Coffee Consumption and Industry Strategies in Brazil: A Volume in the Consumer Science and Strategic Marketing Series 9780128147214, 1891891901, 0128147210

Table of contents :
Front Cover......Page 1
Coffee Consumption and Industry Strategies in Brazil......Page 4
Copyright......Page 5
Contents......Page 6
Contributors......Page 12
About the editors......Page 16
Foreword......Page 18
Preface......Page 20
Section 1 Market outlook, factors and trends......Page 22
1.1 Introduction......Page 24
1.2 The supply-demand balance......Page 25
1.3 Costs, innovations, and competitiveness......Page 30
1.4 Support policies and actions for the coffee sector......Page 35
1.5 Climate change and its impact on coffee production......Page 37
1.6 Final considerations......Page 38
References......Page 39
Further reading......Page 40
2.1 Introduction......Page 42
2.2 Coffee production and supply chain......Page 43
2.3.1 Studies about the demand for coffee......Page 46
2.3.2 Global demographic and income overview......Page 47
2.3.3.2 Perspectives of selected countries and regions’ total and per capita coffee consumption......Page 55
2.4.1 Coffee prices......Page 62
2.4.2 Coffee differentiation......Page 65
2.5 Final considerations......Page 67
Appendix......Page 68
References......Page 69
Further reading......Page 70
3.1 A short definition of specialty coffee......Page 72
3.2 Brazil’s situation in the global specialty coffee scene......Page 75
3.2.1 World’s biggest producer and challenges in reputation......Page 77
3.3 Different producing regions and diverse quality profiles......Page 79
3.3.1.2 São Paulo......Page 81
3.3.1.5 Bahia......Page 82
3.4.1.1 Harvesting and processing innovations......Page 83
References......Page 84
Further reading......Page 85
4.1 Introduction......Page 86
4.2.1 New institutional economy......Page 89
4.2.2 Collective action......Page 91
4.3.1 Coffee market: The role of Brazilian government......Page 93
4.3.2 Coffee market: The role of business association......Page 95
4.3.3 Coffee market: The role of the Coffee Quality Program......Page 99
4.4 Methodology......Page 101
4.5.1 Coffee Quality Program......Page 103
4.5.2 Certification from the perspective of transaction cost economics......Page 107
4.6 Conclusion......Page 108
References......Page 110
Further reading......Page 111
Section 2 Coffee farmers perception and contribution: Certification and strategies......Page 112
5.1 Introduction......Page 114
5.2 The empirical study......Page 116
5.3 Results......Page 118
5.4 Content analysis and coding of elements......Page 121
5.5 Final considerations......Page 125
Further reading......Page 128
6.1 Voluntary sustainability standards: Origin......Page 130
6.2 Standards and certificates for coffee......Page 132
6.3 Application in Brazil: Coffee producers in Brazil......Page 135
6.5 Managerial and policy implications......Page 141
References......Page 142
Further reading......Page 144
7.1 Introduction......Page 146
7.2 Theoretical support......Page 147
7.3 Method......Page 149
7.4.1 Case 1: “Da Serra” Farm, Botelhos—Southern Minas Gerais......Page 151
7.4.2 Case 2: Passeio e Lagoa Farms, Monte Belo, Southern Minas Gerais......Page 153
7.4.3 Case 3: Caxambú Farm, Três Pontas, Southern Minas Gerais......Page 155
7.4.4 Case 4: São Paulo Farm, Patrocínio, Cerrado Minas Gerais......Page 157
7.4.5 Case 5: Jatobá Farm, Patrocínio, Cerrado Minas Gerais......Page 159
7.4.6 Case 6: Denomination of origin Cerrado—DO Cerrado Mineiro......Page 160
7.4.7 Case 7: Conquista Farm, Venda Nova do Imigrante-Espirito Santo......Page 162
7.4.8 Case 8: Educampo (Field Education) Matas de Minas—SEBRAE (Agency for support of small and medium companies and .........Page 163
7.4.9 Case 9: Retiro Farm, Manhuaçu, Atlantic Forest Minas Gerais......Page 165
7.4.10 Resume of the categories of the cases......Page 166
7.5 Conclusions......Page 167
7.5.2 Recommendations for farmers and companies......Page 168
Further reading......Page 169
8.1 Introduction......Page 170
8.2 Family farming and market access......Page 172
8.3 The emergence of new markets for family farming......Page 173
8.4 The coordination of productive systems and the differentiation of coffee......Page 174
8.5 The institutional environment of GIs......Page 177
8.6 Family farming and the GIs of coffee in Brazil......Page 179
8.7 Final remarks......Page 182
References......Page 183
Section 3 Coffee industry strategies: Case studies......Page 188
9.1 Introduction......Page 190
9.2 Previous theoretical discussion......Page 193
9.3 Methodological procedures......Page 195
9.4.1 Cases presentation......Page 197
9.4.2 Attributes and dimensions......Page 198
9.4.3 Organization strategies in coffee procurement by small and medium roasters......Page 201
9.5 Conclusion......Page 206
References......Page 207
10.1 Introduction......Page 210
10.2 Cerrado history and the basis for the DO process......Page 211
10.3 The search for an alliance: The origin of designation conquest......Page 214
10.4 The internationalization strategy: The long path from Minas Gerais to the world......Page 218
10.5 The main challenges for the Cerrado Mineiro accreditation in the international market......Page 222
Further reading......Page 223
11.1 Introduction......Page 224
11.2 Brazilian cooperativism......Page 225
11.4 Methodology......Page 227
11.5.1 Institutional changes......Page 229
11.5.11.1 Environmental practices......Page 234
11.5.11.2 Social practices......Page 236
11.5.11.3 Internationalization......Page 237
11.5.11.5 Diversification......Page 238
11.5.11.6 Verticalization......Page 239
11.5.11.7 Innovation......Page 240
11.5.11.8 Transparency......Page 241
11.5.11.9 Management/governance......Page 242
11.5.11.10 Financial transactions......Page 243
11.6 Final discussion: The relationship of strategic dimensions with organizational adaptability and flexibility......Page 245
References......Page 248
Further reading......Page 249
12.1 Introduction......Page 250
12.2 Strategic pillars of Illy in Brazil......Page 251
12.3 Flexibility and evolution of strategies......Page 255
12.3.1 Partnership network......Page 257
12.3.2 Quality award and illy club......Page 262
12.3.3 Forms of acquisition......Page 265
12.4.1 Competition for raw material......Page 268
12.4.2 Disruptive technologies in the field and climate change......Page 270
12.4.3 Challenge of propagated sustainability and the diminishing relevance of certifications......Page 271
12.4.4 Attention points......Page 272
12.5 Final considerations on Illy’s future in Brazil......Page 273
References......Page 274
Further reading......Page 275
Section 4 Retail and consumer......Page 276
13.2 Long before the first wave......Page 278
13.3 Imminence of the first wave......Page 281
13.4 The first wave......Page 282
13.5 Second wave of coffee......Page 284
13.6 The third wave of coffee......Page 286
13.7 Epilogue: Will there be a fourth wave of coffee?......Page 291
References......Page 293
Further reading......Page 294
14.1 Introduction......Page 296
14.2.1 Consumption beyond consumerism......Page 297
14.2.2 The concept of experience......Page 299
14.2.3 Experiential marketing......Page 300
14.2.4 The consumption of experiences......Page 302
14.3 Methodology......Page 305
14.4.1 A brief historicity of coffee and coffee shops......Page 306
14.4.2 Coffee consumption waves around the world......Page 307
14.4.3 The third wave in the city of São Paulo......Page 310
14.5 Conclusions......Page 313
References......Page 315
15.1 A consumers’ perspective of coffee origin......Page 318
15.2 Origin recognition through geographical indication......Page 320
15.3 An analysis of consumer behavior regarding coffee origin......Page 323
15.3.1 The coffee choice process......Page 325
15.3.2 Consumers’ perception of coffee from Cerrado Mineiro and Chapada Diamantina......Page 329
15.3.3 Origin as a source of information......Page 333
15.3.4 A coffee choice process model: How is origin information processed?......Page 334
15.3.5 A comparison between Brazil and Colombia......Page 336
15.4 Final considerations......Page 338
References......Page 339
Further reading......Page 341
16.1 Introduction......Page 342
16.2 The effects of consumer behavior on the coffee market: An overview on the differences among countries......Page 344
16.2.1 Who drinks coffee?......Page 347
16.2.2 Taste is not enough, coffee has to be sustainable and fair......Page 348
16.2.3 Coffee consumption habits in Brazil......Page 351
16.3.1 Who produces and who sells coffee?......Page 353
16.3.2 What is the market perception of Brazilian coffee?......Page 357
16.3.3 The domestic market......Page 358
16.4 Conclusion......Page 359
References......Page 360
17.1 Introduction......Page 364
17.2.1 Model of choice for food......Page 366
17.2.2 Forces for healthy eating among young people......Page 368
17.2.3 Conceptual framework......Page 371
17.3 Methodology......Page 373
17.4.1 Perception of the benefits of coffee consumption......Page 374
17.4.2 Barriers to the perception of coffee as a healthy drink......Page 376
17.4.3 External stimulus for coffee consumption......Page 377
17.4.4 Coffee consumption as a healthy habit......Page 378
17.5 Discussion......Page 380
17.6.1 Theoretical contribution......Page 382
17.6.4 Future research......Page 383
References......Page 384
Index......Page 388
Back Cover......Page 398

Citation preview

COFFEE CONSUMPTION AND INDUSTRY STRATEGIES IN BRAZIL

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Woodhead Publishing Series in Consumer Science and Strategic Marketing

COFFEE CONSUMPTION AND INDUSTRY STRATEGIES IN BRAZIL Edited by

LUCIANA FLORÊNCIO de ALMEIDA EDUARDO EUGÊNIO SPERS

An imprint of Elsevier

Woodhead Publishing is an imprint of Elsevier The Officers’ Mess Business Centre, Royston Road, Duxford, CB22 4QH, United Kingdom 50 Hampshire Street, 5th Floor, Cambridge, MA 02139, United States The Boulevard, Langford Lane, Kidlington, OX5 1GB, United Kingdom © 2020 Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-12-814721-4 For information on all Woodhead publications visit our website at https://www.elsevier.com/books-and-journals

Publisher: Matthew Deans Acquisition Editor: Megan R. Ball Editorial Project Manager: Susan Ikeda Production Project Manager: Joy Christel Neumarin Honest Thangiah Cover Designer: Greg Harris Typeset by SPi Global, India

Contents Contributors xi About the editors xv Foreword xvii Preface xix

Section 1  Market outlook, factors and trends 1. Global coffee market: Socio-economic and cultural dynamics

3

Celso Luis Rodrigues Vegro, Luciana Florêncio de Almeida

1.1 Introduction 3 1.2 The supply-demand balance 4 1.3 Costs, innovations, and competitiveness 9 1.4 Support policies and actions for the coffee sector 14 1.5 Climate change and its impact on coffee production 16 1.6 Final considerations 17 References 18 Further reading 19

2. Perspectives of global coffee demand

21

Guilherme Nunes Torga, Eduardo Eugênio Spers

2.1 Introduction 21 2.2 Coffee production and supply chain 22 2.3 Coffee demand 25 2.4 Coffee prices, coffee differentiation, and marketing approach 41 2.5 Final considerations 46 Appendix 47 References 48 Further reading 49

3. Brazilian specialty coffee scenario

51

Bruna De Ribeiro Costa

3.1 A short definition of specialty coffee 3.2 Brazil’s situation in the global specialty coffee scene 3.3 Different producing regions and diverse quality profiles 3.4 The future of specialty coffee: Technology and quality innovations References Further reading

51 54 58 62 63 64 v

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4. The Coffee Quality Program in Brazil

65

Geraldo Magela Jardim Barra

4.1 Introduction 65 4.2 Theoretical framework 68 4.3 Institutional environment of the Brazilian coffee agribusiness 72 4.4 Methodology 80 4.5 Results 82 4.6 Conclusion 87 References 89 Further reading 90

Section 2  Coffee farmers perception and contribution: Certification and strategies 5. Certifications for coffee cultivation: Characterizing personal values of producers and consumers

93

João Otávio Meirelles Ratton, Eduardo Eugênio Spers

5.1 Introduction 93 5.2 The empirical study 95 5.3 Results 97 5.4 Content analysis and coding of elements 100 5.5 Final considerations 104 References 107 Further reading 107

6. Certification: Facts, challenges, and the future

109

Roberta Souza Pião, Lyon Saluchi da Fonseca, Éder de Carvalho Januário, Maria Sylvia Macchione Saes

6.1 Voluntary sustainability standards: Origin 109 6.2 Standards and certificates for coffee 111 6.3 Application in Brazil: Coffee producers in Brazil 114 6.4 Conclusions 120 6.5 Managerial and policy implications 120 6.6 Questions 121 References 121 Further reading 123



Contents

7. Farm innovation: Nine cases of Brazilian coffee growers

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125

Decio Zylbersztajn, Samuel Ribeiro Giordano, Christiane Leles Rezende De Vita

7.1 Introduction 125 7.2 Theoretical support 126 7.3 Method 128 7.4 Description of the case studies 130 7.5 Conclusions 146 References 148 Further reading 148

8. What fills your cup of coffee? The potential of geographical indication for family farmers’ market access

149

Ana Elisa Bressan Smith Lourenzani, Kassia Watanabe, Giuliana Aparecida Santini Pigatto, Mara Elena de Godoi Pereira

8.1 Introduction 149 8.2 Family farming and market access 151 8.3 The emergence of new markets for family farming 152 8.4 The coordination of productive systems and the differentiation of coffee 153 8.5 The institutional environment of GIs 156 8.6 Family farming and the GIs of coffee in Brazil 158 8.7 Final remarks 161 References 162

Section 3  Coffee industry strategies: Case studies 9. Procurement strategies in the coffee industry: Cases of local coffee roasters in Paraná state

169

José Paulo de Souza, Sandra Mara Schiavi

9.1 Introduction 169 9.2 Previous theoretical discussion 172 9.3 Methodological procedures 174 9.4 Procurement strategies in the coffee industry 176 9.5 Conclusion 185 References 186

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10. Cerrado Mineiro Region designation of origin: Internationalization strategy

189

Luciana Florêncio de Almeida, Juliano Tarabal

10.1 Introduction 189 10.2 Cerrado history and the basis for the DO process 190 10.3 The search for an alliance: The origin of designation conquest 193 10.4 The internationalization strategy: The long path from Minas Gerais to the world 197 10.5 The main challenges for the Cerrado Mineiro accreditation in the international market 201 References 202 Further reading 202

11. Business history and challenges for coffee cooperatives in Brazil: The case of Cooxupé Cooperative

203

Caroline Gonçalves, Decio Zylbersztajn

11.1 Introduction 203 11.2 Brazilian cooperativism 204 11.3 Agricultural cooperatives through time—New strategies 206 11.4 Methodology 206 11.5 Analysis: The new Cooxupé case study 208 11.6 Final discussion: The relationship of strategic dimensions with organizational adaptability and flexibility 224 References 227 Further reading 228

12. Illycaffè and flexible strategies: A case of a resilient company

229

Luciana Florêncio de Almeida, Decio Zylbersztajn

12.1 Introduction 229 12.2 Strategic pillars of Illy in Brazil 230 12.3 Flexibility and evolution of strategies 234 12.4 Current and future challenges for adding value to the coffee chain in Brazil 247 12.5 Final considerations on Illy’s future in Brazil 252 References 253 Further reading 254



Contents

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Section 4  Retail and consumer 13. The waves of coffee and the emergence of the new Brazilian consumer 257

Camila R. Arcanjo Teles, Jorge H. Behrens

13.1 The waves and the coffee 257 13.2 Long before the first wave 257 13.3 Imminence of the first wave 260 13.4 The first wave 261 13.5 Second wave of coffee 263 13.6 The third wave of coffee 265 13.7 Epilogue: Will there be a fourth wave of coffee? 270 References 272 Further reading 273

14. The consumption of experiences in specialty coffee shops

275

Lucas de Vasconcelos Teixeira

14.1 Introduction 275 14.2 Theoretical framework 276 14.3 Methodology 284 14.4 Discussion and results 285 14.5 Conclusions 292 14.6 Questions 294 References 294

15. Does coffee origin matter? An analysis of consumer behavior based on regional and national origin

297

Renata Pozelli Sabioa, Eduardo Eugênio Spers

15.1 A consumers’ perspective of coffee origin 297 15.2 Origin recognition through geographical indication 299 15.3 An analysis of consumer behavior regarding coffee origin 302 15.4 Final considerations 317 References 318 Further reading 320

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16. Behavioral aspects of the coffee consumer in different countries: The case of Brazil

321

Lilian Maluf de Lima, Lilian de Pellegrini Elias, Mario Malta Campos Dotta e Silva, Karin Vieira da Silva, Anderson Sasaki Vasques Pacheco

16.1 Introduction 321 16.2 The effects of consumer behavior on the coffee market: An overview on the differences among countries 323 16.3 Perspectives and trends for Brazilian coffee 332 16.4 Conclusion 338 References 339

17. Coffee and health in the perspective of young consumers

343

Roberta Prado Rodrigues, Luciana Florêncio de Almeida, Eduardo Eugênio Spers

17.1 Introduction 343 17.2 Theoretical framework 345 17.3 Methodology 352 17.4 Findings 353 17.5 Discussion 359 17.6 Final conclusions 361 References 363 Index 367

Contributors Geraldo Magela Jardim Barra Federal University of Juiz de Fora, Juiz de Fora, Brazil Jorge H. Behrens School of Food Engineering, University of Campinas, Campinas, Brazil Bruna De Ribeiro Costa Costa Café, Sao Paulo, Brazil Lyon Saluchi da Fonseca Department of Production Engineering, University of São Paulo, São Paulo, Brazil Karin Vieira da Silva University of Santa Catarina – UDESC, Florianopolis, SC, Brazil Luciana Florêncio de Almeida ESPM, São Paulo, Brazil Éder de Carvalho Januário Department of Business, University of São Paulo, São Paulo, Brazil Mara Elena de Godoi Pereira Faculty of Science and Engineering, Sao Paulo State University—UNESP, São Paulo, Brazil Lilian Maluf de Lima Department of Economics, Management and Sociology, “Luiz de Queiroz” College of Agriculture, University of São Paulo (USP), Piracicaba, Brazil Lilian de Pellegrini Elias University of Campinas – UNICAMP, Campinas, SP, Brazil José Paulo de Souza State University of Maringá (UEM), Maringá, Brazil Lucas de Vasconcelos Teixeira University of São Paulo (School of Business Administration) and ESPM (Department of Communication and Consumption Practices), São Paulo, Brazil Christiane Leles Rezende De Vita PENSA (Agribusiness Knowledge Center); Università del Caffé, São Paulo, Brazil Mario Malta Campos Dotta e Silva Sao Paulo School of Economics (EESP) – Getulio Vargas Foundation (FGV), Sao Paulo, SP, Brazil

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Contributors

Samuel Ribeiro Giordano PENSA (Agribusiness Knowledge Center); Università del Caffé, São Paulo, Brazil Caroline Gonçalves Federal University of Mato Grosso do Sul, Corumbá, Brazil Ana Elisa Bressan Smith Lourenzani Faculty of Science and Engineering, Sao Paulo State University—UNESP, São Paulo, Brazil Anderson Sasaki Vasques Pacheco University Center of Brusque – UNIFEBE, Brusque, SC, Brazil Roberta Souza Pião Department of Production Engineering, University of São Paulo, São Paulo, Brazil Giuliana Aparecida Santini Pigatto Faculty of Science and Engineering, Sao Paulo State University—UNESP, São Paulo, Brazil João Otávio Meirelles Ratton ESPM, São Paulo, Brazil Roberta Prado Rodrigues Tres Coraçoes Coffee Group, Sao Paulo, Brazil Renata Pozelli Sabioa Department of Health Management, Evaluation and Policy, Université de Montréal, Montréal, QC, Canada Maria Sylvia Macchione Saes Department of Business, University of São Paulo, São Paulo, Brazil Sandra Mara Schiavi State University of Maringá (UEM), Maringá, Brazil Eduardo Eugênio Spers Department of Economy, Administration and Sociology, ESALQ—USP, Piracicaba; ESPM, São Paulo, Brazil Juliano Tarabal Cerrado Mineiro Federation, Minas Gerais, Brazil Camila R. Arcanjo Teles School of Food Engineering, University of Campinas, Campinas, Brazil Guilherme Nunes Torga Department of Economy, Administration and Sociology, ESALQ—USP, Piracicaba, Brazil; Audencia Business School, Nantes, France Celso Luis Rodrigues Vegro Agricultural Economics Institute (IEA); Brazilian Rural Society (SBR); Industry Federation of São Paulo State (FIESP), Sao Paulo, Brazil



Contributors

xiii

Kassia Watanabe Federal University of Recôncavo da Bahia—UFRB, Cruz das Almas, Brazil Decio Zylbersztajn Economics of Organization, School of Economics and Business, University of São Paulo, São Paulo, Brazil

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About the editors Luciana Florêncio de Almeida holds a PhD in business economics from FEA/USP with a postdoc at Technische Universität München, in Germany in the Department of International Agribusiness. She holds a master’s degree in business administration from UFLA, Minas Gerais, Brazil. She attended as a visiting researcher in the Department of Agricultural Economics at the University of Missouri, United States, and in the Chair of Food and Agribusiness at the University of Macerata, Italy. Additionally, she was the former Executive Director of the Brazilian Coffee Exporters Council (CECAFE). Her consulting career includes Strategic Management and Marketing projects through Stracta Consulting. She is currently a full professor at the doctoral program in business administration and at the Consumer Behavior Master Program at ESPM-SP. She is also member of PENSA (Agribusiness Knowledge Center at FEA/USP) and Agrifood & Franchising Research Center (ESPM/SP). Eduardo Eugênio Spers hold a doctorate degree in business administration at the University of São Paulo (FEA/USP) and a postdoctoral degree at Wageningen University (WUR), Netherlands. He is currently a full professor of the doctoral program in business administration and professional master in consumer behavior at ESPM/SP; associate professor at University of São Paulo, campus Esalq; coordinator of the MarkEsalq (Esalq/USP); and member of PENSA (Agribusiness Knowledge Center at FEA/USP) and Agrifood & Franchising Research Center (ESPM/SP).

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Foreword A cup of Illy espresso is the final act of a long and varied journey, involving the thousands of families who work with us, day after day, to produce this elixir. It is the end-product of a veritable obsession with quality, which began all the way back in 1933—the year when Francesco Illy chose Trieste to start up a business based on a dream: offering the best coffee to the world. Brazil has always played a big role in this dream. My father, guided by the idea of an enterprise centered on quality, ethics, and sustainability, used to visit Brazil in search of the perfect beans. When the ICO agreement collapsed in 1989, generating a heavy crisis with a sharp drop of growers’ incomes that affected the entire coffee market, he decided to look beyond the trading business model to embrace a new one—one based on direct relations with the coffee producers. In the early 1990s, Brazil was the world’s largest producer of coffee but suffered a reputation for low-quality product and poorly paid producers. Ernesto Illy pioneered the direct purchase model, developing a close relationship with coffee growers based on knowledge-sharing with the aim of obtaining the best possible quality by sustainable practices. Knowing that there were consumers ready not only to buy but also to pay a premium price for this quality, he started to build Illy’s relationship with Brazilian growers on four pillars: selecting and working directly with meticulous coffee producers; transferring knowledge to produce high-quality beans while respecting people and the environment; compensating them for the quality they achieve by paying a premium price, to foster ongoing improvement and ensure sustainable production; and creating a strong Illy coffee producers’ community, sharing values and best practices to strive for excellence. This process, initiated by my father almost 30 years ago, considerably improved quality and sustainability of Brazilian coffee (today universally recognized and appreciated), helping the entire coffee community to grow and develop, and I am proud to say that part of the merit for this improvement and consequent development has been attributed to Illy by the Brazilian Parliament. It soon became—and still is today—the Illy business model in all the countries and regions we buy from. In 1991, we launched the first Prêmio Ernesto Illy de Qualidade Sustentável do Café para Espresso, to award the best Brazilian producers and incentivize them to continue striving for the best sustainable quality. In 2016, on the xvii

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Foreword

25th anniversary of the Prêmio, we extended this recognition to all the countries we buy from, creating the Ernesto Illy International Coffee Award, held every year at the United Nations in New York. This Award—now in its third edition—has already been named “the Oscars of Coffee”, and it stemmed from the original Brazil Award. In the same way, the Clube Illy do Café, founded in 1999 and today including more than 600 Brazilian growers, will continue to exist but will be part of a new international Illy community, starting its activity in 2019: Casa Illy. Brazil is where it all proudly started and where it will continue to develop. Brazil is still leading the way. Andrea Illy Illycaffè S.p.A., Trieste, Italy

Preface The Coffee Consumption and Industry Strategies in Brazil book was written to close an editorial gap with regard to the Brazilian coffee industry. In this sense, the authors’ main objective was to provide an overview of the coffee sector, placing special emphasis on marketing strategies and consumer behavior in Brazil. The four sections of this book take the reader on a journey into the Brazilian coffee sector, exploring the main chain blocks of production, industry, retailing, and consumption. The first section (Market Outlook, Factors, and Trends) is composed of four chapters that explores facts and trends related to the coffee industry inside and outside Brazil, positioning the country in the international scenario for coffee production, exportation, retailing, and consumption (Chapters 1 and 2); the diversity and complexity of specialty coffee production and commercialization inside the Brazilian territory (Chapter 3), and also, the institutional, environmental, and the industry quality program (Chapter 4). The second section (Coffee Farmers’ Perception and Contribution: Certification and Strategies) examines the role played by certifications in the farmer´s perspective as well as in consumer evaluation (Chapter  5). The major Voluntary Sustainability Standards (VSS) adopted by Brazilian coffee farmers are presented along with a discussion concerning their main challenges for the coffee sector’s sustainability goals (Chapter 6). Nine cases are presented highlighting how innovation approach and adoption might increase competitiveness and positively shift farm management and coffee production (Chapter 7). Geographic indication for food origin is increasing in emergent countries and developed markets acting as an attribute for differentiation. The Brazilian coffee sector is exploring this trend as a competitive tool for coffee family farmers (Chapter 8). The third section (Coffee Industry Strategies: Case Studies) discusses relevant issues for industry competitiveness in coffee procurement, internationalization, and cooperation. Important production regions such as Parana State (Chapter  9) and Cerrado Mineiro (Chapter  10) are the protagonists of two case studies that explore quality coffee differentiation through denomination of origin. The major global coffee cooperative is in the central analysis of business strategies of this type of organization considering new challenges in recent years (Chapter 11). Dr. Ernesto Illy’s saga to match company demand into the high quality coffee market, his xix

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innovative strategy to create value for coffee farmers, and establishing of successful procurement are described. Some questions are raised in the chapter in the face of new challenges for Illycafé embedded in a high-level competition market (Chapter 12). Finally, the last section (Retail and Consumer) focuses on coffee consumer´s trends in retailing, origin, and health attributes. Responsible for the second place in global coffee consumption, Brazilian consumers are entering the fourth coffee wave demonstrating rapid growth in the specialty coffee experience in and out of the home (Chapter  13). Specialty coffee shops also play a relevant role in inspiring coffee lovers to have a unique experience at social spaces (Chapter 14). Behavioral aspects are presented and discussed concerning coffee origin and consumption patterns among countries (Chapters 15 and 16). As consumers are increasingly focused on food health aspects, the functional and social attributes of coffee are explored in the perspective of young consumers (Chapter 17). This book is appropriate for researchers in the fields of food retail and production, food marketing, consumer behavior, consumer and food science, agribusiness marketing and strategy, food industry, and other related topics; for undergraduate and postgraduate students studying marketing, consumer behavior, strategy, and agribusiness; and for professional and practitioners acting in the food industry, marketing managers, and marketing and strategy consultants. Finally, this book is a must-read for those contributing to and lovers of the coffee industry. Enjoy your journey through the Brazilian Coffee World! Luciana Florêncio de Almeida Eduardo Eugênio Spers

SECTION 1

Market outlook, factors and trends

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CHAPTER 1

Global coffee market: Socio-economic and cultural dynamics Celso Luis Rodrigues Vegroa,b,c, Luciana Florêncio de Almeidad a Agricultural Economics Institute (IEA), São Paulo, Brazil Brazilian Rural Society (SBR), São Paulo, Brazil Industry Federation of São Paulo State (FIESP), São Paulo, Brazil d ESPM, Sao Paulo, Brazil b c

1.1 Introduction Commercially classified as an agricultural commodity, coffee is one of the most outstanding commodities in international transactions, as well as domestic supply, in terms of quantity and value. The major suppliers are located in developing countries, and the major customers are the developed countries, where coffee demand is concentrated. Edaphic conditions prevailing in the intertropical and equatorial belt of the globe determines the trade chain design for coffee transactions around the world. Other agricultural commodities such as soybean, corn, cotton, and sugar are also extremely relevant in the world market for food and fiber, but unlike those, coffee is grown, harvested, and usually prepared by small farms with employment of family labor without the use of modern machines and equipment that are widely used in the earlier mentioned crops. In part, this characteristic stems from the occupation of coffee plantations in topographically more rugged areas that are naturally uninteresting for other crops considering the difficulty for substituting crop mechanization for human labor. Once a coffee crop is installed, there is no predefined period for it to be renewed. For instance, it’s still possible to find some crops that are more than 100 years old in Brazil. Another characteristic associated with this culture is related to its capacity of offering environmental sustainability along with rural development (Global Coffee Platform, 2017). Other peculiarities of coffee-growing and its market can be added. From an agronomic point of view, coffee is a very docile plant. Eliminating climatic extremes, it accepts water deficit (more for the Arabica variety than Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00001-9

© 2020 Elsevier Inc. All rights reserved.

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Coffee consumption and industry strategies in Brazil

for Robusta), high temperatures (more for the Robusta variety than for Arabica), nutritional deficiencies, shading by other fruit and/or timber species (environmentally constituting the most sustainable production systems), pruning (soft and drastic), and defoliation during harvest or due to disease, and yet it might offer yields in a subsequent harvest. Around 170 countries are coffee producers, and almost all nations consume it. This wide distribution of cultivation has not prevented a growing concentration of production in a few nations. Approximately 70% of the world’s supply comes from four countries: Brazil (Arabica and Robusta varieties), Vietnam (mostly Robusta), Colombia (Arabica), and Indonesia (Robusta). On the consumption side, United States, European Union, Brazil, and Japan account for two-thirds of the world’s demand for coffee (International Coffee Organization [ICO], 2017). Agricultural commodities usually do not allow extensive storage as there is severe impairment in quality. Differentially, respecting the limits of humidity, luminosity, and temperature, coffee can be stored for decades and will still be found in reasonable condition for consumption. The nature of coffee allows coffee growers to use the harvest as savings, and many of them might store some bags instead of immediately selling them expecting to find better prices in the near future. In the last three decades, there has been an increasing demand for coffee drinkers, with a more notable expansion of the habit of tasting coffee between the populations of Asia (from the central to the eastern portion represented by Japan) and the Arabian Peninsula. This “discovery” of coffee by these populations has shown a consumption growth rate of about 2% per year, above the vegetative growth of the world’s population (1.2% recorded in 2015 and declining) (ICO, 2017). Another relevant aspect is related to the peculiar inelasticity of the demand. In general, consumers are willing to consume independent of the price volatility that is a common phenomenon in the coffee future market. Our lives are rooted in a varied collection of memories, and coffee certainly frames many of them. Recall your memory of the fresh-brewed coffee aroma at the house of a sweet grandmother. It’s one of those unforgettable feelings that lights up again and again after every new cup of coffee. No other product as coffee has such a capacity to bind to our affections.

1.2  The supply-demand balance The speculative process based on the coffee supply and stock movements is partly responsible for the commodity price formation in the world m ­ arket.



Global coffee market: Socio-economic and cultural dynamics

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However, this whole process at some point converges to the intrinsic fundamentals related to the product, mostly the balance between supply and demand. In the case of coffee, aspects concerning its different qualities (soft drinks, full bodied with fruity notes, floral, chocolate, etc.) and types (Arabic or Robust) add complexity to this process. Martins (2005) demonstrated that expectations on Brazil’s crop performance, the peculiarity of the Brazilian crop cycles, and climate factors emerged have relevant effects on coffee’s future market valuation in Brazil and at the New York Stock Exchange Board. Also, Martins and Castro Junior (2005, p. 15) asserts that “regulation policies and coffee supply interventions adopted by public institutions are incompatible with the new world reality, represented by lower interventionism and greater competition.” However, depending on the crop location, the harvest is concentrated in a certain period, ensuring relative stability for green coffee supply to the processors (roasters) throughout the year. Also, the ease of stockpiling the product makes it difficult to pinpoint an off-season for coffee culture. Taking into account all the mentioned aspects, analysis focused exclusively on supply-and-demand statistics should be cautious to design scenarios for supply and price estimates. In 2015 and 2016, for example, there was a large period with scarce rainfall at the Robusta belt in Brazil,a causing product shortages and diversion of Arabica exports to supply the domestic market (Valor Econômico, 2017). In the last few years, world production exhibited slight oscillations. In its July 2017 report, the US Department of Agriculture (USDA) indicated that total coffee production will reach 159.31 million bags of processed coffee, with an estimate of 95.23 million bags of Arabica and a further 64.08 million bags of Robusta (Fig. 1.1). However, when the quantities of Arabica are observed, there are significant variations from 98.8 million bags in the 2016/17 season to only 86.4 million bags in 2014/15. To a large extent, such oscillations of Arabica production is due to the biennial pattern of the Brazilian crop, which is a phenome logical characteristic of crops exposed to sunshine lighting. Although it shows smaller variations in total production related to Arabica variety, Robust crops showed a decrease in the 2016–17 harvest due to the prolonged drought, recovering in the following year. There is a controversy to address, such as oscillations in world coffee production due to climate change phenomena. Also, there is no consensus in determining how sensitive coffee crops are to global warming.The ­employment a

In Brazil, Robusta is named Conilon, which is a variety of Robusta plant.

Million bags (60 kg)

6

Coffee consumption and industry strategies in Brazil

180 160 140 120 100 80 60 40 20 0

59,71

65,89

86,55

100,82

93,99

2015/16

2016/17

2017/18

67,59

67,21

66,6

92,46

86,46

2013/14

2014/15

Arabic

Robusta

Fig. 1.1  Total world coffee production per variety: 2013/14 to 2017/18 (estimate).

of new technologies applied to soil correction and treatment (afforestation, densification, irrigation, soil correction, and fertilization) jointly with the development of new varieties (more tolerant to water deficit, for example) have the potential to mitigate high temperatures and occurrence of eventual droughts. Around 80% of the world’s coffee production is destined for exports, and green coffee (Arabic and Robust) constitutes approximately three-quarters of that percentage, followed by soluble coffee and ground coffee. Brazil and Vietnam together are the world’s largest coffee exporters (Fig. 1.2). Green coffee imports by nonproducing countries often provide opportunities for more international trade. The European countries, in particular, acquire green coffee from producing countries to locally process roast and ground coffee, soluble coffee, and capsules. Then, all these added-value products are exported for producing and nonproducing countries. This is known as a re-export transaction. Germany, Belgium, United States, and Brazil

Vitenan

Colombia

Indonesia

Honduras

Million bags (60 kg)

70 60 50 40 30 20 10 0

2013/14

2014/15

2015/16

2016/17

Fig. 1.2  Main coffee exporters: 2013–14 to 2017–18 (estimate).

2017/18



Global coffee market: Socio-economic and cultural dynamics

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Italy are the major players, which account for more than 75% of all re-­ exports (ICO, 2017). Switzerland, home of the global company that has held the capsule technology patent for many years, retains relevance in the world market for coffee capsule manufacturing. Over the last 20 years, a new flow of coffee trade has emerged, consisting of transactions between producing countries. According to statistics from ICO (2017), this type of transaction exceeded 7 million bags in 2016. Few producing countries are also major coffee consumers. Brazil holds the world’s production and exporting leadership, and also the second place for consumption. Ethiopia and Costa Rica consume a significant percentage of domestic production. The other coffee-producing countries are basically coffee exporters, even though consumption has grown significantly in the last few years. Among the importing countries (excluding Brazil), the European Union’s economic bloc represents the largest demand market for coffee, followed by the United States and Japan (Fig. 1.3). Except for the Japanese case that, in the last 30 years, has replaced the preference for tea to coffee, the others are considered mature markets for the beverage, in which the increase in demand remains relatively stable. The highest coffee consumption growth rates are currently concentrated in the so-called emerging markets for coffee. East Asian countries, the Arabian Peninsula, and former members of the Soviet bloc show a significant increase in demand each year. Approximately 20 million bags are consumed in the following countries (in descending order): Philippines, Indonesia, China,Vietnam, and South Korea. Among the producing countries, although facing an economic crisis since 2014, Brazil maintains a good

Fig. 1.3  Main coffee importers: 2013/14 to 2017/18 (estimate).

