Publication - Working Paper
The vast majority of the world’s poor are employed in agriculture (see, e.g., World Bank (2008)). Promoting exports of agricultural products and linking farmers to global markets, therefore, has the potential to reduce poverty. At the same time, it is argued by many that market imperfections along agricultural value chains and unfair conditions in global market prevent these beneficial impacts to fully realise and might even exacerbate poverty by increasing farmers’ dependency and expose them to huge fluctuations in prices and income.
Coffee is exclusively produced in developing countries and almost entirely exported to high income countries. Coffee is the world’s most widely traded tropical agricultural commodity, 7.9m tonnes of coffee were produced in 2011, of which 6.2m tones were exported. Coffee-producing countries earned $23.5bn from coffee exports in 2011, 25 million smallholders produce 80% of the world’s coffee, and coffee provides a livelihood for a further 100 million people in coffee-producing countries.
The project is, therefore, intimately connected to the IGC goal of promoting sustainable growth in low-income countries. For many countries, coffee has the potential to lift the lives of many in rural areas and generate very valuable foreign exchange. We will illustrate this with a comparative analysis of the coffee value chain in several IGC countries, including Rwanda, Tanzania and Uganda and eventually Kenya as well as non-IGC countries, e.g. in Latin America (Costa Rica, Colombia and Peru). For example, in Rwanda alone, there are approximately 400,000 coffee farmers. The sector accounts for a substantial share (on average 30%) of export revenues. At the same time, the country has not yet reached its full potential: an IGC-funded study conducted by Dr. Macchiavello and Dr. Morjaria documented that only approx. 30% of the coffee is exported as washed (processed), despite a 25% FOB price premium associated with fully-washed coffee and as well as a substantial processing capacity under-utilisation in the country (55%). These figures appear to be similar for Kenya, a much larger producer in which an estimated 2 million farmers are directly involved in coffee production. Like in Rwanda, coffee still represents a substantial share of exports (on average 20 to 30% given recent growth in other sectors), only 20% of the coffee is exported as fully washed despite a comparable FOB price premium of 30%. Given the radically different industrial organisation of the two sectors in Kenya and Rwanda, however, it is not clear whether the policy implications for Rwanda are suitable for Kenya and what, if anything at all, one country should learn from the experience of the other. Rwanda’s exports are characterised by a highly concentrated sector in which a handful of large firms (typically subsidiaries of multinationals or local well established trading firms) extend substantial pre-harvest finance to mills and, in the last couple of years, have started a strategy of backward vertical integration. In Kenya, the presence of the auction makes these inter-linkages and organisational forms difficult to implement for most exporters, unless they serve the still relatively narrow specialty sector. If constraints on the operation of mills are important in Kenya too, further work is required to understand the best options to remove them.