As coffee drinkers face a proliferation of ethical labels Fairtrade, Rainforest Alliance, Utz Kapeh it is time to ask what they all mean

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1 EthicalCorp.com 7 March 2007 Special Report: Ethical certification Sustainability with a rich aroma John Russel, Deputy Editor As coffee drinkers face a proliferation of ethical labels Fairtrade, Rainforest Alliance, Utz Kapeh it is time to ask what they all mean McDonald s and the Eden Project, the environmental visitor attraction in Cornwall, UK, might appear to have nothing in common. But there is one thing they do share: their taste in coffee. Environmental conservation is a rarely noted concern of McDonald s clientele. But now visitors to the chain s 1,200 UK outlets can wash down their Big Macs with a cup of coffee that claims to protect the rainforest. Since January, all McDonald s coffee has been sourced from farms meeting the social and environmental standards of the Rainforest Alliance, an environmental non-governmental organisation that certifies coffee producers. The chain buys its beans from Kraft-owned coffee roaster Kenco, which has sold Rainforest Alliance-branded coffee since Rainforest Alliance standards cover wildlife, water and ecosystem conservation; soil and integrated pest management; and the fair treatment of workers. It is these sustainability standards the Eden Project, the United Nations and, less glamorously, the government of Belgium all favour when buying coffee. McDonald s order the largest ever for sustainable coffee in the UK should be welcome news for producers on the Daterra farm, a 7,000 hectare holding in Minas Gerais, Brazil. Its proceeds will fund conservation work on the cerrado, a shrub-forest habitat the Rainforest Alliance says is as endangered as the Amazon. The McDonald s decision should also boost trade for small farmers in Colombia, where 1,440 farms and co-operatives are certified to Rainforest Alliance standards. Their premiums for producing sustainable coffee last year totalled $1.6 million. Fair enough But the fast food chain s move has caused controversy. McDonald s has inevitably been perceived as cashing-in on ethical consumerism, although a more serious question surrounds the choice of Rainforest Alliance-certified coffee as opposed to the more well-known ethical label on the UK high street, Fairtrade. McDonald s says it opted for Rainforest Alliance because, aside from the quality of the coffee, the scheme offers a combination of social and environmental benefits on farms. Or, in the words of a company spokesman, McDonald s liked the scheme s holistic approach to supply chain sustainability. But the Fairtrade Foundation is concerned that McDonald s will benefit unduly from the good name its own label enjoys in the UK. Ian Bretman, the foundation s deputy director, believes people are not sufficiently informed to distinguish between ethical labels. He says: Companies have to be very careful on how their schemes are perceived by consumers. Bretman wrote to the Times newspaper when the story broke to complain of their coverage of McDonald s move into fair trade. Rosemary Byrde, global Fairtrade policy adviser at Oxfam, agrees that a proliferation of marks

2 can cause confusion among consumers. She finds it odd that McDonald s opted for Rainforest Alliance coffee in the UK, but sells Fairtrade at stores in New England, in the US. A corporate strategy that adopted Fairtrade globally would have sent out a far more powerful signal to other coffee retailers around the world, Byrde says. To complicate matters further, McDonald s announced that while UK outlets would sell coffee certified under the Rainforest Alliance, in Europe it will offer coffee certified under another scheme, Utz Kapeh. Growing fast Coffee certified under these three schemes accounts for a tiny fraction of global trade in the commodity: around 3%. But all are growing fast. Volumes traded under Rainforest Alliance have grown by more than 100% a year for the past four years. Utz Kapeh is expanding rapidly into 22 countries, while in the UK, Fairtrade coffee company Cafédirect is the country s sixth largest coffee brand. In the Netherlands, certified coffee, including organics, now accounts for 25% of all coffee sales. Both Rainforest Alliance and Utz Kapeh promise benefits to producers in poor countries while safeguarding the environment. But each proposes to do so in different ways to Fairtrade, placing varying degrees of emphasis on these twin objectives. The Fairtrade system addresses the way products are traded, offering a guaranteed minimum price to producers. The scheme s overriding concern with producer prices can be traced to its origins as Max