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Coffee consumption and industry strategies in Brazil

pace in the domestic market demand with an average per-year increase of 2% (Associação Brasileira da Indústria de Café [ABIC], 2017). Globally, in the last decade the demand for coffee has increased at rates close to 1.7%– 2.0% per year (ICO, 2017). The emergence and final consumer acceptance of coffee encapsulation technology has played a relevant role in the consumption increase in the last two decades. Considering the added value potential of this technology, all the coffee leading companies have capsules in their portfolio. Currently the market for coffee capsules accounts for more than US $14.5 billion dollars with an annual growth rate of 18% in real value terms over 2011–16 (Euromonitor Passport, 2017). Recent estimates indicate that approximately 160 million bags (of 60 kg of green coffee) will be consumed (Fig. 1.4) in 2017/18. It is equivalent to 9.6 million tons of coffee in the form of roasted and ground coffee (prepared in strainer, espresso, French press, Italian mocha, and capsules), roasted in beans (preferably espresso), and soluble. This continuous growth can be explained by the beverage’s popularity and accessibility for any social and economic population. In addition, several medical studies have proven that coffee offers health benefits and better performance in conducting tasks (ABIC, 2017). It’s also associated with break time during exhaustive work or study days. Connected with the contemporary need of convenience, spaces for social interaction, and to simply enjoy, coffee shops present a relevant phenomenon in all urban cities around the world. In recent years since 2002, the coffee market has showed a situation where consumption surpasses coffee production, systematically reducing existing storage (United States Department of Agriculture [USDA], 2017a,b). The

Fig. 1.4  Coffee consumption and countries: 2013/14 to 2017/18 (estimate).



Global coffee market: Socio-economic and cultural dynamics

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Fig. 1.5  World coffee stocks: 2013/14 to 2017/18 (estimate).

stock/consumption ratio is clearly trending downward, which may make the market more volatile; this movement can be observed daily in the stock exchange boards where coffee contracts are negotiated, mainly BM&F in Brazil, New York Stock Exchange in the United States, and London Stock Exchange in the United Kingdom (Fig. 1.5).

1.3  Costs, innovations, and competitiveness The most common coffee varieties cultivated commercially are Arabica and Robusta. Arabica coffee has several species and is known by its fragility compared to Robusta. The plants are usually cultivated under milder conditions (tropical and tropical altitude) and require more careful agronomic management in terms of nutritional, phytosanitary (pests and diseases), harvesting, and postharvesting. On the other hand, Robusta coffees preferentially occupy the equatorial zones of low altitude, are characterized as more vigorous plants, and are less susceptible to disease attacks. In addition to these attributes, it’s relevant to consider the different modes of coffee harvesting and management such as manual versus mechanized, dry versus irrigated, plateau versus mountain, more spaced crops versus denser crops, full sun crops versus shaded crops, business versus family, and so on. There is no homogeneity in coffee production systems, even inside a producing country or between countries. When all this variability is taken into account, the cost calculations and comparisons should be done under caution. However, there is a consensus that the agronomic technology adoption in crops allows an increase in productivity with a consequent reduction in unit cost of the beneficiated coffee bag.

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Coffee consumption and industry strategies in Brazil

In terms of harvesting, the so-called picking technique (picking only the ripe fruit) offers exceptional quality for the final beverage; however, it raises the product’s final cost. On the other side, semimechanized or fully mechanized harvesting systems allows relevant cost reduction. Except for crops planted in equatorial zones that usually have large annual precipitation, other areas can be afflicted by droughts of various durations in different seasons causing the coffee plant to suffer from water deficits. Climatic phenomena of this nature are reflected in a substantial decrease in the crop production potential. Also, the overall surviving areas will present low quality coffee beans with several defects such as pimples, and mummified or malformed grains. The use of irrigation might mitigate the risk of production losses as well as offer far above average productivities in such magnitude that the initial investment can be amortized in two or three harvests. Crop densification, which consists of the implantation of a greater number of plants per hectare, results in productivity yields per hectare in detriment of the plant’s productivity. The largest population of plants does not increase costs in the same proportion, resulting in lower expenses per unit produced. However, there are biological limits for the densification technique, and they become even more rigid when associated with mechanical harvesting. The adoption of programmed pruning systems makes it possible to recover the aerial part of the plant that loses much of its productive potential during the consecutive harvests. This process will favor higher yields and, consequently, cost reduction per unit produced. Although, as previously mentioned, the coffee cultivation profile is mainly composed of small farms employing family labor, there are largescale coffee farms, particularly in the region called Cerrado Mineiro in the State of Minas Gerais, the largest coffee producer in Brazil. In general, the large-scale farms are managed professionally through specialized teams hired to offer agronomic and managerial support, focusing on intensifying production and productivity gains (De Almeida and Zylbersztajn, 2017). Some of them can reach 50 bags per hectare adopting semi- or fully mechanized systems for crop harvesting with 35 bags on average per hectare in the region (Cerrado Mineiro, 2017). The diffusion of innovations for coffee production is of great importance to the sector. Recently, plantations in coffee-producing countries in Central America have been severely affected by coffee rust (a fungal disease that withers leaves, preventing photosynthesis). This substantially reduces



Global coffee market: Socio-economic and cultural dynamics

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harvests and, consequently, impoverishes coffee farmers and rural workers, as they can no longer depend on harvesting coffee as a source of income. The gradual substitution of susceptible varieties, combined with training farmers to manage and deal with the disease, has enabled the revitalization of plantations and increased production. Although mineral and/or organ mineral fertilization are long established technologies in coffee production, full mechanization of all stages of the plantation has only become a reality in the last 20 years. Of all the costs associated with planting coffee, the harvest weighs heaviest on the coffee farmer, especially when it is necessary to hire labor outside of the family. Furthermore, the low productivity of harvesting, especially hand-picking (approximately 50 kg of fruit per man per day, albeit with exceptional results in terms of quality), does not offset the need to increase the yield, whereas prices tend to fall and, at the same time, meet the requirements for the welfare of the hired coffee pickers. Self-propelled machineryb for harvesting reduces costs by up to 60% compared with stripping and probably more than 1000% in the case of hand-picking. Other innovations can be added, although they do not ensure a higher yield, improve the quality of the coffee, or meet urgent environmental requirements. In countries that produce so-called wet processed or washed coffee (the fruit is depulped and fermented), such as Colombia, Central American countries, and Kenya, large quantities of water are used, and the drainage of effluents contaminate watercourses, causing damage to lake biota, and impacting livestock and urban water supplies. Therefore, it is desirable to incorporate technologies that reduce the use of water and allow the correct treatment of effluents before they are discharged into rivers. The technologies available for coffee production have the capacity to increase production with a low or moderate increase in total expenses. These technologies are economically feasible when the cost is calculated in terms of each bag of coffee produced. There are no accredited databases for comparing production costs from country to country. However, among the most important coffee-producing nations, Brazil can be used as a proxy for estimating production given its continental size and because it has plantations with a variety of topographical conditions, harvesting techniques, and property management. b

In an 8-h shift, a self-propelled harvester produces an average of 400 60-kg sacks of processed green coffee (equivalent to ripe fruit). With hand-picking, in the same 8-h shift, 10 men would collect the equivalent of approximately two sacks of processed coffee.

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Coffee consumption and industry strategies in Brazil

To exemplify this statement, a comparison was made of the total operational cost calculated by the National Supply Company (CONAB) in seven coffee producing belts in Brazil: South (Londrina); Southeast (Franca, Guaxupé, São Sebastião do Paraíso, and Manhuaçu); Midwest (Cristalina); and Northeast (Luis Eduardo Magalhães and Barra do Choça). The comparisons were basically drawn in terms of the harvest: manual versus mechanical. Figure  1.6 demonstrates that the production cost for mechanical ­harvesting is lower than for those coffee farms that employ manual labor. Additionally, it is possible to note that there is a variability on productivity level for each production system raging from 56 bags per hectare on mechanical harvesting up to 32 bags per hectare on manual harvesting. The productive scale, associated with the topographical conditions of the land on which the plantations are located, involves aspects that might hinder the adoption of mechanized harvesting, thereby adding competitiveness to coffee production. However, many small and family coffee farmers have gained access to machinery by hiring it from third parties that specialize in this type of work at a cost agreeable to both parties involved in this stage of production. This opportunity has enabled small plantations to become more competitive.

Manual

4.500 4.000 3.500 3.000 2.500 2.000 1.500 1.000 500 -

140,00 120,00

80,00 60,00

US$/sc

100,00

40,00 20,00 0,00

C ris L. ta E. lin M a ag al hä es Fr an ca G u ax S. S. up do é Pa ra is o Pa V. tro N ci .d ni o o Im i gr Ba an rra te do C ho ça M an hu aç ú Lo nd rin a G ua xu pé

US$/ha

Mecanizado

US$/ha

US$/saca

Fig.  1.6  Total operating cost (hectare and bag) by type harvesting system, selected regions, Brazil, 2017/18 harvest. * US$ 1.00 = R $3.79 (average exchange rate of Aug. 2018). Source: CONAB, 2018. Disponível em: https://www.conab.gov.br/info-agro/custosde-­producao/planilhas-de-custo-de-producao/itemlist/category/405-planilhas-de- ­custosde-producao-culturas-permanentes?start=10 [Acesso em 09 August 2018].



Global coffee market: Socio-economic and cultural dynamics

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In the case of Brazil, several aspects have to be considered. The Arabian plantations grown under full sun conditions have the characteristic of offering a high yield followed by other low or median productivities.Thus, a truly representative cost needs to consider at least the average of four seasons, with eight harvests being ideal. This constitutes another complicating factor, as it is necessary not only to arrive at costs that represent real competitiveness but also to draw comparisons at the international level. Agricultural economists should be inspired by geneticists who dedicate their productive careers to creating a new variety of coffee (25–30 years selecting individuals that stood out from their original population and the ensuing interspecies crossing). Rural development processes cannot restrict their directives (both public and private) exclusively to the economic activity of coffee plantations. The most important processes nowadays might include Internet access and training in computer studies for young people who live in rural communities. This will enable them to adopt modern practices when they come to manage their properties. The so-called digital inclusion of coffee farmers and their families helps to increase the effectiveness of training and qualifying people in the use of agricultural technologies, rural accounting, and commercial planning.These are decisive requirements in a context in which competition for markets is global. However, the competitiveness involved in coffee production is not exclusively based on costs but on a set of equally important factors. Nowadays, quality is undoubtedly the most highlighted factor. The drink has become increasingly accepted worldwide in part because of exhaustive efforts to improve its quality in the main producing countries, with or without the support of technology of a biological (varieties, fermentations) or mechanical nature (peelers and dryers), as well as roasting, grinding, and practicality (capsules). The renowned competence and reputation of the export sector are fundamental when it comes to attracting parts of the international market. Investments in publicity and the creation of global brands for products (notable cases include Juan Valdez and Blue Mountain) can create value for the product, increasing income in the other links of the production chain. Internationally accredited certifications have considerable appeal in the eyes of consumers in developed countries with a high per capita income. Seals that attest to conditions of sustainability in resource exploitation, protection of forests and birds, higher/gourmet levels, products from traditional family coffee plantations, and/or native populations are well accepted and add value to brands that invest in these certifications (verification, auditing, loyalty of roasting companies).

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Coffee consumption and industry strategies in Brazil

So-called natural coffees (fruit picked and dried in the heat of the sun) have attributes that are desirable for preparing espresso coffee (creamy drink, the technical expression for its body). Depulped (washed) coffees are more suitable for filtered coffee and similar drinks (mocha, French press). Peeled coffees combine both possibilities, and fermented coffees are prepared in the Turkish style. Depending on the preference of consumers in a given market (Italians = espresso; Northern Europeans = filtered), the choice lies in one of the types of postharvest preparation, each one valued in a specific situation. Regarding the costs and competitiveness of the product, our affective bonds are an important aspect when it comes to demand or, at the other extreme, a lack of empathy. As their habits evolve, consumers establish their preferences. Irrespective of how much they have to pay, they remain loyal to the brand and flavor to which they have become accustomed or would like to try (there is no lack of seductive innovations). Of course, crises such as the financial meltdown of 2008 led to changes in the main markets (more robust blends). However, when the initial shock was over, there was a slow recovery on the part of blends that were mostly Arabian in quality.

1.4  Support policies and actions for the coffee sector Coffee cultivation is a relevant agricultural activity in developing countries. Also it is considered by international development organizations as a potential promoter of rural development due the labor absorption, possibility of product storage, market liquidity, and the adding value chain. Historically, several incentives through local public policies were launched aimed at strengthening coffee cultivation in the producing countries. Within the United Nations, a number of organizations have been set up to encourage this development, including the International Coffee Organization (ICO) which is a forum for coffee-producing nations as well as for coffee consumption nations. ICO aims to build alliances between relevant coffee sector participants and private and public organizations, with a focus on improving the living standards of the rural populations involved in the activity. Under this goal, in the mid-1960s of the last century, an agreement was reached establishing supply quotas for each producing country and also administered pricing for marketing the product. This commitment made between producing and consuming countries, known as The International Coffee Agreement (ICA), has lasted for about 30 years. Brazil has played an important role for the agreement’s accomplishments in the measure that it accepted to reduce its market share retaining



Global coffee market: Socio-economic and cultural dynamics

15

stocks. On the other hand, the other signatory’s countries kept selling over their quotas. Facing this situation, Brazil decided to negotiate its participation in the agreement and, after several discordances, the ICA was undone in 1989 (Saes and Nakazone, 2002). The postregulation period allowed Brazil to increase coffee quality and also improve the local industry (Farina et al., 1997). Votta et al. (2006) listed main facts that occurred after free market was adopted by the global players in 1989: • Coffee market segmentation: the emergence of different products, such as personal coffee machines, expresso coffee, decaffeinated coffee, among others; • Investment in the postharvest process to improve coffee quality with the support of government programs; • Creation of local farmer’s associations to strengthen the bonds between suppliers and imports, and the valorization of gourmet coffee; • Foundation of the Brazilian Specialty Coffee Association (BSCA) for the improvement of high-quality coffee procurement; • Spread of prizes such as Cup of Excellence and ones promoted by companies, such as the first one made on Brazil by Illy Café (Brazilian Quality Prize for Expresso) in 1991; • ABIC’s program creation on Quality Control in 2004. World Intellectual Property Organization (WIPO) Report indicated that, for commodity coffees, exporters on average add 16% to the price in the process of transferring the product to roasters after their purchase from coffee growers (price based on New York and London Stock Exchange). In turn, roasters increase prices by 228.8% from the purchase price recorded on production belts. Similar percentages are measured for specialty coffees and much higher than those calculated for commodity coffees classified as “fair trade” (WIPO, 2017). The value distribution along the productive chain might be a determining factor to overcome difficulties faced by coffee growers in the main producing areas. The roasting and solubilizing companies strive to get closer to the ­coffee-producing areas, aiming to shorten the marketing chain and offering price premiums for those farmers who accomplish their sustainability protocols. Also, these companies are implementing projects that assist coffee growers to improve their welfare condition such as training in crop management, in computer science, or on production cost management. The coffee grower’s association’s inside production cooperatives has strengthened their bargaining power. Agricultural production is characterized as a price-taker sector due to the intrinsic farming atomization.Thanks to their organization and the social capital that the cooperative represents,

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Coffee consumption and industry strategies in Brazil

coffee growers are able to improve the negotiation terms to market their production. Also, the association helps them to acquire farm inputs with lower costs, which is crucial to control productivity and costs.

1.5  Climate change and its impact on coffee production Adequate environmental factors, involving interaction between climate, soil, plant, and atmosphere, constitute decisive factors in the success of rural ventures. Obviously, as a human activity, agriculture can be expected to be among those most greatly affected by climate change. Greenhouse gas emissions cause extreme events of temperature, drought, excessive rainfall, and other climate “disorders.” Before delving deeply into the repercussions of climate change for plantations, it should be highlighted that Arabian coffee is a subforest shrub with less efficient photosynthetic biochemistry (compared with grass, for example). In this respect, coffee plants, when cultivated in full sun, have a ­production regime with highs and lows throughout a biennial lifecycle (typical pattern of the Brazilian harvest). Furthermore, they require regular pruning. In turn, cultivation of coffee in an agroforestry regime (as found in Central America and India), in addition to environmental benefits to the flora and fauna, has an advantage of maintaining stable production harvest after harvest, with longer periods of ripeness with well-known repercussions for the quality of the drink. However, due to the competition for nutrients and water, some of the other plants, shrubs, and grasses in the surrounding area tend to see a drop in their production. The most plausible scenario in the coming decades, with reference to the summits regularly held for nations to discuss the theme, is the intensification of already perceived climate changes. In 2014, prolonged droughts when abundant rainfall was expected were disastrous to Brazilian coffee production. This water shortage was prolonged and accentuated in the Conilon coffee belts (predominant Robusta variety in Brazil), reducing harvests on two occasions, by half in the first year and by 30% in the consecutive year. Although the coffee plant is highly docile (Arabian), accepting a variety of practices (compaction, pruning, water deficit of up to 150 mm, for example), in climatic terms, it is very demanding. Regions in which the average temperatures (day and night) are above 22°C and below 19°C impede the development of the plants. Furthermore, in cold spells under 2°C, the sap freezes with the rupture of cells producing what is known as a black frost.The coffee plant does not accept persistent winds and badly drained soil. As it is equatorial in origin, Conilon plants require even rainfall throughout the year.



Global coffee market: Socio-economic and cultural dynamics

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In these circumstances, even slight modifications in the oscillation of the climate affect and will continue to have a great impact on coffee production. Palliative measures to provide land in microclimates more favorable to development and production could be adopted. These include forestation (less surplus than in agroforestry), irrigation, densification, and subsoiling (greater water retention capacity, weed control, and adoption of varieties more tolerant to extreme climates). Complex climate models have been used to prepare future scenarios, simulating temperatures rising by an average of 2°C. In these conditions, many Brazilian Arabian coffee-producing belts would be shifted to high plateaus or farther south (Pinto et al., 2008). However, there is controversy over the real prediction capacity of these models, and many technicians in the field of coffee production question these results. The lack of effectiveness and abandonment of global collective actions to reduce the emissions responsible for global warming will force coffee farmers to adopt solutions to mitigate this phenomenon. Fortunately, some of these solutions are sufficient to alter the microclimate of a plantation, making it more resistant to forecasted changes.

1.6  Final considerations The production and especially the consumption of coffee around the world are rising, especially in Southeast Asia, the Arabian Peninsula, and Eastern Europe. The populations in these regions are considered emergent in the consumption of the drink. Another promising fact is that coffee has become a widely accepted and preferred drink among young people. The growing habit of drinking coffee increases demand for the product, encouraging coffee farmers from all nations to produce more and better sustainable coffee. The trade of coffee between producing and importing countries goes back centuries. On many decisive occasions in the history of civilization, coffee consumption was a popular habit. Coffee shops and coffee consumption have important roles in the occurrence of revolutions such as the French Revolution and the Industrial Evolution in England. Nowadays, the agroindustrial system of coffee has achieved a highly refined level of organization. This includes the production of coffee, with a wide variety of players involved (family coffee farmers, medium-sized and corporate producers); cooperatives receiving, processing, classifying, and offering the product to internal and external markets; associated with

18

Coffee consumption and industry strategies in Brazil

rural credit cooperatives and insurance companies guaranteeing production/income. Other players include stock exchanges offering mechanisms to mitigate recurring price fluctuations on the market, traders supplying every corner of the globe, and international companies working with transport and logistics. There are also roasting and grinding companies with a diverse line of products (roasted and ground, roasted grains, instant coffee, cappuccino, capsules that have revolutionized how the drink is consumed), and cafeterias with their baristas and latte art. Finally, there are avid consumers awaiting innovations with regard to how to enjoy coffee, requiring ever-widening spaces for socializing. All told, there is a complex system, and great effort is required to become familiar with it in detail. In the future, we can expect more interest in coffee and the businesses and professions built around it. Coffee shops propel the need to socialize, gaining space in the urban scenario of large cities and towns. This phenomenon reverberates in production areas, which are revitalized by the ability to preserve the landscape, harmonize with the local environment, and provide conditions for the welfare of coffee farmers and their families. Coffee will continue to be an inspiration for humanity with its trade and consumption, providing frameworks for people and nations to pave the way for greater international cooperation to benefit not only those involved but society as a whole. This is because coffee stimulates dialogs and meetings, helping to overcome differences to promote the greatly needed republican environment.

References ABIC, 2017. Café e Saude. Retrieved from: http://abic.com.br/cafe-com/cafe-e-saude/. Cerrado Mineiro, 2017. Institucional Website. Retrieved from: http://cerradomineiro.org/. De Almeida, L.F., Zylbersztajn, D., 2017. Key success factors in the Brazilian coffee Agrichain: present and future challenges. Int. J. Food Syst. Dyn. 8 (1), 45–53. Euromonitor Passport, 2017. The Global Coffee Pods Market in 2017: The End of an Era? Euromonitor International. Farina, E.M.M.Q., Saes, M.S.M., de Azevedo, P.F., 1997. Competitividade: Mercado, Estado e Organizações. Editora Singular, São Paulo. Global Coffee Platform, 2017. Institutional Website. Retrieved from: http://www.globalcoffeeplatform.org/pt/. ICO, 2017. Trade Statistics. Retrieved from: http://www.ico.org/trade_statistics. asp?section=Statistics. Martins, C.M.F., 2005. A Volatilidade nos Preços Futuro do Café Brasileiro e Seus Principais Elementos Causadores (Dissertation). Universidade de Viçosa. Martins, C.M.F., Castro Junior, L.G., 2005. A volatilidade nos preços futuro do café brasileiro e seus principais elementos causadores. In: 30th ENAMPAD Conference, September 23–27, 2006. Encontro nacional de Pos-Graduação em Administração (ENAMPAD), Salvador, Bahia.



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Pinto, H.S., Assad, E.D., Zullo Junior, J., Evangelista, S.D.M., Otavian, A.F., Avila, A.D., … Coltri, P.P., 2008. A nova geografia da produção agrícola no Brasil. In: Aquecimento Global e a Nova Geografia da Producao Agricola no Brasil. Embrapa Informatica Agropecuaria: Unicamp, Campinas. Saes, M.S.M., Nakazone, D., 2002. Estudo de competitividade de cadeias integradas no Brasil: Impactos da zona de livre comércio. Unicamp, Campinas. USDA, 2017a. Forecast Overview World. Retrieved from: https://apps.fas.usda.gov/psdonline/circulars/coffee.pdf. USDA, 2017b. Global Agricultural Trade System. United States of América. Retrieved from: https://apps.fas.usda.gov/gats/default.aspx. Valor Econômico, 2017. Preço do Conilon Bate Recorde e Acirra Disputa na Industria. Retrieved from: http://www.valor.com.br/agro/4729009/preco-do-cafe-conilon-baterecordes-e-acirra-disputa-na-industria. Votta, T.B., Vian, C.E., Pitelli, M.M., 2006. A Desregulamentação no mercado de café torrado e moído e a emergência de Campos organizacionais: uma análise prospectiva e uma agenda de pesquisa. In: 44th Congress, July 23–27, 2006, Fortaleza, Ceara, Brazil (No. 149211). Sociedade Brasileira de Economia, Administracao e Sociologia Rural (SOBER). WIPO, 2017. World intellectual property report 2017: intangible capital in global value chains. World Intellectual Property Organization, Geneva (137 p.).

Further reading Banco Central do Brasil, 2017.Taxa de Câmbio, Brasília. Retrieved from: http://www4.bcb. gov.br/pec/taxas/port/ptaxnpesq.asp. CONAB, 2017. Acompanhamento da Safra Brasileira de Café. v.4—safra 2017, n.3—terceiro levantamento. Brasília, 107 p. CONAB, 2018. Disponível em: https://www.conab.gov.br/info-agro/custos-de-­producao/ planilhas-de-custo-de-producao/itemlist/category/405-planilhas-de-custos-de-­ producao-culturas-permanentes?start=10. (Accessed 9 August 2018).

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CHAPTER 2

Perspectives of global coffee demand Guilherme Nunes Torgaa,b, Eduardo Eugênio Spersa,c a

Department of Economy, Administration and Sociology, ESALQ—USP, Piracicaba, Brazil Audencia Business School, Nantes, France ESPM, São Paulo, Brazil

b c

2.1 Introduction The exact origins of coffee are unknown. However, popular legends assert that the beginning of coffee production and consumption dates back to Abyssinia, in present day Ethiopia. The first observations concerning this beverage apparently involved its energy-giving effects on goats. The first mention of coffee is attributed to the Persian physician Rhazes (CE 865– 925), who referred to the drink as bunchum. But he was not writing about the same beverage that we drink today; the first time that coffee beans were roasted, ground, and infused was in the 15th century (Pendergrast, 2010). During the following centuries, coffee consumption spread throughout the world, including Europe, and also gained a major role during mercantilism, according to Ormrod (2003). At the 20th century, coffee was largely traded worldwide, and some underdeveloped countries such as Brazil had their economies based on coffee exports, as explained by Skidmore (2009). Nowadays, the supply chain of coffee has evolved to a complex system that involves several agents, from the agricultural inputs firms, farmers, and commodity traders to food industries and retailers. One of the biggest challenges faced by them is how to add more value to the final product and, thereafter, to the value chain. But to attain that purpose, it’s crucial to understand how consumers perceive the value of the coffee, that is, how the demand will respond to changes of the final product or at the supply chain. The main objective of this chapter is to provide information about coffee demand that can assist all agents of the coffee value chain to organize themselves to be more competitive in the near future, keeping in mind the consumers that they will be selling to. The specific objective of this chapter is to analyze the perspectives of the global demand for coffee in the present, providing a summarized literature Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00002-0

© 2020 Elsevier Inc. All rights reserved.

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Coffee consumption and industry strategies in Brazil

review as well as new ideas based on available demographic and income data for a better understanding of future scenarios.

2.2  Coffee production and supply chain For a better understanding of the coffee market, it’s indispensable to observe how production behaves and how it fits consumers’ preferences over time. The first topic to be reviewed is the behavior of the coffee supply chain. Lewin et al. (2004) studied the global supply and demand for coffee in different markets and provided new trends at that time, with regard to the importance of this product for low-income economies. The real prices of coffee were at 100-year lows in 2002, which caused a poverty increase to small farmers that produced coffee in countries like Nicaragua, for instance. A consequence of the decline in coffee prices has been a decline in the share of the final retail price that is received by producing countries. This decline has been caused by two factors. First, the coffee roasting and retail industries have made profits by developing new products and by taking advantage of various value-adding activities, such as marketing, branding, differentiation, and flavoring. […] Second, the noncoffee components included in the retail price of coffee, such as wages, packaging, and marketing, have grown and now represent a much more significant share of the total retail price than the actual coffee itself.

For that reason, new ways of adding value to this beverage’s value chain were necessary, not only to the retailers and industry, but also at the farm level. The updated table that follows shows the biggest coffee producers worldwide and analyzes if the global coffee supply has changed significantly from this chapters’ analysis. Table  2.1 makes explicit states where coffee is produced worldwide in the last 17 years. It shows that the global green coffee supply has not changed its origin from the study of Lewin et al. (2004) until today. The only difference is that Honduras, Peru, and Uganda increased their share in the global market, whereas India and Guatemala saw their market shares reduced. But the main players (Brazil, Vietnam, Colombia, and Indonesia) still compose the top four. The next relevant point is the global exports, shown in Table 2.2. Basically, the framework of the main exporters has not changed during this period, as the top four exporters are the same as the top four producers.



Table 2.1  The 10 biggest coffee-producing countries in 2016/17 and the evolution of their production in the last 17 years (in thousands of 60-kg bags) Typea Country

a

A/R R/A A R/A A A R/A A R/A A/R

2000/01

2005/06

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

31.310 14.841 10.400 6.987 3.115 2.667 5.020 2.676 3.401 4.940 85.356

32.935 13.842 12.564 9.159 4.779 3.204 4.567 2.489 2.175 3.676 89.391

53.428 20.000 8.523 9.129 7.500 4.331 5.033 4.069 3.267 3.950 119.230

50.592 26.500 7.652 10.644 6.798 5.887 5.233 5.373 3.115 3.850 125.643

55.420 23.402 9.927 11.519 6.233 4.686 5.303 4.453 3.914 3.763 128.619

54.698 27.610 12.163 11.265 6.527 4.578 5.075 4.338 3.633 3.189 133.077

52.299 26.500 13.339 11.418 6.625 5.258 5.450 2.883 3.744 3.310 130.828

50.388 28.737 14.009 12.317 6.714 5.766 5.800 3.304 3.650 3.420 134.104

55.000 25.500 14.500 11.491 6.600 5.934 5.333 4.222 3.800 3.500 135.880

113.673

111.396

139.600

147.904

149.623

152.228

148.738

151.565

153.869

 Type R refers to Robusta and A to Arabica coffee. Data from the International Coffee Organization (ICO, 2017).

Perspectives of global coffee demand

Brazil Vietnam Colombia Indonesia Ethiopia Honduras India Peru Uganda Guatemala 10 Biggest producers World

Years

23

24

Years Country

2000

2005

2010

Brazil Vietnam Colombia Indonesia India Honduras Peru Uganda Guatemala Ethiopia 10 Biggest exporters World

18.016 11.618 9.177 5.358 4.229 2.879 2.362 2.513 4.852 1.982 62.985

26.198 13.432 10.871 6.744 2.829 2.392 2.369 2.369 3.466 2.435 73.105

33.167 14.229 7.822 5.489 4.647 3.349 3.817 2.657 3.468 3.324 81.968

33.806 17.717 7.734 6.159 5.414 3.947 4.697 3.142 3.697 2.675 88.989

28.549 22.920 7.170 10.722 5.044 5.508 4.310 2.685 3.750 3.203 93.861

89.559

87.562

97.067

104.449

111.023

Data from the International Coffee Organization (ICO, 2017).

2011

2012

2013

2014

2015

2016

31.662 19.718 9.670 10.882 5.033 4.185 3.971 3.672 3.575 2.870 95.237

36.429 26.097 10.954 6.175 5.131 4.252 2.720 3.442 3.043 3.117 101.361

37.018 20.655 12.716 8.379 5.262 5.030 2.790 3.596 2.961 2.985 101.391

34.267 27.422 12.831 6.545 6.086 5.306 3.960 3.543 3.072 3.001 106.032

110.509

114.658

113.953

119.048

Coffee consumption and industry strategies in Brazil

Table 2.2  Exports of all forms of coffee by the 10 biggest exporting countries (in thousands of 60-kg bags)



Perspectives of global coffee demand

25

Macdonald (2007) analyzed some initiatives aimed at transforming the institutional arrangements that organize coffee production and trade ­worldwide, for example, Fair Trade, Starbucks’ Café Practices Program, and other wider campaign activities about “trade justice.” It was observed that, even though these initiatives helped empower marginalized workers and producers, they failed to develop transparent ways of defining the boundaries of partial responsibilities or institutional procedures to enable their coordination, which has “significantly weakened their capacity to entrench empowerment principles throughout the governance system of the coffee industry as a whole,” according to the author.

2.3  Coffee demand With an overview of the coffee supply chain, we can now analyze the main subject of this chapter: coffee demand. So first, studies about the demand for coffee will be summarized, then the global demographic and income will be analyzed, and, finally, the global demand for coffee.

2.3.1  Studies about the demand for coffee Okunade (1992) tested the compatibility of coffee demand data with the habit formation hypothesis, and assessed implications of demand elasticity estimates for projected producer revenues and demand for imported coffee. Using an unrestrictive Box-Cox Demand Model, they estimated that the model automatically satisfies theoretical demand properties; strongly support incorporating habits and related beverage and sugar prices in coffee demand model; and predict inelastic US coffee consumption per capita will reduce 24% and have a 6.3% increase in producer revenues by 2000. Goddard (1997) estimated linear versions of the Almost Ideal Demand System for American and German coffee imports with the intent of testing for homothetic and nonhomothetic weak separability and calculating elasticities. Elasticities by country of origin indicated an elastic demand for coffee in the United States and an inelastic demand for coffee in Germany.They also stated that roasters consider these types of coffee as both substitutes and complements. Analyzing the global demand for green coffee, Silva et al. (2000) found that, for high-income countries, the consumption of coffee had stabilized at the end of the 20th century. High rates of increases in consumption could be found in Asian countries due to high rates of growth in population and income. At the same time, new markets presented specific patterns of preferences observed and analyzed by producers and exporters of coffee.

26

Coffee consumption and industry strategies in Brazil

By analyzing how retail prices, preferences, and market power influence coffee demand in Sweden, Durevall (2007) evaluated the belief that ­consumer coffee prices are high in comparison with bean prices, and that lower consumer prices would lead to substantial increases in bean exports from Third World countries. He estimated a demand function for the period between 1968 and 2002 and, together with information on import prices of coffee beans, simulated an oligopoly model. Through this model, the level of market power was estimated, as well as how coffee demand would react to reductions in marginal cost to its minimum level. The estimated maximum level of market power was low, but it generated big spreads between consumer and bean prices once the price elasticity had low values. It was stated that the effect of a price decrease would be small because longrun coffee demand was dominated by changes in the population structure in combination with different preferences among age groups. Therefore, a change to perfect competition would only have an unimportant effect on Swedish coffee bean imports. Bacci (2007) used a time series approach to forecast coffee demand in Brazil for the following years. Through different methodologies, he established a combination method to make the forecast and concluded that, with a better demand forecasting method, coffee processors can make better strategic decisions in terms of financial, marketing, and production planning. Based on a study about the justifications and motivations of the coffee consumption in Belo Horizonte (Brazil), Arruda et  al. (2009) found that the younger population consumes the least amount of coffee, and that the aroma was the most appreciated attribute in coffee. Bonnet and Villas-Boas (2016) studied if there was an asymmetric pricecost pass-through in the French coffee market, that is, whether prices respond differently to negative and positive upstream cost shocks.They found significant evidence that consumers react differentially to positive and negative price movements, that is, the demand is less elastic to price increases than to price decreases. In fact, they concluded that the shape of the demand curve could explain the observed asymmetric price transmission of cost shocks.

2.3.2  Global demographic and income overview To reach the objectives of this chapter, the procedure will involve two main steps: first, we analyze the global demographic and income overview, to understand the dynamics of the population (consumers) in terms of size,



Perspectives of global coffee demand

27

age, and income. The second section aims to identify the perspectives of present and future coffee demand and provide a marketing approach to link producers and consumers. Two important factors that influence global coffee demand are the demographic and income aspects of the global population (Silva et al., 2000). For that reason, the main questions to be answered at this point will be: How is the world’s population evolving? What is its age distribution? What is the behavior and trends of global income and its concentration? And how do these relate to coffee consumption? Silva et  al. (2000) highlighted two important factors that influence global coffee demand: the demographic and income aspects of the global population. Following his results, the first variable researched was the global population, which provides a perspective of the global market’s gross size. Therefore, the following chart shows the estimated evolution of the world’s population from 1990 to 2022 (Fig. 2.1). We can see that the world’s population is increasing in a relatively linear growth. In a logarithmic scale, it presents a relatively weak growth, but from 2017 to 2022, it’s expected to grow from 7.52 billion people to 7.92 billion: a 5.28% growth in 5 years. But not all people drink coffee, so what will be the effect of this population increase for coffee consumption? This chapter will attempt to answer this question in the section “Perspectives of the Future,” but for now, it’s important to know that there is a growing population worldwide, according to the United Nations. 9

Global population (billions of people)

8 7 6 5 4 3 2 1

8 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18 20 20 20 22

6

19 9

4

19 9

2

19 9

19 9

19 90

0

Year

Fig. 2.1  Global population evolution from 1990 to 2022. (Source: Data from the United Nations, Department of Economic and Social Affairs, Population Division, 2017. World Population Prospects: The 2017 Revision.)

28

Coffee consumption and industry strategies in Brazil

The next relevant information to be analyzed is the age of the world’s population. Arruda et  al. (2009) found that younger people are the ones who consume the least amount of coffee for some reasons already mentioned, so the percentage of the population below 14 years old is a good variable to be looked at, since it represents by definition (1 − Percentage of the population above 14 years old). We can see that the percentage of the population aged below 14 years old has decreased during the last 27 years, from 32.9% in 1990 to 25.9% in 2017, and is expected to reach 25.22% in 2022.That behavior is related to a change in the global age pyramid, which is different among the more developed economies and less developed ones. So, if the results found by Arruda et al. (2009) apply to global coffee consumption, it is expected that there is a negative correlation (and causality) between the percentage of the population below 14 years old and the consumption of coffee per capita (Fig. 2.2). The next two charts, extracted from the UN database, show the evolution and forecasts for the age pyramids of more developed economies and developing ones (that, by the way, will not be pyramids within some years). Fig. 2.3 shows the evolution of the age pyramid from 1950 until 2017, and the forecasts until 2100 for developed economies. We can clearly observe that the reduction in the percentage of the population below 14 years old in these economies is due to the reduction in the birth rates, causing

Population aged 0–14 (% of total population)

34 32 30 28 26 24 22

22

20

20

18

20

16

20

14

20

12

20

10

20

08

20

06

20

04

20

02

20

00

20

98

20

96

19

94

19

92

19

19

19

90

20

Year

Fig.  2.2  Global population aged between 0 and 14 years old as a percentage of the world’s total population. (Source: Data from the United Nations, Department of Economic and Social Affairs, Population Division, 2017. World Population Prospects: The 2017 Revision.)



