Opinion Letter from Colombia’s FNC on the Emerging Institutional Uncertainty

A reasonably contentious situation has emerged in the Colombian coffee sector, following a leaked Presidential commission report that suggested the need for widespread reforms among the country’s numerous coffee-related institutions.

Players within the Colombian coffee industry are anxiously awaiting the official report, but no Colombian coffee institution arguably has a more vested interest in the situation than the Colombian Coffee Growers Federation (FNC), one of the largest and most well-organized agricultural NGOs in the world.

Here we are publishing a letter shared with us by the FNC, in full and unedited. It is written by FNC’s Chief Communications Officer Luis F. Samper. To be clear, this is an opinion letter that was shared with us, and those opinions are wholly of the author and the FNC:

A debate on the role of coffee institutions has recently commenced in Colombia. Michael Sheridan recently reported on the draft recommendations of a study conducted by The Commission for the Study of Coffee Policy and Institutions for Daily Coffee News. A number of reactions from a number of academics, exporters and, of course, coffee growers have been heard. A final version of the recommendations is expected to be published in a few weeks. At the same time, yet another report (the so-called Rural Mission report) is also expected in the not too distant future, whereas the Colombian government is also working on its 4-year development plan, which will have a strong agricultural component.

The Colombian debate may have a wider significance across the coffee industry and perhaps the wider agricultural sector. It is well known that nearly 65% of the food produced in the world comes from small farmers and in fact over 80% of the world´s farmers have parcels of less than five hectares. The viability of small farming is therefore of huge significance to wider audiences. Nowadays farmers not only have to contend with a shrinking labor force and urban migration, but also with the volatility of prices, exchange rates, climate variability and the increased prevalence of diseases and pests that climate change brings along. At the same time, consumers are requesting that they be sustainable, to adopt different practices and fulfill different criteria. In addition, hedging and insurance are costly and markets do not necessarily work as efficiently in the local farming communities as they work in the international exchanges.

After the free market policy environment that took over in the 1980s and 1990s, the world at large has become somewhat skeptical of free markets solving all the problems by themselves without the need of any regulation. Many now argue for institutions to be present to solve market imperfections or abuses. The mortgage crisis and deregulation in the financial industry are frequently mentioned. Many Nobel Prize winners in Economics in recent years –including 2014, have worked most of their lives on imperfect markets and institutional economics.

Recent economic discussions related to agricultural institutions take the side of grower’s needs and interests. How to deal with all the challenges listed above, how to reduce their transaction costs, or how to optimize productivity of land and of labor without a strong institution that represents the interests of small farmers? Also, in accordance with modern managerial academic thinking, providing a vision and a strategy to be more competitive and sustainable is always needed and part of the process. Unfortunately, the recent report on Colombian coffee falls short of these demands. Many critics of the report, mostly growers themselves from different regions, cultures and farm sizes, question that the Commission´s draft report recommendations fail to advance conditions for Colombia’s coffee farmers. On the contrary, they indicate that its implementation will affect and reduce farmer´s competitiveness. They contend that they threaten to move benefits backward rather than forward for growers while leaving the Colombian Coffee Growers Federation (FNC) weakened and ineffectual.

Take the quality discussion. The FNC has always focused on differentiating Colombian coffee as a washed mild Arabica coffee that complies with minimum quality requirements. This way, Colombian coffee brands work on a leveled playing field and can count on the work of many decades to obtain and maintain a special reputation for Colombian coffees. The report contends that this means unifying quality standards (forgetting that there is just a minimum quality standard but not a maximum quality standard) and that, to the contrary, Colombia should explore venturing out to robusta markets as a way to regain market share. Of course many will have the temptation to mix high quality with robusta beans and market them as Colombian coffee, affecting the reputation gained for Colombian mild washed arabica coffees and the growers and brands that currently produce and market them. We doubt there will be the same interest to market Colombian coffees to consumers if coffee quality can vary so widely. Therefore, and without delving into the question of whether Colombia would be more competitive in producing this species than other countries currently producing it, the real question that is not discussed is how labeling and clear competitive rules can be successfully enforced in over 80 countries to maintain the quality premiums and differentiation that Colombia currently enjoys by taking this bold – and risky adventure.

Or just take the problems that coffee growers face in terms of transaction costs in their local communities. As opposed to many coffee producing countries, the FNC devised a system whereby coffee growers always have the option to sell their coffee near their farms, in cash, at current international market prices –every day of the year, independently of whether other buyers are in the market or not. One has to realize that nearly 800,000 coffee transactions a year take place in local communities for volumes of less than 20 kilos of green coffee! This means that there are hundreds of thousands of sales by small growers to their local buyers of just 2, 5, 10 or 15 kilos. In fact, the average transaction volume is of less than 60 kilos. It is no surprise than in the absence of what we call the FNC Purchase Guarantee policy, growers will not have much negotiating power in the local communities where they sell their coffee. As it happens in other countries, Colombian coffee farmers will have to take whatever price they are given, with payment sometime in the future. As it turns out, the purchase guarantee policy foments competition and reduces transaction costs (a subject treated extensively in institutional economics literature) and therefore corrects markets’ inefficiencies. Thus, the report’s conclusion that Colombia´s domestic market is liquid and highly competitive is correct, but it fails to acknowledge that this is possible precisely thanks to the purchase guarantee system.

There are many additional points that are part of the debate. While productivity and yields have decreased in many countries, and coffee growers have faced difficult times over the last decade due to climate change, domestic currency appreciation and high labor and fertilization costs (common problems faced by high quality coffee producers), some insist that these problems are caused by the Colombian institutional model. Many fail to understand the causality of institutions and these problems. In fact, as many industry members know, Colombia is increasing its shipments to the U.S. and Europe in 2014. Without Colombian institutions, the situation of coffee growers following the 3 year long La Niña event of 2009-2011, the leaf rust epidemic and currency revaluation would be more complex, and considerably less favorable.

These and other contentious topics do not mean that there is a need for a debate and of a self- evaluation of what policies and actions can be contemplated or improved. Now that many of the studies have been released, many contributing authors are being invited to present their findings to the FNC. We will of course be interested to understand how the Vitamin E content of Colombian coffee explains the Colombian differentials, and surely we will learn of possible initiatives that need to be carefully considered by growers and their Federation. This, together with the upcoming reports yet to be published, will no doubt provide very interesting input for the new FNC strategic plan. As a non-profit and non-political organization founded on participative representation and transparency, the FNC is always open to evaluations and assessments that lead to positive results for growers.
Luis F. Samper is the Chief Communications and Marketing Officer of Colombian Coffee Growers Federation.