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Q&A on Colombian Institutional Reform with the FNC’s Luis Fernando Samper

Colombian coffee

Colombian coffee bags. 2008 Creative Commons (standard license) photo by tothefront

by Michael Sheridan of CRS Coffeelands Blog

In 2013, Colombia was roiled by a series of strikes that started in the coffeelands but soon went national.  The coffee growers who catalyzed the wave of protests called for immediate price supports and reforms to the country’s coffee institutions. President Juan Manuel Santos granted the former and, with respect to the latter, convened a presidential commission to study the institucionalidad cafetera de Colombia and recommend reforms.

The report of what has been known in Colombia as simply theMisión Cafetera was supposed to be issued by the end of 2013, but the Executive Summary of the Misión Cafetera report was issued only last month, a full year and a half late.  It included some recommendations for radical reforms to the powerful Federación Nacional de Cafeteros (FNC).

Today, FNC Communications Director Luis Fernando Samper shares his thoughts about the Misión and its recommendations for the future of Colombian coffee.

What are your general thoughts on the Commission’s final report and the way it went about its work? 

During my career at the FNC I have had the opportunity to interact with other similar Commissions that take place every few years to analyze the evolution of Colombia’s coffee industry. There is no doubt that the members of this Commission also had good intentions. My personal impression is that the report of this Commission did not contribute many new elements for discussion or new ideas, whereas previous Commissions did.

In general terms, I would say that the 2015 Coffee Commission focused on market share and desired production levels but ignored the coffee grower, and his/her realities, which are also Colombian realities. More specifically, I did not have much contact with the Commission on the topics I deal with, including branding, Geographical Indications, quality policies, consumer trends, etc. I don’t believe that the Commission’s analysis was very knowledgeable in these areas.

Does the Federation agree with any of the Commission’s recommendations? If so, which ones?

There are 10 big “recommendations.” Four of them are easy to agree on.

No one can argue with the first four: coffee continues to be a life option for millions of Colombians (recommendation #1), a profitable coffee growing industry will help eradicate poverty (recommendation #2), there is no one single solution for coffee and both higher productivity and specialty coffees are needed (recommendation #3) and good agricultural practices are required for an environmentally sustainable sector (recommendation #4).

If you look at the latest FNC Strategic Plan, approved by the latest Coffee Grower’s Congress, each of these topics is addressed in great depth, with concrete actions and objectives. We agree with these recommendations, but they are clearly insufficient and lack depth and concrete initiatives.

There is another group of three recommendations with which we partially agree.

The Commission states that a profitable coffee growing industry requires an institutional reform that promotes productivity (recommendation #5), and we agree that our coffee institutions should promote productivity. The fact that productivity has increased by over 50 percent over the past few years and that Colombia’s harvest could reach 13 million bags this year shows that current institutional framework has promoted productivity effectively. At the same time we don’t believe in miracles. Productivity will not increase without concrete actions and policies like the ones we have put in place.

The Commission also recommends that we clearly separate the roles of the FNC and the State to avoid the erosion of the social fabric of coffee communities (recommendation #6). We certainly are not in favor of a deterioration of what we call the “strategic social capital” in coffee communities. But at the same time, we have to be realistic. Can the Colombian State really be effective in building roads, promoting peace or fostering development in coffee regions without public-private partnerships with organizations like ours? We believe it is also our responsibility to help coffee growing communities accomplish their desires, and we have been doing so with international aid agencies, clients and local and regional governments. It is easy to say that the FNC should not participate in these efforts. But if not the FNC, then who is going to perform these functions on a similar scale? In the near future, it will certainly not be the State.

Another recommendation deals with the FNC’s commercial activity (recommendation #7). It is important to highlight that the Commission sees value in FNC’s commercial activities, but believes the FNC should operate exclusively with private incentives and no use of public resources. We believe in the market, but, unlike the Commission, we do not blindly believe in the free market as a solution for everything and everybody’s problems. There are recent examples of clear market failures in the United States and Europe. Unlike the Commission, most of the world has come to realize that free markets on their own do not perform miracles.

In the case of FNC’s commercial activity, our primary interest is that every Colombian grower receives a transparent and fair market price when he or she brings her coffee to the nearest town. Correcting market imperfections by way of our guaranteed purchase policy is the cornerstone of FNC’s commercial activity, ensuring the highest possible price transfer to growers by leveraging competition amongst local buyers. We are not in the market to maximize profits but to make sure growers reduce their transaction costs and are not abused.

Without question there are recommendations in the report with which the FNC does not agree. Which are the most worrisome recommendations from the Federation’s perspective?

We disagree with the Commission’s recommendations 8 and 9.

The Commission recommends that Colombia eliminate its minimum quality policy and the alleged conflict of interest between the FNC’s application of that policy and its commercial activity (recommendation #8). We believe in strategy rather than magic. We believe we should differentiate our product as so many successful companies and brands do. We do not believe in commoditizing what Colombian coffee growers produce so that they have to compete on equal terms with Southeast Asia or any other newcomer. An in order to differentiate yourself, you have to apply policies regarding coffee quality. This makes a Geographical Indication strategy possible, and makes it possible for growers to obtain price premiums as one of their competitive strategies.

The Commission also considers price stability or other possible risk tools to benefit growers a waste of time and resources (recommendation #9). We acknowledge this is not an easy subject, but at the same time we just cannot tell growers to fend for themselves. Certainly Colombia will never be able to bring to bear the kinds of resources that a U.S. Farm Bill or EU Common Agricultural Policy can. But at the same time, we have to acknowledge that the risks associated with growing coffee have increased, from climate change to price and exchange rate volatility. It is certainly easy to criticize, but it is quite a bit more difficult to innovate and implement, as we have been doing.