29

Perspectives of global coffee demand

1950

Age

100

2017 100

Females

Males

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

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Females

Males

0

0 50

40

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20

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0

10

20

30

40

50

50

40

30

20

10

2050

Age

100

0

10

20

30

40

50

2100 100

Females

Males

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

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Females

Males

0 50

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0

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20

30

40

50

50

40

30

20

10

0

10

20

30

40

50

Population (millions)

Fig.  2.3  More developed regions’ population pyramids from 1950 to 2100. (Source: United Nations, Department of Economic and Social Affairs, Population Division, 2017. World Population Prospects: The 2017 Revision.)

a higher percentage of adults (between 25 and 60 years old); by 2050 and 2100, the age distribution will be more uniform, with a higher percentage of people above 80 years old compared to today. The next chart shows the same information, but for the developing economies (Fig. 2.4). A similar pattern for the developed economies can be observed for the less developed ones, but with a huge delay. The behavior of the pyramid in developed regions from 1950 to 2017 is much like the behavior of the pyramid for less developed regions from 2017 to 2050. The important point here is that the reduction of the percentage of the younger population (below 14 years old) and hence the increase of

30

Coffee consumption and industry strategies in Brazil

2017

1950

Age

100

100

Females

Males

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0 400

300

200

100

0

100

200

300

400

0 400

Females

Males

300

200

100

Age

100

100

Females

Males

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90

80

80

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60

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50

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40

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30

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20

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0 400

300

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0

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2100

2050

100

200

300

400

0 400

Females

Males

300

200

100

0

100

200

300

400

Population (millions)

Fig.  2.4  Less developed regions’ population pyramids from 1950 to 2100. (Source: United Nations, Department of Economic and Social Affairs, Population Division, 2017. World Population Prospects: The 2017 Revision.)

p­ roportion of the population above 14 years old between 1990 and 2022 is affected mainly by the more developed regions, and it may cause distortions in the response of coffee consumption of each region to population changes. The next relevant point to this study is the behavior of the global income. With more available money, people can buy more goods, including coffee, and also pay more for differentiated ones. As product differentiation is a very important point of this chapter, the first variable to be analyzed will be the world’s Gross Domestic Product (GDP) per capita, that is, the sum of all the final goods and services produced by an economy, divided by its total population, which is one of the main measures of income of an economy.



31

Perspectives of global coffee demand

14000,00

GDP per capita (US$)

12000,00 10000,00 8000,00 6000,00 4000,00 2000,00

22

20

20

18

20

16

20

14

20

12

20

10

20

08

20

06

20

04

20

02

20

00

20

98

20

96

19

94

19

92

19

19

19

90

0,00

Year

Fig.  2.5  Global nominal GDP per capita (US$) estimates from 1990 to 2022. (Source: Data from the International Monetary Fund, 2017. World Economic Outlook. International Monetary Fund.)

Fig. 2.5 shows that the global nominal GDP per capita increased from US $4738 in 1990 to US $10,751 in 2017 (a 126.9% rise) and is forecast to reach US $13,210 by 2022 (a 22.9% rise in comparison with 2017). That is, the world is getting richer, in a gross approach, and if the results found by Arruda et al. (2009) can be applied to global coffee consumption, it is expected that there will be a positive correlation and causality between the percentage of the population below 14 years old and the consumption of coffee per capita. But this variable alone is not enough to measure how this income is being distributed, so the next charts will deepen the evolution of the wealth distribution between low- and middle-income economies and high-­ income ones. Fig.  2.6 states how strong inequality is among countries. The high-­ income economies had, in 1997, around 7.3 times the average income of the rest of the world. This number because 4.5 times in 2016, which that shows an income convergencea effect. Although the nominal GDP per capita does not embody the effects of inflation, it is relevant because the available data from the IMF until 2022 does not include this variable at constant prices. But comparing it to the GDP per capita PPP at constant prices, it’s possible to observe that, from 1997 to 2016, the growth was about half of the nominal measure. a

For further studies on income convergence, see Tamura (1991).

32

Coffee consumption and industry strategies in Brazil

GDP per capita, PPP (Constant 2011 international $)

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5000

19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16

0

Year World

Low & middle income countries

High income countries

Fig. 2.6  Global GDP per capita, PPP by income level from 1997 to 2016. (Source: Data from the World Bank national accounts data and OECD National Accounts data files.)

But which countries belong to the high-, middle-, and low-income definitions of the World Bank and the International Monetary Fund? We can summarize the high-income (or developed) economies as North America (without Mexico),Western Europe, Japan, Australia, New Zealand, South Korea, Israel, Singapore,Taiwan, and Hong Kong. All the other countries are classified either as middle- or low-income economies (or emerging markets and developing economies). But beyond the per capita GDP, another important number to this analysis is the household final consumption expenditure, that is, how much of the gross income of the economy is spent on final consumption by the families for goods and services (Figs. 2.7 and 2.8). We can see that the consumption of the families as a percentage of the GDP in high-income economies was, in 2015 (the last available data), higher than that at low- and middle-income countries, but the annual growth of the household consumption at the low- and middle-income ones is higher; if this trend persists, these economies will buy more products and services throughout the years than the developed countries. Thereby, the overview of this section is that the world is getting more populous, older, richer, and with a growing consumption of goods, especially in developing economies. These are very important factors for a complete analysis of global coffee demand. These results can mean that



33

62 60 58 56 54 52 50 48 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

46 1997

Household final consumption expenditure (% of GDP)

Perspectives of global coffee demand

Year World

Low & middle income countries

High income countries

Fig.  2.7  Global household final consumption expenditure (% of GDP) from 1997 to 2015. (Source: Data from the World Bank national accounts data and OECD National Accounts data files.)

8 6 4 2 0

19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16

Household final consumption expenditure (annual %growth)

10

–2

Year World

Low & middle income countries

High income countries

Fig. 2.8  Global household final consumption expenditure (annual % growth) from 1997 to 2016. (Source: Data from the World Bank national accounts data and OECD National Accounts data files.)

the increase of consumption will be higher in low- and middle-income countries given that increases in income imply increases in coffee consumption, but this relationship will be better studied in the next sections that analyze coffee demand itself in the present and provides perspectives to the future.

34

Coffee consumption and industry strategies in Brazil

120000,00 100000,00 80000,00 60000,00 40000,00 20000,00 0,00

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Global coffee consumption (thousands of 60 kg bags)

140000,00

Year

Fig. 2.9  Global coffee consumption in thousand 60-kg bags from 1990 to 2016. (Source: Data from the International Coffee Organization (ICO, 2017).)

2.3.3  Perspectives of present coffee demand 2.3.3.1  Global coffee demand overview For an outlook on global coffee demand, the main data to be analyzed are global coffee consumption, coffee consumption per capita, and the major consumer markets.The International Coffee Organization (ICO) provided all these data. The first chart shows the world’s total consumption on the last 26 years (Fig. 2.9). Global coffee consumption increased in almost all the years of the series, except for 1994 and 2009. The percentage variation during the period was 67.9%, from nearly 79 million 60-kg bags in 1990 to 133 million in 2016. But are consumers actually drinking more coffee, or is it just a population expansion? The answer is found through per capita consumption (Fig. 2.10). The per capita increase on coffee consumption was more moderate, from approximately 0.897 kg per year in 1990 to 1.069 kg per year by 2016, but that’s still a 19.2% increase. The real growth in per capita consumption took place after 2000, and the reasons behind it go beyond the demographic and income effects, and will be better studied in Section 2.4.3. 2.3.3.2  Perspectives of selected countries and regions’ total and per capita coffee consumption This topic will focus on regional differences of coffee consumption worldwide and how they evolved. The first step in the analysis is to understand which countries buy the most coffee, that is, who are the biggest consumers of the global market (Table 2.3).



Perspectives of global coffee demand

35

1,0500 1,0000 0,9500 0,9000 0,8500 0,8000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Coffee consumption per capita (kg)

1,1000

Year

Fig. 2.10  Global coffee consumption per capita in kilograms from 1990 to 2016. (Source: Data from the International Coffee Organization (ICO, 2017).)

It’s possible to observe that the European Union is responsible for more than half of the total consumption of the importing countries. The biggest consumers of coffee outside of the EU are the United States (holding the world’s largest consumption), Japan, and the Russian Federation. Additionally, the consumption of these four corresponded to 96% of the global consumption by importing countries and 61% of the global consumption in 2016. Another important point to be observed is that the consumption of these countries is very similar to their imports of coffee, which indicates that a very high percentage of their coffee is imported (Table 2.4). Even though these importing countries don’t produce significant quantities of coffee, there is a marked difference between their imports and consumption. For instance, taking the example of Germany in 2013, about 21.1 million bags were imported, whereas 9.3 million bags were consumed. This difference is caused by an interesting characteristic that is key to understand the dynamics of the global coffee market: re-exporting. Table 2.5 shows the top 10 re-exporting countries. Comparing this table with the top exporting countries, Germany, Belgium, United States, and Italy show up among the top 10 exporting countries, with Germany in the third place (in quantity exported). Another interesting point of view is to analyze the main exporters of roasted coffee (Fig. 2.11). Either exporting raw or processed coffee, it’s crucial to understand the role of the re-exporting countries on the international coffee market to realize that their demand is not only for internal consumption.

36

Table 2.3  Domestic consumption of importing countries (disappearance) (in thousands of 60-kg bags) Country

2000

United States Germany Japan France Italy Russian Federation Spain United Kingdom Poland Netherlands European Union Top 10 countries Total of importing countries Worldb

18.746 8.770 6.626 5.402 5.149 1.863

20.998 8.665 7.128 4.787 5.552 3.185

21.783 9.292 7.192 5.713 5.781 3.700

22.044 9.460 7.015 5.962 5.689 3.754

22.232 8.830 7.131 5.790 5.710 3.696

23.417 9.378 7.435 5.707 5.634 3.648

2.991 2.342

3.007 2.680

3.232 3.134

3.149 2.925

3.435 2.926

3.501 2.828

2.046 1.860 38.351

2.267 1.927 39.877

2.156 1.347 41.196

2.034 909 40.756

1.936 1.382 40.979

55.795

60.196

63.330

62.941

67.548

73.683

76.540

94.784

107.137

118.892

a

2005

2010

2011

2012

2013

2014a

2016a

23.767

24.438

25.243

7.494

7.695

7.872

4.021

3.846

4.438

1.669 1.625 41.852

42.234

41.578

43.307

63.068

64.842

35.281

35.979

37.553

76.438

76.910

79.457

80.661

81.085

84.304

120.390

122.225

125.565

127.905

129.329

132.602

  Countries from the European Union are not included, because their data are available only until 2013.  The world’s consumption is considered as total consumption of importing countries plus total consumption of exporting countries. Data from the International Coffee Organization (ICO, 2017). b

2015a

Coffee consumption and industry strategies in Brazil

Years



Table 2.4  Imports of the top 10 coffee-importing countries (in thousands of 60-kg bags) Years Country

a

2005

2010

2011

2012

2013

2014a

2015a

2016a

27.565

27.708

28.838

7.657

8.063

8.026

4.981 4.747

4.693 4.710

4.871 5.233

23.767 13.895 6.315 6.908 6.520 3.491 3.768 3.321 1.890

23.042 16.716 7.269 7.408 5.714 4.063 4.356 3.589 3.336

24.378 20.603 8.236 7.407 6.717 5.924 5.034 4.366 4.155

26.093 20.926 8.355 7.544 6.992 5.828 4.821 4.542 4.218

26.056 21.816 8.691 7.025 6.841 5.668 5.094 4.444 4.175

27.016 21.174 8.823 8.381 6.713 5.502 5.137 4.520 4.410

3.012

3.433

4.302

4.183

4.126

4.206

72.887

78.926

91.122

93.502

93.936

95.882

44.950

45.174

46.968

103.574

117.040

135.562

139.516

142.671

146.925

75.541

77.268

73.956

  Countries from the European Union are not included, because their data are available only until 2013. Data from the International Coffee Organization (ICO, 2017).

Perspectives of global coffee demand

United States Germany Italy Japan France Belgium Spain Canada Russian Federation United Kingdom 10 Biggest importing countries All importing countries

2000

37

38

Years Country

Germany Belgium United States Italy Netherlands Spain Poland Switzerland Malaysia United Kingdom 10 Biggest reexporters World a

2000

2005

2010

2011

2012

2013

4.825 2.357 2.055

8.356 2.905 2.452

11.542 5.053 3.191

11.683 4.894 3.728

12.590 4.754 3.384

12.020 4.257 3.248

1.156 1.106 753 531 313 754 652

1.708 1.061 1.453 524 567 683 885

2.446 1.236 1.803 1.123 1.313 1.732 1.193

2.663 1.769 1.672 1.370 1.414 1.200 1.264

2.964 1.347 1.659 1.607 1.425 1.342 1.200

3.183 1.781 1.636 1.615 1.547 1.440 1.380

14.502

20.594

30.632

31.657

32.272

20.630

29.244

39.871

41.502

42.903

2014a

2015a

2016a

3.361

2.958

3.175

1.616 1.583

1.641 1.539

1.748 1.563

32.107

6.560

6.138

6.486

43.711

13.110

12.928

14.328

  Countries from the European Union are not included, because their data are available only until 2013. Data from the International Coffee Organization (ICO, 2017).

Coffee consumption and industry strategies in Brazil

Table 2.5  Re-exports by the top 10 re-exporting countries (in thousands of 60-kg bags)



Perspectives of global coffee demand

Switzerland

19% Italy

Germany

Belgium Poland

5.0% 4.6%

13% France

15%

Netherlands

6.7%

Czech Republic Slovakia

3.0% United Kingdom

2.9%

2.0%

United States

39

Canada

3.6%

7.1%

4.6%

China 3.4%

Fig. 2.11  Roasted coffee (not decaffeinated) international trade. (Source: Simoes, A.J.G., Hidalgo, C.A., 2011. The economic complexity observatory: an analytical tool for understanding the dynamics of economic development. In: Workshops at the Twenty-Fifth AAAI Conference on Artificial Intelligence, with data from the UN Comtrade.)

Finally, the next table shows the biggest consumers of coffee among the exporting markets (Table 2.6). The table shows that, beyond the world’s biggest producer and exporter of coffee, Brazil is also the second biggest consumer country, just behind the United States. Indonesia, Ethiopia, and the Philippines are also big consumers of the beans. It is interesting to observe that neither China nor India appear among the top consumers, even though these two countries have the biggest populations worldwide totalling 2.7 billion people or 38% of the global population (UN, 2017). India is the 14th biggest consumer country of coffee worldwide, and China is estimated to be the 16th largest consumer. This behavior is caused by cultural reasons, basically their preference for tea as a hot drink, in substitution for coffee, which leads to lower levels of consumption. ICO (2015) stated that, besides a lack of reliable statistics, in recent years it’s estimated that the consumption of coffee in China has been growing in double-digit rates, consuming more coffee than Australia, which shows signs of slowing. As the economy of China continues to grow, the pool of consumers with disposable income expands, and demand for coffee rises accordingly.The presence of coffee shops is no longer a novelty but rather an essential feature of the urban landscape. Although still predominantly a tea-drinking nation, China is rapidly developing a taste for coffee, which could have significant implications for the world market. The main ideas presented in this section were the growing consumption of coffee worldwide, both in gross and per capita terms; the economies with the most consumers are, in this order, the European Union, United States, Brazil, Japan, Indonesia, and Russia; and the dynamics of the market’s demand, including importer’s re-exports.

40

Years Country

2000/01

2005/06

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

Brazil Indonesia Ethiopia Philippines Mexico Vietnam India Colombia Venezuela Thailand Top 15 Total of exporting countries Worlda

13.200 1.676 2.014 820 1.305 402 1.000 1.400 1.184 500 23.501 27.236

15.540 2.500 2.609 1.040 1.725 800 1.337 1.400 1.457 500 28.908 33.454

19.132 3.333 3.383 2.125 2.354 1.583 1.800 1.308 1.650 775 37.443 42.352

19.720 3.667 3.383 2.175 2.354 1.650 1.917 1.439 1.650 1.100 39.055 43.952

20.330 3.900 3.400 2.325 2.354 1.825 2.000 1.441 1.650 1.130 40.355 45.315

20.085 4.167 3.650 2.550 2.354 2.000 2.100 1.469 1.650 1.200 41.225 46.109

20.333 4.333 3.675 2.800 2.354 2.200 2.200 1.505 1.650 1.250 42.300 47.245

20.500 4.500 3.700 3.000 2.354 2.300 2.250 1.672 1.650 1.300 43.226 48.244

20.500 4.600 3.700 3.000 2.354 2.300 2.250 1.700 1.650 1.300 43.354 48.298

94.784

107.137

118.892

120.390

122.225

125.565

127.905

129.329

132.602

a

 The world’s consumption is considered as total consumption of importing countries plus total consumption of exporting countries. Data from the International Coffee Organization (ICO, 2017).

Coffee consumption and industry strategies in Brazil

Table 2.6  Domestic consumption of exporting countries (in thousands of 60-kg bags)



Perspectives of global coffee demand

41

We can see a clear correlation between the demographic and income variables presented and coffee consumption worldwide, so given the forecasts available until 2022, it’s expected that the quantity of coffee demanded globally will continue to grow until this year, but estimating this rise is not part of the scope of this chapter.

2.4  Coffee prices, coffee differentiation, and marketing approach This section will focus on the relationship between supply and demand for coffee worldwide. Therefore, three main aspects will be studied: coffee prices, coffee differentiation, and marketing perspective.

2.4.1  Coffee prices Although this chapter will not use prices to produce forecasts for the future, it’s important to understand the relationship between prices and consumption to understand both the evolution and the current scenario of global coffee demand. The following chart shows the evolution of nominal prices of the Arabica and Robusta coffee beans in US cents per pound (Fig. 2.12). It’s possible to observe that coffee prices had their lowest point in the series between 2001 and 2002, at US 22 cents/pound of Robusta and US 52 cents/ pound of Arabica due to the global coffee crisis when, although the coffee business was booming in consuming developed countries (see Table 2.7), Coffee Arabica and Robusta monthly prices (20 years) 300,00

Prices (US cents/lb)

250,00 200,00 150,00 100,00

Nov/16

Mai/14 Mar/15 Jan/16

Nov/11 Set/12 Jul/13

Mai/09 Mar/10 Jan/11

Set/07 Jul/08

Jan/06 Nov/06

Set/02 Jul/03 Mai/04 Mar/05

Jan/01

Nov/01

Jul/98 Mai/99 Mar/00

0,00

Set/97

50,00

Time Coffee, Robusta price

Coffee, other mild Arabicas price

Fig. 2.12  Coffee Arabica and Robusta monthly prices in the last 20 years (1 lb = 0.454 kg). (Source: Data from Index Mundi and World Bank.)

42

Country

United Kingdoma Maltaa Italy Luxembourg Russian Federation Latvia Japan Czech Republic Lithuania Slovakia Austria Norway Turkey Cyprus Germany Denmark

Years 1990

1995

2000

2005

2010

2011

2012

2013

2014

2015

2016

10.55

13.79

12.91

14.74

15.7

19.02

19.2

18.92

20.56

18.91

16.29

5.31

7.8 5.7

8.4 4.44 4.23

10.36 6.13 6.04

13.1 7.34 7.08 7.03

14.81 8.52 8.22 7.75

14.15 8.49 7.89 8.62

14.99 8.99 8.21 8.69

14.93 8.85 7.93 7.65

12.8 7.48 6.91 6.43

13.33 7.45 7.25 6.65

10.26

3.88 17.72

3.97 12.92 3.36

3.93 8.22 3.79

6.1 6.39 5.01

8.67 7.35 6.58

8.08 7.57 7.13

7.52 6.05 7

6.89 5.68 6.61

6.57 5.6 5.75

6.46 6.21 6.14

3.62 2.44 3.05 2.98 3.19 3.58 2.83 3.45

3.78 2.79 3.77 4.11 3.76 5.28 4.06 4.28

5.37 4.84 6.69 4.48 5.89 5.21 4.76 5.44

7.81 6.06 8.32 5.78 6.31 6.06 5.1 6.92

7.09 6.71 8.38 5.48 7.47 6.36 4.74 6.72

6.6 6.82 8.62 5.05 7.35 6.47 5.65 6.36

6.55 6.67 8.63 7.5 6.45 6.48 5.72 6.43

6.06 5.6 7.44 5.81 5.73 5.3 5.18 5.85

6.08 5.74 5.64 5.56 5.37 5.3 5.05 4.94

4.9 3.31 2.83 3.99 3.81

5.18 4.54 4.68 4.26 5.02 5.57

Coffee consumption and industry strategies in Brazil

Table 2.7  Retail prices of roasted coffee in selected importing countries (in US $/lb)



a

4.12 2.97

6.24 4.04 5.04

3.95 3.45 2.72 3.56

3.62 2.98 3.43 3.73

4.45 3.97 4.85 3.69 5.67 4.88 4.03 6.32 5.97

2.69 2.29 3.03 2.15 2.81 3.22 2.81 4.09 4.15

3.27 3.03 4.83 4.53

4.88 3.26 3.71 3.72 2.92 3.22 2.84 2.99 2.75 2.56 4.1 3.75 5.86 4.7

  Soluble coffee. Data from International Coffee Organization (ICO, 2017) (1 lb = 0.454 kg).

4.93 3.91 5.02 4.31 3.62 3.92 3.69 3.99 3.62 3.64 5.18 4.57 6.59 5.77

5.35 5.19 6.08 4.8 4.16 4.42 5.36 5.58 4.13 4.14 6.48 5.98

5.69 5.68 6.07 4.48 3.44 4.47 4.8 5.2 3.92 4.16 6.2 5.83

5.79 5.45 5.42 4.78 3.59 4.53 4.29 4.34 3.92 3.92 6.24 5.74

5.73 4.99 4.86 4.62 3.75 4.44 4.31 4.11 3.77 3.85

4.99 4.72 4.16 4.03 3.45 3.82 3.9 3.82 3.11 3.28

5.71

5.38

6.96

6.93

6.83

6.8

6

4.93 4.39 4.31 3.96 3.79 3.73 3.67 3.48 3.26 3.17

5.85 Perspectives of global coffee demand

Portugal United States Hungary Slovenia Bulgaria Spain Finland Sweden France Poland Belgium Netherlands Switzerland Average price

43

44

Coffee consumption and industry strategies in Brazil

large supplies of c­offee and subsequently low prices caused an immense hardship to countries where coffee is a key economic activity, as well as to the farmers who produce it.b On the other hand, during the first months of 2011, Arabica coffee especially saw its prices up to almost US $3 a pound due to a supply shock because of very poor harvests and a demand shock. We can see that the international crisis of 2008 also made coffee prices fall but not as much as seen in 2001.The point here is to observe that when you have an excess of production, that is, the quantity produced overcomes the quantity demanded, the prices tend to fall. And, for that reason, it is important for agents of the coffee value chain to analyze and develop projections on how the demand will be in the future. The next table shows the retail prices of roasted coffee in selected imported countries. We can see that, differently from commodity prices, retail prices are less susceptible to price variations. Take, for example, the United States and Western European countries (the world’s largest consumers of coffee). In 26 years, their retail prices did not have strong volatility like the coffee bean prices in the international market. One of the possible reasons explaining this behavior could be due to the fact that the industry and retailers develop more studies forecasting demand than producers, so they more efficiently avoid having their products so abundant in the market if there is not enough demand for purchasing them. When processers expect that there will be a reduction in quantity demand, they reduce production. But for agricultural producers, it’s harder to operate like this, because they don’t grow coffee beans in machines, but in Coffea plants. Having a long-term perspective is important for them, and this is why this chapter focuses on this issue.

2.4.2  Coffee differentiation As Lewin et  al. (2004) mentioned in their paper, adding value to coffee production was necessary at that time and is still important today.Therefore, this section will analyze how the “adding value” process that connects supply and demand works, mainly through a term from marketing and economics called “product differentiation.” One of the first articles about product differentiation was by Smith (1956), which studied product differentiation and market segmentation b

The Global Coffee Crisis: A Threat to Sustainable Development—International Coffee Organization (2002). Available from: http://www.ico.org/documents/globalcrisise.pdf. [Accessed 01 December 2017].



Perspectives of global coffee demand

45

as alternative marketing strategies. Rosen (1974) introduced the Hedonic Prices approach to product differentiation, that is, a model that identifies price factors determined not only by internal characteristics of the good but also how external factors affect it. Green and Srinivasan (1978) summarized the development of the methodology of Conjoint Analysis, relating it to relevant topics mainly in ­psychology and economics, and studied the reliability and validity testing of this methodology. They also discussed its applications to the evaluation of products and services in both the private and public sectors. Krugman (1979, 1980) analyzed how product differentiation affects International Trade, as well as monopolistic competition and increasing returns of scale. The main concept for this research will be the one proposed by Nicholson and Snyder (2011), who identified the impacts of differentiated products for the microeconomic theory: The possibility of product differentiation introduces some fuzziness into what we mean by the market for a good. With identical products, demanders were assumed to be indifferent about which firm’s output they bought; hence they shop at the ­lowest-price firm, leading to the law of one price. The law of one price no longer holds if demanders strictly prefer one supplier to another at equal prices […] With differentiated products, we will take the market to be a group of closely related products that are more substitutable among each other (as measured by crossprice elasticities) than with goods outside the group.

That is, when a company differentiates its product from the competitors’ through new attributes, the competition will be weaker, making room for price increases with a lower demand reduction in comparison to the scenario of perfect competition. The differentiated coffee market requires that the agents of the supply chain distinguish their products by origin, processes, or other attributes, such as superior taste or fewer defects. These can be traded through more profitable channels than the usual industrial chains of undifferentiated commodity channels and include geographic indications of origin, gourmet and specialty coffee, organic, fair trade and other social appeals, ecofriendly, shade grown, and other certified coffees (Lewin et al., 2004). Raynolds et al. (2007) compiled the governance models, environmental and social patterns, and market positions of the five main environmental and social certifications from third-party initiatives for the coffee markets: Organic, Fair Trade, Rainforest Alliance, Utz Kapeh, and Shade/Bird

46

Coffee consumption and industry strategies in Brazil

Friendly. They found that the certifications that attempt to increase ecological and social expectations are expected to be increasingly challenged by those that seek to sustain current standards. They also concluded that the susceptibility of these initiatives to market pressures point to the need for private regulation to work together with public regulation in enhancing both social and environmental sustainability.

2.4.3  Marketing approach Beyond the demographic and income effects, another point is crucial to understand the behavior of the demand: the marketing aspect, that is, the connection between the supply chain and consumers. In the early 2000s, Nestlé started to introduce its new Nespresso machines worldwide,c some years before Starbucks had started its globalization process by opening stores in Asia and Europe.d These coffee processers and retailers, as well as the so-called “third wave of coffee,” characterized by an increasing coffee quality, a more direct trade, higher emphasis on sustainability, lighter roast profiles, innovative brew methods, a focus on customer service (Hartmann, 2011), and also indication of origin (Quintão and Brito, 2016), changed the way consumers see and drink coffee, adding perceived value to the drink, as mentioned by Lewin et al. (2004), causing an increase in the per capita consumption worldwide along the 21st century. We are maybe heading to a “fourth wave of coffee” based on high-tech innovations of the 21st century like e-commerce and drone deliveries. This new wave can change the way people purchase and consume coffee, reducing the importance of the point of sale and increasing the competition for online advertising.These subjects will be approached more deeply along the next chapters.

2.5  Final considerations It’s crucial for agents of the coffee value chain to understand the consumers they are and will be selling to. The objectives of this chapter were to analyze the perspectives for the global demand for coffee in the present and the future, and to reach them, an extensive literature review, along with demographic and income data, were used to provide a better understanding c

For further information, see https://www.nestle-nespresso.com/about-us/our-history#. For further information, see https://www.starbucks.com/about-us/company-information/ starbucks-company-timeline.

d



Perspectives of global coffee demand

47

of the available information in such a way that all agents of the chain can organize themselves to be more competitive in the near future keeping in mind the global market that they will be inserted into. Therefore, to reach this objective, the main points studied were, first, how the coffee supply chain is organized globally and who the main producers and exporters are. Then, the next step was to aggregate relevant data about the global demographic and income evolution, and current and future ­scenarios and understand how they relate to the demand for coffee. The main conclusions at this point were that the world’s population and income per capita are rising, which seem to have a high correlation with the consumption of coffee. Moreover, the world is becoming older too, which is also positive for coffee suppliers. In the last 26 years, there was a 67.9% growth in global coffee consumption, which was not enough to elevate commodity prices given production expansion. This is why product differentiation is so important, so a marketing point of view as extracted from the literature was also approached at this point, highlighting the main attributes that coffee producers, processers, and retailers could use to overcome the pricing issue, mainly based on marketing strategies and technological innovations. Thus, the last message of this chapter is to highlight the importance of the investments for the coffee value chain to develop not only high-end technologies for production and distribution but also a better understanding of the consumers they are selling to, so that new ways of coffee differentiation can provide a growing value to the entire chain. The suggestion for future research is to study global consumption and also the per capita consumption by country and region to understand exactly which countries have the biggest potential demand, how to penetrate these markets, and also the development of more deepened pricing and consumption projections.

Appendix The main data sources for this chapter were the United Nations’ (UN) World Population Prospects, the International Monetary Fund (IMF), the World Bank national accounts data, and OECD National Accounts data files. The available literature and data until 2017, including coffee consumption, its global trade, prices to growers, and retail prices, were extracted from the International Coffee Organization (ICO) and Simoes and Hidalgo (2011): Observatory of Economic Complexity.

48

Coffee consumption and industry strategies in Brazil

Because the ICO separates their data between importing and exporting countries, with different time standards (the consumption of importing countries are available for the calendar years, whereas for the exporting countries, the data is distributed in crop years), the methodology established to estimate the Global Consumption at the year t(CGt ) will be to sum the domestic consumption for the year t at the importing countries (Ctm) and the domestic consumption for the crop year t; t + 1 at the exporting ones (Ct; t + 1x). That is: CtG = Ctm + Ctx;t +1

(2.1)

This method may cause distortions in relation to the reality, but it ­efficiently approximates the yearly consumption worldwide.

References Arruda, A.C., et al., 2009. Justificativas e motivações do consumo e não consumo de café. Cienc. Tecnol. Aliment. 29 (4), 754–763. Bacci, L.A., 2007. Combinação de Métodos de Séries Temporais Para Previsão da Demanda de Café no Brasil. Universidade Federal de Itajubá, Itajubá. Bonnet, C.,Villas-Boas, S.B., 2016.An analysis of asymmetric consumer price responses and asymmetric cost pass-through in the French coffee market. Eur. Rev. Agric. Econ. 43 (5), 781–804. Durevall, D., 2007. Demand for coffee in Sweden: the role of prices, preferences and market power. Food Policy 32 (5), 566–584. Goddard, E., 1997. Weak separability in coffee demand systems. Eur. Rev. Agric. Econ. 24 (1), 133–144. Green, P.E., Srinivasan,V., 1978. Conjoint analysis in consumer research: issues and outlook. J. Consum. Res. 5 (2), 103–123. Hartmann, J., 2011. Starbucks and the third wave. In: Coffee: Grounds for Debate, pp. 166–183. International Coffee Organization (ICO), Historical Data on the Global Coffee Trade. Available from: http://www.ico.org/new_historical.asp?section=Statistics. (Accessed 29 November 2017). International Coffee Organization (ICO), 2015.A Report on Coffee in China.Available from: http://www.ico.org/documents/cy2014-15/icc-115-7e-study-china.pdf. (Accessed 6 December 2017). Krugman, P., 1979. Increasing returns, monopolistic competition, and international trade. J. Int. Econ. 9 (4), 469–479. Krugman, P., 1980. Scale economies, product differentiation, and the pattern of trade. Am. Econ. Rev. 70 (5), 950–959. Lewin, B., Giovannucci, D., Varangis, P., 2004. Coffee Markets: New Paradigms in Global Supply and Demand. World Bank Agriculture and Rural Development Discussion Paper, 3. Macdonald, K., 2007. Globalising justice within coffee supply chains? Fair trade, Starbucks and the transformation of supply chain governance. Third World Q. 28 (4), 793–812. Nicholson, W., Snyder, C., 2011. Microeconomic Theory: Basic Principles and Extensions. Nelson Education. Okunade, A.A., 1992. Functional forms and habit effects in the US demand for coffee. Appl. Econ. 24 (11), 1203–1212. Ormrod, D., 2003. The Rise of Commercial Empires: England and the Netherlands in the Age of Mercantilism, 1650–1770. Cambridge University Press.



Perspectives of global coffee demand

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Pendergrast, M., 2010. Uncommon Grounds:The History of Coffee and How It Transformed our World. Basic Books. Quintão, R.T., Brito, E.P.Z., 2016. Connoisseurship consumption and market evolution: an institutional theory perspective on the growth of specialty coffee consumption in the USA. Rev. Bras. Market. 15 (1), 1–15. Raynolds, L.T., Murray, D., Heller, A., 2007. Regulating sustainability in the coffee sector: a comparative analysis of third-party environmental and social certification initiatives. Agric. Hum.Values 24 (2), 147–163. Rosen, S., 1974. Hedonic prices and implicit markets: product differentiation in pure competition. J. Polit. Econ. 82 (1), 34–55. Silva, O.M., Leite, C.A.M., Pinto, W.J., 2000. A Demanda de Café em Grão à Nível Mundial: O Que os Dados Mostram. Mimeografado. In: Programa Nacional de Pesquisa e Desenvolvimento do Café. Mimeografado. Simoes, A.J.G., Hidalgo, C.A., 2011. The economic complexity observatory: an analytical tool for understanding the dynamics of economic development. In: Workshops at the Twenty-Fifth AAAI Conference on Artificial Intelligence. Skidmore, T.E., 2009. Brazil: Five Centuries of Change. OUP Catalogue. Smith,W.R., 1956. Product differentiation and market segmentation as alternative marketing strategies. J. Mark. 21 (1), 3–8. Tamura, R., 1991. Income convergence in an endogeneous growth model. J. Polit. Econ. 99 (3), 522–540. United Nations, Department of Economic and Social Affairs, Population Division, 2017. World Population Prospects: The 2017 Revision.

Further reading Grégoire, G., 2014. Multiple linear regression. Eur. Astron. Soc. Publ. Ser. 66, 45–72. Heal, G., 1980. Spatial structure in the retail trade: a study in product differentiation with increasing returns. Bell J. Econ., 11 (2), 565–583. International Monetary Fund, 2017. World Economic Outlook. International Monetary Fund. Moreira, D.M., 2001. Administração da Produção e Operações. Pioneira Thomson Learning, São Paulo. Newbold, P., 1994. Statistics for Business & Economics. Printice Hall. Inc, New Jersey. Quintão, R.T., Brito, E.P.Z., Belk, R.L.W., 2017. Comunidade de consumo de apreciação e Sua Dinâmica. Rev. Bras. Gestão Negóc. 19 (63), 48–64. United Nations, 2016. Statistical Division (Comtrade). United Nations. World Bank. World Development Indicators. [Accessed 08 October 2017]. World Bank; International Coffee Organization; Thomson Reuters Datastream. Global Economic Monitor Commodities. World Bank, 2017. [Accessed 08 October 2017].

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CHAPTER 3

Brazilian specialty coffee scenario Bruna De Ribeiro Costa Costa Café, Sao Paulo, Brazil

3.1  A short definition of specialty coffee Oftentimes, the definition of specialty coffee is very broad or abstract, with most people thinking that it only means a more gourmet or superior coffee. However, there are technical ways to define and classify specialty coffee.The one most often adopted today is the Specialty Coffee Association’s (SCA’s) classification, which states that these coffee lots should score 80 points or more on a 100-point scale that evaluates coffee by fragrance, aroma, flavor, aftertaste, acidity, body, uniformity, balance, clean cup, sweetness, and overall score. This evaluation is made via a cupping, technical term for coffee tasting, which is officially done by a Q Grader (Arabica Quality Grader) certified by the Coffee Quality Institute (CQI), who evaluates coffee defects from green coffee samples after roasting until all the flavor notes in a cup are assessed. To a less technical extent, these coffees are usually also grown in special and ideal climates and are distinctive because of their full cup taste with little or no defects. SCA also refers to specialty coffee as a joint force of many people working toward a high-quality product, who have made it their life’s work to continually improve quality. This is not the work of only one person in the lifecycle of a coffee bean; “specialty” can only occur when all of those involved in the coffee value chain work in harmony and maintain focus on standards and excellence from the beginning until the end of coffee production. The professionals involved in coffee quality are producers, green coffee buyers, roasters, baristas, and finally consumers (Fig. 3.1). On the producers’ side, it is very important that coffee trees are carefully cultivated and harvested at the right time; producers also must apply correct processing and storage practices. Green coffee buyers should have a network of producers from whom they can select the best lots, evaluate it, sometimes do part of the processing, and destine it to the roasters who, after the adequate roasting profile, will count upon baristas to brew it in the perfect way so that the final consumer can have the perfect cup of coffee. As many Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00003-2

© 2020 Elsevier Inc. All rights reserved.

