C.1. Expansion of the GVC as a driver of sustainable

C.1. Expansion of the GVC as a driver of sustainable and inclusive growth

Key sustainability challenges in the coffee sector remain…

The coffee sectors in producing countries are often associated with various market failures, such as limited access to information about new technologies and stateof-the-art and climate-smart farming methods, market requirements or prices, lack of access to inputs required to produce high-value coffee products, lack of access to finance, and high transport and transaction costs to access output markets. As a result, coffee supply chains in many countries are characterized by high transaction costs, inefficient production and products with little value addition. In particular, smallholder coffee growers lack the capacity to invest in their coffee plantations, improve productivity of operations, and add value to their produce in order to be able to participate in the GVC (Figure C.1). This is exacerbated by the coffee price crisis, as several years of low producer prices have eroded the economic viability of coffee production in many origins (ICO, 2019a). The covid-19 pandemic has put additional pressure on the sector. Even before the price crisis and the global pandemic producers in traditional coffee supply chains were challenged in adhering to the highest social and environmental standards, a situation that could worsen in view of economic pressures, resulting in detrimental social effects (such as higher prevalence of child labour or low wages) and impact on the environment (such as land degradation and depletion of natural resources). On the other hand, successful upgrading of on-farm operations or adoption of Good Agricultural Practices and standards by farmers may be insufficient to unlock the benefits related to the GVC. Finding niche markets for high-value outputs is essential. For instance, only a fraction of coffee produced according to specific quality and sustainability standards can be marketed as such, undermining the economic viability and sustainability of upgrading efforts made by producers in conventional coffee value chains (Panhuysen and Pierrot, 2018).

BOX C.1: Buyer-driven programme for promoting a sustainable coffee sector in Burundi

Within the framework of promoting Public Private Partnerships, the ICO contributed to the design and monitoring of a programme to promote a sustainable coffee sector in Burundi, an active member of the Organization. The project aimed to improve the skills of smallholder coffee farmers in order to increase productivity and the quality of their coffee to generate profit and to improve their living standards and enable them to continue farming coffee as a profitable business and access the coffee Global Value Chain.

The programme was driven by Sucafina, a leading trader, which set up the Kahawatu Foundation and appointed the project implementation team. The project with a budget of USD 1.6 million covered activities over four years (2014-2017), while pursuing fundraising. IFAD granted project offices to Kahawatu in Bujumbura. Since the project’s inception in March 2014, the foundation has secured funds from various partnership agreements targeting specific beneficiaries:

• USAID (USD 5.5 million) for 22, 500 beneficiaries • GIZ (477,200 Euros) for 14,000 beneficiaries • Nestle (USD 33,000) for 100 beneficiaries • Starbucks (USD 32,000) for health insurance and medical equipments to 54,000 farmers • Catholic Relief Services (USD 500,000) for 4,000 beneficiaries. With the support from various partners, project implementation continues covering: • Providing good agricultural practices to farmers; • Establishing demonstration plots and farmer field schools; • Promoting coffee nurseries; • Planting improved varieties or replacing old trees; • Promoting environmentally friendly coffee farming; • Facilitating access to inputs (fertilizers, planting materials); • Promoting organic fertilization; • Building/strengthening the capacity of farmers’ organizations • Agri-business development • Community engagement • Youth and gender involvement in agriculture The Sucafina/Kahawatu model is being replicated in Rwanda and Uganda. The Kahawatu Foundation has been registered in Switzerland as a not-for-profit organization and is responsible for implementing sustainability projects on behalf of Sucafina SA. For more information, visit the Kahawatu foundation: www.kahawatu.org.

Sustainability challenges

Constraints on participation in global value chains (Limited access to information, credit, and input) Lack of efficient and high value-added operations along with good management practices and governance Low social and environmental sustainability standards

Inputs and instruments

Contracts and vertical coordination

Durable and closer firmto-firm relationships Horizontal coordination

Information, credit and input provisions to producers Sustainability standards and regulations

Output

Productivity increases High value-added coffee products Adoption of better management practices Revenue increases

Adoption of socially and environmentally sustainable practices

SOURCE: Adapted from Janvry and Sadoulet (2020)

Intermediate outcomes

Coffee sector growth Export value growth Employment growth Better governance Improved social and environmental outcomes

Narrowed living income gap

Long-term goals

Sector transformation

Living income Economic, social, and environmental sustainability and development

… but can be addressed through value chain development instruments.

Within the framework of inclusive development efforts, GVC actors mobilize resources and tools to address the constraints to efficiency and value addition.24 As the expansion of the GVC is primarily driven by the private sector, these comprise long-term contracts, closer relationships along the value chain, vertical coordination, and FDI. For instance, long-term contracts are a powerful instrument linking smallholder coffee producers to highvalue coffee markets. In addition to minimizing market risks, contracting firms can provide farmers with services to overcome barriers in order to comply with stringent international and voluntary standards (quality, safety and sustainability) required by national regulators and highvalue coffee markets in the GVC. Horizontal coordination (formation of farmer groups, consortia or cooperatives) is another instrument employed within the framework of inclusive development of the GVC. Cooperatives reduce transaction costs and encourage vertical integration and also reduce the costs of investment in their coffee business for individual farmers.

