseen to reduce income asymmetries in the chain.
4. VOLUNTARY REGULATION,
COORDINATION, AND UPGRADING
To what extent may the adoption of voluntary regulatory systems favor the position of
farmers in the coee chain? This section explores the impact of voluntary regulatory
schemes on the coordination of the coee
chain, as well as their implications for growers
upgrading.
The adoption of voluntary regulatory systems by farmers has two potential benets: (i)
it increases the ability to reap economic rent
(upgrading) and (ii) it improves the chances of
gaining access to, or remaining in, a particular
market. There is a noteworthy dierence between both functions. The former entails retention of value added and a better position in the
chain. The latter is a tool for avoiding exclusion
and outperforming competitors by ensuring
participation, which does not necessarily imply
a larger retention of value added or bargaining
power. In this case, standards work as implicit
market requirements, and the ability to meet
them as a reputation tool.
Table 1 summarizes major features of the voluntary regulatory systems described in the previous section. In regard to the stringency of
standards, the voluntary regulatory systems in
the coee industry may be divided in at least
two groups. (i) Good practices: in this category
are the Starbucks code, Rainforest Alliance,
SAI code, Utz Capeh, and the 4C, which hold

very similar types of minimum standards or

baseline benchmarks on the social, environmental, and economic performance of coee
cultivation. These schemes are meant to exclude
worst practices and target the mainstream
sector. That is, they encourage the production
of sustainable coee at competitive prices.
Therefore, entry barriers are purposely low. (ii)
Stringent practices: bird friendly, Fair Trade,
and organic belong to this category, whose standards are far from common practices and target niche market segments. Except Fair Trade,
voluntary regulatory systems in the coee
industry command a exible price premium,
which is determined by market and non-market
interactions between agents along the chain,
including quality concerns.
Coordination between traders/roasters and
farmers tends to be stronger in the Starbucks
code and Fair Trade schemes due to the level
of extra standards information (dicult to
codify) involved in the interactions between different agents of these chains. In the case of
Starbucks, strong coordination is the result of
vertical integration, while in the Fair Trade system strong coordination is shaped by two features: (i) the long-term relations promoted by
Fair Trade organizations and (ii) its structural
demand/supply mismatch, which provides considerable power to traders/roasters to decide
which farmers participate, or are excluded from
the system. Despite these power asymmetries,
in these cases strong coordination normally entails considerable upgrading opportunities for
those farmers who are able to participate, since
a relative high premium can be obtained. However, the main limitation, particularly in the
case of Fair Trade, is the total number of growers (and the total volume of coee) that may
actually participate in these commercialization
channels.
In the Rainforest Alliance, Bird-Friendly,
SAI code, Utz Kapeh, and 4C schemes, coordination between roasters and farmers tends to be
very weak since these systems intend to set
minimum good practices, the information
exchanged is easy to codify and the level of extra standards information exchanged is low.
As the price premium associated with these
schemes tends to be little or inexistent, upgrading opportunities for smallholders are comparatively lower, and the adoption of these
regulatory frameworks is rather a tool for
accessing or remaining in particular markets.
Due to the stringency of organic certication,
the level of information exchanged between

Table 1. Voluntary regulation systems in the coee industry

Overall entry
barrier

Second party

Third party

Starbucks
code

SAI code

Fair Trade

Organic

Rainforest
Alliance

Utz Kapeh

4C

Short

Short

Large

Large

Short

Short

Short

High

Low

High

Low

Low

Low

Low

Third party
(paid by
farmers)
High

Third party
(probably paid
by farmers)
Low

Third party
(paid by farmers)

Third party
(paid by farmers)

Third party
(paid by
farmers)
Low

Third party
(paid by
farmers)
Low

Third party
(probably paid
by farmers)
Low

Low. Flexible
(market)

Low. Flexible
(market)

Very low. Flexible

(market)

Large estates

In practice
large estates

Any kind

High, becoming
Low to be
registered. High to
low
actually participate
Very low. Flexible
High. Fixed
Medium, becoming
(market)
low.
Flexible (market)

Medium.
Flexible
(decided by
Starbucks)
Target group
Growers of
Any kind
Small landholders
(growers)
high quality
in cooperatives
coee
Upgrading
Control by It tends to become
Limits to the
constraints
Starbucks
a market
number of
for growers
requirement
farmers the
system may reach
Coordination type
Strong
Very weak
Strong
(between traders/
coordination
coordination
coordination
roasters and farmers)
(near to market
transactions)
Expected impact on
price premium to
farmers