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Coffee consumption and industry strategies in Brazil

Production

Processing

Green buyers

Cooperatives

Exporter

Smallholders: 70% production

Roasters

Baristas/retail

Final consumers

Fig. 3.1  The coffee supply chain

people say until it became a cliché, high-quality coffee is the result of the effort from everyone in the supply chain, from seed to cup. Some other characteristics observed in the specialty coffee scene are the predominant use of Arabica beans, preferably of single origins, with a light to medium and recent roast, prepared in front of the consumer by different brewing methods and usually by small businesses (roasters). That is one way to define specialty coffee: as a truly craft product with a superior final beverage. Some consumers also consider capsules or sustainably certified coffees as specialty coffees (Fig. 3.2). More recently, a Euromonitor survey commissioned by the Brazilian Specialty Coffee Association (BSCA) showed that the consumption of specialty coffee in Brazil had an average annual growth of 18.1% in the period 2012–16 (Euromonitor, 2017). Retailers sold R$3.2 billion (US $1 billion) worth of specialty coffee, which accounts for 5.1% of total coffee sales in

Brazilian specialty coffee scenario

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Fig. 3.2  World coffee production

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Coffee consumption and industry strategies in Brazil

the country. The study projects a consumption growth of 1.7 million bags of specialty coffees until 2021. Capsules will have a great influence on this increase, providing they respond to the challenge of becoming environmentally responsible with biodegradable or recyclable versions.

3.2  Brazil’s situation in the global specialty coffee scene It is impossible to speak about Brazilian coffee without considering Brazilian history and culture. Before becoming the biggest coffee exporter in the world (Fig. 3.3), Brazil had a very wavering history concerning the commodity. The grain arrived in the country in 1721 (Oliveira, 2012), and the development of the coffee market is extremely interconnected with the

Main exporters by country in 2015/16

(Source: ICO)

Country

60 kg/bags

Metric tons

Brazil

43,200,000

2,592,000

Vietnam

27,500,000

1,650,000

Colombia

13,500,000

810,000

Indonesia

11,000,000

660,000

Ethiopia

6,400,000

384,000

Honduras

5,800,000

348,000

India

5,800,000

348,000

Uganda

4,800,000

288,000

Mexico

3,900,000

234,000

Guatemala

3,400,000

204,000

Peru

3,200,000

192,000

Nicaragua

2,200,000

132,000

China

1,947,000

116,820

Ivory Coast

1,800,000

108,000

Costa Rica

1,492,000

89,520

Kenya

833,000

49,980

Papua New Guinea

800,000

48,000

Tanzania

800,000

48,000

El Salvador

762,000

45,720

Ecuador

700,000

42,000

Fig. 3.3  World coffee production



Brazilian specialty coffee scenario

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country’s path due to its great commercial value and the way it was nationally explored. In Brazil, coffee crops started in the state of Pará. From there, they spread throughout the country, starting to be grown in other states. Joao Alberto Castelo Branco, a judge who was transferred from Pará to Rio de Janeiro, brought some seeds with him and initiated the cultivation in that state, where the main area of cultivation was the “Baixada Fluminense.” According to Romero (1997), it was in Rio de Janeiro that the plant began its remarkable expansion to other regions of the country; therefore, many forests were cleared to start coffee plantations. An example of this is the area where we now find the famous houses of the Tijuca Forest, which had its native forest devastated to make way for large coffee plantations.The current Tijuca neighborhood was known at the time as the “coffee area.” Later, around 1860, the commodity was eradicated from that region. With a large drought in 1844, the minister Almeida Torres proposed the expropriation of the planted areas to save water resources in the city. Thus, reforestation was undertaken, and with it came the Tijuca Forest, which currently makes up the landscape of Rio de Janeiro city. Around the 1820s, coffee was taken from Rio to São Paulo, Minas Gerais, Paraná, and other states. By the end of the 1840s, Brazil had become the biggest coffee-producing country in the world. In the year 1953 after a huge frost in Paraná, which significantly increased international coffee prices, the main producing states became Minas Gerais and São Paulo for Arabica and Espírito Santo for Robusta (Conilon) due to favorable climate and soil conditions. In the country, coffee was and continues to be a major drive for socioeconomic development in many producing regions, generating income and employment in rural areas. Since 1969, the State of Minas Gerais has consolidated its participation in the national context; the state’s average annual coffee production increased from 2.3 million 60-kg bags in the period of 1968–72 to currently 25 million (2017); such production represents 55% of national production. In general, Brazil is the biggest coffee producer and exporter internationally; in its 2017 crop, the country produced more than 45 million 60-kg bags of coffee with a planted area of approximately 2 million ha (Conab, 2017). Production and demand for specialty coffee gained momentum in the last 15 years. Since then, production has increased in Brazil, and more producers are interested in getting involved with the specialty movement.

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According to the BSCA, up to 8 million 60-kg bags of specialty coffee were harvested in the 2016 crop in Brazil, which represented 35.5% of the world’s market demand for the niche and 16% of Brazilian total production. According to the International Coffee Organization (ICO), the coffee market grows around 2% a year internationally, whereas the specialty coffee sector is advancing between 10% and 15% annually, totalizing 22.5 60-kg bags in demand for 2016.

3.2.1  World’s biggest producer and challenges in reputation As mentioned earlier, Brazil is the world’s biggest coffee producer, responsible for about a third of coffee production globally and also the biggest exporter. In 2017, Brazilian production was estimated at 45 million 60-kg bags. As such, the country’s production and market behavior have a huge influence on international market prices, which means a drought in Brazil can lead to price increases for coffee all over the world. This has led many coffee enthusiasts to believe that Brazil’s emphasis on quantity makes producers forget about quality, which makes it more difficult for Brazilian producers to market their product. But certainly Brazil is one of the most developed coffee-producing countries in terms of research and processing techniques. Brazil alone invests more in coffee research than all other producing countries put together, but unfortunately the country’s reputation as a producer of low-quality coffees goes back to the 19th century when several factors contributed to this image, some of which are still present today. In the 1840s, Brazil was already the largest coffee exporter in the world, and by the end of the century its share in global exports reached 80%. The lead position was undoubtedly a great achievement, but this was done through the sale of inferior quality product. According to historian Mark Pendergrast, coffees were classified only as Brazils and Milds; the problem was that Brazils meant bitter coffees, as opposed to the Milds or smooth coffees with superior quality (Pendergrast, 2010). At the port, it was the famous defective Café Rio. One can imagine that buyers depreciated the Brazilian product simply by its abundance. However, the Brazilian grains were harvested by means of the derriça, which meant that all qualities were mixed together, whereas in Central America, they already used selective harvesting. At the beginning of the 20th century, Brazil continued to produce coffee in increasing quantities, and policies to stabilize prices and incentivize overproduction were implemented. Meanwhile, other producing countries



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were specializing in washed coffees, although the technology took a while to be completely adopted. According to Professor Julie Charlip, only 40% of Costa Rica’s production was washed in the 1920s (Charlip 2003). Beginning in the 1960s, Brazilian research institutions provided new and more productive varieties to coffee growers. There were also changes in the implantation and management of crops that provided greater production per area. However, productive crops require a lot of care, and most coffee farmers were not prepared for this, as explained by Silva and Cortez (1998). The result was an even bigger loss in quality. Finally, in the early 1990s, the end of the International Coffee Agreements knocked prices down. It was precisely at that critical moment that things started to change. The Italian roaster illycaffè, which sells a blend with a large percentage of Brazilian coffee, noticed a decrease in quality. Therefore, to encourage improvements in production, they created a quality contest that exists until today. Since then, national research organizations invested in numerous experiments to unravel the secrets of coffee quality. New practices and technologies were created and disseminated in the producing regions. The production of Cereja Descascado, the name for Brazilian semiwashed or pulped natural coffees, increased and valorization of natural coffees started. The quality contests multiplied across the country and, currently, exports of differentiated coffees are growing continuously. Another highlight of Brazilian involvement with quality contests came years later with the partnership between the Specialty Coffee Association of America (SCAA) and the BSCA to initiate the Cup of Excellence (COE) competition that only takes into account coffees scoring above 86/87 points in the SCA system. The COE competition selects these coffees and sells them at an international auction to roasters and importers all around the world. The competition started to be managed by the Alliance for Coffee Excellence (ACE) (2017) who then started the program in several other countries. Brazil began to gain prominence in the specialty coffee scene and, in 2005, its champion coffee, which was produced by Fazenda Sertão from Dona Nazareth Pereira in Carmo de Minas (MG), was considered the most expensive in the world at the time, with a bid given by Café Artigiano, from Vancouver, Canada, with prices reaching the equivalent of R$14,900 per 60-kg bag, compared to the average of R$450 that a commodity per 60-kg bag is worth today.

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Coffee consumption and industry strategies in Brazil

More recently, Brazil broke a record again; the coffee produced by Fazenda Bom Jardim in the municipality of Patrocínio, Minas Gerais state, that won the 2017 Cup of Excellence contest for the Pulped Natural category, receiving the highest value ever paid for a coffee lot in its auctions around the world: R$56,457 (US $17,222) per 60-kg bag. According to Revista Cafeicultura (2006), all coffees offered in the auction were purchased by companies from 12 countries: Germany, Saudi Arabia, Australia, Bulgaria, Canada, South Korea, United States, France, England, Japan, New Zealand, and Taiwan, which generated total sales of R$1,151,092 (US $357,459). The average bid was also a record in Brazil at US $12.75 per pound, which is equivalent to R$5431 (US $1686) per 60-kg bag.The contest was organized by the BSCA in partnership with the Brazilian Trade and Investment Promo on Agency (Apex-Brasil) and the Alliance for Coffee Excellence (ACE). The reward came in the form of recognition. After almost three centuries of coffee production and more than 150 years of world leadership, Brazilian coffees are associated with quality, and the country is the main supplier of large international roasters known to require specific standards who invest in microlots.

3.3  Different producing regions and diverse quality profiles Brazil has 14 major coffee-producing regions spread over seven states (Fig. 3.4); therefore, it is possible to find a lot of diversity in the country’s profiles due to its size, different characteristics in the producing regions, and high level of research to experiment with varietals and processing methods. The main producing states in Brazil are Minas Gerais (Sul de Minas, Cerrado Mineiro, Chapada de Minas, Matas de Minas), São Paulo (Mogiana, Centro-Oeste), Espírito Santo (Montanhas do Espírito Santo, Conilon Capixaba), Bahia (Planalto da Bahia, Cerrado da Bahia, and Atlantico Baiano), Paraná (Norte Pionerio do Paraná), Rondonia, and Rio de Janeiro. In these coffee-producing areas, there is a wide range of traditional and experimental varieties being cultivated, mainly: Bourbon, Mundo Novo, Icatú, Catuaí, Iapar, Catucaí, and more. Another characteristic that brings diversity to Brazil are farm sizes, which can range from small family plantations of less than 10 ha to big estates of more than 2000 ha. Most Brazilian coffees are natural (unwashed) or pulped natural (semiwashed). A natural processing method means that, after the coffee cherries



Brazilian specialty coffee scenario

59

Fig. 3.4  Brazilian coffee producing regions

are picked, they are dried without removing the skin or mucilage, and semiwashed means that the skin and some mucilage is removed before drying. Usually natural processing is difficult to do without damaging the beans, but it can add a substantial body, sweetness, smoothness, and complexity to the coffee’s profile, and Brazil’s climate, with scarce rainfall and long periods

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Coffee consumption and industry strategies in Brazil

of sunshine, makes the country perfect for natural processing. Semiwashed is a more expensive producing method but can be compensated by the fact that it avoids defects and assures a higher quality coffee.

3.3.1  Specific characteristics 3.3.1.1  Minas Gerais The largest coffee-growing state in Brazil, Minas Gerais accounts for more than 55% of the country’s production. It is also the major source of Brazilian specialty coffee. The producing regions within Minas Gerais are: Sul de Minas (also known as South of Minas): The region has a high altitude, averaging 950 m, and a mild annual temperature of around 22°C. It is the biggest producing region in Brazil, with mostly small farms ranging from 10 to 100 ha, although that can vary greatly. The main varietals are Catuaí, Mundo Novo, Icatu, Obatã, and Catuaí Rubi. As for the flavor profile, coffee is typically full-bodied with slightly citric notes and fruity/floral aromas. Cerrado Mineiro: Brazil’s first coffee-producing region to win Designation of Origin status, giving it similar statue to famous wine-­ producing regions. It’s a large region, comprised of 55 municipalities located between the Alto Paranaiba, Triangulo Mineiro, and the northwest of Minas Gerais. Its farms range from medium-sized (2–300 ha) to large estates. With an altitude of 800–1300 m and well-defined seasons (humid summer and mild to dry winter), this region is well-suited to the production of specialty coffees; it is also known for using irrigation systems. Most popular varieties are Mundo Novo and Catuaí; as for cupping profiles, Cerrado de Minas coffees tend to have medium acidity and body, high sweetness, and chocolate and caramel notes. Chapada de Minas: The region has highland regions interspersed with valleys, making it suitable for mechanized production. Catuaí and Mundo Novo are cultivated here. Matas de Minas: Situated in the Atlantic Forest, Matas de Minas has an undulating landscape and is characterized by a warm and humid climate; 80% of its producing farms are smaller than 20 ha. It’s known for its increasing production of specialty coffee, which is typically sweet with citric, caramel, or chocolate notes. Catuaí and Mundo Novo are farmed here. 3.3.1.2  São Paulo São Paulo is one of Brazil’s historical coffee-growing states, because part of its economic history was highly influenced by the commodity. It’s also home to the Port of Santos, the main coffee exporting port.



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Its main producing regions are: Mogiana: The region has favorable altitudes (900–1100 m), mild temperatures (averaging 20°C), and uneven terrain producing good-quality coffee, with very sweet and balanced cupping profiles. Most popular varieties are Mundo Novo and Catuaí. Centro-Oeste de São Paulo: This hilly region is comprised of the cities Marilia, Garça, Ourinhos, and Avaré. Like Mogiana, the terrain is uneven. Most of the farms are small to medium-sized. 3.3.1.3  Espírito Santo Espírito Santo is Brazil’s second biggest coffee-producing state and its largest producer of Robusta (Conillon). Also, nowadays Espírito Santo is increasing its fame for very complex specialty-grade production in very small farms. The producing regions within Espírito Santo are: Montanhas do Espírito Santo: This highland area has mild temperatures and altitudes varying between 700 and 1300 m, allowing it to produce specialty-grade coffees.The region’s known for its high acidity and fruitiness, and the main cultivated varieties are Mundo Novo and Catuaí. Conilon Capixaba: Conilon, a Brazilian Robusta, is grown here, usually on small properties and at low altitudes. 3.3.1.4 Paraná Paraná was a very traditional coffee-producing region in Brazil, but numbers decreased a lot after a big frost in the 1950s.The state exclusively grows Arabica in Norte Pioneiro do Paraná. Coffee plantations are dense and have high levels of productivity. 3.3.1.5 Bahia Located in the northeast of Brazil, Bahia coffee cultivation only began in the 1970s.Yet it’s already gained fame for its quality beans and use of technology. About 75% of its crops are Arabica. There are two producing regions within Bahia: Cerrado and Planalto da Bahia: These are the most high-tech ­coffee-producing regions in Brazil, where full mechanization is common. This is made possible by the uniform ripening and rainy winters. This results in sweet coffees, usually Catuaí, with low acidity and a full body. The region has recently been known for producing high-quality coffees, especially in the subregion of Chapada Diamantina at Planalto da Bahia. Atlantico Baiano: Like Conilon Capixaba, this region produces Conilon (Robusta) on small properties at low altitudes.

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Coffee consumption and industry strategies in Brazil

3.3.1.6 Rondonia This region is exclusively dedicated to growing Conilon (Robusta) coffee. It has a tropical climate with high temperatures and low altitudes.

3.4  The future of specialty coffee: Technology and quality innovations 3.4.1  Increased productivity and decreased planted area Over time, the Brazilian coffee sector invested in research and development of new productive techniques and technology, as well as in training farmers about good agricultural practices. According to CeCafé, an example of this evolution is that, in terms of productivity, Brazil has a leading position internationally. In 1960, Brazil had a planted area of 4.9 million ha and productivity of 6.08 60-kg bags per ha, with a total production of 29.8 million bags. Currently, according to CONAB (National Supply Company), the Brazilian territory has a planted area of 2.2 million ha with productivity of 25.6 60-kg bags per ha, indicating a 55% reduction in its producing area, with a fourfold increase in productivity, which resulted in a 66.4% increase in coffee production, estimated at 49.7 million bags for the 2017/18 crop. Furthermore, Brazilian coffee production also contributes to reducing emissions of CO2 by carbon sequestration as the coffee is considered a perennial tree, with an average duration between 20 and 30 years. In comparison to the year 1960, Brazil had 4.3 billion coffee trees. Today, there are 6.7 billion coffee trees. 3.4.1.1  Harvesting and processing innovations Brazil has been a world leader when it comes to coffee harvesting and processing innovations, which can increase sustainability, efficiency, and quality. A dramatic concern for coffee production is currently represented by climate change, which threatens the survival of Coffea arabica cultivation worldwide and imposes modifications of the agronomic practices to prevent this risk. The quality of coffee beans depends on optimized protocols of cultivation, ripe berries collection, and removal of the outer fruit layers by dry or wet processes and moisture reduction. Storage and shipment represent two steps where bean quality needs to be preserved by preventing fungal contamination that may affect the final product and form mycotoxins, mainly ochratoxin A.



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Throughout the years, Brazil has pioneered new technologies, such as the application of starter cultures in fermentation and the exploitation of industrial enzymes in accelerating the process of flavor development in coffee beans. Through careful coffee production methods and controlled fermentation processes, coffee producers may increase their income by assuring high standards of quality and high added value for the coffee experience sector. Also, mechanical harvest started to be widely used in Brazil due to increasing labor costs and lack of interest by youth in rural work, and the country has pioneered new technologies and machineries to increase quality by this process, also providing a faster harvest. 3.4.1.2  Creation of more resistant and higher quality varieties Coffee hybrids have the potential for high-quality cup scores, rust resistance, and greater productivity. Since 1997, with the creation of the Research Consortium, coffee research conducted at IAC (Agronomic Institute of Campinas, 2017) has gained new interest. In the area of biological studies, a major fact from the constitution of the Consortium was the effective participation of researchers from the IAC and Embrapa Units in the Coffee Genome Project, which, in a first phase, developed the sequencing of the coffee genome, resulting in the construction of a database with more than 200,000 DNA sequences. This allowed the identification of more than 30,000 genes responsible for the various physiological mechanisms of coffee growth and development. Currently, research is dedicated to the analysis of the sequences, adding function to them by means of identification of molecular markers and of gene promoters to give continuity to the genetic improvement of the coffee tree. There are expectations that there will be repercussions in reducing production costs, environmental protection, and increasing crop productivity, improving the quality of the beverage, and the competitiveness of the product.

References Agronomic Institute of Campinas (IAC), 2017. Centro de Café. Retrieved from: http:// www.iac.sp.gov.br/areasdepesquisa/cafe/. Alliance for Coffee Excellence (ACE), 2017. History. Retrieved from: https://­ allianceforcoffeeexcellence.org/about-us/. Charlip, J., 2003. Small farmers and coffee in nicaragua. In: Clarence-Smith, W.G., Topik, S. (Eds.), The Global Coffee Economy in Africa, Asia, and Latin America 1500–1989. Cambridge University Press, New York.

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Conab (Companhia Nacional do Abastecimento), 2017. Acompanhamento da Safra Brasileira. Retrieved from: http://www.conab.gov.br/OlalaCMS/uploads/­ arquivos/18_01_08_09_06_29_cafe_dezembro.pdf. Euromonitor, 2017. Tendência do Mercado de Cafés em 2017. Retrieved from: http:// consorciopesquisacafe.com.br/arquivos/consorcio/consumo/tendencias_do_mercado_ cafe_2017.pdf. Oliveira, R.A.L., 2012. Planejamento da Conversão do Café Convencional Para o Orgânico: Um Estudo de Caso. Escola Superior de Agricultura Luiz de Queiroz, Piracicaba. Pendergrast, M., 2010. Uncommon Grounds:The History of Coffee and how it Transformed our World. Basic Books. Revista Cafeicultura, 2006. História do Café—A Importância Sócio—Econômica. Retrieved from: www.revistacafeicultura.com.br/index.php?tipo=ler&mat=5548. Romero, J., 1997. Cafeicultura Prática: Cronologia das Publicações e dos Fatos Relevantes. Editora Agronômica Ceres, São Paulo. Silva, L.S., Cortez, J.G., 1998. A qualidade do café no Brasil: histórico e perspectivas. Cader. Ciênc. Tecnol. 15 (1), 65–91. Jan./Abr.

Further reading Samper, M., 2003. The historical construction of quality and competitiveness: a preliminary discussion of coffee commodity chain. In: Clarence-Smith, W.G., Topik, S. (Eds.), The Global Coffee Economy in Africa, Asia, and Latin America 1500–1989. Cambridge University Press, New York.

CHAPTER 4

The Coffee Quality Program in Brazil Geraldo Magela Jardim Barra

Federal University of Juiz de Fora, Juiz de Fora, Brazil

4.1 Introduction In Brazil, until 1991, the regulation of the coffee market incurred a negotiation schema that was unfavorable to producing quality; also given was the fact that volume was favored to the detriment of value differentiation in terms of quality. Due to that, among other reasons, Brazilian coffee firms’ strategies prioritized the production of quantity. The legacy of this policy was the consolidation of a worldwide negative image of Brazilian coffee. Nonetheless, with deregulation, a scenario emerged that favored value differentiation in terms of quality. The end of the International Coffee Agreement (ICA), the extinction of the Brazilian Coffee Institute, and pricing control over the commodity influenced the creation of a new scenario. There was a latent demand for actions oriented toward the promotion of Brazilian coffee quality, with the emergence of business associations oriented to implementing collaborative strategies. This context prompted a demand for better organization of the agents, with the support of business associations that spread at a rapid rate to meet the interests of their members (Barra and Machado, 2014). Indeed, in late 20th century, the alteration of the Brazilian institutional environment was one of the fomenters of transformations in business associations. Many business associations that once acted as mere interlocutors with the Brazilian government have broadened their scope of performance with proactive management concepts. Back then, these business associations also improved their contribution to the process of coordination among Brazilian coffee agents. In this new competitive scenario, when a coffee grower belongs to a business association, it gains institutional support for generation of new business deals and maintenance of the business. Due to the increasing number of business associations in the Brazilian coffee agribusiness, demand is created by studies describing the role of these organizations. Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00013-5

© 2020 Elsevier Inc. All rights reserved.

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Coffee consumption and industry strategies in Brazil

Traditionally, studies on business associations have treated them as rent-seeking. However, research in developing countries reveals a wide range of activities undertaken by these organizations. These support functions address crucial development issues emphasized in the New Institutional Economy, such as strengthening property rights, facilitating vertical and horizontal coordination, and reducing information costs, among others (Doner and Schneider, 2000). Research on the role of institutions in economic growth began by highlighting the activities of business associations. In addition, literature on economic governance in industrialized countries has demonstrated ways in which various types of networks have helped develop institutional advantages, including the important role of business associations. However, there is still no unsystematic understanding of the conditions in how business associations affect growth in the developing world. In part, this is the result of relative academic neglect of these organizations, at least in the context of developing countries. However, studies have shown ways in which business associations have improved economic performance in developing countries in a wide variety of contexts (Doner and Schneider, 2000). According to New Institutional Economics, it is understood that, in the Brazilian coffee market, relations are based on a high transaction environment, demanding institutional support actions, such as those undertaken by business associations.This type of environment makes it difficult to establish transactions, because it is tough for organizations to become competitive within a system that is not coordinated, and where there is a predominance of opportunistic actions among agents. The certification provided by business associations, for example, is an important investment to operate in the Brazilian coffee market, because it is a quality instrument that reduces transaction costs and reduces the asymmetry of information between the buyer and seller (Barra, 2006). In this scenario, the Brazilian Coffee Industry Association (ABIC), the Cerrado Mineiro Coffee Growers Federation, and the Brazil Specialty Coffee Association (BSCA) are examples of business associations that started to play an important role in the coordination of Brazilian coffee agribusiness. Due to the deregulation and the new attributions of the Brazilian government and business associations, it is pertinent to analyze the role of business associations and the Brazilian government in this new competitive scenario. The coordination of Brazilian coffee agribusiness can be carried out by the collective actions of business associations. It is worth mentioning that,



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in Brazil, there are already previous studies on the business associations in Brazilian coffee agribusiness (Farina et al., 1997; Barra and Machado, 2014). It is assumed that it is important to discuss the role of business associations in the process of coordinating Brazilian coffee agribusiness. In this chapter, the Coffee Quality Program of the ABIC was chosen. The purpose of this chapter is to describe the role of Coffee Quality Program certification in the coordination of Brazilian coffee agribusiness. ABIC is a business association that acts as a provider of collective action to improve the performance of its members. Authors like Williamson (1985) and North (1990) illuminated the theoretical discussion. Although this chapter uses the concepts of new institutional economics, widely published in the literature on the coordination of Brazilian coffee agribusiness, this work tries to point out new important variables for commercialization in the Brazilian coffee market. One position in Institutional Economics, derived by North, is that institutions are the rules of the game under which organizations like firms and business associations try to maximize their gains. They merely seek to maximize the incomes of shareholders or members. The broader rules of the game do all the theoretical work in explaining large outcomes like growth, investment, and entrepreneurship. In the other hand, Coase and Williamson treat firms as institutions, which also constrain the behavior of economic agents. Although they devote almost no attention to business associations, their definitions can accommodate business associations as institutions to be explained (Doner and Schneider, 2000). According to North (1990), if institutions are the rules of the game, organizations and entrepreneurs are the players. The framework of this research views the role of associations in an analogy with football. Whereas institutions are the “rules of the game” and entrepreneurs are the “players,” associations can act as “coaches” and the government can act as a “judge” or “referee.” The focus is to describe the role of business associations in the coordination of agribusiness systems. The government will take care of the rules of the game, encouraging virtuous practices and inhibiting improper conduct in the market. This chapter discusses the representation that business associations have in a new institutional environment. Section  4.2 briefly reviews institutional theories, systematizing a conceptual analysis to be applied to studies of Brazilian coffee agribusiness. In Section  4.3, the historical context of the institutional environment of the Brazilian coffee market takes place. Section 4.4 presents the methodology used to produce the research data

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and findings. Section  4.5 shows the role of business associations in the coordination of agribusiness systems. In the final section, we draw some conclusions.

4.2  Theoretical framework 4.2.1  New institutional economy Williamson (2000) defines the typology of four analytical levels that allows us to broaden the view of the study of organizations. In this typology, the first level is composed of informal institutions, whose object is focused on the formation of a rooted social structure, in which evolution occurs between centuries (Grannoveter, 1985). The second level is composed of the institutional environment, whose object is the formal institutions, which are treated as the “rules of the game” and whose evolution occurs between decades (North, 1990). The third level is composed of governance, with evolution from a year to a decade (Williamson, 1985). At the fourth level are the contributions of the theory of agency and neoclassical economy, where organizations are characterized by continuous evolution. The new institutional economy is predominately concerned with levels 2 and 3: the institutional environment and institution of governance. The convergence of economic theory with institutionalism was consolidated by the new institutional economy, mainly through the premises elaborated by Coase (1937); this author approached the firm in this seminal article as a “nexus of contracts,” providing the basis for the works of Williamson and North. Coase (1937) demonstrated that, in addition to production costs, there are transaction costs associated with the use of market mechanisms; thus it was possible to understand firms as institutional arrangements that conduct transactions through formal contracts or informal agreements (Zylbersztajn, 1995). The institutional matrix of a society encompasses the institutions (rules of the game) that will define the vector of stimuli for economic agents. These institutions reduce the uncertainty of transactions between agents by establishing a structure for their interaction. Whereas formal institutions are constituted by norms formalized by public agents, informal institutions are codes of conduct socially constructed in this society (North, 1990). In this research, the institutional theories were revisited, systematizing a conceptual analysis to be applied to studies of Brazilian coffee agribusiness. The historical context of the institutional environment of the Brazilian coffee market took place, emphasizing the collective actions. Based on the



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analysis of institutional theories, it was shown that the new institutional economics produces an analysis of these strategies consistent with production systems from the aspect of transaction costs. One position in the new institutional economy, derived by North, is that institutions are the rules of the game in which organizations, like firms and business associations, try to maximize their gains.The rules of the game do all the theoretical work in explaining great results like growth, investment, and entrepreneurship. On the other hand, Coase and Williamson treat companies as institutions that also restrain the behavior of economic agents. Although they do not pay attention to business associations, their definitions can accommodate business associations as institutions (Doner and Schneider, 2000). The economics of transaction costs allows the establishment of a relationship between the attributes of the transactions with the most efficient forms of organization in terms of transaction and production cost savings. It is assumed that a more efficient form of governance will be a consequence of the attributes of the transactions and of the parameters established by the firm’s institutional environment (Zylbersztajn, 1995). Williamson (1991), treating the dimensions of transactions as parameters, proposes that the comparison of the relative efficiency of governance structures for each type of transaction by means of an analytical model defines the level of asset specificity as the main variable. The form of governance will be selected based on a level of asset specificity, according to the comparison of the costs of establishing the transaction in the market through vertical integration or hybrid forms. There are three groups of factors conditioning the efficient forms of governance: the behavioral assumptions, the characteristics of the transaction, and the institutional environment.Therefore, to understand transaction cost economics, it is essential to understand the impact of the behavioral assumptions of the limited rationality and opportunism in the transactions, because these assumptions influence the behavior of the individuals, generating impacts in the development of the transactions among the agents in the costs and the establishment of forms of governance (Zylbersztajn, 1995). There is the possibility of the occurrence of postcontractual opportunism due to the concepts of limited rationality and opportunism. There is a need to set up precautionary mechanisms, which may be formal or informal, such as formal contracts or other forms of coordination supported by social ties or reputation. Although the contracts are formal safeguards that aim to control variability and mitigate risks (Zylbersztajn, 2005), contracts due to limited rationality are characterized as incomplete (Williamson, 1996).

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Finally, transaction cost economics allows formulation of hypotheses about the organization of productive systems in the context of agribusiness (Zylbersztajn, 1995), and this theory may include the study of the role of business associations.

4.2.2  Collective action Olson (1965) contributed to research on the role of business associations by establishing the proposition that interest groups are providers of collective benefits, and that their existence is hampered by the free rider. The concept of collective benefit as a stimulating factor for the formation of groups demonstrates that individuals encouraged by self-interest should group together to provide collective benefits, because no agent will be willing to bear their cost independently. Therefore, the free rider is implicit in his theory of the logic of collective action, although this term is not quoted in the author’s work (Nassar, 2001). Firms in a perfectly competitive industrial sector, as a common interest, maximize their sales and stipulate a high price for their product. As the rise of production in industry causes the price to fall, profitability tends to decrease in the firms of this industry when production rises. Maximizing a firm’s profitability leads to reduced profitability in the industry. Firms have both common interests at higher prices and conflicting interests in relation to production. Because it is not rational for an individual entrepreneur to reduce his output to achieve greater prices for his sector in a perfect competition market, it is not rational for this entrepreneur to pay for the government’s support alone. There is no interest of the entrepreneur to individually assume the costs of such collective benefits (Olson, 1965). The member of a large organization is in a position analogous to the firm in a perfectly competitive market, because the loss of one participant will not increase the cost to another in any perceptible way. The departure of a participant, or their noncontribution to the collective benefit, does not lead the participant to believe it will lead other members exhibiting the same behavior. This member believes that he will be able to enjoy the collective benefit, whether or not he has contributed to the group. For him, his individual efforts will not result in the realization of the collective benefit, to the point that others stop collaborating. This fact makes collective action difficult, as it leads to the possibility of free-rider behavior (Olson, 1965). Olson (1965) creates a distinction between small and large groups, demonstrating principles of functioning and shedding light on the problem of collective action. In large groups, there is a greater tendency to create



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a favorable environment for free riders than in small groups, because the collective benefit, by its very nature, makes it impossible to exclude those who did not participate in its provision. Not all members are willing to pay the same amount for the collective benefit, as each member can value it differently. According to Olson (1965), the larger the group, the smaller the member’s perception of the importance of their contribution to the provision of the collective benefit. Indeed, if a member of a small group does not participate in the provision of the collective benefit, there may be an increase in the cost of provision for the other members. With this, they may decide not to contribute more to the provision of this benefit, causing its extinction. This perception tends to avoid nonparticipation because, in this case, the member visualizes the importance of his contribution. However, there is a tendency for there to be no clear perception among the members of large groups, increasing the chances that the collective benefit will not be provided. Olson (1965) believes that there are two trends. In large groups, as the benefit is more subject to the appearance of free rider, there is a need for coercion mechanisms or stimuli to avoid such behaviors.With respect to small groups, the collective benefit can be provided in general, without the need for coercion or any stimulus. In the latter case, the benefit itself is enough to encourage collective action. Commonly, in small groups, the collective benefit will be provided by the members’ own interest, since the substantial percentage of the total gain of this benefit tends to be greater than the large ones because of the smaller number of members. Each member views the collective benefit as a generator of individual gains that outweigh the costs of providing it. For this to occur, it is enough for a member to have such a perception. The collective benefits will not be efficiently provided, even in small groups, since they are offered to all members, regardless of the degree of participation. Olson (1965) characterizes the groups according to different incentive structures, dividing them into three categories: privileged, intermediate and latent. The privileged are the smaller groups, whose members are encouraged to contribute to the provision of the collective benefit, even if they must bear the costs alone. In this case, the need for group coordination or organization is avoided. Intermediaries are groups in which no member is willing to shoulder the collective benefit provision alone, but it is not difficult for members to realize if a member does not co-operate for this provision. In this case, there is a need for group coordination and organization. The latent

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are larger groups in which there is no perception of the members about the importance of their contribution to the provision of the collective benefit. In this case, there is a need to create selective incentives. The group action in the latent groups will only be stimulated by a selective incentive. Selective incentives can be achieved by means of positive economic or social stimuli for those members who act in the group’s interest. For those who do not bear the costs of group action, selective incentives can be realized through coercive actions. In this case, the noncontributing member can be excluded from the collective benefit. According to Olson (1965), there are two important concepts for understanding the formation of groups that can be extracted by synthesizing their propositions: large groups differ both quantitatively and qualitatively from small groups, and the determining factors for the existence of small groups explain the existence of large groups. Olson (1965) did not care about heterogeneity when discussing group size. For Olson (1965), large groups (even those of agents of a single industry) have high costs of communication and negotiation that can inhibit collective action. In turn, the smaller groups (even the heterogeneous ones) present low costs. Thus, smaller groups become more preferable than large groups. Business associations can be understood as collective actions that aim to contribute positively to the performance of their members through the provision of collective assets and selective incentives. The efficiency of a business association’s actions relative to its members is defined as the ability to generate a return greater than the cost of membership, providing positive results in terms of collective goods and selective incentives (Nassar, 2001).