Havelaar the Fairtrade movement s first trademark, created in 1988 by a Dutch NGO, named after a book describing the exploitation of Japanese coffee growers by Dutch colonial merchants in the 19th century. In contrast, Rainforest Alliance and Utz Kapeh focus on the way farms are managed. Both cover social and environmental standards, although Utz Kapeh places a lesser emphasis on protecting wildlife and biodiversity. These are key tenets of the Rainforest Alliance scheme, whose governors form the secretariat of the Sustainable Agriculture Network, a coalition of conservation groups across Central and South America. Of all three schemes, it is Utz Kapeh that is the most market-driven. The scheme stresses the importance of traceability in coffee supply chains, and specifies how beans should be harvested and handled to produce the best quality crops. This, too, reflects its origin as an industry-led partnership between the Ahold Coffee Company, the coffee roasting arm of the Dutch supermarket chain, and farmers in Guatemala in Income support The focus of Utz Kapeh and Rainforest Alliance on farm management means they are criticised for being more concerned with reassuring buyers than tackling poverty, which is the explicit mission of Fairtrade. Bretman notes: If they are not tackling the economics of the system and every other scheme accepts the economics of the current system I just question how they can claim to be doing the same thing [as Fairtrade]. Fairtrade aims to rebalance commodity markets in favour of disadvantaged producers in poor countries. It does so by fixing producer prices at levels designed to be sufficient to keep smallholders on their land, stemming migration to overcrowded cities. Fairtrade sets a floor price for coffee at $1.21 per pound for Arabica beans, and $1.01 per pound for lower-grade Robusta. If the market price rises above these floors, Fairtrade will pay an extra premium of $0.05 per pound. Further premiums of $0.15 per pound are paid to coffee farmers certified as organic. But farmers certified under other schemes also receive higher prices than those supplying

3 mainstream coffee markets. According to the Costa Rican Centre for Sustainability Market Intelligence, Rainforest Alliance-certified farms worldwide receive on average $0.14 per pound above the commodity market price for coffee, which now stands at around $1.06 per pound. Coffee grown on Utz Kapeh-certified farms typically fetches prices of between $0.01 and $0.10 per pound above this market price. Utz Kapeh director David Rosenberg says the scheme gives farmers weekly price updates to help them negotiate contracts with buyers. But premiums are not a form of development aid. He says: It very much reflects the true costs of certification and reward for the producer of certification. It is not intended as a handout. And Fairtrade s premiums are not what they were. As commodity prices rise, premiums farmers receive for sustainable coffee diminish in value. When in 2001 coffee prices slumped to a 30-year low of $0.60 per pound, the guaranteed income from Fairtrade was important in keeping farmers on their land. But price recovery since the coffee crisis of means premiums are no longer a simple measure of producer income. Chris Willie, chief of sustainable agriculture at the Rainforest Alliance, says: It s more than about price it s about margins. In Costa Rica, Willie estimates that efficient production of a pound of coffee costs producers $0.80. When it comes to selling their crop, Rainforest Alliance-certified farmers in the region on average receive $1.20 per pound. Demand for sustainable coffee is rocketing, says Willie, for several reasons. Buyers are flocking to certified farmers because even though the coffee is a little more expensive, it s worth it because the quality is up, the consistency is up and the farmer is a much better business partner, he says. Costs of compliance But sceptics point to the high costs of joining certification schemes, which include hiring auditors, developing new management systems and training staff. A familiar argument is that standards are biased towards larger farms that can afford to implement them. Since 70% of coffee is grown on small farms of fewer than ten hectares, certification s benefits are at best limited. A 2006 report from Consumers International and the International Institute for Environment and Development on global coffee supply chains, From Bean to Cup, finds that Fairtrade has been most successful in addressing the financial concerns of small producers. It says under Fairtrade the direct costs of certification are considerably lower than for other certification schemes as are the indirect costs of compliance. This reflects