Who benefits from rapidly increasing Voluntary Sustainability Standards (VSS)? Evidence from Fairtrade and Organic coffee in Ethiopia

1. Who benefits from rapidly increasing Voluntary
Sustainability Standards (VSS)?
Evidence from Fairtrade and Organic coffee in Ethiopia
Bart Minten, Mekdim Dereje, Ermias Engida & Seneshaw Tamru
IFPRI-ESSP
Ethiopian Economics Association
13th International Conference on the Ethiopian Economy
July 23-25, 2015
Addis Ababa
1
ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE

2. 2
1. Introduction
• Growing emphasis on Voluntary Sustainability
Standards (VSS) practices globally, in response to
social/environmental pressure
• Consumers willing to pay higher prices for products
that guarantee:
- Product origin
- Fair prices to producers
- Ethical standards of production/processing
- Environmental sustainability
- Safety and quality safeguards

3. 3
1. Introduction
• Coffee the leading agricultural commodity to apply
different VSS
• Relatively few studies that examine the impact of VSS
arrangements on coffee producers
• Mixed findings: some positive (Ruben and Fort; 2012;
Wollni and Zeller, 2007); some no effect (Jena et al.,
2012; Cramer et al., 2014)
• Few studies in Africa where VSS uptake low

4. 4
1. Introduction
• Look at Ethiopia’s coffee sector; Coffee most
important export product; Coffee 25% of its foreign
exchange earnings; 4 million coffee farmers are
involved
• Will study at how benefits of VSS are distributed
along the value chain, based on data from exporters,
cooperatives, traders and producers

5. 2. VSS in coffee
• Most important ones: 1/ Fair trade;
2/ Organic; 3/ Rainforest Alliance; 4/ Utz
Capeh; 5/ 4 C (“Common Code for Coffee
Community”) Association; 6/ CAFÉ
(Starbucks); 7/ Nespresso AAA
• Independent certification for most; not for
4C; (6) and (7) private standards
• Often double certification: 42% of Fair Trade
is also organic

6. 2. VSS in coffee
• VSS rapidly taking off in the world (VSS made
up globally 4% in 2005, now it is almost 20%)
• Low and slow in Ethiopia
0
5
10
15
20
2005 2010 2015
%
Ethiopia World

7. 3. Data
• Producer survey fielded in February 2014:
- Focus on the major 12 coffee producing zones. 5
strata based on the 5 coffee varieties of Ethiopia
- Total of 1,600 coffee farmers were randomly sampled
with an even distribution among each variety (320
farmers each strata)
- Detailed information on coffee marketing
• Producer prices from sample of
cooperatives/traders; 148,558 purchase transactions
over a nine-year period

8. 3. Data
• Export transaction census:
- July 2006 until June 2014
- Obtained from the Ministry of Trade
- Information contains price, weight, quality indicators,
quantity, type of exporter and VSS certification
- 35,471 observations

9. 4. VSS certification in Ethiopia: Total exports
• VSS certified coffee’s share small; not growing
• Makes up 75% of exports of cooperatives
Quantity coffee exports Certified coffee
Total By Share Total
Share
(%) By cooperatives By non-
Coope-
ratives
Coope-
ratives in of total
% of
coop.'s
Coope-
ratives
year tons tons % tons exports tons exports tons
2007 156,157 7,541 4.8 6,352 4.1 5,708 75.7 644
2008 170,433 7,242 4.2 5,210 3.1 4,011 55.4 1,199
2009 111,035 7,690 6.9 4,541 4.1 4,277 55.6 264
2010 199,478 10,703 5.4 9,438 4.7 8,922 83.4 516
2011 160,523 10,302 6.4 8,475 5.3 7,552 73.3 923
2012 192,150 11,073 5.8 9,494 4.9 8,351 75.4 1,143
2013 172,247 10,460 6.1 8,482 4.9 7,487 71.6 995

10. 4. VSS certification in Ethiopia: Types
• One-third of cooperatives VSS certified
• Double certification common: 80% of Fair
Trade also organic; 98% of Organic also Fair
Trade
Number of certified primary cooperatives
Number of Type of VSS
Cooperative coops Any VSS Organic Faitrade Rainforest Utz
unions Certifcate Alliance Capeh
Sidama 47 42 39 41 3 5
Yirgacheffe 26 26 26 26 3 2
Oromia 250 41 24 41 3 3
Limmu Inara 27 16 16 5 0 0
Wolaita Damota 42 10 10 0 0 0
Kaffa 34 19 18 15 0 0
Bench Maji 39 3 3 0 0 0
Total 465 157 136 128 9 10