4.3  Institutional environment of the Brazilian coffee agribusiness 4.3.1  Coffee market: The role of Brazilian government The regulation under the ICA, which is aimed at stabilizing rural incomes and maximizing foreign exchange earnings through exports, interfered in the whole Brazilian coffee agribusiness. The regulation of coffee in Brazil has shown that the policies oriented to a specific segment end up generating impacts in other segments, demanding other interventions. With deregulation, the coordination exerted by the Brazilian government was realized by market agents as business associations (Farina et al., 1997). In the regulation period, there were no incentives for the coffee farmer to invest in differentiation; he could not add value to his product, because



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the way of commercialization in Brazil did not prioritize quality assessment. In turn, with deregulation, some coffee growers began to invest in the production of certified coffees. In a deregulated market context, there is no longer any sense in thinking about coffee in terms of restrictive macroeconomic policies. However, this does not mean reducing the role of the institutional environment in this segment (Saes and Nakazone, 2002). Since the early 20th century, the coffee market has been the subject of intervention policies. In 1906, Brazil initiated a unilateral policy of price support, because it was responsible for three-quarters of the world’s coffee production (Saes, 1995). Up to 1960, Brazilian government policies were aimed at price appreciation through supply constraints.The Brazilian government used this policy because it had a situation of a near-monopoly in the market. Due to new competitors and a decline in marketshare, the Brazilian government sought other producer countries to implement pricing policies (Saes, 1995). Until the early 1960s, the Brazilian government tried to implement agreements with producer countries to share the cost of the pricing policy. With the failure of these attempts, Brazil alone was at the cost of stabilizing the coffee market. In 1962, the first ICA was established with 25 purchasing countries and 42 exporting countries. Since then, the coffee market has been systematically manipulated by price support policies by the economic clauses of the ICA (Saes, 1995). It was only through the Brazilian Coffee Institute, created in 1952, that there was a greater market expansion of coffee produced in Brazil (Saes and Nakazone, 2002). The Brazilian Coffee Institute encouraged the Brazilian coffee sector through projects such as a campaign to increase domestic coffee consumption; a program to encourage the production of soluble coffee; and a resolution to restrict the entry of companies in the roasted coffee sector. Brazilian government intervention in the coffee market arose because of the significant share of coffee in export revenues. The Brazilian government’s need to maximize revenues from coffee exports to create a source of revenue (now to leverage the process of import substitution or to help reduce budget deficits) has led to increased sector regulation (Saes, 1995). In 1996, the Coffee Policy Deliberative Council (CDPC) was created with the purpose of aggregating the entities of the coffee business. The coffee segments were formed by the following organizations: National Confederation of Agriculture (CNA) and National Coffee Council (CNC) representing production; ABIC representing the roasting industry; Brazilian

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Coffee consumption and industry strategies in Brazil

Association of the Soluble Coffee Industry (ABICS) representing the soluble industry; and the Brazilian Coffee Exporters Council (CECAFÉ) representing exporters (Saes and Nakazone, 2002). Brazilian government policy was able to reconcile the public interest, the implementation of economic policies, and the private sector. The regulation was based on a harmonious pattern of interaction between Brazilian government and private sector. The bond allowed compromise in which the agents acted in consonance with the rules established by this interaction. The private sector delegated its right to carry on its business in return for a guarantee of minimum levels of profit. The Brazilian government began to coordinate the Brazilian coffee agribusiness with macroeconomic objectives. Brazilian government power guaranteed that there would be no market players breaking the “rules of the game” for their own benefit (Saes, 1995). In 1991, the Brazilian Coffee Committee was created to be the interlocutor of the Brazilian coffee sector with the government and international organizations (Saes, 1995). In 1993, with the failure to negotiate new ICA clauses, more than 30 producing countries established the Association of Coffee Producing Countries (APPC). In 1993, an agreement was signed in which the countries of the APPC assumed a commitment to retain 20% of exports. To manage retention, the National Coffee Department (DENAC) was created as a claim of a part of the sector to replace the IBC (Saes, 1995). The regulation period has incorporated a very unfavorable form of negotiation to produce quality coffees. There was no incentive to invest in quality, because the volume was prioritized and there was no differentiation in quality. Brazilian government policy contributed in large part to the nondevelopment of certified coffees, creating obstacles to the establishment of strategies to accompany the changes of the late 20th century (Saes, 2004).

4.3.2  Coffee market: The role of business association Historically, the business associations that once acted as mere interlocutors with the Brazilian government have broadened their scope of performance. In the 1990s, business associations of the Brazilian coffee sector are reformulating their strategies with changes in the institutional environment. This new context prompted a demand for better organization of the agents, where these organizations seek to provide members with suitable institutional support for the generation of new business deals and maintenance of the business. In addition, some business associations of the Brazilian coffee sector are increasing their contribution in the process of coordination



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among the agents of Brazilian coffee agribusiness.With deregulation toward the late 20th century, the business associations have been attempting to change the image of Brazilian coffee in the international market. Indeed, its actions have so far had positive externalities for Brazil’s coffee agribusiness contributing to the business of economic agents (Barra and Machado, 2014). So, it is understood that the coordination of Brazilian coffee agribusiness can be carried out by the collective actions of business associations. These organizations have the capacity to act as an agent of coordination, having the capacity to strategically fill a space occupied by the Brazilian government in the regulatory period. Indeed, since the deregulation, business associations broadened their activities and started to play an important role in the coordination of Brazilian coffee agribusiness, as well as in the competitiveness of the entire Brazilian coffee sector. These organizations have been strengthened by their strategic role in defending the interests of their members. In the 1990s, a new dynamic emerged in the Brazilian coffee market, which became one of the fomenters of transformations in business association. The business associations that once acted as mere interlocutors with the government—agents of rent-seeking—broadened their scope of performance. Since then, business associations of the Brazilian coffee market reformulated their strategies with the changes in the institutional environment. This new context prompted demand for better organization of the agents, where these organizations seek to provide members with suitable institutional support for a generation of new business deals, increased gains, and maintenance of the business as agents of trust. In addition, some business associations of the Brazilian coffee sector are increasing their contribution in process of coordination among the agents of Brazilian coffee agribusiness as agents of coordination (Barra and Machado, 2014). The growth of the market for coffees and the demand for products certified in the global markets caused impacts on the Brazilian coffee agribusiness after deregulation. This scenario required coordinated activities of the business associations not only at the horizontal but also at the vertical level. Among the new attributions that these organizations began to assume, the following stand out: certification of agents in the supply chain, joint actions with the Brazilian government, and partnerships with other business associations (Barra, 2006). According to Farina et al. (1997), there was an increase in the discussion about the role of business associations in the coordination of economic

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Coffee consumption and industry strategies in Brazil

activities from the reduction of government intervention in the European economies in the late 20th century.With deregulation, it was perceived that market and government failures could boost the role of business associations. The business associations, among other roles, can act in the provision of collective goods, which are subject to “free rider.” Although these assets can be provided by the Brazilian government, there are advantages to be provided by business associations. Partnerships with business associations along the production chain are also essential activities for the coordination of activities. BSCA’s interactions with the development of the specialty coffee market are highlighted, notably the interface with the Specialty Coffee Association of America (SCAA), Specialty Coffee Association of Europe (SCAE), and Specialty Coffee Association of Japan (SCAJ). BSCA’s interaction in the coffee market through competitions, fairs, visits, trade missions, and other means has been important for the business of its members and for the Brazilian coffee sector (Barra, 2006). After the deregulation of the coffee market, and the redefinition of the roles of the Brazilian government and business associations, the policies and dynamics of the Brazilian coffee agribusiness were no longer established by the Brazilian government alone. The mechanics of this productive system will be increasingly related to the negotiations between the Brazilian government and business associations, which will begin to act to assert interests of the associates and the Brazilian coffee sector (Saes, 1995). Business associations filled a space left by the market and the Brazilian government after deregulation. Business associations began to carry out essential activities for coordination and, therefore, facilitated the implementation of differentiation strategies.With deregulation, the business associations began to carry out more proactive work in the support of their associates, by providing a set of actions aimed at facilitating the production process of its members in a new perspective related to the coordination of Brazilian coffee agribusiness. The growth of economic concentration, combined with the reduction of Brazilian government interventionism in Brazilian coffee agribusiness, created new demands for business associations. Indeed, business associations can carry out actions to support their members’ businesses, such as provision of information for the sector, institutional marketing, collective purchases, participation in the creation of sectorial policies, etc. (Saes and Nakazone, 2002). In Brazil, deregulation required a redefinition of the role of business associations. The business associations contain elements that may allow for



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the coordination of economic activities and may constitute functional institutions for public management. The support of business associations creates conditions that facilitate investment and the production of public goods. Collective actions to defend private interests can be made compatible with general interest objectives. ABIC was founded in 1973 with the aim of representing, through collective action, the coffee roasting and grinding industry in Brazil. In the period leading up to the deregulation of the Brazilian coffee sector, ABIC launched the Self-Inspection Program for the Coffee Industry. The self-­ regulation program reversed not only the fall in consumption but also established a new transaction profile for the Brazilian coffee sector. In 2004, the ABIC launched the Coffee Quality Program aimed at reorienting the sector and changing the perception of consumers through differentiation. Already in 2007, ABIC launched the Brazilian Sustainable Cafes Program. In turn, in 2007, the Coffee Quality Circle was launched with the purpose of certifying companies that offer coffee services. In 2016, ABIC launched the certification program with a methodology oriented toward the evaluation of coffee in capsules (ABIC, 2018). By analyzing the history of ABIC’s role in the Brazilian coffee market, the Coffee Quality Program plays a prominent role during the period of deregulation of the Brazilian coffee sector. In the domestic market, it is the certificate that allows differentiation strategies in the Brazilian coffee sector through market segmentation. The expansion of the complexity of ABIC’s actions is evident by its collective actions, as well as the sedimentation of its strategic role in the Brazilian coffee industry, having throughout its history played the role of an agent of interface with the Brazilian government, trust agent, and coordination agent.We also observe a similar trajectory in the history of the Cerrado Mineiro Coffee Growers Federation and also the BSCA. The Cerrado Mineiro Coffee Growers Federation was created in 1992 with the purpose of valuing the collective brand for the quality of the coffee produced by the region. Already in 1993, the brand “Café do Cerrado” was registered. Then, the development of an official denomination of origin system was started to avoid free riders and opportunistic actions. The Cooperative of the Cerrado Coffee Growers was created in 1995 with the objective of being a facilitator of coffee exports for the region’s farmers.The Cerrado Mineiro Coffee Development Foundation was created in 1997, with the objective of developing training projects for production (Barra and Bronzo, 2016).

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The Cerrado Mineiro Coffee Growers Federation strengthened the geographical indication process in 2005, which made it possible to value the origin of the coffee growers in this region. This organization plays the role of interface agent with the Brazilian government, and it is possible to visualize the business associations as instruments of institutional change.The role of interface agent in the Brazilian government was fundamental for the definition of rules for the designation of origin in the Brazilian coffee agribusiness (Barra and Bronzo, 2016). At the Cerrado Mineiro Coffee Growers Federation, through traceability, it is possible to identify at what stage the coffee beans are produced and moved along the chain. This organization is a federation composed of eight business associations and eight cooperatives in a horizontal arrangement. This federation coordinates the coffee production chain in a vertical way (Barra and Bronzo, 2016). In 2010, the Federation structured the brand management project of the Cerrado region, creating the expression “Cerrado Mineiro Region,” with the purpose of certifying its origin. The new brand was a marketing action to guide the region’s strategies through the “Café de Atitude” (coffee with attitude) proposal. In 2014, Cerrado Mineiro was the first region in the world to issue a denomination of origin seal for green coffee as well for roasting coffee. BSCA’s activities began in 1991 and, starting in 1992, participated in national and international fairs and events. BSCA was invited to participate in the International Coffee Organization (OIC) Gourmet Coffee Project started in 1999 as coordinator for 2 years. Beginning in 1999, BSCA launched the Cafés do Brazil Quality Competition and the Cup of Excellence program. In 1999, BSCA implemented the certification program by establishing a code of conduct that standardizes the associates’ productive practices. For that, the Socioenvironmental Management System for the Production of Special Coffees was instituted. In 1999, BSCA was chosen to conduct the Cafés do Brazil program by the Brazilian government. This program contributed to the development of the specialty coffee sector and received funding from the Brazilian government. In 2001, BSCA developed the Marketing Plan for Brazilian Special Coffees.

4.3.3  Coffee market: The role of the Coffee Quality Program In recent decades, there has been an increased focus on food safety in the coffee world market. In this context, the role of certification in the coordination of coffee agribusiness has become more and more common in recent



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decades. Certification takes responsibility for food safety in the agrifood supply chain. In addition, increasing consumer awareness regarding issues of food safety, quality, and the environment have created a growing demand for certification coffee. The certifications communicate information about the attributes of a product, contributing to a building of trust among partners. Since the early 2000s, there has been a profusion of the types of certification in the coffee market. These certificates coexist and compete, making it difficult to distinguish between the role of each certification in that market. These certificates are the result of government actions, nongovernmental organizations, and private companies (Reinecke et al., 2012). The opportunity of a negotiator presenting with opportunistic behavior is attenuated or avoided by using certificates. In the coffee market, certification facilitates decreased transaction costs because they provide buyers with information in a way that is conscious and reliable. Typically, certification is used in the coffee market to attest to the attributes of coffee when companies adopt standards that require the adoption of differentiated attributes. So, certification coffee reduces information asymmetry, ensuring that a coffee conforms to the specifications. Certificates are crucial to enter certain specialty coffee drinking countries, where there is great concern with quality, food safety, and sustainability. These mechanisms contribute to lessen information asymmetries and, consequently, reduce transaction costs in a sustainable coffee market (Barra and Machado, 2014). The concept of certification in this paper is based upon studies by several authors: Saes et al. (1998) (ABIC); Barra (2006) (BSCA); Martinez (2006) (UTZ); Mafra (2008) (FCC); Palmieri (2008) (RAS); Leme and Machado (2010) (ABIC); Pedini (2011) (FLO); Miranda and Saes (2012) (FLO); Souza et al. (2013) (FLO); Pereira (2013) (GAP); Rosa (2014) (GAP); Prado (2014) (GAP); Leme (2015) (UTZ); and Barra (2016) (UTZ) (Table 4.1). In the agrifood supply chain, the agents through investments in certification seek alternative ways to reduce the risk of opportunism. These agents develop safeguards through the development of trust and through investments in certification. The Coffee Quality Program is a coordination program of the agrifood supply chain because this certification reduces information asymmetry, ensuring that a coffee conforms to the specifications. Finally, the Coffee Quality Program was a crucial step to refocus the sector. In addition, this certification changes consumers’ perception that all coffees are equal. The purpose of the certification is to further improve the quality of coffee offered to consumers based on an objective strategy: a satisfied coffee consumer drinks more coffee. This certification served as

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Table 4.1  Coffee certification Authors

Certification

Focus

Agent

Saes et al. (1998)

ABIC (Brazilian Coffee Industry Association) BSCA (Brazil Specialty Coffee Association) UTZ (UTZ Certified) FCC (Cerrado Coffee Growers Federation) RAS (Rainforest Alliance) ABIC Brazilian Coffee Industry Association) FLO (Fair Trade Labeling Organizations) FLO (Fair Trade Labeling Organizations) FLO (Fair Trade Labeling Organizations) GAP (Good Agricultural Practice) GAP (Good Agricultural Practice) GAP (Good Agricultural Practice) UTZ (UTZ Certified) UTZ (UTZ Certified)

Quality

Rosters

Quality

Growers

Sustainability Origin

Growers Growers

Sustainability Sustainability

Growers Rosters

Fair Trade

Growers

Fair Trade

Growers

Fair Trade

Growers

GAP

Growers

GAP

Growers

GAP

Growers

Sustainability Sustainability

Growers Growers

Barra (2006) Martinez (2006) Mafra (2008) Palmieri (2008) Leme and Machado (2010) Pedini (2011) Miranda and Saes (2012) Souza et al. (2013) Pereira (2013) Rosa (2014) Prado (2014) Leme (2015) Barra (2016)

Source: Elaborated by the author.

an improvement tool for roasting companies not only to produce a better product but also to ensure consistent coffee quality and industrial process, guaranteeing quality standards in all produced lots. This certification is a reliable link between industry and consumers, and will expand to encompass basic issues for a real offer of better products (ABIC, 2018).

4.4 Methodology To understand the evolution of the Coffee Quality Program in the Brazilian coffee market, historical documents were analyzed. Data since 2000 were selected from the main Brazilian newspapers related to the economic field: “Folha de São Paulo,” “Estado de São Paulo,” and “Valor Econômico.” Data collection was carried out using keywords previously defined after a



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bibliographical research on coffee certification. Then, the keywords were ­validated by a specialist researching coffee. Table  4.2 presents the list of search keywords. Based on this set of documents, some citation news was selected to build the certification scenario in the market for roasted and ground coffee in Brazil. Table 4.3 shows the list of news selected for the research. Table 4.2  List of keywords Keywords

Description

Coffee Quality Program + ABIC

Coffee Quality Program Brazilian Coffee Industry Association Brazilian Coffee Industry Association Coffee Quality Program Brazilian Coffee Industry Association (Seal)

ABIC Coffee Quality Program ABIC Seal Source: Elaborated by the author.

Table 4.3  List of news

N1 N2 N3 N4 N5 N6 N7 N8 N9 N10

News

Date

“The oscillation of commodities” (Folha de São Paulo) “Nation wants international marketing to sell more coffee” (Estado de São Paulo) “Roasted coffee will have official control” (Estado de São Paulo) “Do you want a champion coffee?” (Estado de São Paulo) “Coffee consumption in Brazil glows 3.11% on 10/11” (Estado de São Paulo) “Entrepreneurs invest in gourmet coffee to attract the most demanding consumer” (Estado de São Paulo) “Twelve cups of coffee straight from the supermarket” (Estado de São Paulo) “Utam launches new specialty grain coffees” (Estado de São Paulo) “Gourmet or special coffee?” (Folha de São Paulo) “A coffee crop that will stay in the memory” (Valor Econômico)

11/22/05

Source: Elaborated by the author.

05/24/10 11/24/10 01/19/12 01/24/1 09/03/1 01/28/1 03/16/1 01/25/1 08/21/1

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4.5 Results 4.5.1  Coffee Quality Program Among the various types of certification provided by ABIC, the Coffee Quality Program was chosen for the number of certified brands and for being the certificate that allows for differentiation strategies in the sector through market segmentation (Table 4.4). The Coffee Quality Program, created in 2004, certifies the quality of the final product through a sensorial analysis methodology, and classifies and differentiates coffees in four categories: Extra Strong, Traditional, Superior, and Gourmet. Further certifying the product, the company is audited for its good manufacturing practices during its whole process to ensure consistency. The product is monitored by the program, and any modifications are communicated to the industry, which is geared toward maintaining and improving the flavor profile of its brand. If the quality standards are not complied with, administrative procedures are open to penalties that can result in being removed as member of the association (ABIC, 2018). In the Coffee Quality Program, the Global Quality of the Coffee Beverage is the joint perception of the aromas of the beverage and its degree of intensity. In this certification, the evaluation of the quality of the coffee beverage is made by expert cuppers trained in accredited labs through sensorial analysis and considers, flavor, acidity, body, fragrance of the coffee powder, and its bitterness, among other qualities. In this certification, the category of the coffee quality is determined according to the Global Quality obtained by the product on a scale of 0 to 10. This classification helps consumers decide which quality of coffee they want to buy (ABIC, 2018). Table 4.5 presents the Historical Documents for the period 2005–10. After the implementation of the Coffee Quality Program, it is verified by Table 4.4  Brands certified in ABIC Certification

Coffee Quality Program Sustainability Capsules Purity

Total

Quantity Gourmet

Superior

Traditional

Extra strong

 805

202

160

342

101

  28   19 1050

 11   2   –

 14   5   –

  3  11   –

  1   –

Source: Elaborated by the author.



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Table 4.5  Historical documents (2005–10)

N1

N2

N3

News

Focus/data

Coffee enters the list of products that have recommended standards for food safety. Within 6 months, the Pão de Açúcar group will only buy coffee with seal from ABIC—a label that evaluates the quality, the drink, and the flavor of the product. The Coffee Quality Program is a voluntary seal established by the ABIC, and only 25 coffee industries among the thousands of the country have it. With the demand of Pão de Açúcar, demand for this seal will increase, says Nathan Herszkowicz of ABIC He acknowledged that the coffee quality program sold domestically, launched today, is not a measure aimed at increasing exports of roasted and soluble coffee. “It will not be there that we will increase exports of roasted and soluble coffee,” he said. In its assessment, the current momentum for the sector is favorable to the growth of the market. “Brazil has a fantastic potential ahead of it, both for the sale of green coffee, as soluble, roasted and ground” ABIC’s executive director, Nathan Herszkowicz, complements, however, that the IN16 was formulated with absolute industry involvement. “We have had 13 meetings with members to discuss the matter during the period in which IN was in public consultation.”

Food standard 11/22/05

Food standard 05/24/10

Food standard 11/24/10

Source: Elaborated by the author.

the analysis of the documents that began as the proposal of a new food standard in the Brazilian coffee market. Table 4.6 presents the Historical Documents for the period 2011–14. The analysis of this period shows the beginning of maturity of the process of differentiation in the domestic market, where consumers begin to value the superior coffee and gourmet coffee through their purchases at certified coffee shops. Table 4.7 presents the Historical Documents for the period 2015–18.The analysis of this period demonstrates the consolidation of the ­differentiation

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Coffee consumption and industry strategies in Brazil

Table 4.6  Historical documents (2011–14)

N4

N5

N6

News

Focus/data

Those who love coffee, or coffee geeks, as they are nicknamed outside the country, drinkers interested in the origin of grains and the best techniques of preparation, will now have access to high quality grains. This is because the auction of the 10 finalist lots of the National Coffee Quality Competition organized by the Brazilian Coffee Industry Association (ABIC) will be open to the general public, not restricted to the industry, as in the previous six versions. They are grades that have been rated ‘very good’ and ‘exceptional’ according to the Specialty Coffee Association of America (SCAA) methodologies and the ABIC Coffee Quality Program ABIC has sought to improve the quality of roasted and ground coffee sold in Brazil for more than 20 years. And more recently it implemented the Coffee Quality Program, which aims to identify the attributes of the grain in the packaging, facilitating the choice of consumers through product differentiation (divided into Gourmet, Superior and Traditional categories). “In the year 2000, there was no Gourmet brand in supermarkets … today we have 100 gourmet cafes,” said ABIC Executive Director Nathan Herskowicz, citing the results of the organization’s work during the event With an eye on the glowing interest in gourmet coffee, small and medium grain growers take advantage to establish a direct relationship with the consumer.This is the case of Café Santa Monica, which previously only provided the product for restaurants, bakeries and coffee shops, and went to work this year with smaller packaging and sale in emporiums. Producer Luiz Cláudio Cruz has created a signature club to deliver coffee at the customer’s home. In the opinion of Nathan Herszkowicz, executive director of the Brazilian Coffee Industry Association (ABIC), this movement of producers evidences the growth of the market and shows that the consumer wants and accepts to pay more for a quality product

Differentiation 1/19/12

Source: Elaborated by the author.

Differentiation 24/01/12

Differentiation 03/09/2013



The coffee quality program in Brazil

Table 4.7  Historical documents (2015–18)

N7

N8

N9

N10

News

Focus/date

Since 2004, ABIC has tracked the quality of brands available in the Coffee Quality Program, which in addition to establishing the traditional, superior and gourmet categories, monitors affiliate products with regular tests in test laboratories. If they do not meet the ABIC criteria, the coffees do not receive the quality seal The UTAM Group, for nearly 50 years in the coffee production and distribution market, invested R $2 million in its Minas Gerais plant to have a modern and exclusive structure to produce gourmet coffees. Among the novelties of products that will have this new production structure are the Utam Speciale and Utam Crema cafes, in 1-k packs, with new blends of roasted coffee beans, and aimed at the food service market. The Utam Speciale 100% Arabic grain selection, with medium roast and hard drink, a blend with superior quality in the general coffee classification of the Coffee Quality Program of the Brazilian Coffee Industry Association (ABIC) ABIC (Brazilian Association of the Coffee Industry) has launched a project that, despite the need for adjustments, is still unique in the world: the classification of roasted or industrialized coffee. This project divided the industrialized coffees of associated companies into three categories: Traditional, Superior, and Gourmet Nathan Herszkowicz, executive director of the Brazilian Coffee Industry Association (ABIC), says the traditional coffee industry is already benefiting from the supply of higher quality grains harvested in June and being processed by roasters. Evaluation carried out within the ABIC’s Coffee Quality Program, with samples from the retail of traditional cafes, which already include some new cafes, shows an improvement in the score of this category

Consolidation of differentiation 1/28/15

Source: Elaborated by the author.

Consolidation of differentiation 03/16/17

Consolidation of differentiation 01/25/18

Consolidation of differentiation 08/21/18

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process in the domestic market. The experts already note the approval of the certification by the consumers of differentiated coffees, highlighting the consumption of superior and gourmet coffees.

4.5.2  Certification from the perspective of transaction cost economics Collective actions to stimulate consumption create an incentive to free-rider behavior on the part of some of the firms because knowing that they cannot be excluded from the benefit of collective action, they do not want to bear the cost of this collective action. An example are the market actions aimed at increasing consumption that generate a positive effect for all companies in the sector. Considering that a business association does not have coercive power, there is no way to force all firms to pay for such an action. In this sense, ABIC’s actions can be a contractual relationship between the business association and its members, characterized by fragility.Thus, the commitment between the members and the business association can be broken at any time by the possibility of the free-rider effect.This fact implies the challenge for the business associations to always renew its attention to the interests of its associates (Saes et al., 1988). The certification provided by a business association such as the ABIC can reduce this free-rider effect by the fact that its instrument is a quality flag effect that functions as an instrument of coordination of Brazilian coffee agribusiness. Certification is an instrument for coordinating Brazilian coffee agribusiness to ensure that all coffee has the attributes sought by the consumer. In the certification, the consumer finds a sign of differentiation and, for this reason, finds support in their purchase decision. As a result, buyers are more confident because compliance with the certification code of conduct reduces the level of uncertainty and the possibility of opportunistic actions. The certifications are mechanisms of quality and facilitators of the negotiations in the coffee market. These mechanisms contribute to the reduction of transaction costs, as quality certificates reduce the asymmetry of information in the production systems. By bringing these gains, certification in many cases can add value as an attribute that guarantees certain attributes of product differentiation. For this reason, certification of coffee makes it possible to obtain a premium price in the market (Barra, 2016). Table 4.8 presents the theoretical comparison between the benefits of certification in the coffee sector and the Coffee Quality Program. Finally, although institutions are the rules of the game and entrepreneurs are the players, the business associations act as “coaches” and the g­ overnment can act as the “judge.” In this scenario, ABIC is a set of networks capable of



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Table 4.8  Benefits of certification and the Coffee Quality Program Benefits of certification

Coffee Quality Program

The combination of lower costs (obtained by lowering production and transaction costs) and premium pricing (obtained by improving product quality) allows a higher contribution margin and result (Barra, 2016) By defining a strategy of the same price combined with lower costs (obtained by reducing production and transaction costs), it enables the producer to increase the margin of contribution. In this case, there are two possibilities. There is the possibility of an increase in the sales volume, resulting in an increase in the results. There is also the possibility that there will be no increase in sales volume. In this case, there is an increase in the result, due to the increase in the margin of contribution caused by the reduction of costs (Barra, 2016) The combination of lower costs (obtained by lowering production and transaction costs) at a lower price allows the company to achieve an increase in sales volume, thereby increasing the result (Barra, 2016)

The gourmet/superior coffee presents the ability to achieve the premium price that can be obtained by improving product quality The traditional/extra-strong coffee presents the same price capability combined with lower costs that can be obtained by improving processes allowing reduction of production and transaction costs

The traditional/extra-strong coffee presents the same price capability combined with lower costs that can be obtained by improving processes allowing reduction of production and transaction costs

Source: Elaborated by the author.

creating space for collective learning. Indeed, the members of ABIC share knowledge and exchange information through cooperation of certification programs. ABIC is a network that contributes to the build-up of trust among agents of the agrifood chain, lessens information asymmetry, and reduces transaction costs. This type of network contributes to the construction of their member’s reputation, by means of the Coffee Quality Program. Based on the discussions in this chapter, we describe the role of business associations in the coordination of agribusiness systems.

4.6 Conclusion ABIC offers an excellent example of the importance of the organizations in the support for companies that want to commercialize roasted coffees.

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The results show that ABIC performs a range of functions that can facilitate the development of the business between ABIC members and its main buyers. The competitive differential of members is based on their strategies of production, which focus on quality, and aligning productive practices with a deep concern about environmental and social issues. The ABIC has promoted an environment with a good reputation and institutional stability among its members. The findings of the present research ratify the theory that this type of organization is an agent of coordination that contributes to the build-up of trust among partners of Brazilian coffee agribusiness, to reduce transaction costs. The study enables the development of collective strategies to guide collective efforts for better performance results. The ABIC has historically contributed to the building of trust of roaster brands in Brazilian coffee agribusiness. In addition, this business association has contributed to a reduction of transaction costs in this market. Certification acts as a tool for reducing information asymmetries among agents of the Brazilian coffee agribusiness.When purchasing a certified coffee, the consumer will be able to recognize their attributes, both in the case of traditional and extra-strong coffee, as well as superior and gourmet coffee. Therefore, in future studies it would be interesting to analyze the consequences of certification and its reduction of transaction costs and asymmetry of information for consumers. It would also be appropriate in a future paper to explore the free-rider effects and collective action still in the roaster segment. The proposed theoretical framework may help the agents of the Brazilian coffee agribusiness in understanding the critical role of the certifications provided by business associations in supporting business in this productive system. Nevertheless, it is believed that studies of this reality, through deeper research, are necessary to understand this problem. It would be interesting to see how the Coffee Quality Program impacts roasters, retailers, and consumers. It is possible to raise critical success factors so that research can investigate the determinants of roasters in adopting certification. Also, it is important to analyze how certification has been recognized by the consumer segment. Finally, through the results obtained in this study, it is evident that the certification provided by business associations is important for the coordination in Brazilian coffee agribusiness, being a fundamental instrument to generate competitiveness for companies and for the sector, as already ­previously verified by research on business associations in the Brazilian



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c­ offee market. The Coffee Quality Program presents itself as an instrument capable of contributing to the institutionalization of the best productive practices.

References ABIC—ASSOCIAÇÃO BRASILEIRA DA INDÚSTRIA DO CAFÉ, 2018. Disponível em. www.abic.com.br. (Accessed September 9, 2018). Barra, G.M.J., 2006. O suporte das associações de interesse privado em canais de distribuição de produtos diferenciados: um estudo de caso no mercado de cafés especiais. Dissertação (Mestrado em Administração)—Universidade Federal de Lavras, Lavras. 132 p. Barra, G.M.J., 2016. Modelo de maturidade para processos certificados em sistemas agroindustriais. Tese (Doutorado em Administração) – Universidade Federal de Minas Gerais, Belo Horizonte, 179 p. Barra, G.M.J., Bronzo, M.L., 2016. Teorias institucionais aplicadas aos estudos de sistemas agroindustriais no contexto do agronegócio café: uma análise conceitual. REGE. Revista de Gestão USP. Barra, G.M.J., Machado, R.T.M., 2014. Impacts of the Business Associations on Organizations and Agriculture-Based Systems. vol. 7. RAMA: Revista em Agronegócio e Meio Ambiente 103–120. Coase, R.H., 1937. The Nature of the Firm. University of Chicago, Chicago. Chap. 2. The firm, the market and the law. Doner, R.F., Schneider, B.R., 2000. Business associations and economic development: why some associations contribute more than others. Bus. Polit. 2 (3). Farina, E.M.M.Q., Azevedo, P.F., Saes, M.S.M., 1997. Competitividade: mercado, estado e organizações. Singular, São Paulo. Grannoveter, M., 1985. Economic action and social structure: the problem of embeddedness. Am. J. Sociol. 91 (3), 481–510. Leme, P.H.M.V., 2015. A construção do mercado de cafés certificados e sustentáveis da UTZ Certified no Brasil: As práticas e os arranjos de mercado.Tese (Tese em Administração)— Universidade Federal de Lavras, Lavras. 274 p. Leme, P.H.M.V., Machado, R.T.M., 2010. Os pilares da qualidade: o processo de implementação do Programa de Qualidade do Café (PQC). vol. 12(2). Organizações Rurais e Agroindustriais, Lavras, pp. 234–248. Mafra, L.A.S., 2008. Indicação geográfica e construção do mercado: a valorização da origem no Cerrado Mineiro. Tese (Doutorado em ciências sociais). UFRRJ, Rio de Janeiro. Martinez, J.L.T., 2006. Impactos da certificação Utz Kapeh em fazendas de café: estudo de casos enfatizando o sistema de informação. Dissertação (Mestrado em Administração)— Universidade Federal de Lavras, Lavras. 132 p. Miranda, B.V., Saes, M.S.M., 2012. Coordenação e qualidade no sistema fairtrade: o exemplo do café. vol. 14(3). Organizações Rurais e Agroindustriais, Lavras, pp. 367–379. Nassar, A.M., 2001. Eficiência das associações de interesse privado: uma análise do agronegocio brasileiro. Dissertação (Mestrado em Administração)—Faculdade de Economia, Administração e Contabilidade. Universidade de São Paulo, São Paulo. North, D.C., 1990. Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge. Olson, M., 1965. The Logic of Collective Action. Public Goods and the Theory of Groups. Harvard University Press, Cambridge. Palmieri, R.H., 2008. Impactos socioambientais da certificação Rainforest Alliance em fazendas produtoras de café no Brasil. Dissertação (Mestrado em Administração)—Universidade de São Paulo. Faculdade de Economia, Administração e Contabilidade, São Paulo.

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Pedini, S., 2011. Fair Trade: alternativa ao mercado convencional de café e processos de empoderamento de cafeicultores familiares. Tese (Doutorado em Administração)— Universidade Federal de Lavras. Pereira, S.P., 2013. Caracterização de propriedades cafeeiras com relação às boas práticas agrícolas: aplicação das análises de cluster e discriminante. Tese (Tese em Agronomia) – Universidade Federal de Lavras, Lavras, 138 p. Prado, A.S., 2014. Boas práticas agrícolas e certificação na cafeicultura. Dissertação (Mestrado em Administração) – Universidade Federal de Lavras, Lavras, 128 p. Reinecke, J., Manning, S., Hagen, O., 2012.The emergence of a standards market: Multiplicity of sustainability standards in the global coffee industry. Organ. Stud. Ber. 33 (5/6), 791–814. Rosa, B.T., 2014. Caracterização das “boas práticas agrícolas” e roteiro metodológico para a certificação da cafeicultura familiar no Sul de Minas. Dissertação (Mestrado em Administração) – Universidade Federal de Lavras, Lavras, 145 p. Saes, M.S.M., 1995. A racionalidade econômica da regulamentação no mercado brasileiro de café. 1995. Tese (Doutorado em Administração) – Universidade de São Paulo, São Paulo. Saes, M.S.M., 2004. Evitando a queda da rentabilidade na produção agrícola: basta diferenciar? In: ENANPAD, XXVIII, set. 2004, Curitiba. Anais eletrônicos. ANPAD, Rio de Janeiro. Saes, M.S.M., Nakazone, D., 2002. Estudo da competitividade de cadeias integradas no Brasil: Impactos das Zonas de Livre Comércio. Cadeia: CAFÉ, São Paulo. Saes, M.S.M., et al., 1998. ABIC: ações conjuntas e novos desafios frente à reestruturação do mercado. In: SEMINÁRIO INTERNACIONAL PENSA DE AGRIBUSINESS. vol. 8. Anais…:FEA/USP, São Paulo. Souza, S.M.C., Oliveira, S.B., Costa, F.C., Novais, P.C.A., 2013. Avaliação do grau de conformidade visando à inserção dos cafeicultores na certificação e comércio justo (fair trade). Coffee Sci. 8 (4), 510–518. Williamson, O.E., 1985.The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. Free Press, New York. Williamson, O.E., 1991. Comparative economic organization. The analysis of discrete structural alternatives. Admin. Sci. Quart. 36, 269–296. Williamson, O.E., 1996. The Mechanisms of Governance. Oxford University Press, New York. Williamson, O.E., 2000. The New Institutional Economics: taking stock, looking ahead Oliver E. Williamson. J. Econ. Lit. 38 (3), 595–613. Zylbersztajn, D., 1995. Estruturas de governança e coordenação do agribusiness: uma aplicação da nova economia das instituições. Tese (Livre Docência em Administração)— Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo, São Paulo. Zylbersztajn, D., 2005. Papel dos contratos na coordenação agroindustrial: um olhar além dos mercados. In: Congresso da Sociedade Brasileira de Economia e Sociologia Rural. vol. 18. Anais…: SOBER, Ribeirão Preto.

Further reading North, D.C., 1994. Economic performance through time. Am. Econ. Rev. 84 (3), 359–368. Ponte, S., 2002.The “Latte Revolution”? Regulation, markets and consumption in the global coffee chain. World Dev. 30 (7), 1099–1122 (2002). Rademakers, M.F.L., 2000. Agents of trust: business associations in agri-food supply systems. Int. Food Agribus. Manag. Rev. (3)139–153.

