Consumers pay a premium for specialty products, in theory supporting higher wages for farmers. But it will take more to make these markets truly sustainable

When you pay $20 for a bag of coffee or $10 for a chocolate bar the general assumption is that you are paying for a higher quality product, and that some portion of that higher-than-normal price is making its way into the pockets of farmers.

That belief is underscored by stories and photos lining the walls of the shops that sell such goods, or stamped onto packages, depicting subsistence farmers who have been given a lifeline out of poverty by your addiction to medium-roast Yirgacheffe. Similarly, socially conscious consumers will often opt to purchase products that are certified organic or fair trade, believing that these products go farther to support farmers than their non-certified counterparts.



Unfortunately, the emergence of specialty product segments in commodity markets like coffee and chocolate has not dovetailed with a rise in the quality of life of farmers producing the raw materials of those products. That’s not to say that specialty products are not helping at all, just that various market forces need to shift in order to make these markets work better for farmers.

“I’m not convinced that there is yet a model that works comprehensively,” said Simran Sethi, an expert on agricultural biodiversity and author of the forthcoming book “Bread, Beer, Chocolate: The Slow Loss of Foods We Grow and Love.”

“The ones that support superior quality are good from the perspective of sustaining heirloom varietals that support biodiversity and sustain unique flavor profiles, but that means a significant amount of a crop will be rejected in order to sustain that quality. Farmers have bumper seasons and they’re subjected to every variability – weather, climate, politics, transportation. Most of the cost and risk is still going to be absorbed by the farmer.”

Peter Giuliano, director of the Specialty Coffee Symposium, an industry conference put on each year by the Specialty Coffee Association of America, says the specialty coffee industry is generally concerned about this issue. “At a recent symposium, one of our members stood up and asked: ‘We pay farmers more money for quality, but does that actually translate to a bottom-line better livelihood for them?’” he said.

“The answer we came up with was maybe not, we don’t know, more research is necessary. And that’s essentially where we’re at as an industry. We believe in the idea that better quality coffee, better sustainability, and a better life for farmers can go hand in hand, but systematizing it is a challenge.”

Once a commodity, always a commodity

A big part of the challenge for these markets is the fact that their prices are more or less set by commodity markets. Coffee is priced according to the coffee commodity market price (“the C market” as those in the industry refer to it). That price was set about 100 years ago to help stabilize the price of coffee, which had historically been fairly volatile, for coffee roasters.

“It did a really good job of that and it has been the dominant pricing mechanism for coffee ever since,” Giuliano said. “And that can be useful for farmers, too, because they can theoretically buy coffee futures and hedge like anyone else. So market theorists tend to think it’s good that the commodity price drives the coffee market.”

According to Giuliano, problems arise out of the underlying assumption inherent to commodity pricing: that all products within the market are interchangeable. Those problems are compounded by the fact that what’s driving the commodity price up and down may have nothing to do with the coffee market itself.

“Theoretically a specialty coffee company could work with the C price and just say this higher quality coffee is worth the C price plus a dollar,” Giuliano explained.

“But the things driving the commodity market are not necessarily the same things driving high-quality coffee farming. Then, there’s been a lot more activity in the C market recently from people not in the coffee trade at all, who are just using the market to speculate, and they benefit from market ups and downs that aren’t necessarily reflective of supply and demand or beneficial to those of us in the coffee trade.”

While the coffee and chocolate markets are not at all the same thing, commodity pricing has wreaked similar havoc on producers in both industries. On the chocolate front, the issue is how poorly the commodity market reflects retail supply and demand. Even when the commodity price does reflect what’s happening on the ground, it can unfairly affect some more than others.

According to Shawn Askinosie, founder and CEO of Missouri-based craft chocolate company Askinosie, the current Ebola outbreak in West Africa will affect the price of cocoa if it reaches Ghana or the Ivory Coast, where roughly 70% of the world’s cacao is grown. “It will affect the global price even though there’s no direct effect of supply in Ecuador or the Philippines.”

Beyond these sorts of issues – inherent to any sort of global commodity market – is the fact that demand for chocolate has been increasing rapidly over the past several years, with demand for dark chocolate at a 20-year high, but the commodity price has remained low.

“You look at that situation and you think: what the heck is gonna make that price go higher if higher demand doesn’t?” said Askinosie. “That’s where you get to thinking it’s never going to change, because you’ve got Cargill, Mondelez, Nestle, Hershey’s, Mars – all the big players want to keep that low price, and yes, you will find discussions and conferences and papers written about sustainability plans and efforts to help the farmers and that’s great. But really the market just needs to pay more.”

Weathering market forces

Breaking free of commodity pricing, however, is not simple. In the coffee industry, even specialty roasters who deal directly with their suppliers have to take the C price into account when they’re crafting those deals. “If the market goes sky-high, it can be very tempting for a producer who has a fixed rate locked in with a roaster to ‘lose’ some product in order to sell it at the higher price to someone else,” Giuliano explained.

“And it happens in the reverse too: if the market drops, suddenly a roaster might be rejecting product for quality reasons so that they can replace it with a lower-cost option. In most cases that won’t happen, but it’s important to include mechanisms in your contract that eliminate the temptation.”

Moreover, specialty coffee roasters still base the price they pay some producers on the C market price, and even if they’re paying 200% higher, the farmer may be barely eking out a living.

On the chocolate side, it’s more a question of the market’s willingness to pay for quality product at scale. Despite the craft chocolate boom, the poorer quality but higher volume-producing cacao plants are a safer economic bet for producers.