in part its weaker emphasis on process standards, such as environmental management. Willie admits the costs of obtaining Rainforest Alliance certification can be high, ranging from $500 for a small farm to tens of thousands for larger holdings. But he insists these investments pay off. He recalls one farmer in Nicaragua who invested $30,000 to meet Rainforest Alliance standards on worker housing a significant part of improving labour conditions in coffee farming, where work is seasonal and undertaken mostly by migrants. Willie says the farmer recouped his investment in one and a half harvests through higher yields, as workers chose to remain on his farm for the less fruitful third and fourth pickings a time by which most workers have usually left. Rosenberg, too, admits start-up costs for Utz Kapeh entrants are significant: about $0.04 per pound of coffee grown. But this figure is potentially misleading, since it takes no account of the higher yields and reduced inputs enjoyed on certified farms. Rosenberg says: The process of organisation and of bringing management rigour into their farming practices leads to significant business benefits. He adds that small farms take as little as six months to obtain certification,

4 compared with up to three years under other schemes such as organic certification. Consumers International recommends all certification schemes streamline farm evaluation procedures and step up efforts to introduce group audits, through which a number of farms can be inspected en masse and even against multiple standards. To reduce startup costs, both Utz Kapeh and Rainforest Alliance employ agronomists to give farmers the technical help they need to qualify for certification. Many farms must still pay for auditors to fly in from Europe, although all schemes are training local monitors in a bid to cut inspection costs. A lack of co-ordination between schemes means farmers certified to multiple standards must pay for separate audits. A notable exception is the work of the Fairtrade Labelling Organisations in recruiting organic auditors and training them in conducting Fairtrade audits. Access to market Another teething problem is that much more coffee is certified as sustainable than is sold as such. A lack of demand means most certified coffee commands no premium. Utz Kapeh for example has about 200,000 tonnes of coffee certified on farms around the world. But just 36,000 tonnes of this coffee is sold as certified. The rest is either sold under other certification schemes, or at the market price. About 40% of Rainforest Alliance coffee is sold as certified, while the figure for Fairtrade is just 25%, as supply of sustainable coffee outstrips demand. Retailer interest in sustainable coffee is growing, as the McDonald s move indicates. But doubts remain over the commitment of some coffee roasters to buying certified coffees. A celebrated case of this allegedly tokenistic embrace of sustainability was Nestlé s launch of its Fairtrade brand, Partners Blend, in October The move has attracted criticism, since Partners Blend is the company s only Fairtrade offering in a portfolio of 8,500 products. Certification schemes require buyers to declare how much sustainable coffee is contained in products bearing their logos. Fairtrade products must contain 100% sustainable coffee to carry the logo. Utz Kapeh asks buyers to ensure products displaying its seal are made from 90% sustainable coffee beans. In contrast, Rainforest Alliance requires just 30% of the coffee to be from certified farms, although brands must state on the packet if the contents are less than 100% certified. Willie defends this approach. The reason for setting the threshold so low, he says, is to encourage greater uptake from large coffee roasters. Kenco and others are actually buying more certified coffee than they are branding as such, says Willie, and mixing it into mainstream brands. Consumers are drinking coffee from beans made from sustainable farms without knowing it, he says. Emerging leader But of all certification labels, it is Utz Kapeh, as the most buyer-led, that looks set to break into the mass market. Its global ambitions are seen in the fact it is currently the only coffee certification scheme in Vietnam, the world s third largest coffee producer dealing mainly in lower-grade Robusta beans. Utz Kapeh does not aim to cultivate a niche following. Rosenberg says ethical standards should be basic qualifiers in the market; a way for companies to provide assurance for their brands. He explains: Only a small percentage of the market is willing to pay a premium for sustainability as such. And the vast majority of the market simply expects a brand to deliver a sustainable product.