11. 4. VSS certification in Ethiopia: Which coffee?
• Often argued that VSS certified coffee is lower
quality coffee
• Run probit model; Positive associations with VSS
certification:
- Strong effect of origin: Coffee from Sidama +
- Cooperatives and private commercial farms +
(compared to parastatals and private exporters)
- Better quality and washed coffee
• In Ethiopia, better coffee is more likely to be
certified, possibly because of third-party assessment

12. 5. Methodology
• Hedonic price methodology: Food price is a function
of characteristics of the product (varieties, post-
harvest technologies, and VSS certification)
• Estimation strategy at different levels of value chain:
Where p is price; VSS is dummy of VSS certification; X
other determinants of prices; α buyer fixed effects; η
monthly fixed effect; ν stochastic error term
jt
m
t
t
m
j
j
m
ijt
i
m
jt
m
jt XVSSp    **** 43210

13. 6. Quality premiums VSS certification: Export level
• Premiums over the years 2006 to 2014 88 US cents/lb
• However, no control for quality; need regressions0
.002.004.006.008
.01
Density
0 200 400 600
US cents/lb)
non-certified certified

14. 1. Quality premiums VSS certification: Export level
• 11-15 US cents/lb (robust to different specifications)
2. Quality premiums VSS certification: Prod. Level
• NO significant effect (robust to different
specifications
 However, VSS certified cooperatives more likely to
pay out second payment and/or dividend;
underestimation of benefits
6. Regression results

15. • Include second payment in price obtained from
producer survey 2014
6. Quality premiums VSS certification: Producer level
0
.05
.1
.15
.2
.25
Density
0 5 10 15
Birr/kg)
cert. coop non-cert. coop
non-coop

16. • Combine first, second, and dividends: difference
certified vs. non-certified cooperatives : 0.80 Usc/lb
(significant with F-test)
• Times 6 to get at clean green beans (processing ratios):
converts to 4.6 USc/lb.
• Compare to 13.7 USc/lb. at the export level (fixed
effect; for the most recent period)
• Transmission of 33% of the export premium to the
producer
6. Quality premiums VSS certification: Producer level

17. • Two-thirds of the quality premium not transmitted.
Where did it go?
1. Overheads. 30% of premiums goes to unions, to pay
for doing deals, aggregation, etc. Certification costs.
3 USc/lb (about 20% of the premium). Sometimes
paid by unions; sometimes by primary cooperatives.
2. Cooperative decides on use of budgets. Mostly
investments in communal assets such as schools,
roads, etc. but also offices, cars, etc.
3. Repayments of debts. Bought coffee at too high a
price; price dropped and losses were incurred. Also
loans for wet mills that have to be repaid.
6. Quality premiums VSS certification:
What explains the gap?

18. 7. Do VSS achieve other objectives?
In general, some evidence that there are other benefits
from being a member but results not that strong
• Reducing child labor
• Improve child education
• Enhance better agricultural practices
• These are on top of the additional payements

19. 8. Conclusions
• VSS quickly taking off in global value chain
• Adoption of VSS certification in Ethiopia is low (5% of
exported quantity) and has grown slowly over time
• Significant quality premiums at the export level,
leading to additional export income of 2 million USD
per year; If more done, export earnings would go up:
e.g. if 25% VSS certified coffee from Ethiopia, 10
million USD per year extra.
• Find that one-third of quality premiums of 13.7
USc/lb of higher export prices go to producer

20. 8. Conclusions
• Median coffee farmer in Ethiopia sells 400 kgs of red
cherries equivalent; If all sold certified and all sold as
red cherries, it would increase his income with 144
Birr per year or 7.5 USD per year…; Even if assumed
complete efficiency (100% transmission), increased
annual income of 20 USD per year…
• This low number, combined with implementation
costs, might explain low growth in adoption of Fair
Trade in Ethiopia;
• Other VSS - not going through cooperatives - are
currently constrained because of the market
institutional set-up (ECX).