That leaves only the garantía de compra.  The Commission recommends effectivelydoing away with one of the signature programs of Colombia’s coffee institutions—the guaranteed purchase policy. What is the Federation’s perspective on this recommendation?

We disagree with this recommendation (#10). One cannot just simply assume that the market will work perfectly in Colombia’s 590 coffee producing communities without our purchase guarantee policy. Recent figures show that almost 800,000 transactions in the domestic market each year are of quantities of less than 25 kilos of parchment. Many of these are just 5 or 10 kilos. Will that farmer know what the current price is? What negotiating power does a grower have in that situation? Will he be able to negotiate quality premium incentives by himself? Will he be paid in cash? Will it be enough to cover his transaction costs? Can he run the risk that the buyer will refuse to buy at any price?

Producers from all over the world are envious of Colombia’s system of assuring the purchase of all Colombian coffee at market prices, every day of the year, in every coffee-growing community. This approach promotes competition among all buyers, for the benefit of growers. The Commission seems to put blind faith in the market and believes that without FNC intervention everybody will be better off. We believe that buyers, and not growers, will be better off if this recommendation was adopted.

We have spoken in the past about public investment in rural development in general and the coffee sector in particular. I know that the Federation perceives a resurgence of public investment in agriculture around the world after many years of disinvestment. In this context, how does the Federation see the recommendation to circumscribe the mandate of the country’s coffee institutions?

Colombia has faced 20 very difficult years in agriculture. Toward the end of last century and at the beginning of this century, we faced a serious security situation, particularly in rural areas. This, together with low prices, made reinvesting in coffee farms difficult. When the security environment improved, Colombia’s currency rallied against the dollar, reducing coffee’s profitability for growers. In fact, and contrary to what the Commission suggests, during this period many coffee growers remained in coffee thanks only to the support of the FNC.

Nowadays we believe Colombian society has understood the importance of rural development to achieve peace and security. We expect that this focused approach will benefit farmers and of course we stand ready to contribute with our experience, know-how and trajectory to leverage and optimize resources.

The Commission argues that Colombia’s ministries and other public institutions should assume many of the Federation’s responsibilities, in part because they have vastly expanded their capacity to tend to the needs of the country’s rural populations. Isn’t it possible that the Commission doesn’t propose disinvestment from Colombia’s coffee sector, only from its traditional coffee institutions?

We strongly believe in public-private partnerships. The FNC and its local Committees have leveraged their community involvement and the ability to execute projects in rural environments with public resources and donors from other countries. We would of course be happy to have a more efficient and present State in all coffee growing communities but we know from experience that we cannot just stand aside and wait until this happens because public programs are formally the government’s responsibility. Coffee-growing communities demand action, and we have to respond to those demands.

Eduardo Lora, the prominent Colombian economist who contributed to the Commission’s work, suggests in this article in the business magazine Dinero that the Federation’s arguments against reform are precisely the reasons it needs reform. How do you respond to his argument?

We disagree with Mr. Lora on a number of points.

He confuses the FNC with the National Coffee Fund (FoNC) resources, suggesting that the FNC or its employees can impose arbitrary prices and get rewards for FoNC’s commercial activities, which is not true. We simply do not have that kind of market power.

He and others have argued that the FoNC margins are too big, but they forget to deduct from the gross margins the operational expenses need to get coffee to seaports and the accounting effect of risk management instruments that are part of the commercialization process. In fact, FoNC net commercial margins were close to zero last year.

Also, while he suggests in the Commission documents that free competition will ensure that coffee growers get the best possible price, his article suggests that free competition would not lead to this outcome, as exporters and multinationals would collude in their purchase prices and not maximize prices paid to growers. This logic contradicts his assessment that the purchase policy guarantee should be eliminated.

We also disagree with his vision that FNC was a bystander or a free rider during the years where we had ICO quotas, rather than an important actor in obtaining the positive outcomes that Colombia achieved during those decades.

Lastly, we disagree with his calculations regarding the way the FNC delivered research and extension services and other public goods. In 2014, the cost of the public goods we provide are 150 percent of the income we received from grower contributions. It was thanks to the FNC’s credibility and ability to forge alliances that we were able to finance this difference.

What are the next steps in this process? Is there a process for the Federation to formally consider or respond to the Commission’s recommendations?

We already have a Strategic plan that was approved by the coffee growers themselves. Of course we take into account what the Commission says, as well as the Rural Commission that is underway, what the OECD has stated and the priorities that the government has established in its National Development Plan. But our Vision is stated in our Strategic Plan, which is the grower’s mandate. We are reporting on a quarterly basis back to growers a set of indicators at national and regional level and will continue to do so.

What is missing? Are there any other thoughts you would like to share regarding the Commission report?

Our primary interest is the coffee growers of Colombia. We are the Colombian Coffee Growers Federation, not simply the Colombian coffee federation. Our main concern is helping people improve their standard of living. We believe the Commission focused on coffee as a product and not on the social fabric of coffee, not on the people. There is no point in having a 25- or 50-percent market share if the people who grow coffee are not going to be better off. In today’s modern economic debate we do not limit ourselves to growth, we also talk about income distribution, inequality and sustainability. In that sense the Commission’s focus was very limited in scope, and most of its recipes are outdated and lack depth.