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

1. Who benefits from rapidly increasing
Voluntary Sustainability Standards (VSS)?
Evidence from coffee in Ethiopia
Bart Minten,
Mekdim Dereje
Ermias Engida
Seneshaw Tamru
Addis – EDRI
October 17, 2014
1

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
• Fair trade and organic VSS first ones, but
quickly losing market share (2013)
• More certified coffee produced than sold
0 500 1000 1500 2000 2500
Nespresso AAA
CAFÉ practices
4C Association
Utz certified
Rainforest Alliance
Organic
Fairtrade
1000 Metric Tons
Verified-certified sold Verified-certified produced but not sold

7. 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
20
15
10
5
0
2005 2010 2015
%
Ethiopia World

8. 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; copied prices from “record
book”; 148,558 purchase transactions over a nine-year
period

10. 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

11. 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

12. 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 primary Any VSS Organic Faitrade Rainforest Utz
unions
coope-ratives
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

13. 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

14. 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:
m
pjt   *VSS   * X   *   *  0 1 2 3 4
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

15. 6. Quality premiums VSS certification: Export level
• Premiums over the years 2006 to 2014 88 Usc/lb
• However, no control for quality; need regressions
0
.01
.002 .004 .006 .008
Density
0 200 400 600
US cents/lb)
non-certified certified

16. 6. Quality premiums VSS certification: Export level
• 5 specifications (VSS certification always significant):
1. Period 2006-2014; all exporters: pooled
specification: 22.17 USc/lb
2. Period 2006-2014; all exporters: fixed effects by
exporter: 15.33 USc/lb
3. Period 2006-2014; only cooperatives; fixed effect by
exporter: 11.47 USc/lb
4. Period 2013-2014; all exporters; fixed effect by
exporter: 10.59 USc/lb
5. Period 2013-2014; only cooperatives; fixed effect by
cooperative: 13.66 USc/lb

17. 6. Quality premiums VSS certification: Producer level
• Some background information
% of farmers… Non-certified
cooperative
VSS Certified
cooperative
All
cooperatives
Option to sell to cooperatives
Farmer that sold cooperatives
21
5
18
15
40
19
Cooperatives buy:
- Red cherries only
- Dried cherries only
- Both red and dried
Total
30
48
22
100
90
1
9
100
62
22
15
100
Cooperatives’ price for red cherries are:
- Higher
- Lower
- The same
- Do not know
Total
35
3
45
16
100
47
39
12
3
100
43
28
22
7
100

18. 6. Quality premiums VSS certification: Prod. level
• 5 specifications (from section 5 model):
1. Period 2003-2012; all producers; all forms
(red/dry/beans); pooled: 0.94 USc/lb (significant)
2. Period 2003-2012; all producers; red cherries;
pooled: 1.56 USc/lb (significant)
3. Period 2003-2012; all producers; red cherries; fixed
effect by producer: 0.13 USc/lb (not significant)
4. Period 2003-2014; cooperatives only; red cherries;
fixed effect by exporter: 0.09 USc/lb (not significant)
5. Period 2011-2012; only cooperatives; red cherries;
fixed effect by cooperative: -0.26 USc/lb (not signif.)

19. 6. Quality premiums VSS certification: Producer level
• However, VSS certified cooperatives more likely to
pay out second payment and/or dividend;
underestimation of benefits
% of farmers… Non-certified
cooperative
VSS Certified
cooperative
All
cooperatives
who received a second
payment
8 55 44
If received, … (Birr/kg) 0.9 0.8 0.9
Who received a dividend 11 27 23
If received,… (Birr) 885 217 240
Who received a second
payment or dividend
13 66 53

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

21. 6. Quality premiums VSS certification: Producer level
• Use data from the producer survey of 2014; three
specifications for prices paid for red cherries:
1. Price at transaction only: difference cert. vs. non-certified
cooperatives: 0.44 USc/lb for red cherries
(non significant with F-test) (confirms results of the
previous time series analysis)
2. Combine first and second payment: difference
certified vs. non-certified cooperatives : 0.82 Usc/lb
(significant with F-test)
3. Combine first, second, and dividends: difference
certified vs. non-certified cooperatives : 0.80 Usc/lb
(significant with F-test)

22. 6. Quality premiums VSS certification: Producer level
• How much of export premium transmitted:
- Premium of 0.80 USc/lb at the producer level for red
cherries
- 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

23. 6. Quality premiums VSS certification:
What explains the gap?
• 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.

