Quality upgrading and contract enforcement in Uganda's coffee sector

Project Active from to Firms and Firm capabilities

There has long been interest in the process of structural transformation, moving from subsistence agriculture to the production of manufactured goods (Lewis, 1954). Improving the value of agricultural exports is often considered an important first step in this process. More broadly, there has been growing interest in quality upgrading in developing country markets and firms (see Sutton (1991, 1998); Hallak (2006); Verhoogen (2008); Atkin et al (2017) amongst others).

This research will focus on international coffee markets. In these markets there appear to be large returns to quality management. On world markets, higher-quality coffee – ripe, undamaged, and washed– can receive premiums of over 90% compared to lower-quality coffee. However, farmers in developing countries’ coffee production consistently fall short of these quality standards. It is estimated this has resulted in $20-30 million per year forgone in Uganda's Rwenzori region alone (Morjaria & Sprott, 2018).

What prevents these farmers from providing the high-quality coffee that international markets demand?  One possibility is that, due to long-supply chains of intermediation, farmers may not have access to the same quality premiums offered by the world market. It has been documented that farmers tend to enjoy a relatively small portion of the world price in various commodities (Staatz, Dione, and Dembele 1989; Coulter and Poulton 1999; Osborne 2005). What has been less well-documented is how this varies with quality.  If farmers receive a smaller portion of the world price for high-quality goods than they do for low-quality, this will depress the price-quality gradient they face (as compared to that prevailing on the world market). And, it will discourage production of high quality, relative to incentives under an undistorted quality premium.

Consequently, this project aims to study how market structure affects incentives for quality upgrading along developing country supply chains. Though detailed surveys with farmers, intermediaries, and large processors, this study will document how price premia for quality are passed along the supply chain.  It will identify how this varies with the observability of quality dimensions, buyers’ ability to enforce contracts, and the market structure of intermediation.  Finally, it pilots an experiment to test the hypothesis that variation in competition shapes the effective quality premium faced by producers.