Voluntary sustainability standards (VSS), another instrument to pursue sustainability, have become widely used within the GVC. Driven by ethical consumerism, lead firms in the C-GVC are adopting increasingly stringent voluntary standards to minimize the risks associated with global coffee production (see Box C.2 for detailed information on sustainability standards). Governments, on the other hand, can create a set of regulations and policies that provide a legal framework for sustainable value chains and mobilize support as part of an enabling environment approach (Figure C.1).

24 Inclusive value chain development is a holistic approach to sustainable sectoral transformation (Donovan et al., 2016; de Janvry and Sadoulet, 2020).

Inclusiveness implies facilitating – otherwise marginalised – smallholder farmers’ participation in value chains. Inclusive value chain development efforts have been strongly supported by the World Bank and institutions alike as a pro-poor growth strategy in the past decade (World Bank, 2019).

Removal of constraints (e.g. input unavailability and knowledge barriers) facilitates farmers’ access to the knowledge and technologies required for participation in the C-GVC. Inputs and services provided within the framework of value chain development efforts not only integrate producers but also increase their performance. Short-term results include higher productivity and revenues created along the chain. Closer and more durable relationships facilitate the transfer of higher sustainability standards in addition to better management practices and governance from lead firms to the upstream value chain actors.

Inclusive value chain development efforts made by the lead GVC actors contribute to economic, social, and environmental sustainability of the C-GVC and to achieving the Sustainable Development Goals.

Improvements in productivity and value addition boost export value and create local employment opportunities, thereby increasing incomes of farming households and the wider coffee-growing community. Similarly, adoption of higher sustainability standards and better agricultural and management practices and corporate governance contribute further to improved economic, social, and environmental outcomes, such as a living income for farmers and a living wage for workers, higher export revenues, employment creation, better governance, and economic growth, as well as reducing negative environmental impact and improving gender equality.

… in the pursuit of a sector transformation.

GVC-driven improvements of the economic viability of coffee production and equitable distribution of gains related to upgrading would contribute to sustainable transformation of the coffee sector along with the achievement of Sustainable Development Goals, such as reduced poverty, improved health and education, gender equality, and climate action.

BOX C.2: Standards as an instrument to mitigate sustainability challenges

National and international standards and conformity assessment procedures for health and safety, the environment, labour, and quality are set and enforced by governments primarily to protect consumers, workers, and the environment but also to facilitate trade and market access. But in a GVC world, the private sector is increasingly setting and requiring “voluntary” standards across global supply chains. Driven by consumer demands and national regulatory pressures, private standards and labels are growing in importance. Through standards, knowledge and technology can be transferred in a codified way to firms and workers along the value chain. Currently, approximately one third of global coffee production is associated with one or more sustainability certifications1 and the amount of coffee produced in compliance with sustainability standards is increasing at a rapid rate. Although the lead companies in the GVC have developed their own sustainability standards schemes (e.g. Starbucks’ C.A.F.E. Practices and Nestlé’s Nespresso AAA) the majority of the world’s sustainable coffee production is certified by third parties. The most common independent standards in the coffee sector are:

The Common Code for the Coffee Community (4C): 4C has the largest certified coffee area, over 1.3 million hectares and registered the largest growth in area. The 12 principles established by the 4C Code of Conduct are based on good agricultural and management practices, international conventions and recognized guidelines accepted in the coffee sector.

Rainforest Alliance: the vision of Rainforest Alliance is a world where people and nature thrive in harmony. In 2018, Rainforest Alliance merged with UTZ. The sustainability standards comprised under the Rainforest Alliance seal aim at conserving forests, advancing the rights of rural people, improving the livelihoods of farmers and forest communities, and building climate resilience. Fairtrade International: Fairtrade’s main focus is on economic and social sustainability, ensuring decent working conditions for hired labour and a Fairtrade Minimum Price and/or Fairtrade Price Premium for producers. The minimum price aims to cover the producer’s cost of sustainable production, whereas the price premiums aim to allow farmers to invest in improving their quality of life (achieving a living income). Fairtrade offers a higher price premium for organically grown products. Organic: Organic certification focuses on environmental sustainability aspects of coffee production. The cultivation practices need to be in line with the certification standards implemented by the respective certification organization (e.g., no use of pesticide or mineral fertilizers). Organic certification standards vary between countries but generally require good agricultural practices that reduce adverse environmental impacts.

1 https://www.iisd.org/system/files/publications/ssi-global-market-reportcoffee.pdf