“The crops with the highest yield of cacao can transform the life of a farmer, but it tastes nothing like chocolate,” Sethi said. “Some of it is OK, a lot of it is awful. But the market doesn’t reward quality, so even the farmers growing heirloom cacao plants tend to also grow a commodity crop as a back-up, or they are farmers who had capital to begin with and can afford to just grow heirloom.”

The commodity chocolate crops are also typically less sustainable. They’re often grown in full sun to increase volume, but this also increases the potential for weeds and disease, which in turn increases pesticide use. Until the market rewards sustainability, social responsibility and quality, however, that’s not likely to change.

“I used to be such a very strong proponent of fair trade and organic, but now after visiting farms in Africa and South America, and speaking with a lot of people involved in specialty coffee and craft chocolate, I’ve realized that it’s more nuanced,” Sethi said. “You see it in Central America with ‘la roya’ – coffee leaf rust – and there are these cases where a farmer has paid for organic certification and then they’re in danger of losing their whole crop to this disease if they don’t spray. They have to decide whether to save the crop or save the certification.”

“These aren’t people who went to Ivy League schools and later decided to get into farming, these are people who can’t afford medicine for their children,” Sethi added. “There are very real concerns right now about hunger in these communities, and there is no fallback profession.”

The road forward

Although the experts agree that fair trade certification initially helped to raise awareness around the injustices suffered by farmers, particularly those in developing countries, no expert interviewed said they thought the label is effectively addressing the problem it set out to solve. Nor does either certification or direct-trade alone seem to be the solution.

“There are people closing these gaps through direct trade efforts but there is no oversight there so, ultimately, the consumer has to trust the story on the label or website,” Sethi said. “Areas where certification schemes do exist are laden with bureaucracy which means that farmers or co-op managers are forced to re-allocate resources (time and money) toward achieving and maintaining that certification which is, for many smallholder farmers, an impossibility.”

Askinosie said that while he appreciates what fair trade standards did to bring awareness and change around social and environment issues for farmers, at this point the label has become “a victim of its own good marketing.”

“Consumers buy it and feel like they’ve done a good deed, and the unfortunate reality is that the farmer doesn’t end up with a lot more money because of the intended goodwill of consumers,” he added.

Instead, those hoping to change these industries are betting on a mix of direct relationships between farmers and manufacturers, and new business models that help to distance specialty products from commodity prices.

Michael Jones, co-founder and CEO of coffee collective Thrive Farmers, is the architect of one such model. Jones jumped ship from the biotech industry into coffee 10 years ago when a trip to Costa Rica opened his eyes to injustices in the coffee industry.

“It was amazing to me that you’d have coffee selling for $80 a pound in Japan and yet the farmer was only making $4 a pound,” he said. “As a guy who didn’t come from that industry I couldn’t get away from the fact that coffee is worth more now than it’s ever been, there’s more consumption of and more demand for coffee than ever in history, and yet the farmers are in some cases making less per pound than it costs them to produce.”

In an attempt to fix that model, Thrive has signed on a network of small farmers whose beans it sells to various roasters and retailers throughout the world. Thrive pays producers a fixed percentage of the wholesale price it gets for selling their beans (75% if they sell the beans green and 50% if the beans are sold roasted), and Jones said that price stays relatively stable year over year, so farmers can better predict what their income will be.

Thrive has also helped to tackle another key issue with the coffee market: the fact that many producers don’t know exactly how much it costs them per pound to produce coffee. Giuliano said that has made it difficult to determine what the wholesale price (and thus the retail price) per pound needs to be in order for specialty coffee to be sustainable. But perhaps the most important shift in the Thrive model is the fact that it ties quality to compensation and enables farmers to sell quality product at scale.

“Beyond pricing stability, the most powerful outcome of the Thrive model is the alignment that is created between the farmer and retail consumers,” Jones said. “Increased quality allows sales at higher price points, and with predictable pricing structures, it is now worth farmers making investments of time and money to learn more about farming, which can increase both yield and quality. These both translate into more income, which entirely changes the paradigm they have historically been tied to.”

Various companies in both the specialty chocolate and specialty coffee realms also are working on getting both retail and wholesale customers to adjust their price expectations and to stop thinking of “farmers” as a homogenous group.

“What’s best for the farmers I work with in the Philippines may not be the best for the farmers in Tanzania or the farmers in Ecuador,” Askinosie said. “They’re not the same people. They’re not the same culturally, they’re not experiencing the same degree of poverty, they may have different religious backgrounds that affect what they want and need. Of course we can make some basic assumptions – people need clean water, for example – but it’s a mistake I think to not include farmers in the discussion about what’s best for them.”

Both Askinosie and Giuliano point to the need to educate the consumer market and push retail prices up further, too. “One thing everyone agrees on in coffee is that it’s too cheap,” Giuliano said. “And no consumer feels that way. The $20 bag of coffee from Blue Bottle is probably, in the long term, an unsustainably low price.”

Coffee already saw a shift in consumers’ willingness to pay more for coffee when Starbucks took the industry by storm, and Askinosie is hoping for a similar phenomenon in chocolate. “You can say what you want about Starbucks, but they had the wherewithal to do some things that moved the needle in the coffee market,” he said. “I firmly believe that in my lifetime we’ll see a $25 chocolate bar that the specialty consumer market will be willing to pay for.”

At the same time, specialty manufacturers are intensely aware of creating an access issue on the consumer side as they balance the cost of production with sales prices for farmers. The ultimate solution is likely a mixture of growth in the specialty markets and more realistic pricing in the commodity markets.

“There are a lot of people doing great things,” Sethi said. “We just haven’t developed a model that captures everything. We can’t. We prioritize in any given moment what’s important to us. If you’re saving the rainforest, you can’t also be hyper-focused on taste. You can try, but one priority will edge out the other. It has to.”

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