Any kind

Increasing
competition
(price premium
erosion)
Weak
coordination,
becoming closer
to market
transactions

Fourth party

GOVERNING THE COFFEE CHAIN

Distance between
standards and
common
practices
(stringency)
Importance of
extra-standards
information
(specicity)
Monitoring

First party

It tends to become
It tends to
a market requirement
become a
market
requirement
Very weak
Very weak
Very weak coordination
coordination
coordination
(near to market
(near to market (near to market
transactions)
transactions)
transactions)
Reduced
consuming
market

2037

2038

WORLD DEVELOPMENT

traders/roasters and farmers tends to be higher

in this system. However, this information is relatively easy to codify and therefore strong
coordination is not needed. Its relative high
transformation cost and the current trend toward erosion of its price premium reduce
upgrading opportunities in this system.
Market competition between alternative voluntary regulatory systems in the coee sector
will likely increase in the near future. For example, in Dutch supermarkets, it is already common to nd both Utz Kapeh- and Max
Havelaar-certied coee on shelves. Utz Kapehs label uses the catchphrase responsible
coee, while Max Havelaar uses Fair Trade
coee. Are consumers really able to distinguish the information embodied in both labels?
The evaluation of credence attributes is conditioned by awareness of and condence in the
providers of the information by consumers
(Cason & Gangadharan, 2002; Grolleau,
2002). The proliferation of voluntary regulatory systems may increase awareness, but at
the expense of undermining consumer condence (Lewin et al., 2004) and creating a race
to the bottom of standards.
It is likely that the systems promoting good
practices will converge in a common code,
such as the 4C. The 4C is an interesting initiative and a historical novelty, since it constitutes
a new voluntary agreement between a variety of
stakeholders for regulating dierent dimensions
of the global coee chain, a task that in the past
was in hands of national states and inter-governmental bodies. If adopted in practice, it will
improve the social and environmental performance of coee farming. Nonetheless, the 4C
will be unable to improve the position of growers (as a whole) within the chain and economically reward the farmers adopting better
practices. Besides, its widespread implementation will probably have impacts on both the
current institutional framework of the coee
industry and other voluntary regulatory
schemes.
On the one hand, a possible outcome of the
consolidation of the 4C may be a further disarticulation of the ICOwhose role would be
even hazier than nowadaysand the subsequent cutback of states participation in the
global governance of the international coee
chain. In addition, it would be harder for the
rest of the schemes to justify a price premium,
since consumer perception of the dierence between mainstream and sustainable coee
chains would be more blurred than at present.

5. POLICY OPTIONS
Policy proposals for coping with the coee
crisis have been restricted to basically three
major and inter-related issues of concern for
producing countries: supply control, crop
diversication, and quality improvement
(IADB et al., 2002). This section describes the
diculties for putting into practice these policies and explores some options that alternative
interactions between agents along the chain
may provide.
(a) Supply control and related measures
Market-friendly approaches to reduce
overall coee supply have failed in the recent past. The most remarkable attempt
was the Quality-Improvement Program (QIP),
launched by the ICO in February 2002.
This program aimed to reduce supply by means
of diverting poor quality beans from the market, but it was blatantly unable to achieve its
goals. Two factors may explain this result: (i)
there is in fact a considerable demand for
low-quality green coee in the mass segment,
which makes it hard to create economic incentives to eliminate this kind of coee and (ii)
due to its current institutional weakness, ICO
lacks the capacity to implement its resolutions.
Owing to these and other factors, a globally
concerted strategy to reduce overall supply
does seem politically plausible in the near
future.
The present global oversupply of green coffee reveals that coee farmers share a sort of
production lock-in. The most important
causes are likely lack of information, nancial
support, and alternative markets. Another
barrier to diversication is the fact that coee
is a permanent crop and the coee industry
has been traditionally cyclical; both features
induce time lags in the reaction to market
developments. In addition, governments in
developing countries lack institutional and
nancial capacity to implement diversication
programs, and in some locations, there are
hardly protable alternative agricultural practices to coee production. In the current context of globalized tropical agricultural systems
characterized by lack of subsidies and clear
competitive advantages of economies of scale,
the promotion of crop diversication is a very
daunting task, particularly among small coee
growers.