SECTION 2

Coffee farmers perception and contribution: Certification and strategies

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CHAPTER 5

Certifications for coffee cultivation: Characterizing personal values of producers and consumers João Otávio Meirelles Rattona, Eduardo Eugênio Spersa,b a

ESPM, São Paulo, Brazil Department of Economy, Administration and Sociology, ESALQ—USP, Piracicaba, Brazil

b

5.1 Introduction Certification systems for agribusiness have emerged from a new set of ­demands related to sustainability and food security, imposed on the agrifood sector. For Leme (2015), certificates are the link between consumers who want sustainable products and producers, and industries that change their production patterns to meet this demand. Saes and Spers (2006) argue that the growing demand of consumers for certified products represents an opportunity for farmers to adopt differentiation strategies such as identifying the origin and production method, and thus meet the demand of this market (Saes and Spers, 2006). Leme (2015) states that the quality of special and certified coffees not only relates to the specific characteristics of the beverage, these coffees also have symbologies linked to the differentiation through their consumption. According to the author, consumers of certified coffees, such as those who attest to environmental and social aspects of production, not only seek a specific distinction in the quality of the beverage, but they also consume intangible aspects such as preservation of the environment, respect for workers, and incentive to family farming. In this sense, quality refers not only to intrinsic aspects of the product, such as nutritional content, health, and organoleptic characteristics, but to cultural and ethical qualities as well. Because of the pressure from consumer markets, large roasters and corporations in the coffee sector have shown interest in expanding the presence of certified sustainable coffees in their product portfolios. However, the expansion of this market depends on the performance of the Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00004-4

© 2020 Elsevier Inc. All rights reserved.

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productive sector.This scenario presents opportunities for Brazilian producers. Currently, Brazil is the world’s largest supplier of certified sustainable coffee, and there is a perception by the foreign market that Brazil is the only producer country capable of expanding coffee production to meet its growing demand (Pereira, 2013). The demand for certified coffee allowed the construction of new markets, creating opportunities for producers to adopt new strategies to market and add value to their product. Although many of these certifications bear some resemblance, because they address the social and environmental aspects of production and also the quality and safety of the product, each of them seek to meet a particular desire or interest of the consumer. For Leme (2015), the value added or price difference of these coffees is the result of the recognition and appreciation of the differences of the product by the consumer, as intangible as these values may be. In the last years, the search for quality in agroindustrial products presented great growth due to changes in consumer preferences. Products that have some desired attributes are valued among consumers (Souza et  al., 2000). The consumer profile has been going through changes, with the emergence of new values and principles related to the idea of sustainability, health, and greater perspective of life. The market has demanding consumers, who seek not only quality, in the sense of a minimum acceptable standard for the attributes of the product, but also symbolic qualities, which refer to the ethics of production. Demographic, cultural, lifestyle changes, and the ease of access to information are some of the transformations responsible for changing consumer habits. Understanding the “new” consumers, what they want, and what they need has become not only a competitive advantage but also a necessity for survival. Successful strategies are a combination of consumer understanding, attributes, and benefits that they seek out in products as aspects of their own personality outsourced by the use of those same products (Barrenar et al., 2015). For Schwartz (2012), analyzing personal values is a very effective way to characterize cultural groups and societies, and it also works to explain motivations of attitudes and behaviors; they work as an inner guide for individuals. According to the author, a characteristic of personal values relates to its lasting nature, that is, once a person internalizes them, they will hardly change. Due to this characteristic, they work as good predictors of behaviors. From this perspective, it is important to analyze the perception of certified coffee producers to make the decision of certifying their p­ roduction,



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and that consumers understand the elements considered during the ­purchase-decision process. The model of consumer behavior proposed by the means-end chain (MEC) addresses the needs of this chapter. Gutman (1982), one of the authors who introduced this model of analysis in the marketing field, states that associations between the “ends,” consumer’s desires, and the “means,” actions adopted to achieve the ends, can represent the purchase decision, in this context, associated with the use of products. The MEC model allows the relation of important personal values to the individual to the attributes perceived in a specific product. This model, applied through the laddering interview technique, enables the quantification of these relations and, therefore, to increase the knowledge about the consumer’s cognitive structure (Gutman, 1982). In the context of this chapter, the MEC, combined with the technique of laddering interviews, makes it possible to characterize the values involved in the perception of coffee producers and consumers as to certifications for the product. This chapter aims to characterize the cognitive structure of the values involved in the perception of producers and consumers of coffee, as they relate to the existing certifications in this market, by identifying and quantifying the relationship among attribute, consequence, and value.

5.2  The empirical study Gutman (1982) introduced the theory of the MEC in the marketing field, more specifically for the study of consumer behavior. The MEC model is an exploratory study that uses a qualitative approach. This type of study allows analyzing the cognitive structure of the consumer to understand their motivations, their attitudes, their buying behavior, and their decision processes. The studies of Gutman (1982, 1991);Walker and Olson (1991); Hofstede et al. (1998);Vriens and Hofstede (2000); Olson and Reynolds (2001); Lin (2002) consider the MEC model the main theoretical basis to reach such objectives. According to Gutman (1982), the MEC technique allows the identification of links between attributes and benefits of products and personal values of the consumer. It is possible to understand MEC as a method to understand why consumers buy certain products or brands, working as a tool to meet marketing demands such as new product development, brand positioning, advertising strategies, and market segmentation. Hofstede et  al. (1998) states that the MEC theory has its basis in the work of psychologists (Tolman, 1932) and economists (Abbott, 1955), who

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recognized that the consumer does not purchase products simply for what they are but because of what they can do for them. According to the author, the MEC theory postulates that consumer knowledge has a hierarchical organization through a structure that connects the product’s attributes to the consequences of its use to consumers’ personal values. These concepts are the “content” of the consumer’s knowledge, whereas the links between the concepts are the “structure” of knowledge. For Olson and Reynolds (2001), this is the most general formulation regarding MEC, which considers that the consumer has three levels of knowledge related to the consumption of products: (1) the attributes of the product; (2) the consequences or results from the use of the product; and (3) the expectations or values that can reach a satisfaction level by using the product. Combined, these levels of knowledge form a hierarchical chain of associations. The set of associations receives the name of MEC because the consumer considers the products and their attributes as a means to an end, which is possible to translate as the satisfaction of relevant personal values and consequences. The chain is the set of connections between attributes, consequences, and values. A hierarchy that connects concepts at a concrete level (product attributes) to concepts at an abstract level (personal values) arranges these connections (Olson and Reynolds, 2001). The MEC model sequentially connects the attributes of products (A) to consequences arising from the use of products (C), and consumer personal values (V). For Gutman (1982), the sequence formed by the A-C-V connections is the chain of means and ends. The hierarchical value map (HVM) represents the set formed by the various chains, which indicates the relations between all attributes perceived in a specific product, the consequences, and personal values. The HVM is a graphic representation of the main A-C-V connections that consumers perceive about a particular product. Normally, the HVM chart illustrates how a small number of personal values can reduce a large set of attributes perceived in a product through the consequences of the action of use or consumption of the product. One way of measuring personal values is Schwartz’s Theory of Values. The values have a division of 10 dimensions, which reflect the individuals’ central motivations. Schwartz (2012) states that these values are universal in nature because they are based on universal requirements of human existence, such as basic biological needs, requirements for orderly social coordination, and institutional demands for group survival and well-being.



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According to Schwartz (2012), the basis of the value structure is the fact that actions aimed at reaching a value have consequences that conflict with some values but are congruent to others. In other words, these actions have practical, psychological, and social consequences. Choosing an action that promotes a certain value may transgress a competing value. Therefore, the theory defines a circular structure of the relations among the 10 dimensions of value, from their compatibility or opposition of objectives. Schwartz (2012) states that the circular structure depicts the total pattern of conflict and congruence relations between values. The circular structure represents continuous motivation. The closer two values are in any direction around the circle, the more similarities there are among their motivations, and analogously, the further away, the more antagonistic their motivations are. In this chapter, Schwartz’s Theory of Values will serve as the basis for the analysis of the identified values.

5.3 Results In this section, the presentation of the data obtained in the research takes place. First, the characterization of the respondents takes place with the description of the sample, and then the content analysis, the construction of HVMs, and the determination of the dominant perceptions guidelines. The analysis has two stages: the analysis of data from certified coffee producers and then coffee consumers who know at least one of the certifications for coffee production. It is worth noting the difficulty of interviewing coffee consumers who consider certification at the time of purchase decision. For this reason, for the representation of the cognitive structure of values of this group, the focus was on interviewing consumers who only knew some of the certification systems. Ten rural producers of certified coffee participated on interviews for this research. These producers are associated with APAS, and have the certifications Certifica Minas, designed by the Government of the State of Minas Gerais through the Company of Technical Assistance and Rural Extension (EMATER), and Fair trade. Table 5.1 shows the main characteristics of the producers and their respective properties. Most respondents are male, and the average age of the sample of producers is 47.3 years. Another characteristic described is the level of schooling of the participants; most of the producers have a complete higher education (40%),

98

Respondent

Gender

Age

Education level

Hobby

Beginning

P1 P2 P3 P4

M M M M

24 46 39 53

Motorcycles Farming Production of honey Play tennis

2009 1996 1994 1996

P5 P6

F F

37 60

Nature Read

2002 2013

P7 P8

M F

59 44

Play tennis Cook

1992 1992

P9 P10

F M

52 59

Higher education Higher education Secondary education Higher education (graduate) Secondary education Higher education (graduate) Higher education Incomplete primary education Higher education Higher education (graduate)

Cycling Fishing

2000 2007

Coffee consumption and industry strategies in Brazil

Table 5.1  Farmer’s profile.



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followed by respondents with graduate degrees (30%), secondary education (20%), and only one respondent had incomplete primary education (Table 5.2). Regarding the characteristics of the properties, all producers have the Certifica Minas and Fair trade certifications. It is interesting to highlight that two respondents also belong to the International Women’s Coffee Alliance (IWCA), a collaborative network of women involved in the entire coffee chain (IWCA, 2016). All respondents have their properties located in cities near São Gonçalo do Sapucaí, where the APAS is located. In addition to this association, producers also belong to the Agricultural Cooperative of Vale do Sapucai (Coopervass), which provides all the storage structure and processing of coffee to the cooperative producers. The average size of the coffee plantations of respondents is 47.7 ha; however, there is some variability in the sample containing medium producers with plantations of 90 and 100 ha and approximately 15 permanent employees in their properties, and small producers with areas from 8 to 15 ha and none or at most 2 permanent employees. Table 5.2  Farm’s profile. Respondent

Certifications

P1

Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade Cert. Minas/ Fairtrade

P2 P3 P4 P5 P6 P7 P8 P9 P10

Coffee plantation (ha)

Employees

County

55

2

45

3

19

2

35

6

S.G. do Sapucaí S.G. do Sapucaí S.G. do Sapucaí Careaçu

15

3

90

15

S.G. do Sapucaí Careaçu

75

15

Turvolândia

8

0

Campanha

35

2

100

10

S.G. do Sapucaí Heliodora

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Coffee consumption and industry strategies in Brazil

When it comes to consumers, those who stated to know at least one of the mentioned certifications and verifications systems (Fair trade, Rainforest Alliance, Utz, Organic, Global Coffee Platform, Certifica Minas, BSCA, and ABIC) were interviewed. Eight consumers responded to the interview. Four of them took place in two coffee shops in São Paulo, Coffee Lab and Isto é Café. Two other participants responded to the interview in a coffee shop located in Varginha, Minas Gerais, Ouro of Kaffa; and the other two in the city of São Gonçalo do Sapucaí (Table 5.3). Again, the majority of respondents in this group are men, and the average age is 31.8 years. Regarding education levels, five respondents stated to have graduate degrees, one master’s degree, and two with higher education. All respondents stated they know about some of the certifications or verifications; however, they stated that they did not consider the certification seal as a determining attribute for their purchase decision. After the characterization of the sample, the analysis of the ladders identified from the interviews took place.

5.4  Content analysis and coding of elements Considering the laddering procedure discussed in the section about method of research, each element, or synonym, identified in the interviews had a classification of attribute, consequence, or value.The analysis has three parts: Table 5.3  Consumer’s profile. Respondent

Gender

Age

Education level

Occupation

C1

M

28

C2 C3

M F

27 30

C4

M

24

Agronomic engineer Economist Commercial manager Professor

C5 C6

F F

24 32

C7

M

31

C8

M

59

Higher education (graduate) Higher education Higher education (graduate) Higher education (graduate) Higher education Higher education (graduate) Higher education (graduate) Higher education (graduate)

Student Advertising person Entrepreneur Entrepreneur



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the results of interviews with certified producers, the results obtained from the consumers, and the discussions and comparisons. It was possible to identify 12 elements, classified in 4 attributes, 5 consequences, and 3 values. These elements are codes of grouping of consumer perceptions about the attributes of coffee certifications and their relation to their personal values. Table 5.4 presents the coding for the results obtained from interviews with coffee producers. Attribute 1 (marketing instrument) represents the producers’ perception of the certification’s ability to differentiate and position their product. Attribute 2 (sustainability) relates both to the perception the producer expects the consumer to have about the certification, and to the rules imposed by the program. The producers pointed to the certification of agricultural production as a trend (attribute 3), as well as the marketing of certified products. They believe that this market will become more robust internally in the future. Finally, attribute 4 (union) corresponds to the perception on the performance of the association. They affirm that, after the creation of this organization, producers became more collaborative; in addition, they emphasize the importance of the association’s performance in the community, mainly in relation to the improvements negotiated with the municipal government, such as a post office and an outpost service of the Bank of Brazil. As for the consequences, the cooperation and valorization of group action (consequences 5 and 8) are due to the association’s performance. Consequence 6 (market access) represents opportunities for exporting coffee. Attention to the production method (consequence 7) relates to the standards established by the certification. Producers say they have adopted better production practices after their ownership certification. Consequence 9 (transparency) represents the willingness of producers to be more transparent about the production practices adopted. Table 5.4  Numbering of attributes, consequences, and values for producers. Attributes

Consequences

Values

1. Market instrument 2. Sustainability 3. Trend

5. Cooperation 6. Access to markets 7. Attention to the production method 8.Valorization of group action 9. Transparency

10. Universalism 11. Achievement 12. Security

4. Union

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Regarding values, universalism (value 10) represents the concern of producers to meet the demands of consumers, and to preserve the people and nature of their communities. Achievement (value 11) is the personal fulfillment and the work invested to meet certification standards. Value 12 (security) means the stability acquired through the improvements and organization of production, as many of the producers interviewed have their coffee production as the main source of income. To structure a value chain, it was important to use the MECanalyst, in which was possible to insert the obtained attributes and consequences, and then associated with their respective values. Fig. 5.1 presents the HVM. The HVM comprises six chains. Attributes are in the lighter color rectangles; the consequences, in medium color; and values, in a darker tone. Table 5.5 presents the sequence analysis, which brings in the first column the initial attribute of each sequence; in the second column, the sequence formed with consequences and values; and, in the last column, the interpretation of the sequence. Attribute 1 (investment) relates to the perception that the producer has to invest in the property to suit certification standards. Attribute 2

Universalism (10) nr: 5 sub: 56%

Valorization of group action (8) nr: 3 sub: 33%

Cooperation (5) nr: 2 sub: 22%

Sustainability (2) nr: 2 sub: 22%

Achievement (11) nr: 6 sub: 67%

Security (12) nr: 8 sub: 78%

Transparency (9) nr: 3 sub: 33%

Acess to markets (6) nr: 4 sub: 44%

Attention to the production method (7) nr: 5 sub: 44%

Union (4) nr: 4 sub: 44%

Tendency (3) nr: 3 sub: 33% Marketing instrument (1) nr: 5 sub: 56%

Fig. 5.1  Value chain: coffee farm’s image of the certifications.



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Table 5.5  Relation between elements of each sequence of the value chain for the farmers.

Market instrument

1–6–11

Sustainability

2–7–12

2–7–10

Trend

3–9–12

Union

4–5–12

4–8–12

Certification is a way of differentiating all the production and allows access to more demanding markets, thus valuing all the efforts of the producer. To meet the standards of the certification program, the producer must improve its production method, promoting sustainability. The product becomes differentiated and attractive to the market, ensuring its income. The promotion of sustainability also indicates the producer’s commitment to environmental, social and product health issues, invigorating the image of agriculture. Producers believe that consumers will demand more transparency on productions methods of the products they consume, especially food. The union promoted by the certification (because they receive the certification through the association) promotes cooperation between producers, ensuring greater stability for the community. Producers value union. Individual performance lost space to the association.

(­valorization) refers to the valorization of the product; certified coffee is usually marketed at a higher price. Consumers also believe that access to certified products is a trend (attribute 3). Finally, attribute 4 (consciousness) refers to the consumption of products in which the production methods reduce socioenvironmental impact (Table 5.6). Regarding the consequences, consumers pointed out the payment of fairer prices to producers (consequence 5). They believe there will be an increase in the supply of certified products (consequence 6). Consumers also pointed out that the production methods for certified products respect some quality standards (consequence 7); and these quality standards promote sustainability (consequence 8) and appreciation of the producer’s work (consequence 9). In addition, consumers stated that the certification works as a subsidy for purchasing decisions, because the product brings

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Table 5.6  Numbering of attributes, consequences, and values for consumers. Attributes

Consequences

Values

1. Investment 2.Valorization

5. Fair prices to the producer 6. Increased supply of certified products 7. Best production practices 8. Sustainability 9.Valorization of the producer 10. Subsidies for purchase decision 11. Trust

12. Benevolence 13. Self-direction

3. Trend 4. Consciousness

14. Universalism 15. Security

more information that the consumer may or may not consider relevant to make their decision (consequence 10). Consumers also stated that certified products create more trust, once there is a process to attest that a product meets a certain quality standard (consequence 11). In terms of values, benevolence (value 12) refers to the improvement of the living conditions of the producer, both in relation to the return on investment and knowledge, and adoption of safety measures in the work environment. Self-direction (value 13) relates to the consumer’s knowledge to aggregate implicit information in a certification seal to make their decision in the moment of purchase. Universalism (value 14) refers to the consumer’s concern with environmental and social issues, and the life quality of the farmer. Finally, value 15 (safety) relates to the reduction of an internal conflict in the moment of consumption, because certified products, according to the interviewees, reduce the uncertainties regarding sanity and quality of the product (Fig. 5.2). It was possible to identify seven value chains, starting from one concrete attribute (investment) and three abstract attributes (value, trend, and consciousness). Table 5.7 presents the relations among the attributes, consequences, and values for the consumer.

5.5  Final considerations The objective of this chapter was to characterize the cognitive structure of the values involved in the perception of producers and consumers regarding coffee certifications, considering the gap in the literature when it comes to the characterization of these groups and the identification of the motivators for the adoption of certifications for coffee production, and the consumption of certified coffees.



Coffee certification and the laddering perspective

Benevolence (12) nr: 2

Sustainability (8) nr: 3 sub: 43%

Fair price to the producer (5)

Valorization (2) nr: 3 sub: 29%

Self-direction (13) nr: 3

Appreciation of the producer’s work (9)

Universalism (14) nr: 6

Security (15) nr: 9 sub: 71%

Subsidies for purchase decision (10) nr: 5 sub: 57%

Increased supply of certified products (6)

Investment (1) nr: 2

105

Trust (11) nr: 7 sub: 71%

Best production practices (7)

Trend (3) nr: 5 sub: 43%

Consciousness (4) nr: 6

Fig. 5.2  Value chain: image of the certification for the coffee consumer.

From a general perspective, the survey identified that both producers and consumers believe that certifications are a trend for the coffee market. Both relate this fact to the demand for more transparent transactions, reducing, in this way, uncertainties and conflicts at the time of purchase regarding the origin and quality of the product. Another aspect that was possible to identify from the research was the concern with sustainability. Producers and consumers consider certifications as a way to promote best production practices, dealing with both a current issue and also ensuring the permanence of production, in the view of producers, and improving the quality and safety of the product, in the view of consumers. This chapter has as a limitation the fact that it has not identified consumers who consider certifications as an attribute to guide their purchasing decision. Most of the interviewed consumers only knew, in different degrees, some of the certifications for coffee. Some have argued that the supply of certified coffee in the domestic market is still very restrictive, and there is a lack of consumer education regarding the meanings and objectives of the certifications. As a suggestion for future work, it is relevant to recommend the extension and stratification of the sample of producers according to the size of the property or type of certification. The certifications present in the coffee market range from family production to large producers, and the stratified analysis of these groups will allow the identification and comparison of the different motivations for the adoption of certifications.

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Table 5.7  Relation between elements of each sequence of the value chain for the consumer.

Investment

1–7–8–14

1–7–11–15

Valorization

2–5–9–12

Trend

3–6–10–13

3–11–15 Consciousness

4–7–8–14

4–7–11–15

The investments made to meet the standards of the certification authority, promote the adoption of best production practices, usually associated with sustainability. In addition to promoting the sustainability of the property, the investments made to adopt a set of good practices reduce the uncertainties of the consumer regarding the quality and sanity of the product. Respondents consider the certification a way to value the producer’s work. Some consumers said they believe that agriculture has a high degree of difficulty and that obtaining a certification is a possibility of the coffee producer to get fairer prices for their product and thus obtain means to improve their living conditions. Consumers stated that increasing the supply of products with some form of sustainable appeal is a trend. However, they claim that the certification is able to communicate what is actually making a particular product sustainable, and this way, it provides subsidies for a more conscious buying decision. The trend pointed out by consumers also concerns the demand for more transparent information about the product. Producers consider the certification of the production as an indicative of producers’ awareness. Consumers have stated that through certification and adoption of best production practices, the producer promotes sustainability, showing concern for a contemporary issue. In addition to promoting sustainability, consumers said they believe in the coffee certification, and the consequent adoption of best practices, indicates that the producer is concerned about the health of their product.



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References Abbott, L., 1955. Quality and Competition. Greenwood Press, Westwood. Barrenar, R., García, T., Camarena, D.M., 2015. An analysis of the decision structure for food innovation on the basis of consumer age. Int. Food Agribus. Manag. Rev. 18 (3), 149–170. Gutman, J., 1982. A means-end chain model based on consumer categorization processes. J. Mark. 46 (2), 60–72. Gutman, J., 1991. Exploring the nature of linkages between consequences and values. J. Bus. Res. 22 (2), 143–148. Hofstede, F., Audenaert, A., Steenkamp, J.B.E., Wedel, M., 1998. An investigation into the association pattern technique as a quantitative approach to measuring means-end chains. Int. J. Res. Mark. 15 (1), 37–50. International Women’s Coffee Alliance (IWCA), 2016. Retrieved from https://www.womenincoffee.org/ (2 April 2019). Leme, P.H.M.V., 2015. A Construção do Mercado de Cafés Certificados e Sustentáveis da UTZ Certified no Brasil: As Práticas e os Arranjos de Mercado (Dissertação de Mestrado). Mestrado em Administração, Universidade Federal de Lavras-MG. Lin, C.F., 2002. Segmenting customer brand preference: demographic or psychographic. J. Prod. Brand Manag. 11 (4), 249–268. Olson, J.C., Reynolds, T.J., 2001. The Means-End Approach to Understanding Consumer Decision Making. Lawrence Erlbaum Associates Publishers, Mahwak (440 p.). Pereira, S.P., 2013. Caracterização de propriedades cafeeiras com relação às boas práticas agrícolas: aplicação da análise “cluster” e discriminante (Tese de Doutorado). Universidade Federal de Lavras. Saes, M.S.M., Spers, E.E., 2006. Percepção do consumidor sobre os atributos de diferenciação no segmento rural: café no mercado interno. Organ. Rurais Agroind. 8 (3), 354–367. Schwartz, S.H., 2012. An overview of the Schwartz theory of basic values. Online Readings in Psychology and Culture 2 (1), 11. Souza, M.C.M., Saes, M.S.M., Otani, M.N., 2000. Pequenos produtores e o segmento de cafés especiais no Brasil: uma abordagem preliminar. In: Anais, 10 Simpósio International Farming System Research Association. IFSA, Santiago. Tolman, E.C., 1932. Purposive Behavior in Animals and Men. Century/Random House, London. Vriens, M., Hofstede, F.T., 2000. Linking attributes, benefits, and consumer values. Mark. Res. 12 (3), 4–10. Walker, B.A., Olson, J.C., 1991. Means-end chains: connecting products with self. J. Bus. Res. 22 (2), 111–118.

Further reading ABIC. Associação Brasileira da Industria de Café, O Café no Brasil. http://abic.com.br/ cafe-com/historia/. (Recuperado 04 Setembro, 2018). Fairtrade Labelling Organizations International, 2006. Uma Introdução à Certificação de Comércio Justo. FLO, Bonn. Food and Agriculture Organization of the United Nations, 2005. The State of Agricultural Commodity Markets 2004. (52 p.). ICO, 2003. Impact of the coffee crisis on poverty in producing countries. In: International Coffee Organization, 89th Session, 17–19 September 2003, Cartagena, Colombia. ICO, 2014. World coffee trade (1963–2013): a review of the markets, challenges and opportunities facing the sector. In: International Coffee Council, 112th Session, 3–7 March 2014, London, United Kingdom.

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Informe Estatístico do Café, Política Cafeeira. http://www.agricultura.gov.br/acesso-a-informacao/acoes-e-programas/cartas-de-servico/politica-cafeeira. (Recuperado 04 Setembro 2018). SEBRAE-MG, 2001. Diagnóstico Sobre o Sistema Agroindustrial de Cafés Especiais e Qualidade Superior do Estado de Minas Gerais. SEBRAE-MG, São Paulo. Spers, E.E., Zylbersztajn, D., 1999. Estudo de caso dunguling state. Certificação de qualidade na agricultura australiana. In: Anais, 9 Seminário Internacional PENSA, São Paulo.

CHAPTER 6

Certification: Facts, challenges, and the future Roberta Souza Piãoa, Lyon Saluchi da Fonsecaa, Éder de Carvalho Januáriob, Maria Sylvia Macchione Saesb a Department of Production Engineering, University of São Paulo, São Paulo, Brazil Department of Business, University of São Paulo, São Paulo, Brazil

b

6.1  Voluntary sustainability standards: Origin In the last two decades, there has been an increase of certifications and standards created by the consumer countries, the so-called voluntary sustainability standards (VSS) (Grabs et al., 2016). One of the reasons for the existence of certifications and standards is due to the variety of producer countries and different producer profiles. In this sense, it becomes complicated to access all relevant product information. In addition, standards also arise to preserve the environment, improve the conditions of workers in the agricultural sector, and promote the consumption of healthy foods. Coffee was one of the first and the most important markets to receive environmental certification (Potts et al., 2014). According to coffee industry associations,“Sustainable Coffee Program” (2016), the share of certified coffee or in accordance with some standard in total production increased from 15% to 40% from 2008 to 2015, respectively, whereas conventional coffee production increased 4% per year, and certified or standardized coffee grew 26% per year. From a producer’s perspective, some authors argue that VSS could be an opportunity for small and medium farmers to differentiate their products and capture more value (Borrella et al., 2015; Fitter and Kaplinksy, 2001), whereas others argue that, in the upper levels of the value chain, coffee prices tend to increase faster than the commodity prices received downstream. This is what is called the “coffee paradox” (Daviron and Ponte, 2005). On the other hand, for the smaller producer, the requirements regarding sustainability certificates are constantly increasing, and it is expensive to adopt and maintain certification.The costs refer to changes on the farm to comply with the requirements; also, payments to certification bodies for annual monitoring of property improvements are high (Henson and Humphrey, 2009; Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00005-6

© 2020 Elsevier Inc. All rights reserved.

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Raynaud et al., 2005). Besides the cost of the certification, coffee producers need to address requirements from different standards. Each market requires a different standard/certification, which means that producers have to adopt multiple certificates to sell in more than one market. For example, the Netherlands consumes around 30% of all UTZ-certified coffee. Europe imports 55% of Rainforest Alliance-certified coffee, whereas the United States, Germany, and Switzerland are the main consumer markets for certified Organic coffee (Pierrot et al., 2010). Bitzer et al. (2013) argue that producers have risks for addressing VSS requirements, and financial support and a long-term buyer relationship is essential to enable investments. Besides, the results about the impacts of the VSS adoption on productivity are controversial. Some authors such as Everage and Ingersoll (2013), argue that VSS implementation could improve yields and technical efficiency. However, the Committee on Sustainability Assessment (Giovannucci et al., 2008) using a multicriteria analysis approach find that more than 60% of respondents reported decreased coffee yields as a result of participation in a recognized sustainability system. In the most important coffee markets like the European Union, the United States, and Japan, the demand for conventional coffee is stagnant, yet demand for certified coffee is increasing. It is worth noting that there are few statistics on this market, although all studies point to its significant growtha (Giovannucci and Koekoek, 2003; Giovannucci et al., 2012). Coffee is cultivated in more than 80 countries in Central and South America, Africa, and Asia, and provides livelihoods for 20–25 million farming families, because smallholders produce most of the world’s coffee, around 70% of the total (Panhuysen and Pierrot, 2014). However, the total land dedicated to coffee production covers a relatively small area of agricultural land, around 10.5 million ha. Four countries dominate global coffee production: Brazil (35%), Vietnam (15%), Indonesia (9%), and Colombia (7%). In 2016, Brazil produced 51.37 million bags of 60 kg of coffee. Arabic coffee production was 43.38 million bags, and Conilon coffee production was 7.98 million bags.The planted area of the two varieties is 2,223,464.1 ha, and the estimated productivity is 26.33 sc/ha. From January to December 2016, coffee represented US $5.47 billion, ranking fifth in position among the most exported products by Brazilian agribusiness (Companhia Nacional de Abastecimento—CONAB, 2016). a

See https://hivos.org/sites/default/files/coffee_barometer_2014_report_1.pdf



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6.2  Standards and certificates for coffee To ensure that coffee production actually follows sustainable criteria, the industry in line with government organizations have created several certificates that guarantee compliance with certain sustainability standards (Kolk, 2012). These certificates began to be launched in the 1980s in response to concerns about the implications of increasing agricultural production for the environment and for society (Taylor, 2005). In general, certificates require the producer to have minimum working conditions that do not suffer any kind of discrimination, respect the local minimum wage law for all involved in production, and not to employ children under 15 years or less than the minimum age as defined by local legislation (Dammert and Mohan, 2015). The four major coffee certificates that include independent monitoring and certification are: Fair trade, Organic, Rainforest Alliance (RA), and UTZ (Kolk, 2013). In some producing countries such as Brazil, Vietnam, and Colombia, the 4C standard of conduct is also of great importance due to the large volume of production that address this code. Each of these certificates, although similar to each other, has different approaches (Kolk, 2012). Overall, Fair trade aims to support small farmers; the Rainforest Alliance (RA) and Organic focus on protecting ecosystems and biodiversity; whereas UTZ aims to integrate sustainability with market criteria. In 2017, the merger of Rainforest Alliance and UTZ was announced until the end of the year. The new organization will be named Rainforest Alliance according to UTZ Organization website. It was also stated that the merger would make it easier for companies to achieve sustainability certification. 4C is pointed out by experts as the gateway to other certificates. It is noteworthy that the four certificates comprise producer, environment, and market, and what will differentiate them is the importance they give to each of these criteria. Next are details of a little more of each of these certificates. According to the Association’s website, “The 4C Standard was designed in order to improve the economic viability (productivity, efficiency and market access) for coffee producers, the working and living conditions of their families and workers, the protection of primary forest and the conservation of natural resources such as water, soil, biodiversity and energy.” Launched in 2003 through a multistakeholder international public-private initiative, the 4C Association is already responsible for more than 42% of the world’s sustainable coffee production and 22% of total coffee production, with a production growth rate of about 90% per year (Potts et al., 2014).

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According to the organization’s website, “The 4C association, through the Collaboration Platform, organizes periodic forums and workshops, in which participants can acquire knowledge, establish new contacts and create synergies to jointly address the sustainability issues that affect the coffee sector.” Potts et  al. (2014) draws attention to the fact that a certification, by definition (ISO, 2005), is a statement of third parties related to products, processes, systems, or people. As the 4C association performs its own audits, it would not necessarily be a certification but rather a verification, which is confirmation by providing objective evidence, that the specified requirements have been met. In 2017, Coffee Assurance Services (CAS) was created, which is responsible for the 4C standard verification system. CAS is a provider of integrity control services in the coffee industry for 4C Code of Conduct Verification as well as supervision, integrity, and monitoring coffee progress. This organization is responsible for: (1) providing training to local 4C testers; (2) issuing 4C licenses; and (3) assessing the level of compliance of 4C Units with respect to the 4C Code of Conduct. Organic: The organic certificate is intended to avoid harmful practices to the environment. It prohibits the use of agrochemicals and deforestation, and requires measures of soil erosion control (Blackman and Naranjo, 2012). According to Potts (2007), the certified organic coffee market has doubled every 5 or 6 years. However, only about 3% of the world coffee production meets the requirements of this certification. According to the website of the certificate: “Organic certification can be done by local, international agencies or by partnerships between them. It can also be carried out by groups of small producers, since there are internal control mechanisms that follow the standards of organic agriculture. In such cases, it is common the commercialization through farmers’ and producers’ market and there is no export concern.” An advantage to the farmer who produces in this pattern is that a much higher percentage of production, about 54%, is sold as sustainable. This percentage for other coffees ranges from 25% to 35% (Potts et al., 2014; Bacon, 2005). Fair trade: Fair trade began to appear in the late 1980s, when the Dutch Foundation Max Havelaar launched the first Fair Trade coffee label (Dammert and Mohan, 2015). About 10 years later, this organization, in line with another 17 that also proposed fairer trade, joined together to create the Fair Trade Labeling Organizations International (FLO), which aims to



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“contribute to sustainable development, provide better commercial conditions and guarantee the rights of marginalized producers and workers.” This certification focuses on social aspects, specifically support to producers’ organizations, to offer price premiums aimed at local development. The certification also supports the strength of labor rights and long-run market relations (Valkila, 2014). Rainforest Alliance: This certificate aims to integrate biodiversity conservation, community development, workers’ rights, and productive farming practices to ensure comprehensive management of sustainable exploitation (SCAA Sustainability Council, 2010). According to Pinto et al. (2014), this certificate was initially deployed to large producers in 2008, but over time it began certifying small farmers who were organized into associations and cooperatives. According to the Imaflora Report of 2014, Europe is the largest importing region of Rainforest coffee in Brazil. About 87% of the Rainforest coffee exported goes to Europe followed by North America (48%) and the United Kingdom (33%). As for the origin, the Cerrado Mineiro is the largest region producing Rainforest coffee. UTZ: UTZ Certification is an international certification program that establishes standards to guarantee agricultural production and responsible delivery of coffee, cocoa, and tea. According to Kolk (2012), the advantage of this certificate for the producer is that the improvement of the quality of production and processing causes greater value added to the product to revert to a premium price, that is, a higher price for a better product, following the supply-demand logic of the conventional market. This type of approach is different from the Fair trade certificate, for example, which has the premium price as a certificate requirement. Kolk (2012) still draws attention to the fact that it is very difficult to compare the effects of these certifications to define “which is better.” According to the author, the few studies that tried to compare more than one pattern tended to find positive and distinct effects in each of them, indicating that they could possibly complement each other. An example is the study of van Rijsbergen et al. (2016) conducted in Kenya between 2009 and 2013, which aimed to compare Fair trade and UTZ certifications. The result was that both certifications improved the profitability of coffee production, with Fair trade having a greater impact on quantity produced, and UTZ on improving productivity (reduction of planting area) and quality. The author suggests that this may indicate a certification lifecycle, which initially goes from increased production and increased value

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capture with Fair trade, followed later by a certificate that requires higher productivity and quality, which in this case would be UTZ. Another study aimed at comparing certificates is by Chiputwa et al. (2015). In the survey conducted in Uganda in 2012 comparing Fair trade, Organic, and UTZ certificates, the authors observed that there was no significant correlation between improved quality of life among Organic-certified producers and UTZ. Fair trade-certified producers had 30% higher per capita consumption and were likely to be 50% less poor compared to noncertified producers. Although the Rainforest and UTZ certificates are dealt with separately in this chapter, the merger of the two certificates was announced in June 2017. According to information obtained so far, the merger will not cause changes in procedures and standards for the producer certified by the Rainforest system and UTZ by the end of the year 2018. A summary of the main certifications is in Table 6.1.

6.3  Application in Brazil: Coffee producers in Brazil Coffee is among the most traded agricultural products in the world. Its annual retail sales grew from US $45 billion (Alvarez et al., 2010) in 2007 to US $173.4 billion in 2014 (ICO, 2014), which makes it one of the leading segments in the global food and beverage industry (Carvalho et al., 2016). The fact that its production is mostly concentrated in countries located in tropical regions of the southern hemisphere and consumed mainly in the temperate regions of the northern hemisphere makes coffee a very important product in international trade (Carvalho et  al., 2016). This trade is considered important because it brings resources from more developed countries to developing countries (ICO, 2014). According to Giovannucci and Ponte (2005), more than 6 million families live according to this culture. These families account for more than 70% of the world’s coffee production (Bravo-Monroy et al., 2016). In Brazil, coffee is one of the main agricultural products marketed (Santos et al., 2009; Costa et al., 2013; Rodrigues et al., 2011). According to the report “2015-2024 Agricultural Outlook launched in July 2015” by FAO and OCDE, the country is the leading coffee supplier in the world. According to data from the Brazilian Coffee Industry Association (ABIC), coffee production in Brazil in 2015 corresponded to about 32% of total world production. In addition, according to ABIC, Brazil is also the world’s largest consumer of coffee (in kg of coffee), with an annual ­consumption of about 1200 million kg.



