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26. Are markets failing in Guatemala?

Getting great coffee to market might seem like a simple proposal.  Farmers grow the coffee, we drink the coffee, and diverse actors in between perform specialized tasks that add value to the product – tasks for which they are rewarded with a share of what we pay for the coffee.  In the case of coffees of extraordinary quality, the rewards to farmers and roasters – and prices for us as consumers – should be a bit higher, creating incentives all along the line for increased investment in improved quality.  At least, that is the way it should be.   But in Guatemala, that logic seems to be breaking down.

It is bad enough that in many regions there is precious little price differentiation for high-quality coffees, which removes the incentive for farmers to invest time, effort and money in processes that will increase quality.  But the very logic of the value chain seems not to hold.  Farmers and farmer organizations who understand the logic of the coffee chain have been working for years to capture more of the value added to their coffee by doing as much of the post-harvest processing as they can – wet milling, drying and, in the case of some of the larger and better-capitalized organizations, dry milling and exporting.  For each of these processes, farmers and farmer organizations avoid paying specialized service providers and capture a bit more of the retail price of our coffee.

On visits with farmers in Guatemala this harvest season, I found that the prices being offered by intermediaries for unprocessed cherries were awfully high.  Implausibly high.  High prices might sound like good news.  To many farm families with acute financial needs, high prices mean welcome relief from financial stress over the short term.  But high prices are eroding incentives for quality and value-added post-harvest processing, and undermining smallholder farmer organizations – dynamics that make long-term prospects dim, indeed.

Here is a comparison of the prices farmers were getting in the field, converted to dollars, for selling coffee at different points in the process:

The difference between the prices offered for unprocessed cherries and washed parchment coffee is unusually low.  On a recent visit to El Salvador, for example, farmers told me that this price difference was more like 30 cents per pound – a much more typical differential and of course, a much greater incentive to process the coffee!

Imagine if you could earn almost as much by picking your coffee, selling it and being done with as you could if you wet milled and dried it, a process that involves: investment in a wet mill and drying technology, pulping your coffee, fermenting it, washing it, drying it, performing necessary maintenance on your milling equipment, etc.

The other issue is that the intermediaries are paying cash-on-the-barrel for coffee cherries.  By contrast, most smallholder farmer organizations that have the capacity to mill their members’ coffee don’t have the kind of financing available to offer 100 percent of the coffee’s final value at the time it is turned in to the mill.  If organizations have access to “pre-harvest finance” at all, it is more commonly around 50-60 percent of the coffee’s value, with the rest coming after the coffee has been exported and paid for by the importer.  That means that in order to qualify for the 6-cent-per-pound price differential they are seeing in the market, farmers in Guatemala have to wait months for full payment.  Few smallholder farmers with pressing financial needs and few savings if any are in a position to accept this proposition because to what economists call the “time discount of money” is greater than the price differential – a fancy way of saying that with such a small difference between the price of cherries and parchment, farmers prefer to accept a lower price for their coffee now than wait for a marginally higher price.  When the differential is higher, farmers are more likely to wait it out for full payment, even though this process can be painful.

The consequences of this kind of market can be grave for smallholder farmer organizations, which are essential for improving the long-term well-being of their members but depend on the revenues from coffee sales to finance the services they deliver to their members.  When those members are selling to intermediaries and not their organizations, the future of those organizations is in doubt.  And without the organizations, farmers are right back where they have been for hundreds of years – taking the prices that intermediaries offer for unprocessed coffee.

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