24. 7. Do VSS achieve other objectives?
• On top of economic sustainability, VSS designed to
improve environmental, labor, and social
environments.
• First, qualitative information: What do farmers see as
advantages of having access to certified and non-certified
cooperatives?
• Second, quantitative information: 1/ OLS regression
comparing certified and non-certified cooperatives;
2/ matching exercise

25. 7. Do VSS achieve other objectives?
Non- Cooperatives
coops. Non-cert. Cert.
Major reasons why farmer chose this buyer in 2013 red cherries' sales transaction:
"He gives higher price" 22.3 42.9 11.6
"He accepts large quantities" 0.4 0.0 0.4
"He accepts small quantities" 3.3 0.0 0.6
"He gives advances when needed or lends money" 3.7 0.0 0.4
"He pays immediately" 12.2 1.2 0.7
"He is close by" 25.5 11.9 1.8
"There is no real difference with other buyers" 22.1 2.4 0.6
"There is only a single buyer" 1.4 0.0 0.2
"I trust his weighing" 2.0 4.8 0.6
"The buyer is a relative" 2.5 0.0 0.0
"He buys at the farm gate" 3.1 0.0 0.0
"Buyer has the needed inputs" 0.1 0.0 0.0
"Because of advantages of being a member" 1.2 35.7 83.3
"Other" 0.4 1.2 0.0
Total 100.0 100.0 100.0

26. 7. Do VSS achieve other objectives?
Cooperatives All
Non-certified
Certified
For those having option to sell to cooperatives
Main advantages of selling to a cooperative:
"They provide higher prices" 49 52 50
"They provide credit" 25 14 19
"They provide advice" 44 61 53
"They provide inputs" 41 11 24
"They pay immediately" 58 22 38
"They are close by" 55 58 56
"They do not cheat with weights" 67 55 61
"They pay dividents/second payments later" 42 80 63

27. 7. Do VSS achieve other objectives?
• Are production practices different for VSS certified
farmers? Look at 1/ yields; 2/ extension visits; 3/ use
of compost; 4/ use of mulching; 5/ use of stumping
• More significant adoption of stumping by VSS
certified households (both in OLS and matching)
• More significant adoption of compost by VSS
certified households (both in OLS and matching)
• No significant influence on other indicators
(extension visits; mulching; yield)

28. 7. Do VSS achieve other objectives?
• Are organic production practices different for VSS
certified farmers? Look at 1/ use of chemical
fertilizer; 2/ use of pesticides-herbicides
• Adoption of inorganic inputs is overall low: 6% uses
chemical fertilizer; 2% uses pesticides-herbicides
• Overall not much effect of VSS certification on these
indicators; we find significant reduction in case of
matching and chemical fertilizer use

29. 7. Do VSS achieve other objectives?
• Are child labor indicators different for VSS certified
farmers? Look at 1/ dummy of child labor use;
2/ share of child labor in total labor use
• Descriptive statistics: 30% uses child labor at some
point; 6% of total labor use in coffee production
• Overall not much effect of VSS certification on these
indicators; we find significant reduction in case of
matching and share of child labor in total labor use

30. 7. Do VSS achieve other objectives?
• Are schooling indicators different for VSS certified
farmers? Look at school-age children in school
• Descriptive statistics: 65% of school-age children are
in in school
• No effect in the OLS model; we find significant
increase by 7% in case of matching
• In general, some evidence that there are other
benefits from being a member but results not that
strong

31. 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

32. 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).