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Table 6.1  Certifications for coffee Certification/ Standards

4C Common Code

BSCA

Caccer—Café do Cerrado CACCER— Conselho das Associações dos Cafeicultores do Cerrado

Fair trade

Origin

Scope of the program

To start in 2003 as publicprivate partnership project by the coffee industry and the German development cooperation to initiate a multistakeholder dialog for defining a mainstream code of conduct for sustainability. The Brazil Specialty Coffee Association aims to bring together producers of specialty coffee, spreading this production and stimulate constant technical improvements and greater efficiency in services related to the marketing of these coffees. To certify the origin and the quality of coffee produced in a region called Cerrado Mineiro located in the Northwest of Minas Gerais State, Brazil, under a social, economic, and environmentally sustainable model. It is the first region in Brazil with Protected Geographical Indication systema for coffee. To start in the Netherlands in the 1970s.

Exclude worst practices and continuously increase the sustainability of coffee production and processing in the economic, social, and environmental dimension. Certifies that coffee was analyzed by independent cup tasters and the production process does not harm the environment or workers’ rights. The certification is based on a code of conduct, which includes aspects such as Good Agricultural Practices, Social and Environment Responsibility, supported by traceability mechanism.

Economic and environmental sustainability for farmers and their communities. Minimum price and social premium to cover costs of production and community-elected development programs. Organic premium for organic coffees. Continued

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Table 6.1  Certifications for coffee—cont’d Certification/ Standards

GlobalGap

Organic

Rainforest

UTZ

a

Origin

Scope of the program

The EurepGAP was created in 1997 by a group of British and Dutch retailers called Eurep (Euro-Retailer Produce Working Group). The group is composed of agricultural producers, inputs, and services industries. The standard was developed using the guide: Hazard Analysis and Critical Control Points (HACCP) guidelines published by the United Nations Food and Agriculture Organization. In September 2007, EurepGap changed to GlobalGap. The First Certification was formulated in England, India, and the United States in 1967. Begun in 1992 by Rainforest Alliance and a coalition of Latin America NGO’s, the Sustainable Agriculture Network (SAN). First coffee farm certification in 1996.

EurepGAP “is a set of normative documents suitable to be accredited to internationally recognised certification criteria such as ISO GUIDE 65 and internationally recognised.” The objective is “to reduce the risks in the agricultural production.”

It is started in 1997 as an initiative from industry and producers in Guatemala; Utz Kapeh became an independent NGO in 2000. In 2008, Utz Kapeh changed its name to Utz Certified— Good Inside

Organic farming and processing practices. Sustainable farm management in most holistic sense—social, environmental, economic and, ethical improvements are the cornerstones of the program. Sustainability: economic performance through productivity and farm professionalism; environmental standards to preserve flora fauna shade, buffer zones; Worker Health and Safety.

  Protected Geographical Indication links product quality to their geographic origin, and the quality is certified by a public organization. In other words, the “credibility of a quality label relies on government enforcement” (Raynaud et al., 2005, p. 48). (Souza, R.C., Presoto, A., Saes, M.S.M., Lemeilleur, S., The adoption of sustainable certificates by Brazilian coffee producers. In: 9th Research Workshop on Institutions and Organizations–RWIO, 13–14 October, Center for Organization Studies–CORS, São Carlos, São Paulo, 2014.)



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Brazil also appears as a protagonist in the world production of sustainable coffee. According to Potts (2007), the coffee certification movement presents a market-based solution to the problems created by trade liberalization, through the fixing of minimum prices and payment of premium prices to reduce business volatility, reaching new markets and encouraging an ecologically sustainable production. Wal-Mart, one of the world’s largest retailers, buys all six of its own sustainable coffee brands directly from Brazilian producers (Elder et al., 2014). In addition, it is important to note that the average annual growth rate of sales of sustainable coffee has been significantly higher than the annual growth in conventional coffee sales (Potts and Sanctuary, 2010). Based on Elder et  al. (2014) there is an evolution of sales of sustainable coffee. According to Elder et  al. (2014), the sales of sustainable coffee increased almost 400% from 2004 to 2009. However, according to Veiga et al. (2016), there are indications that the production of sustainable coffee in Brazil is already greater than the demand. One of the consequences is that the premium price paid to certified coffee producers is decreasing. In 2014, empirical research was conducted by academics from the Center for Organization Studies (CORS) research group about the perception of Brazilian coffee producers regarding the adoption of VSS. There were 250 face-to-face interviews with Brazilian coffee producers undertaken. One of the elements analyzed in the research was the type of investment made by producers to meet the requirements of sustainable certifications. The results point out that the investments that stand out are those related to improvements with social and environmental focus, such as biodigestor equipment and the construction of dormitory housing for the workers. From the point of view of the benefits of adopting certification, the producers pointed to the possibility of obtaining a premium price. In other research carried out by Fonseca (2018) with coffee organizations, one conclusion indicated that one of the main effects for producers when adopting the 4C standard was the improvement and adoption of production practices for environmental protection. It also stands out in terms of screening and greater control in the use of pesticides. Another point highlighted by experts is that most of the certificates show “what is to be done” but not “how it should be done.”The “how” element is an essential factor for producers to meet the criteria.They found the scenario of the production of coffee composed by a large number of small producers was fundamental to show how the requirements of the certificates can be met.

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In Brazil there are some government companies that provide this service such as Emater-Empresa de Assistência Técnica e Extensão Rural (Company of Technical Assistance and Rural Extension), which was created in 1966 and does this work with agricultural producers in the State of Minas Gerais. In the case of Emater, we highlight the work related to Certifica Minas, which provides technical support for producers to adopt the 4C Standard. Certifica Minas is an institution linked to the Government of Minas Gerais and responsible for a sustainable standardization program created in 2006 by the State Government. The program aims to stimulate the implementation of good agricultural practices in the mining of coffee, aiming to increase the visibility and competitiveness of this product both in the domestic market and in the foreign market. As an example of a private institution working on 4C standard certification, there is the Global Coffee Platform. The Global Coffee Platform is an organization formed by agents of different links in the coffee production chain. The institution is administered by a Board of 12 members elected at a meeting. Representatives of producers, commerce, industry, and civil society are part of the board of directors.The 2017 board of directors has representatives of other coffee sustainability standards (such as UTZ and Rainforest), thus highlighting the noncompetitive character of this organization. All members of the former 4C Association were automatically included in the Global Coffee Platform. One of the main goals of the Global Coffee Platform is to provide the coffee sector with support in terms of training, indicator data collection, and reporting. The goal is to enable coffee growers to continuously evolve within the industry, allowing them to (1) monitor and report on their progress in a transparent manner; (2) measure their performance relative to others; (3) promote their performance; (4) evaluate areas to innovate and improve performance; (5) attract new partners and donors for funding; (6)  support producers in meeting the Sustainable Development Goals (SDGs); (7) identify the gaps, strengths, and opportunities of the coffee sector; (8) share communication, knowledge, and use of resources; and (9) increase effectiveness within the farm. In general, it can be said that the Global Coffee Platform is an institution with a more global profile focused on policy-making for the chain as a whole. The 4C standard is one of the main proposals of the Global Coffee Plataform, but from 2017, the organization responsible for the verification system became CAS. CAS is a provider of integrity control services in the coffee industry for 4C Code of Conduct Verification as well as supervision,



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integrity, and monitoring of coffee progress.This organization is responsible for: (1) p­ roviding training to local 4C testers; (2) issuing 4C licenses; and (3) assessing the level of compliance of 4C Units with respect to the 4C Code of Conduct. In 2017, the Global Coffee Platform began to carry out actions related to the diffusion of sustainable practices. In early 2017 in Brazil, the organization in partnership with EMBRAPA, SEBRAE, and SENAR conducted an advanced training course on Coffee Sustainability for producers and rural workers from the cities of Ouro Preto do Oeste and Alvorada do Oeste in Rondônia. It also offered sustainability training courses in coffee agriculture for undergraduate students in agronomy at the Universidade Federal dos Vales do Jequitinhonha e Mucuri (UFVJM), Diamantina—MG (Federal University of the Jequitinhonha and Mucuri Valleys), and at the Instituto Federal da Bahia (Salvador—BA) (Federal Institute of Bahia). Another example of VSS diffusing institution in Brazil is Imaflora. According to the organization’s website: “The Institute for Forest and Agricultural Management and Certification - Imaflora - is a non-profit civil association founded in Piracicaba in 1995. The Institute was born under the premise that the best way to conserve tropical forests is to give them an economic destination associated with good management practices and responsible management of natural resources. From this perspective, Imaflora believes that socio-environmental certification is one of the tools that respond to this part of the challenge, with a strong incentive for local, sustainable development in the forestry and agricultural sectors. In the same way, the Institute seeks to influence the productive chains of products of forest and agricultural origin; collaborate in the elaboration and implementation of policies of public interest and, finally, in fact, make a difference in the regions in which it operates, creating models of land use and sustainable development that can be reproduced in other municipalities, regions or biomes from the country.”b This institute is responsible in Brazil for the Sustainable Agriculture Network certification—Rainforest Alliance Certified (RAS) and was responsible for the verification process of the 4C Association from 2013 until 2016. Although this type of organization is formally outside the agricultural production chains, it has importance in the diffusion of new rules and behaviors of this sector. b

http://www.imaflora.org/imaflora-institucional/id_2232.php

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6.4 Conclusions The objective of this chapter was to present the main VSS for coffee adopted by Brazilian producers. It also stressed the importance of some public and private institutions as disseminators of sustainable practices, as well as some advantages and disadvantages indicated in the literature for the adoption of VSS. In general, it is mentioned that, for producers, the adoption of VSS, despite the costs involved, can lead to premium prices and greater access to markets. However, one of the difficulties is the issue of diversity and the large number of certificates/standards, which leads to increased costs for the producer in trying to meet them. One of the fundamental changes occurred with the unification of the certificates Rainforest and UTZ, two of the main certificates for coffee. This fact shows the movement of the market to reduce the number of certifications, which can facilitate the adoption of the certificates by producers. Another factor to emphasize is the importance of certification to increase the control of the producer in the use of inputs in the property and, mainly, control in the use of pesticides. Finally, the importance of rural extension work done by cooperatives or state governments, such as Emater, is emphasized. Certification is made up of requirements, but it is critical to train the producer on how to meet these requirements. This transfer of knowledge is fundamental for the adoption of VSS to be disseminated and lead to improvements in coffee production in Brazil considering economic, environmental, and social aspects.

6.5  Managerial and policy implications From the perspective of producers and industry, it is essential to establish procedures for the adoption of knowledge by producers regarding certifications and how to address the requirements. Given the diversity of production areas, producer profile, and investment capacity found in Brazil, it is crucial to create mechanisms for the transference of knowledge regarding certification requirements and also to support investments that bring improvements in terms of process, product quality, and environmental conditions in coffee production in Brazil. From a policy perspective, state governments could intensify rural extension work in each producing region by strengthening the transfer of knowledge to producers. Finally, through rural extension work, it would be possible to create financing lines for the improvements and changes proposed by the VSS.



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6.6 Questions 1. What are the main challenges for producers to addressVSS requirements? 2. What are the main functions of government and cooperatives in the adoption of VSS?

References Alvarez, G., Pilbeam, C., Wilding, R., 2010. Nestlé Nespresso AAA sustainable quality program: an investigation into the governance dynamics in a multi-stakeholder supply chain network. Supply Chain Manag. 15 (2), 165–182. Bacon, C., 2005. Confronting the coffee crisis: can fair trade, organic and specialty coffees reduce small-scale farmer vulnerability in Northern Nicaragua? World Dev. 33 (3), 497–511. Bitzer,V., Glasbergen, P., Arts, B., 2013. Exploring the potential of intersectoral partnerships to improve the position of farmers in global agrifood chains: findings from the coffee sector in Peru. Agric. Hum.Values 30 (1), 5–20. Blackman, A., Naranjo, M., 2012. Does eco-certification have environmental benefits? Organic coffee in Costa Rica. Ecol. Econ. 83, 58–66. Borrella, I., Mataix, C., Carrasco-Galego, R., 2015. Smallholder farmers in the speciality coffee industry: opportunities, constraints and the businesses that are making it possible. IDS Bull. 46 (3), 29–44. Bravo-Monroy, L., Potts, S., Tzanopoulos, J., 2016. Drivers influencing farmer decisions for adopting organic or conventional coffee management practices. Food Policy 58, 49–61. Carvalho, J.M., Paiva, E., Vieira, L., 2016. Quality attributes of a high specification product evidences from the speciality coffee business. Br. Food J. 118 (1), 132–149. Chiputwa, B., Spielman, D., Qaim, M., 2015. Food standards, certification, and poverty among coffee farmers in UgandaWorld Development. World Dev. 66 (C), 400–412. CONAB, 2016. Acompanhamento da safra agrícola: Café. Companhia Nacional de Abastecimento. Terceiro levantamento, Brasília, pp. 1–107. set. 2017 v. 1. Costa, C., Guilhoto, J., Imori, D., 2013. Importância dos setores agroindustriais na geração de renda e emprego para a economia brasileira. Rev. Econ. Sociol. Rural. 51 (4), 787–814. Dammert, A.C., Mohan, S., 2015. A survey of the economics of fair trade. J. Econ. Surv. 29 (5), 855–868. Daviron, B., Ponte, S., 2005.The Coffee Paradox. Global Markets, Commodity Trade and the Elusive Promise of Development. Zed Books, London, p. 288. Elder, S., Lister, J., Dauvergne, P., 2014. Big retail and sustainable coffee: a new development studies research agenda. Prog. Dev. Stud. 14, 77–90. Everage, L., Ingersoll, C., 2013. The COSA Measuring Sustainability Report: Coffee and Cocoa in 12 Countries. The Committee on Sustainability Assessment (COSA), Philadelphia. Fitter, R., Kaplinksy, R., 2001. Who gains from product rents as the coffee market becomes more differentiated? A value-chain analysis. IDS Bull. 32 (3), 69–82. Fonseca, L., 2018. Efeitos do Padrão 4C na Produção Brasileira de Café Sustentável. Dissertação (Mestrado em Engenharia de Produção), Escola Politécnica, Universidade de São Paulo, São Paulo. Giovannucci, D., Koekoek, J., 2003. The State of Sustainable Coffee: A Study of Twelve Major Markets. International Coffee Organization, London. Giovannucci, D., Ponte, S., 2005. Standards as a new form of social contract? Sustainability initiatives in the coffee industry. Food Policy 30 (3), 284–301. Giovannucci, D., Potts, J., Killian, B., Wunderlich, C., Schuller, S., Soto, G., Schroeder, K., Vagneron, I., Pinard, F., 2008. Seeking Sustainability: COSA Preliminary Analysis of

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Sustainability Initiatives in the Coffee Sector. Committee on Sustainability Assessment (COSA). Giovannucci, D., Scherr, S., Nierenberg, D., Hebebrand, C., Shapiro, J., Milder, J., Wheeler, K., 2012. Food and Agriculture: The Future of Sustainability. A Strategic Input to the Sustainable Development in the 21st Century (SD21) Project. United Nations Department of Economic and Social Affairs, Division for Sustainable Development, New York. Grabs, J., Killian, B., Hernández, D., Dietz, T., 2016. Understanding coffee certification dynamics: a spatial analysis of voluntary sustainability standard proliferation. Int. Food Agribus. Manag. Rev. 19 (3), 31–56. Henson, S., Humphrey, J., 2009. The impacts of private food safety standards on the food chain and on public standard-setting processes. In: Paper Prepared for FAO/WHO, Rome. vol. 13, p. 59. ICO, 2014. World Coffee Trade (1963–2013): A Review of the Markets, Challenges and Opportunities Facing the Sector. International Coffee Organization, London. ISO, 2005. International organization for standardization. Int. Organ. 2005 (2), 1–24. Kolk, A., 2012.Towards a sustainable coffee market: paradoxes faced by a multinational company. Corp. Soc. Responsib. Environ. Manag. 19 (2), 79–89. Kolk, A., 2013. Mainstreaming sustainable coffee. Sustain. Dev. 21 (5), 324–337. Panhuysen, S., Pierrot, J., 2014. Coffee Barometer 2014. Hivos, IUCN Netherlands, Oxfam Novib, Solidaridad and WWF. Pierrot, J., Giovannucci, D., Kasterine, A., 2010. Trends in the Trade of Certified Coffees. International Trade Centre. Technical Paper, Available from: https://ssrn.com/ abstract=1736842. Pinto, L.F., Gardner, T., McDermott, C., Ayub, K., 2014. Group certification supports an increase in the diversity of sustainable agriculture network–rainforest alliance certified coffee producers in Brazil. Ecol. Econ. 107, 59–64. Potts, J., 2007. Alternative Trade Initiatives Income Predictability: Theory and Evidence From the Coffee Sector. International Institute for Sustainable Development, pp. 1–33. Potts, J., Sanctuary, M., 2010. Sustainable Markets Are Growing—Is Sustainability Keeping Pace? A Perspective on Sustainable Coffee Markets. Entwined. Potts, J., Lynch, M.,Wilkings, A., Huppé, G.A., Cunningham, M.,Vivek,V., 2014.The State of Sustainability Initiatives Review 2014: Standards and the Green Economy. International Institute for Sustainable Development and the International Institute for Environment and Development, Winnipeg, MB, ISBN: 978-1-894784-45-0. Raynaud, E., Sauvee, L.,Valceschini, E., 2005. Alignment between quality enforcement devices and governance structures in the agro-food vertical chains. J. Manag. Gov. 9 (1), 47–77. Rodrigues, F., Burnquist, H., Costa, C., 2011. Escalada tarifária e exportações brasileiras da agroindústria do café e da soja. Rev. Econ. Sociol. Rural. 49 (2), 295–322. Santos,V., Gomes, M., Braga, M.J., Silveira, S., 2009. Análise do setor de produção e processamento de café em Minas Gerais: uma abordagem matriz insumo-produto. Rev. Econ. Sociol. Rural. 47 (2), 363–388. SCAA Sustainability Council, 2010. Sustainable Coffee Certifications. A Comparison Matrix (Long Beach, CA: Specialty Coffee Association of America (SCAA)). Taylor, P., 2005. In the market but not of it: fair trade coffee and forest stewardship council certification as market-based social change. World Dev. 33 (1), 129–147. Valkila, J., 2014. Do fair trade pricing policies reduce inequalities in coffee production and trade? Dev. Policy Rev. 32 (4), 475–493. van Rijsbergen, B., Elbers, W., Ruben, R., Njuguna, S., 2016. The ambivalent impact of coffee certification on farmers’ welfare: a matched panel approach for cooperatives in Central Kenya. World Dev. 77, 277–292. Veiga, J.P., Barbosa, A., Saes, M.S., 2016. A Cadeia Produtiva do Café no Brasil: Impactos Sociais e Trabalhistas da Certificação. Relatório de Pesquisa.



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Further reading Giovannucci, D., Von Hagen, O., Wozniak, J., 2013. Corporate social responsibility and the role of voluntary sustainability standards. In: Schmitz-Hoffmann, C. (Ed.), Voluntary Standards Systems—A Contribution to Sustainable Development. Springer Publishing, Berlin, pp. 359–384. Knorringa, P., Nadvi, K., 2016. Rising power clusters and the challenges of local and global standards. J. Bus. Ethics 133 (1), 55–72. Levy, D., Reinecke, J., Manning, S., 2016. The political dynamics of sustainable coffee: contested value regimes and the transformation of sustainability. J. Manag. Stud. 53 (3), 364–401. Souza, R.C., Presoto, A., Saes, M.S.M., Lemeilleur, S., 2014. The adoption of sustainable certificates by Brazilian coffee producers. In: 9th Research Workshop on Institutions and Organizations–RWIO, 13–14 October. Center for Organization Studies–CORS, São Carlos, São Paulo.

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CHAPTER 7

Farm innovation: Nine cases of Brazilian coffee growers☆ Decio Zylbersztajna, Samuel Ribeiro Giordanob,c, Christiane Leles Rezende De Vitab,c a

Economics of Organization, School of Economics and Business/University of São Paulo, São Paulo, Brazil PENSA (Agribusiness Knowledge Center), São Paulo, Brazil c Università del Caffé, São Paulo, Brazil b

7.1 Introduction Innovation, as well as diffusion and adoption of technologies, are interconnected concepts. The predominant approach to innovation focuses on the development of technological trends. New paradigms emerge displacing existing industries and inducing the design of new business models. How do they emerge? How do new paradigms become dominant? How does competition trigger innovation? How do public policies affect technological cycles? These are questions contemplated in the literature. Issues of biotechnological revolution, nanotechnology, precision farming, and connectivity are examples of breakthroughs that have opened room for new business models. Diffusion and adoption of new technologies are concepts as relevant as innovation, as they add to the knowledge of how new cycles emerge adopting the views of the users. The focus is on how new technologies reach the end user and what the incentives are for users to substitute old technologies for new. Particularly relevant is to observe how the user’s perspectives of risk aversion and switching costs play in the process. When dealing with agriculture, the innovation-diffusion-adoption trilogy has gained particular relevance. Many authors in the field of agricultural development tried to reveal development difficulties by convincing farmers to adopt new technologies based on the agricultural revolution age.They blame persistent low productivity of factors to the lack of information provided to farmers, and the solution proposed was to bring only good news to farmers, which was expected to be sufficient to trigger development. This perspective has shown to be naive and simplistic, and leads to inefficient public policies. ☆

This chapter was produced as part of the Università del Caffè Brazil´s activities. The UdC Brazil was born in March of 2000 as a result of a partnership between PENSA (Agribusiness Knowledge Center) and illycaffè. More information: universidadedocafe.com.

Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00006-8

© 2020 Elsevier Inc. All rights reserved.

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The technological evolution of scientific approaches brought new perspectives and received several influences; the first was showing the key role of prices in providing incentives for technological change. The observed dispersion of technological change trajectories and adoption of new technologies by farmers is consistent with different market conditions. In other words, profit maximization is consistent with different levels of technology adoption. Second, the work of Theodore Schultz on human capital stressed the relevance of farmers` education to triggering development, which brought a different perspective to public education policies. Third, in the 1980s, the resource-based approach opened room for new microanalytic studies that applied to technological innovation. The resource-based approach places attention on routines and tacit knowledge that emerges from the experience of agents. This chapter introduces a new perspective of innovation that is neglected in the literature, namely the microinnovation analysis. This aspect combines price perspective and the routine of economic agents. The price-induction approach of technological innovations embodies the role of price incentives, and the knowledge perspective brings the competence of agents to bend routines toward small, additive microinnovations that affect economic results. This work is the result of a 1-year study carried out with nine coffee growers in three Brazilian regions in 2016. Case studies have been developed based on a single protocol to identify microinnovations based on tacit knowledge of agents as well as to determine how the innovations have diffused among farmers. The main findings identified cost-saving and ­value-adding strategies, suggesting that microinnovation deserves further attention for studies of economics of organizations in agriculture. The chapter has five parts: the second section highlights the theoretical perspective, the third presents the research method, the fourth resumes the main findings in the case studies, and the fifth offers a conclusion.

7.2  Theoretical support The literature on farmer’s innovations follows studies on technological change and diffusion of technologies in agriculture that explored the effect of relative prices as determinants of incentives to promote new technologies. For instance, in the 1970s, Binswanger (1974) showed that technology change responds to scarcity, bending research efforts toward scarce production factors signaled by prices. Agricultural mechanization arises as a



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response to limited agricultural labor and fertilizers, just as the green revolution package responds to rises in land prices. Distortions of all sorts affect the process of technological change. The growth of the farm inputs corporations, and the concentration in that industry distorts signals provided by the price mechanism. Farmers have few technical package choices. The remaining question is how farmers respond to incentives directing innovative efforts to solve daily problems. Is farming activity passive concerning innovation, having been left with the single decision to choose among existing alternatives? Or do farmers have room to innovate at the farm level? The literature of adoption of farmer’s technologies shows a pronounced trend. The original influence of Theodore Schultz in the studies on the role of human capital (Schultz, 1961) has opened room for future studies on innovation based on knowledge. Second to the work of Griliches (1960) on technology diffusion, particularly studying the pattern of adoption of hybrid corn in the United States in the 1920s, his crucial contribution identifies two variables: namely the maximum level of adoption of the new technology as a substitution to traditional technology, and the rate of adoption of the innovation. The author shows that, the more profitable the latest technology, the more rapid its adoption and the higher the stabilization of the maximum level of adoption. The same idea inspired the work of Paiva (1971) in the 1970s, who explored the modernization of Brazilian farmers and the persistence of new and old technologies. The literature shows a convergence that the production of new technologies and the adoption of existing technologies by farmers result from price incentives, with profit maximization being the golden rule. This approach assumes the functioning of perfect markets and inexistence of transaction costs. Recent literature of transaction cost economics and the relevance of institutions introduced alternative approach views. Studies of a resource-based approach focus on the role of knowledge carried by economic agents. The fundamental idea is that routines are considered forms of tacit knowledge that cannot be packed and traded. Instead, economic agents develop it in the continuous activity of production. The two elements are critical to support the present study. First, prices and profit maximization matter; second, agents perform local activities that add to the innovation process. Our key proposition is that “farmers carry microinnovations embedded in the routines performed at the production site”; our aim is to reveal some examples adopting the multiple case study method.

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7.3 Method The method used to identify innovations and microinnovations related to coffee production were case studies. Nine case studies of Brazilian coffee growers were produced. Each case identifies elements to answer the research question about the existence of local microinnovations, their motivation, their diffusion, and the connected routines.The regions studied were Cerrado of Minas Gerais State, Matas de Minas/Matas do Espírito Santo, and southern region of Minas Gerais, which represent the most important coffee regions in Brazil. Case studies are widely used in management, economic studies, and also as a method of scientific research. It is a method of registration and research with different purposes. Depending on the target, their structure, size, format, and language will be different (Zylbersztajn et al., 2011). As explained by Farina (1997), the case study describes a real situation lived within an organization. Therefore, it is dated and linked to a set of circumstances both internal and external to the organization.The elaboration of a case depends on the use of the information objectively, accessible to the nonprofessional and, at the same time, organized according to a theoretical structure. In the same line, Zylbersztajn et al. (2011) stated that, whatever its purpose, a case study cannot dispense with three central elements: (A) A well-defined focus. (B) Theoretical structure. (C) Identification of the institutional setting. To meet these three core elements, the authors decided that each case study would have the following essential items in this research: its history involving characteristics of the farm, the producer and the organization, description of the innovation, the challenges faced, and the lessons of the case. Six steps were performed for each case: – Contact with experts to identify potential cases of innovation and microinnovation involving coffee production. – Selection of cases according to the identification of value-adding innovations and diffusion possibility. – Field trip and interviews. – Writing the cases. – Cross-reading. – Seminar of presentation and debate. The theoretical support is also based on the Agribusiness Systems Analysis (Goldberg, Zylbersztajn). For many years, agriculture innovation was discussed as a disconnected sector of the other sectors of the economy.



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There is a profit in adopting the systemic perspective to analyze innovation in agriculture, as a component of the system of organizations that represent the agribusiness system. This theoretical approach involves the role of support organizations, institutions, and the contractual arrangements among firms along the chains. The representation of Agribusiness system can be seen in Fig. 7.1: Based on the systemic view, the processes of innovation in agriculture can generate relevant propositions, such as: (A) Innovations occur in processes as well as products offered to the market. (B) Innovations occur in the context of organizational forms that connect producers-processors-distributors and final consumers. (C) Farmers interact with research institutions in coinnovation processes and to diffusion of innovations. There is an important process of local innovation that occurs within agricultural activity, which is influenced by the competence and educational level of producers that is little recognized. Farmers work daily, solving problems from practice, the exchange of information, and from experimentation, even if not supported by scientific methods. Observing the characteristics of each case, we classified the cases in categories related to their motivations and about their effects: Motivations: Cost-saving, value-adding strategies; improvement of commercialization; and improvement of specific technical operations. Impacts: Technical aspects and managerial aspects. These two categories were subdivided into subcategories get a better glimpse of the specificities of each case and the results obtained due to the innovation processes. These subcategories are: (1) Technical aspects of the case: 1.1 Environmental Impact Control. 1.2 Local Technical Diffusion. 1.3 Technical Diffusion by Rural Extension.

Fig.  7.1  Agribusiness system. (Source: Zylbersztajn, D., Neves, M.F., Caleman, S. (Org.), 2015. Gestão de Sistemas de Agronegócios. Atlas, São Paulo.)

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(2) Managerial aspects of the case: 2.1 Production Costs Effects. 2.2 Improvement in General Management of the Farm. 2.3 Value Addition to the Product. 2.4 Contracts and Commercialization. 2.5 Relations with Stakeholders. These categories and subcategories were not randomly chosen. They emerged during the process of elaboration of the nine cases and were chosen due to their connection with the basic question of this study. In the following section, the case studies will be described and analyzed.

7.4  Description of the case studies Nine case studies have been developed. Seven of them are focused on quality coffee growers that were considered innovators. They were in the main coffee regions of Minas Gerais, which were Southern, Cerrado (savannahs), Atlantic Forest, and the Mountains of the State of Espírito Santo. Two cases are about collective actions: one addresses technical and administrative costs of the farms, and the other targets property rights related to a system of Denomination of Origin “Cerrado Mineiro.” Each one of the cases illustrates elements that contribute to the enlightening of the varied aspects of microinnovation in coffee production and trade.

7.4.1  Case 1: “Da Serra” Farm, Botelhos—Southern Minas Gerais This a typical case in which the innovator is the owner-farmer who embodies the unique human capital associated with the innovation. His curiosity and resourcefulness are the drivers of continuous small and interconnected innovations. Mr. Mario Ferrari, the owner, is an agronomist whose skills have always been mechanics. His farm is located in a hilly region. One side is proper in climate and altitude for the coffee production, but on the other hand is highly labor intensive for the operations of cultivation and harvest. This situation pressures the production costs of coffee in all southern regions of Minas Gerais and anywhere coffee is grown in mountainous areas. This was the challenge that Mr. Ferrari faced every day. He always asked, “What can be improved here?” The profile of Mr. Ferrari, the kind of meticulous person who knows every bit of his farm and who is aware of any routine in the operations, contributes to form this kind of organized innovator.



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Among the many innovations identified in the case study, two were chosen that represent the profile of a resource-based innovator. First, the adaptation and improvement of equipment that Mr. Ferrari makes to control costs and increase the efficiency of specific operations in coffee production. They complement each other, leading to a direct effect on the costs. He deals with his tools in his garage, led by his extraordinary sensibility to make functional and straightforward tools. A semimechanized portable harvester is a simple machine adapted from an olive harvesting machine brought to him from Italy, which was enough for Mr. Ferrari to develop adaptations and turn it into a machine that could be used for coffee harvest. The effect of the new equipment was the improvement of labor efficiency controlling harvesting costs, keeping it at competitive levels. This is typical for open innovation. A separator of impurities developed by Mr. Ferrari leaves behind the traditional way of separating these impurities by hand, such as gravel, small stones, small branch pieces, and leaves from the beans. The old way is handwork-consuming. The process is quite simple, consisting of a pipe with a forced flux of air that separates the beans from the undesirable materials. Mr. Ferrari is not worried about patents or making money with his new tools. In his own words, he expressed this lack of preoccupation with property rights: “I want to be copied.” A second good example of microinnovation is represented by a series of mechanical devices made from junk and old equipment, such as a homemade Jeep and a big sweeper, which is a metal blade used in the coffee yard to revolve the coffee connected in the back of a tractor that saves the work of many men. This family of innovations results from Mr. Ferrari’s competence in dealing with mechanics. It also shows that Mr. Ferrari is an innovator. Cases of innovation like this cannot be replicated, due to the specific skills of the innovator. The progress of this farmer comes from small creative changes. When summed up, they result in an important effects, in this case, the operations, the ways of harvesting coffee, the ways of stacking the coffee in the yard, and the way in transporting goods around the farm. Teachings of the Case: • The problems faced by the farmers, mostly of costs and mainly pricedriven, are the incentives for innovation. • Thorough knowledge of the farm, the operations, the routines, the organization, and mechanical skills sums up to compose the profile of this highly successful innovator.

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• The capabilities of the innovator, in this particular case, creating different solutions to solve farming problems, are nonreplicable due to the specificities of the innovator. Motivation: Cost-saving and improvement of specific technical operations. Technical Aspects: Local technical diffusion and technical diffusion by rural extension. Managerial Aspects: production costs effects and improvement in the general management of the farm.

7.4.2  Case 2: Passeio e Lagoa Farms, Monte Belo, Southern Minas Gerais Adolfo Vieira is a nontraditional coffee grower. Despite his family’s involvement with coffee since the times of his great-grandfather in the 1889s, the generation of his father went to the University. His father is a dentist, and Adolfo is also a dentist. Nevertheless, life conducted Adolfo to lead the farm. Neither his father nor his brother wanted to administrate the farm. Leaving odontology behind, Mr.Vieira became a full-time coffee grower. He developed a different view of the product. He knew little about coffee, but he knew that there was value to be discovered in the production of mountain coffee. The production depended on two key factors, namely production with best agricultural practices and cost control due to the higher cost in the mountains, and the search for the bonuses in prices that the markets pay for quality coffees. In this way, Mr.Vieira had good relations with experts in the field production of coffee to solve the technical problems and, on the managerial side, he participated in quality awards, having initial success. This fact led him to develop relations with several organizations like the Brazilian Specialty Coffee Association, several specific coffee buyers, and with Klabin Paper Co. As can be seen, the features of this case are varied because they involve a nontraditional range of subjects related to innovation with a nontraditional coffee producer. His involvement with the association of special coffees made him president of the entity, and he opened relations with Agencies of Export Promotion. Being physically present at coffee fairs and festivals brought him closer to consumers. An example is a roaster from Japan that buys his coffee, posts pictures of the various stages of the crop in the store, and prints the portrait of Mr.Vieira on the packages. This is a typical case of microinnovation through a direct relationship with consumers and contracts. Mr.Vieira



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solved cost problems in the field and in the office with control and added value with his presence and contracts. The diffusion of these examples was done by Mr. Vieira himself in a kind of personal crusade to prove the feasibility of the coffee produced in the mountains, vis-à-vis, the coffee produced in new agricultural frontiers with flatlands. It can be easily done, he lectures, and is always invited to be a speaker at coffee events. It is a model that can be replicated by other producers because they have the elements and technical support to do so. In this case, there also appears the figure of co-innovation in association with Klabin Paper Co., and the Federal University of Lavras, which is looking for the development of paper packaging (Kraft paper) for small lots of ­ultra-special coffees. Mr.Vieira actively participated, opening the opportunity to have an interesting partnership that created value as it opened the market for differentiated packaging.The great thing was to offer different sizes of packages of 5, 10, 20, and 30 kg to different sizes of producers and consumers as well. Another innovation that must be mentioned is the long-term contract with coffee buyers. Nontraditional transactions again called the attention of Mr.Vieira to make this kind of contract. He understood the logic that could be profitable to him. Because the buyers accepted to pay the price above the market, he gave them a guarantee, through a contract, stating the attributes of quality, amount, and price for his coffee. As he is above the market prices and precisely knows his costs, he avoids the volatility of the market and guarantees his profit margins. In this case, it is observed that the innovation occurs along the whole productive chain. It begins in the field, but it goes mainly out of the farm limits. And it goes much beyond the traditional vision of technology associated with the innovation. In this case, the coffee grower replicates the examples of big companies and prints his name to his product associated with his brand. To Mr.Vieira it clear that his presence in the association and the actions taken there contribute to the improvement of the segment of special coffees. It generates positive externalities to the community of producers. The more, the better to have good producers. Teachings of the Case: • Innovation happens in big corporations, as well as in the small farms, as can be seen clearly in this case. • The proactivity of the innovator farmer is a characteristic associated with his success, and this success will be widespread through neighbors, the coffee community, and the technical assistance corps of the cooperative.

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• The innovation does not happen only on the farm. This farmer noted that, after taking care of the details of the production and the care in the postharvest operations to attain quality, he should continue and go beyond. He perceived the importance of looking for the final consumer. He surpassed one of the most complicated barriers of the Brazilian agriculture: the distance between the producer and the final consumer. Motivation: Cost-saving, value-adding strategy and improvement of commercialization. Technical Aspects: Local technical diffusion. Managerial Aspects: Production costs effects, value addition to the product, contracts and commercialization, relations with stakeholders.