GOVERNING THE COFFEE CHAIN

(b) Quality improvement

Quality, including location-specic images, is
becoming the critical element of the current
trend toward coee dierentiation. The management of quality is the most immediate tool
farmers can use for improving their upgrading
opportunities. The international market of coffee is nowadays characterized by two remarkable features: (i) a great variety of tastes and
notions of quality, which vary highly from
country to country and (ii) a broad market
fragmentation between mass and specialty
segments. The former feature favors economies
of scale and transnational organizational structures for managing quality, which imposes
upgrading constraints on the agents in producing countries. The latter characteristic may act
in the opposite direction, since particular taste
properties determined in cultivation are key
attributes in the specialty market.
Although the specialty segment has experienced a boom (Giovannucci, 2001), the coee
market is still dominated by mass consumers.
Furthermore, recent technological developments have allowed coee roasters to use a larger proportion of cheaper and lower quality
robusta beans in mass-oriented blends (Varangis, Siegel, Giovannucci, & Lewin, 2003; Vellema, Jansen, & Boselie, 2003). Blending is a
distinctive feature of the mass segment. It allows roasters to substitute coees from dierent
origins and qualities. Through this process,
roasters reduce risk and dependency on specic
providers, control information, and retain
value added. Roasters buy coee with complete
information about quality, but they release
hardly any information to the customers (Ponte
& Gibbon, 2005).
In recent years, besides the specialty market
there have been two other sources of innovation in the coee sector: (i) sophisticated consumption environments (e.g., Starbuck stores
and fashionable cafes) and (ii) preparation machines allowing a better appreciation of taste,
aroma, and freshness (e.g., Senseo system,
encapsulated espresso, Illys pads, etc.). The
former trend is normally associated with an
enlarging consumption of specialty coee,
which enhances upgrading opportunities for
farmers. Nevertheless, the latter industrial
strategy works in the opposite direction: it allows roasters to increase the perception of quality by consumers, while continuing to use
blends and a high degree of information control. In addition, the adoption of such prepara-

2039

tion systems reduces consumer access to coee

varieties, at least in the short term. The impact
of these emerging systems is not negligible. 5 In
addition, there is some evidence showing that
due to the asymmetric market power in the coffee chain, the returns to dierentiation tend to
accrue to the nodes closer to consumers (Fitter
& Kaplinsky, 2001).
Some of the points raised above suggest that
the economic rewards accruing to farmers
investing in quality improvement may be less
than expected. A condition to be rewarded for
higher quality is to be able to participate in
commercialization channels targeting the specialty segment. Accessing and remaining in
such channels normally requires coordination
with downstream agents in the chain. To what
extent are emerging voluntary regulatory systems able to contribute to such coordination?
The price premium actually paid in voluntary
regulatory systems (and the capacity to participate) is to a considerable extent determined by
the quality of beans (Kilian, Pratt, Jones, &
Villalobos, 2004). In practice, it is very hard
to dierentiate the eect of quality from that
of certication in the price farmers receive
for their coee. What is clearer is that only
good quality producers are able to obtain
attractive price premiums. This suggests that
the adoption of a voluntary regulatory system
in practice may work as a tool for improving
the image of farmers or cooperatives, vis-a`vis competitors. A certied farmer has shown
to be able to register its production processes,
to trace physical ows, to process information,
and to be accountable. These are critical features for successful coordination. Thus, certication is a reputation tool for farmers,
which eases to become a preferred supplier.
From this perspective, voluntary regulatory
systems of the good practices category are
not instruments for upgrading per se, but rather
facilitate coordination with other agents of the
chain, which eventually may lead to access to
particular commercialization channels, and to
upgrading opportunities.
There is currently a great momentum toward
generating a common set of standards for
excluding the worst social and environmental
practices from the coee industry. This should
be welcomed. However, since price premiums
will not be provided, these standards will become de facto market requirements. The likely
result is that the social and environmental performance of coee growers will improve, but
not necessarily their economic performance.