5 But Bjarne Pedersen, the man behind the Consumers International report, sees little sign of buyers being trusted to integrate sustainability in this way, saying: I can see a situation where people simply trust brands, but I think it s very far away. Pedersen has reservations about Utz Kapeh compared with other certification schemes. He says: It is a little bit less transparent and provides less of what an ethical consumer would go for. Consumer International s report found that in Brazil most farmers certified under Utz Kapeh were already certified under other schemes anyway. But Pedersen predicts the scheme s market focus will see it emerge as the leading sustainable coffee label: Utz Kapeh, because it is retail driven, will end up having a larger chunk of the market. As Pedersen and all certification scheme representatives note, ethical labels should not be fighting each other for a larger share of a niche market. The differences between schemes mean they can co-exist, enabling consumers to choose the label that best reflects their preferences. Yet for this to happen, sustainable labels need to be better explained a process their gradual acceptance by mainstream coffee brands and retailers can only accelerate. Certification schemes compared*. Fairtrade Mission Requirements for farmers Market focus and promotion Price premium above the commodity market price for Arabica coffee beans (currently around $1.06 per pound) Sales of certified coffee Ensure equitable trading arrangements for disadvantaged producers. Organised into co-operatives. Niche markets; consumer focus. Floor price of $1.01 per pound (Robusta beans) and $1.21 (Arabica), or $0.05 above the market price should it rise above this floor. An extra $0.15 per pound for beans also certified as organic. 34,000 tonnes (2005) Rainforest Alliance Promote sustainable agriculture, protecting wildlife and welfare of workers. Conservation; integrated pest management; worker welfare. Specialty and mainstream brands; business to business. Average $0.14 per pound. 27,000 tonnes (2006) Utz Kapeh Enable producers and brands to demonstrate commitment to sustainability. Adaptation of EurepGap standards on food safety, environment and worker welfare. Mainstream brands; business to business. Between $0.01 and $0.10 per pound. 36,000 tonnes (2006) *Adapted from From Bean to Cup: How consumer choice impacts on coffee producers and the environment, Consumers International and the International Institute for Environment and Development (2006) Coffee industry facts

6 $70 billion sales worldwide. Grown in more than 60, mostly developing, countries. Three countries Brazil, Colombia and Vietnam account for 60% of global production. 14 countries depend on coffee for 10% of export earnings. In Burundi, Ethiopia and Uganda, coffee accounts for more than 50% of exports. 25 million growers worldwide. 100 million employed in global coffee industry. Higher-grade Arabica beans account for 65% of coffee supply; lower-grade Robusta for 35%. Source: From Bean to Cup: How consumer choice impacts on coffee producers and the environment, Consumers International and the International Institute for Environment and Development (2006) Organic cuppa Organic coffee is the largest part of the sustainable coffee sector, with more than 40,000 tonnes sold as certified every year. Standards vary from country to country, and there are many organic certification bodies to inspect farms against government regulations. Popular among smallholders, organic agriculture requires farmers to incorporate organic material into the soil and switch to biological methods of pest control. These changes typically take two to three years to implement. But premiums for organic coffee are high: between $0.15 and $0.30 per pound. Starbucks vs Oxfam Starbucks is the coffee shop of the world, buying 300 million pounds of coffee beans last year alone. And while the brand s mermaid logo is often cited as a symbol of rampant globalisation, the company s purchasing practices are remarkably sound. Last year Starbucks paid on average $1.42 per pound of coffee over 20 cents more than Fairtrade and other certification schemes. Sales of Fairtrade coffee in Starbuck s stores climbed to 18 million pounds, or 6% of the company s total coffee turnover. More than half of the coffee Starbucks bought last year was certified under the company s own sustainability guidelines, known as the Cafe (coffee and farmer equity) Practices. Yet Starbucks ethical sourcing does not wash with Oxfam International. As reported in Ethical Corporation, it claims Starbucks influenced a US Patent and Trademark Office decision in 2005 to reject the Ethiopian government s attempts to register Ethiopia s most famous coffee growing regions as trademarks. Campaigners claim the decision has cost coffee farmers potential income of $90 million. Rosemary Byrde, global fairtrade policy adviser at Oxfam UK, says: Starbucks has tied the hands of Ethiopian farmers the company reaps the added value from coffee cultivated by generations of poor farmers. However, Starbucks buys just 2% of Ethiopia s $400 million annual coffee crop. Starbucks managing director, Alain Poncelet, says the company is in talks with the Ethiopian government to resolve the dispute. He says of Oxfam s criticism: Even though they are very unhappy they do recognise we are doing much more than we used to. He adds that Starbucks has received applications from 13,000 Ethiopian farms wanting to join the company s Cafe Practices programme.