2040

WORLD DEVELOPMENT

The outcome will be that the cost burden of

raising the playing eld by means of a common code will be concentrated on the growers
segment. On the other hand, the systems adopting stringent standards do not oer a much
better scenario. The reach of the Fair Trade
market seems to be constrained, and increasing
competition with other voluntary systems will
aggravate this situation. Organic certication
has high transformation costs and is facing
eroding price premiums.
(c) Upgrading opportunities from coordination
Notwithstanding the limitations mentioned
above, there might be policy options for
increasing farmers upgrading opportunities derived from coordination with other agents. One
obvious possibility is to engage in stronger
coordination with roasters, in order to improve
quality, post-harvest processing, managerial
skills, and supply capacity. Kaplinsky and Fitter (2004) have called this strategy the systematic application of knowledge in the value
chain, and describe the example of strong
coordination between Illy and its suppliers,
who also reap economic benets from the
higher prices commanded by Illys roasted coee
(larger income size of the chain). Low-quality
producers face apparently more diculties in
adopting such strategies, since they may be easily substituted. However, as providers of the
major share of blends in the mass segment, they
may improve non-price competitiveness by
learning the capabilities required by their buyers, in order to become preferred suppliers.
Another option is to change the scope and
structure of some current voluntary regulatory
systems. For example, it would be possible to
shift the status of Fair Trade from a trademark to a brand name by transforming national initiatives into an internal agent of the
chain. National Fair Trade initiatives in
importing countries may move into roasting,
where value added is considerable. This will require substantial investment, but larger sales
(encouraged by the reduction of nal prices)
may provide returns to it. A third possible
strategy is to reduce the distance between growers and nal consumers in the non-household
market. An interesting example is the Smell
of Coee, a pilot coee bar located in a business area in Rotterdam. This cafe is run by a
Dutch consultancy rm (Novo Trade) and four
organizations of small coee farmers in Central
and South America. It is planned to be the rst

of a future chain of espresso bars. The main

innovation of this initiative is that small farmers participate as shareholders, retaining 40%
of the shares. Partnerships between associations of growers and non-prot or commercial
organizations in industrialized countries to develop roasting and retailing brands near consumer markets are still practically unexplored.
This is an area that deserves creative eorts
and initiatives.
The above-mentioned alternatives may be
supported and facilitated by public policies
and concerted actions between dierent agents
in producing countries. For example, coordinated action from agents in producing countries may target the international recognition
of coee certicates of origin within the WTO
framework. Besides, national coee institutes
should focus on the identication of coordination opportunities for associations of small
growers, provision of credit facilities, marketing assistance, brand management, and promotion of product dierentiation.
6. CONCLUSIONS
The liberalization of the coee industry has
coincided with the emergence of a number of
voluntary regulatory systems, which are starting to compete between them. A common code
of minimum good practices will likely be established, which would improve the environmental
and social performance of the sector. However,
the application of such a code will not necessarily improve farmers ability to reap economic
benets.
This article has explored the advantages and
limitations of some of the voluntary regulatory
schemes applied to the coee sector, as well as
their impact on the governance structure of
the chain and their implications for farmers
upgrading. The ability to participate in a voluntary regulatory system may work as a reputation tool for farmers, facilitating coordination
between roasters/traders and growers. We have
also explored some possible options for deriving rents from alternative governance structures of the coee chain, such as promoting
stronger coordination with roasters in order
to improve coee quality and farmers skills,
and shortening the length of the chain with
the assistance of public and private institutions.
National coee institutes in producing countries may play a role in promoting stronger
coordination along the chain.

GOVERNING THE COFFEE CHAIN

2041

NOTES
1. The aggregated production of Brazil, Vietnam, and
Colombia shifted from about 30% of global production
in 1970 to approximately 52% presently (Lewin, Giovannucci, & Varangis, 2004).

3. See Rice and McLean (1999), Rice (2001), Slob and

Oldenziel (2003), and Ponte (2004) for thorough reviews
of sustainable labeling in the coee sector.
4. Niewe Rotterdamse Courant, 14-4-05.

2. However, marketing boards, particularly in Africa,

have not been always eective in achieving their supposed
goals. In some cases, they increased transaction costs to
producers and exerted poor quality control (Jerome &
Ogunkola, 2000; Winter-Nelson & Temu, 2002).

5. Currently, about one-third of the coee that is

available on the supermarket shelves in the Netherlands
is from the Senseo system (Sara Lee/Philips).

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