7.4.3  Case 3: Caxambú Farm, Três Pontas, Southern Minas Gerais The case of Caxambú Farm, whose owner is Ms. Carmen Lucia Chaves de Brito, also known as Ucha, is an iconic example of the relevance of gender in the agribusiness system. She has a particular way to go in the relationship with the collaborators, neighbors, internees, researchers, and the local community in general. Out of these good relations, she makes the diffusion of knowledge through the involvement of the local community of producers. In this case, the innovation is addressed based on two dimensions: on the farm, and with the diffusion of knowledge and research innovation in coffee processing with a sensorial laboratory in the farm. The innovation generated in association with the Federal University of Lavras has several characteristics. First, the innovator has the advantages of being a pioneer in touch with new technologies, even if this knowledge is going to be widespread. Second, the proximity of the farm with a research center increases the probability of access to relevant information. Besides acting in research, the family also works to spread knowledge, opening their relationship with other producers and offering postharvesting courses about quality. The presence of a sensorial lab at the farm level is an open innovation bringing the scientists, students, and internees to work directly in local production and interacting with the producer. In this case, the property rights of the findings, despite being held at the farm, are not exclusively transferred to the farmer but rather shared with the research institution because it is a public entity. The exciting thing about the ongoing research is that they look for new coffee beverages through different ways of fermentation. This calls attention because it is also of interest to the coffee industry.



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The participative model of management can be seen in the daily activities of the farm showing that Ucha values the knowledge of the collaborators to solve problems and accepts their suggestions. The feminine hand is in the way the aesthetics; the beauty and ethics are conducted on the farm instead of only valuing the efficiency. Ucha supported the workers in solving problems like housing and schooling for their children as a way to attract and keep workers living on the farm in good conditions of comfort and education. One story showing the feminine hand in the management should be told: “Music in the Storehouse.” Once, a prospective German client, owner of a roasting company, visiting the farm passed the storehouse of the farm and listened Ucha’s ideas to install speakers playing classical music in the storehouse. She said that the beans suffer great stress, that they were a living being whose biology is in process and passing through several operations during the production. She explained they deserve and need a rest before going to the market. In this way, they’d be given moments of peace and harmony. Surprised, the gentleman asked Ucha for a moment to be alone there. After several minutes, Ucha went to storehouse looking for her guest. She found him sitting on the ground, listening to the music, in an emotional state. From then on, he never stopped buying coffee from Ucha’s farm. He returns every year to listen to the music in the storehouse. Teachings of the Case: • The activities carried on Caxambú Farm are innovative and lead to future possibilities, namely the competitive capability of the medium-scale coffee farms always happens when the farmer can add value associated with the quality attributes of the coffee and the social actions shared with the stakeholders. • The search for models of shared management that permit active participation of the collaborators is innovative at the farm level. Ucha’s competence hits the target as an innovative entrepreneur in a resource based model. She says, “The knowledge comes from the university; the research and the knowledge completes itself with the wisdom that comes from the workers.” • The call for the adoption of state-of-the-art technology in production and the “Out of the Box” possibilities are both innovations carried by Ucha on her farm. Motivation:Value-adding strategy and improvement of commercialization. Technical Aspects: Technical diffusion by neighbors. Managerial Aspects: Improvement in the general management of the farm, value addition to the product, contracts and commercialization, social relations with stakeholders.

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7.4.4  Case 4: São Paulo Farm, Patrocínio, Cerrado Minas Gerais The features of this case are of a technical nature involving weed management in the crop, partnership with research institutes, and the reduction in the use of inputs (agrochemicals and fertilizers) and water for irrigation.The manager and associate owner of the farm, Marcelo Montanari, is a restless agronomist. He is always searching for better systems to do things on the farm. He knows every centimeter of his farm because he runs through it every day with his collaborators and internees from the agronomy course that works with him. Marcelo likes to have agronomy students on his farm, making their undergraduate monographs. Sometimes he has even four students working on the farm. He supplies the student’s transport, food, and free access to the farm. They are advised by professors of the University who choose the research issues in a common base of interests with Marcelo. These actions are very innovative, and he lets them make the diffusion of the knowledge gained at the farm. He is never satisfied because he knows that perfection cannot be attained, and there is always room for improvement and for new things. The story behind the weed management started with the graduation of Marcelo at the Federal University of Lavras. He began his profession working with soybeans. In the zero-tillage system, he noticed the huge amount of organic matter that rested in the soil and the help that this biomass gave to the crop regarding nutrients: improvement of the fauna of the soils, increase in the porosity of the soil, maintenance of the humidity of the soil, and much more. He thought, “Why don’t we apply this knowledge in coffee production?” The regular way of managing weeds on coffee plantations was to apply herbicides to kill and dehydrate any form of vegetal species, keeping the soils in the middle of the coffee rows clean. Marcelo took a radical step by stopping the use of herbicides and just using mechanical cutting of the weeds, letting them deteriorate in the soil’s surface. Studying these proceedings with the help of professors of the University of Patrocínio, he knew that, theoretically, they would obtain moisture and elements to fertilize the soils, and generate a better environment for the coffee roots, improving productivity. But he had to prove it scientifically. The proof came with the help of methodology of a professor at Patrocínio University; the use of bioactivators released the nutrients from the biomass, making them available for the coffee plants. It was a vital addition to the process, making the release of nutrients and its availability to the soil and the coffee roots feasible.



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The reduction in the use of inputs, measured in three seasons, was a reduction of 43% in nitrogen, reduction of 54% in phosphorus, and reduction of 56% in potassium. All this, combined with a reduction of hours’ of tractor use and costs of the herbicides, resulted in a total cost reduction of 26.91%. Besides these advantages, there is the improvement of the environmental conditions of the farm, the growth of biodiversity, and the rational use of water. These are strong appeals to clients who value these issues in the final product. Marcelo receives many visits from neighbors and groups of farmers interested in the new practices. He opens his farm to anyone and does not hide any secrets because he knows these innovations will be rapidly adopted when the more conservative producers accept these techniques. Meanwhile, Marcelo, along with professors, researchers, internees, and inputs producers takes the first-comer advantages and the privilege of being a pioneer in this technology. As Marcelo says in his openly natural way, “We are here to produce the kind of coffee the client needs.” Teachings of the Case: • A radical change in the paradigm of the management of weed cover and the use of herbicides through microinnovations: – An innovative mind accepting radically new ways in managing and controlling weeds was necessary to implement this project. More than that, a person needs to be open-minded to understand the nature and origins of the processes that happen on the farm on a scientific basis, with the help of science and scientists. This leads to routines and changes in habits and traditional technology that affect the financial costs of the farm and sparing of natural resources in a very impressive way. – Technical knowledge and register. Technological knowledge, in this case, was not ready to be used. It takes time, patience, and experimentation to find the best results and the best ways to find better ways to apply the processes of weed management. Marcelo knows that, by his nature, he logs every single detail of what happens in the field, with the help of collaborators, internees, and, of course, his acute vision of the plantation. • The possibilities of spreading this knowledge are good because it results in reduction in the costs of production, an aim that every producer looks for.

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Motivation: Cost-saving and value-adding strategy. Technical Aspects: Environmental impact control and technical diffusion by rural extension. Managerial Aspects: Production costs effects, improvement in the general management of the farm, value addition to the product, contracts and commercialization.

7.4.5  Case 5: Jatobá Farm, Patrocínio, Cerrado Minas Gerais According to the scale pattern of the farms, Jatobá Farm is not a typical farm of the region. Its total area of 42 ha, of which 26 are occupied with coffee, does not allow for scale effects in production. The farm was a traditional property from the family, but the relatives who assumed ownership and control could not run it. Mr. Paulo Motta, a well-prepared economist, worked in Brasilia, the Federal Capital 300 km away from the farm. Despite being very open to new technology and innovation, he could not assume management of the farm, so he passed the responsibility to his son, Thiago Motta, who graduated in agronomy. Mr. Paulo formed his plantations with cultivar recommended by the technical assistance of the geneticists of a local research center—EPAMIG. He knew he did not have the scale to produce large quantities of coffee, so he decided to produce coffee seeds and sell them by the kilogram instead of producing only coffee commodity to be sold by the 60-kg bag. This was an innovation Mr. Motta saw was ahead of its time that was pursued by his son, Thiago, and is now a succeeding part of their business. Just after his graduation in agronomy from the University of Brasilia in the federal capital,Thiago Motta had to take over the family farm business because his father was involved with jobs in Brasilia. Thiago along with his collaborators, especially Amauri, the manager, open-mindedly started to develop a series of tools. By their observations, there were more efficient ways to work with the coffee in the yards with tools that were different in design and size than those traditionally used by all farms. It was an almost “tailor-made” production of these tools. The tools were simple, of low cost, and were created in the garage of the farm in an easy way. There were innovative tools to turn over the coffee (“Rodotigre” and “Vaquinha”), mounted to a motorcycle (biciamontoador) with pads in the back to revolve the coffee in the yard and others. Besides the microinnovations in the tools,Thiago extended these innovations to increase the production of certified and inspected coffee seeds, adding value to his product. They began to produce special coffees, in micro-lots, for special clients who looked for sustainable farms.



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Thiago followed the steps of his father in keeping tall native trees in the middle of the coffee plantation, giving a characteristic aspect to the farm. He very carefully managed the natural resources of the farm: the water, the soil, the biodiversity, the forest reserves, the springs, and lakes. These actions put him under the spotlight, and he was identified as a new age entrepreneur participating in contests promoted by an agency for the development of micro- and medium-sized companies. He received prizes, articles in magazines, and recognition for his deeds. Teachings of the Case: • The production of seeds to add value to the coffee in the field instead of common coffee, and the production and commercialization of roasted and ground coffee with self-brand in the Federal Capital-Brasília for HORECA (Hotels, Restaurants, and Catering) shows innovations induced by prices in a struggle to survive, despite the size of the farm. • Introducing sustainable production methods, which resulted in awards in environment management from support agencies, gave visibility to the farm, attracting clients who valued special coffees produced on a sustainable basis. These routine actions and the pursuit of different tools created conditions to develop new approaches as resource-based innovations. • Encouragement of creativity, an open dialogue, and good relationship with collaborators generates positive externalities for the business. Knowing the farm thoroughly was essential to discover the real needs of the operations, leading to the development of simple and efficient tools made locally. Again, this is an example of resource-based innovation, in this case, developed on the farm. Small innovations and changes in the routines have effects on the total results of the farm. Motivation: Value-adding strategy, improvement of commercialization, and improvement of specific technical operations. Technical Aspects: Environmental impact control. Managerial Aspects: Production costs control, improvement in the general management of the farm, value addition to the product, contracts, and commercialization.

7.4.6  Case 6: Denomination of origin Cerrado—DO Cerrado Mineiro This an atypical case with a focus on the collective and coordinated actions made by groups of leaders (farmers) of Cerrado Mineiro, aiming to add value for their members through differentiation of their products. There

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was a need for institutional support, such as law or rules of the game. At the beginning of the movement of regional protection of the brand Café do Cerrado, this group benefitted by the passing of a bill in the Brazilian Congress that regulated rights and dues relative to industrial property. Inside this bill was included a part that governs the Denomination of Origin. This group of producers is subdivided regionally in other counties into groups called “associations.” They started an effort to organize themselves in these associations, giving technical support and helping with marketing, merchandising actions, and representation of the farmers. There was some criticism by groups of traditional farmers, but they were quickly surpassed by the majority of people who had a new mentality and were opening a new agricultural frontier with no links to the past. From the first movements of winning awards for quality, the producer’s associations and cooperatives became more and more aware that, without a union, there would be no future for the coffee produced in the Cerrado region. The idea of having a brand, Café do Cerrado, had always been the target of some farmers. Starting the organization to obtain the indication of origin, they conquered this step in 1996. Advancing to the denomination of origin, a much more complicated set of rules, with rights and dues and the possibility of exclusion, they finally got the certificate published officially in December 2013. The result of this process was the conquest of the denomination of origin (DO) after 23 years of work, dedication, collective actions, and focus. The DO encompasses: • 55 cities. • A production area of 200 thousand hectares, of which 88.240 ha are within DO. • 939 farms and 833 farmers within DO. • 5 million bags of coffee are the total production of the region. • 12.5% of the national production and 25% of the production of the state Minas Gerais. Teachings of the Case: • The case shows that the collective search for results that add value to a group of producers by their product is worthwhile, despite all effort and energy spent in this search.To obtain these results, the producers needed to change their routines in production: the management of several key points in the farm like pesticides contamination, conservation of soil, water management, accountancy, costs control, care with hiring workers,



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concern with the quality of the coffee produced, and many more items that were innovatively introduced in their normal work. • Actions for the common well-being need strong leadership, able and dedicated people to carry on with projects like this. There is also a need for discipline of its participants to comply with the rules and obligations of the denomination of origin. • The innovation is the capability of working together toward a common goal and achieving it. Motivation:Value-adding strategy and improvement of commercialization. Technical Aspects: Environmental impact reduction, technical diffusion via rural extension. Managerial Aspects: Reduction in production costs, improvement in the general management of the farm, value addition to the product, improvement in contracts and commercialization, improvement in social relations with stakeholders.

7.4.7  Case 7: Conquista Farm, Venda Nova do ImigranteEspirito Santo The name of the small farm could not have been more significant: Conquest. This name is due to what these small farmers conquered with their work and sweat. The property rights of this farm; they bought it. They were not privileged by any government social program of access to land so prevalent in Brazil. This fact, by definition, is already innovative in Brazil in familiar production. The main features of this case are the power of the will to have access to land by market acquisition instead of agrarian reform. This family very clearly has the concept of property rights. This fact may have been a consequence of their work as sharecroppers in coffee plantations. There is also an example of resource-based innovation with the process of rationalization in the use of water for the preparation of the coffee. These small farmers knew they had to pulp their coffee to obtain quality and then get a better price for their product. The system SLAR (system of residuary water cleaning) was a result of a joint effort between research institutes and university (INCAPER, IFES, EPAMIG, UFV, and Embrapa Café) and, in this case, the work of this family to construct, install, and run the project. It consists of the reutilization of water in a closed system without compromising the quality of the coffee.There is a reduction in the volume of water (it can reach 90%) in the coffee processing significant to every farmer, especially to those who are in regions with a scarcity of water. This microinnovation is strategic in the global warming period and can easily be replicated and widespread.

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One characteristic of this project is its low cost and the fact that farmers can build their facilities. After processing the coffee, the disposable water is ready for use in fertilization-irrigation, meaning a further reduction of costs with fertilization and the rational use of natural-saving fertilizers. Teachings of the Case: • This case shows the importance of the role of the rural extension of research institutions for small farmers as a means to produce resource-based microinnovations with good results in costs. • It shows the contribution of science in a rational way of using water, avoiding pollution and saving fertilizers. • Low-cost and do-it-yourself projects can be easily replicable and diffused innovatively with the help of the rural extension and the university. Motivations: Cost-saving, value-adding strategy, and improvement of specific technical operations. Technical Aspects: Environmental impact control, local technical diffusion, technical diffusion by rural extension. Managerial Aspects: Production costs effects, improvement in the general management of the farm, value addition to the product, contracts, and commercialization.

7.4.8  Case 8: Educampo (Field Education) Matas de Minas—SEBRAE (Agency for support of small and medium companies and Specialty Coffee Assoc. MG) The region of the Atlantic rainforest in Minas Gerais has astounding landscapes of mountains and woods. But within this beauty hides problems that have caused problems for coffee production for more than a hundred years. With new technologies and innovation, namely the pulping process, producers finally surpassed the hidden problems of the region: an excess of humidity and clouds, leading to an impossibility of obtaining good quality coffee with natural sun-drying. With the new system, obtained with the use of pulping machines, the coffee region received an upgrade in quality but also an improvement in costs.The new processes implicated new costs, which were a problem for the coffee producers. A group of producers got together, united by friendship connections, and created an association of special coffees, The SCAMG, in 2001 in Manhuaçu, a county in the region.This group was looking for solutions for the low prices of the coffee paid by the market that year and also searching for solutions for improvement in costs caused by investments to produce quality coffee. The key was to sell better or reduce the cost.



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Exchanging experiences between them, they saw that they could reduce costs. But they needed a common base for comparisons. This was the seed that led them to unite efforts with a public agency in support of small and medium enterprises: project Educampo (Field education) Matas de Minas. This is an innovative collective action aimed at cost reduction, increasing their competitiveness, improvement of yields, quality, and ways of commercialization. This system provided information so they could make comparisons, among them verifying if their farm was above or below the group average. In this way, the farmer could make better decisions in the management to improve his performance. The key to the innovation was the widespread diffusion of all the knowledge accumulated and created in this collective among them, with the help of the technicians of the agency. The main features of the project are the participation of 11 farmers with 24 farms, an area of 1200 ha of coffee. The technical personnel of the agency produces monthly reports containing production costs and ranking of the farmers to compare themselves and their practices to achieve their results. There is a sharing of knowledge and an immediate diffusion of methods to one another. The great achievement of the project was the reduction of total costs per bag by 16% in the last biennium 2015/2016 and an increase of productivity in 22%. Teachings of the Case: • The collective action and the diffusion of knowledge are innovative, as well as the resource-based competences shared with one another. • The lack of property rights in knowledge creation is particularly relevant because the Educampo Project exists in other regions of the State of Minas Gerais, and each one of the projects uses their knowledge without concern in hiding or covering information. The producers discovered that there was strength in sharing and exchanging information on costs and practices instead of competing and hiding information from one another. Motivations: Cost-saving, value-adding strategy, and improvement of commercialization. Technical Aspects: Local technical diffusion, technical diffusion by rural extension. Managerial Aspects: Production costs effects, improvement in the general management of the farm, value addition to the product.

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7.4.9  Case 9: Retiro Farm, Manhuaçu, Atlantic Forest Minas Gerais Mr. Lage, the owner of Retiro Farm, learned the arts of developing and adapting equipment for the coffee farm in an innovative way with his father in law, in a resource-based competence, and also learned to share these improvements with anyone who came to his farm looking for the information. At the time, the machines played an essential role in the development and growth of the quality of the coffee produced on the farm. One of the great adaptations of tools was a coffee processor that could deal with different stages of maturation of coffee and process all of them. This family of farmers has routinely developed, adapted, or improved equipment that can make an even better preparation of the coffee in the postharvest. Innovating all of the time is the mote. The creativity of this family seems to pass from generation to generation contributing microinnovations to the coffee community. Their major contributions are: The pulper for dry coffee.This homemade solution is not present in the markets to sell. However, it can be replicated in the garage of any farm that has an able person to do it. The pulper to process naturally dried coffees or pulped cherries (CD) is machine developed on the farm and works for both products with excellent results. The bag lifter is an interesting device, also developed there, that permits the worker to lift the bag alone up to his head to make the coffee piles in the warehouses. Simple solutions made by wise people can solve many problems. Teachings of the Case: • When the farmers are looking very close at the functioning of the machines or just one operation on the farm, he can find a solution to a problem. • The management of business needs dedication to the activity and monitoring all the time. • To understand a problem increases the chances of finding a solution. • Formal education is not always a passport to creativity. Will and motivation act as master springs in many processes. Motivations:Value-adding strategy and improvement of specific technical operations. Technical Aspects: Local technical diffusion. Managerial Aspects:Value addition to the product.



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7.4.10  Resume of the categories of the cases According to the main motivations to develop innovation, the cases were grouped as: cost-saving, value-adding strategies, improvement of commercialization, and improvement of specific technical operations, as shown in Table 7.1. In the category about the technical aspects, the application of innovation in the reduction of environmental impacts (6 out of 9) was evident. The two other aspects observed were the ease with which the innovation could be diffused either through the neighbors (5 out of 9) or through the rural extension system (6 out of 9). Table 7.1  Main motivations of innovations. Cases

Cost saving

Value adding strategy

Commercialization

Technical operations

1. Da Serra Farm 2. Passeio e Lagoa Farms 3. Caxambu Farm 4. São Paulo Farm 5. Jatoba Farm 6. DO Cerrado 7. Conquista Farm 8. Educampo 9. Retiro Farm

Table 7.2  Technical aspects of the cases. Cases

1. Da Serra Farm 2. Passeio e Lagoa Farms 3. Caxambu Farm 4. São Paulo Farm 5. Jatoba Farm 6. DO Cerrado 7. Conquista Farm 8. Educampo 9. Retiro Farm

Environmental impact control

Local technical diffusion

Technical diffusion by rural extension

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Table 7.3  Managerial aspects of the cases. Cases

Value addition to Contracts and Production costs Improvement in the product commercialization effects general management of the farm

Relations with stakeholders

1. Da Serra Farm 2. Passeio e Lagoa Farms 3. Caxambu Farm 4. São Paulo Farm 5. Jatoba Farm 6. DO Cerrado 7. Conquista Farm 8. Educampo 9. Retiro Farm

The category improvement in general management of the farm emerged with strength along with Addition of Value to the Product for both subcategories (7 out of 9 cases), as well as the reduction in production costs and the improvement in contracts and commercialization for both subcategories (6 out of 9 cases), and, finally, improvement in social relations with stakeholders (4 out of 9 cases).The resume of this categorization can be seen in Tables 7.2 and 7.3.

7.5 Conclusions Innovations are central to the survival of modern agribusiness systems. The focus of this research was the less studied innovation process: the microinnovation in the farm. We found evidence to confirm that farmers have room to innovate at the farm level. The modalities of innovation identified in the cases were improvements in equipment; innovation in production, postharvest, and in marketing activities; and management of production and costs, as well collective actions. To answer the question about motivation, impacts, consequences of the innovations, and microinnovations identified in the nine cases, they were separated into categories and subcategories. The cases showed successful farmers with their microinnovations whose initial motivations were (in this order): value-adding strategies, cost-saving, improvement of commercialization, and improvement of specific technical operations.



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The positive consequences were: reduction of environmental effects, technical diffusion via neighbors, technical diffusion by rural extension, addition of value to the product, reduction in production costs, and the improvement in contracts and commercialization. In line with the theoretical support, in most of the cases, the innovation emerged from routines developed by farmers during their daily activities, such as forms of tacit knowledge that cannot be packed and traded. This occurs due to specific competencies of innovator, as was shown in the cases of Da Serra Farm, Passeio e Lagoa Farms, Caxambu farm, São Paulo Farm, Jatoba Farm, and Retiro Farm. The innovation can also be the result of a partnership with research institutions, as in the cases of Caxambu Farm and Conquista Farm, or as a result of collective actions as shown in the cases of Denomination of Origin of Cerrado and Educampo. The sum of the knowledge gained over time, sometimes concentrated in the agricultural producer and sometimes present in the routines developed within the farm, represents a generator of useful and value-generating knowledge. Innovation has cumulative effects; it affects the routines of production at the farm level, and it can affect other agents of the agribusiness system. It is a continuous process, and it cannot be ignored.

7.5.1  Recommendations for researchers The real problems faced by producers on a day-to-day basis represent incentives for innovative actions. A partnership among educational institutions, researchers, and extensions in a collaborative way with farmers can generate relevant results, mainly for small rural properties. There is a lack of studies that focus on the effects of microinnovations that happen from everyday experience, inventiveness, and an ability to solve problems.

7.5.2  Recommendations for farmers and companies Rural producers working in the same region may find different solutions to the problems they face. The skills that each producer brings in their baggage allow them to discover different ways of dealing with similar problems. Dedication to work and personal talent are differential in many cases. Not everyone has skills in mechanics, for example, however, many solutions can be found on the farm.

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Farmers, when not competing with neighbors, only tend to gain from sharing information about practices and costs. Good relationships with employees and encouraging creativity can generate positive externalities for your business, sometimes at a very low cost. The search for value aggregation in agribusiness is not trivial. It should be studied and rigorously planned.The bigger solution is not always the best in efficiency. Efficiency gains come from a sustainable organization on the economic, social, and environmental tripod.

References Binswanger, H., 1974. The measurement of technical change biases with many factors of production. Am. Econ. Rev. 64 (6), 964–976. Farina, E., 1997. Coord. Estudos de Caso em Agribusiness. PENSA, Pioneira, São Paulo. Griliches, Zvi., 1960. Hybrid corn and the economics of innovations. Science (New Series) 132 (3422), 275–280. Paiva, R.M., 1971. Modernização e Dualismo Tecnológico na Agricultura. Pesquisa e Planejamento Econômico.V1, dezembro. Schultz, T.W., 1961. Investment in human capital. Am. Econ. Rev. 51 (1), 1–17. Zylbersztajn, D., Giordano, S.R., Almeida, L.F., 2011. Projeto Estudos de Casos BNDES. PENSA.

Further reading Zylbersztajn, D., 1996. Governance structures and agribusiness coordination: a transaction cost economics based approach. Res. Domest. Int. Agribus. Manag. Res. Annu. 12, 245–310. Zylbersztajn, D., Neves, M.F., Caleman, S., Org. 2015. Gestão de Sistemas de Agronegócios. Atlas, São Paulo.

CHAPTER 8

What fills your cup of coffee? The potential of geographical indication for family farmers’ market access Ana Elisa Bressan Smith Lourenzania, Kassia Watanabeb, Giuliana Aparecida Santini Pigattoa, Mara Elena de Godoi Pereiraa a Faculty of Science and Engineering, Sao Paulo State University—UNESP, São Paulo, Brazil Federal University of Recôncavo da Bahia—UFRB, Cruz das Almas, Brazil

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8.1 Introduction Coffee is one of the most consumed food products in the world. South America (Brazil and Colombia), Asia and Oceania (Vietnam and Indonesia), Mexico, Central America (Honduras and Mexico), and Africa (Ethiopia and Côte d’Ivoire) were the main producers and exporters in 2018. In the last 2 decades, Brazilian production has expanded, especially under an environmental sustainability approach, due to research and technology, training and extension services, farmers’ organizations, and efficient supply chain as the main productivity facilitators. According to Guimarães et al. (2016), three movements known as waves can be identified in the coffee market: the first wave is characterized by the increase in commodity coffee consumption in the world due to its utility as an energy drink and distributed by supermarkets; the second wave occurred between the 1960s and 1990s, with the main characteristic of increased concern with coffee quality and intense use of Coffea arabica L., including the popularization of coffee chains and concern with the origin of the beans; the third wave represents the increasing demand for products of differentiated quality, valorization of the terroir, and valorization of a sensorial and singular experience of consumption. This wave brought the concept “seed to cup”, in which products are valued with unique characteristics, linked to the edaphoclimatic conditions of the place of origin, to the farmer, or to the traditional know-how. The global coffee market has shown high price volatility due to increasing global production, speculation, and climate uncertainty. In general, Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00014-7

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coffee is produced by family farmers in the tropics, often at risk of poverty conditions and in close interaction with highly biodiverse biomes, thus the coffee sector has developed and adopted sustainability standards. Brazil and Vietnam were the largest producers of standard-compliant coffee in 2011/2012 (Potts et al., 2014). The notion of value creation shared by Crane et al. (2014) brings alignment to the sustainability idea. The authors point out that one of the possibilities of creating shared value is precisely environmental improvements that can reduce costs or improve products and the greater appeal for the protection of future generations through systemic changes. Some parameters are required in these systems, according to Humphrey and Schmitz (2001), which refer to what is produced (product specification), how it is produced (involving technologies that can be used, quality systems, work patterns, and the environment, when and how much will be produced, and the defined price (governance structures should be required to provide information on the parameters and reinforce trust). South America accounts for 77% of global sustainable production, according to Vandecandelaere et al. (2018). The third wave of coffee shows a promising market for family farmers capable of delivering the desired characteristics linked to the quality of the beverage, process, and environmental or social certifications, and are located in territories with origin protection. Geographic indication (GI) is a registry that promotes regional production from which added value is given from recognition of know-how (savoir-faire) and production geographically restricted to a given territory (Barjolles, 2006). For family farming, the adoption of GI can be a strategy for strengthening activity, access to markets, and adding value to agricultural and nonagricultural activity, such as tourism and gastronomy (Bruch et al., 2009; Froehlich et al., 2010; Vieira and Pellin, 2014). The adoption of new strategies by family farmers represent the mobilization of resources and capacities, and even changes in the way they manage organizations and participate in collective actions. Several factors influence the use and performance of GIs in the sense of fulfilling their objectives and manifesting their potential. Thus, this chapter aims at analyzing the GI as a strategy to facilitate market access for family farmers. This chapter presents a review on GI and family farming, and examples of coffee GIs from traditional coffee regions in Brazil are described. These examples were case studies developed in 2015: Mantiqueira de Minas and the Norte Pioneiro do Paraná, which are registered with Indications of



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Provenance (IP), and one in the Cerrado Mineiro region, with the Register of Denominations of Origin (DO).

8.2  Family farming and market access Many terms are used in the literature to designate small rural settlements, such as peasant agriculture, smallholder farming, or family farming, each term having a political, ideological, or operational significance. Regardless of the term used, the agriculture carried out in small settlements is the largest portion, the largest population allocated in the rural areas, and the predominant form of agriculture in the world. Their participation is relevant to food security, labor force, income generation, maintenance of the genetic resources diversity, and traditional and sustainable forms of production. According to Graeub et al. (2016), family farming is a key component of poverty reduction and improving food and nutrition security. Family farming is recognized as a diverse social category, with a strategic role in the economic and social development of countries. In Brazil, it is characterized by its heterogeneity and diversity of ways of carrying out the activities. These characteristics can be explained by their roots, the social context, and the development models adopted since the colonization of the country. In Brazil, the legal framework of family farming was given by Law no. 11.326, dated July 24, 2006, later modified by Decree No. 9064, dated May 31, 2017. A family farmer or a rural family entrepreneur is considered one who practices activities in rural areas while meeting the following requirements: area of up to four fiscal modules; use of at least half of the family labor force in the productive process and income generation; earning at least half of the family income from the economic activities of their farm or enterprise; and the management of the establishment or the enterprise should be strictly familiar. Among the characteristics of family farming in Brazil is the productive diversity, in which the activities carried out tend to complement each other. This practice allows for access to production inputs generated inside the farm and use of machinery and equipment for more than one activity (Souza and Buainain, 2013), also allowing for the management of the economic risk of the activities developed. Another feature of family farming is multifunctionality. A study by Bonnal et al. (2008) points out that Brazilian family farming has four functions: socioeconomic reproduction of rural families, promotion of food and

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nutritional security of families and society, maintenance of the social and cultural fabric, and preservation of natural resources and the rural landscape. Pluriactivity is another relevant feature. Agriculture is not the only source of supply of goods; there are also the nonagricultural activities carried out by the rural families that contribute to the objective of family economic and social reproduction, and the resilience of family farming (Niederle et al., 2017; Bonnal et al., 2008; Schneider, 2001). Such activities may include processes of vertical integration, tourism, gastronomy activities, and the sale of the labor force, among others. The relationship between family farming and the market is discussed by several authors from different perspectives (Ploeg, 2006; Wilkinson, 2010; Guanziroli, 2013; Souza and Buainain, 2013; Buainain and Garcia, 2014; Schneider, 2016; Schneider and Gazolla, 2017; Bohorquez et  al., 2018). Accessing the market can mean increasing the level of welfare and diversifying access to consumer goods but exposes farmers to price adversities and power inequalities (Schneider, 2016). The inherent characteristics of family farming make this category more susceptible to market distortions. On the one hand is a market with an increased level of demands, immersed in a global competition, and, on the other hand, family farmers face difficulties for competing in terms of economic advantage over larger farmers. Wilkinson (2010) highlights the importance of alternative markets for family farming such as niche and neighborhood markets, traditional products, slow-food, and artisanal, sustainable, and origin products. For any market, the strategies adopted and the role of the public policies and regulation are fundamental. A set of actions (strategies) and the design of a favorable institutional environment promotes access to markets by family farmers. More important than the components analyzed in isolation, there is a need for a systemic and interdisciplinary view required to understand market access under different theoretical-conceptual approaches.

8.3  The emergence of new markets for family farming The shift from subsistence farming systems to the market-oriented paradigm has brought new challenges and opportunities for agrifood systems. Family farming in developing countries faces global competition, even in their local markets. On the one hand, this represents challenges for family farming in developing countries (Reardon and Berdegué, 2002), but on



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the other hand, it represents opportunities for some organizational arrangements based on their allocations of tangible and intangible resources. From the mid-1990s, with the stabilization of the economy and lower prices of agricultural commodities, new markets emerge, such as alternative food networks and exports of nonconventional products (Wilkinson, 2003). Such markets are seen as dynamic and capable of generating employment and income. Immersed in a globalized economy and inserted in global value chains, these products require quality and logistic efficiency, demanding adaptation by the farmers. According to Goodman (2003), alternative agrifood networks have valued the place of origin and socially rooted practices; thus, embeddedness, trust, and the local are important elements to understand the turn of quality. On this issue, Niederle (2009) points out that, simultaneously with the globalization and homogenization of markets, a set of changes in consumption patterns has driven the demand for localized products, valuing quality attributes associated with the origin and peculiar modes of production. In this scope, the importance of GIs comes precisely from the way the valuation of intangible assets associated with a territorial identity operates. It is a strategy that emphasizes the sociocultural embeddedness of the product in the territory where it is produced, exploiting intangible assets that are difficult to transpose to other territories, and allowing access to markets for family farmers.

8.4  The coordination of productive systems and the differentiation of coffee Specialty coffee emerged in the United States in the late 1970s and early 1980s, when the North American coffee market was declining. At that time, the Specialty Coffee Association of America (SCAA) was created to encourage the production and consumption of specialty coffee. This association is the largest entity in the specialty coffee sector that seeks to meet the needs of the sector. Consumers worldwide have been demanding high value-added products with specific characteristics, forming a segmented market (Zylbersztajn and Farina, 2001; Spers et  al., 2004; Niederhauser et  al., 2008). To serve these markets, differentiation strategy is advisable. This strategy is successful when the attributes incorporated into the product result in an increase in the profit margin, because the consumer has the perception of the differentiation, and, therefore, the agents have the incentive to invest (Saes and Spers, 2006).

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The differentiation strategy is related to the quality attributes of the coffee, the origin of the product and environmental and social issues. Thus, specialty coffees encompass product and process standards. The differentiation of coffee is made up of tangible and intangible attributes of the product. The typology that distinguishes product attributes can be divided into three types: search attribute, the consumer can evaluate the product before purchasing it; the attribute of experience, the consumer evaluates the product after trying it; and the attribute of credence, even after consumption, it is not possible to perceive the quality of the product, for example, the environmental and social concern in the production (Brechan, 2006). Certification plays an important role in identifying those attributes. Brazilian coffee growers implement differentiation strategies that allow consumers to perceive the product as specialty coffee.These strategies comprise a range of certification, such as brand, registry of origin, organic certificate, and fair trade certificate (Zylbersztajn and Farina, 2001; Saes and Spers, 2006). Coffee quality assessment methodology adopted by SCAA is one of the main measurable parameters for the commercialization of specialty coffee. In some markets, even fair trade-certified coffee, which is concerned with social and environmental issues, must reach the quality score, as measured by the SCAA methodology, to be sold as such. Therefore, it is not enough to come from a small farm or from a particular region, but it must also be a coffee of measured and recognized quality. The perception of the origin of the product has proliferated in the globalized market, and these consumers are willing to pay a premium price to consume origin products (Cafaggi et al., 2012). In that sense, GI can be an interesting mechanism to facilitate market access. GI may involve the access to external, new, or diversified markets through product “de-commoditization”, quality, added value, and resilience (Vandecandelaere et al., 2018). Moreover, GI may reduce the dependence of commodity markets, helping farmers position their products in niche markets. The need to ensure specific quality1 in GI products may trigger good practices adoption, innovation, and efforts to reach generic quality, 1

According to Vandecandelaere et  al., 2018 (p. 21), “Specific quality differs from generic quality (which is related to compulsory requirements to enter markets, in particular, product definition and food safety aspects) and refers not only to characteristics of final products such as improved texture, appearance, or taste but also encompasses production practices and other characteristics relating to the production area, for example, specific cultural features (such as traditional meals or events).”



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all relevant factors for market access (Vandecandelaere et al., 2018). In fact, the production of specific quality requires high levels of coordination and collective actions among farmers (Saes and Silveira, 2014). Coordination may leverage farmers’ access to market through information sharing, quality improvement, and the mitigation of moral hazard contracts and consequent transaction costs, specifically concerning collective actions and horizontal coordination among farmers; it facilitates access to market due to economies and gains of scale, as well as value-adding (Fernandez-Stark et al., 2012). The recent dynamics of food chains have demanded actors to improve governance for value creation (Trienekens, 2011), especially in the presence of a fragile institutional environment (Royer et al., 2016). Chain coordination is required for family farmers to improve quality and reach high-value markets. It implies vertical coordination and horizontal organization, creating efforts toward quality control and quality standards, market information, access to resources, cost and risk sharing, and transaction costs reduction, among others (Royer et al., 2016). Upgrading market access involves the identification of attributes final consumers are willing to pay for, including better quality and origin (FAO, 2014). Such a perspective has favored the creation of inclusive business models, allowing small and family farmers to access high-value markets. The creation of such values mostly depends on horizontal and vertical coordination along the value chain, demanding collective actions, especially for family farmers (FAO, 2014). National and international literature has portrayed aspects of coordination of systems and governance forms to be the object of study of differentiated products and certification in agriculture. Raynaud et al. (2005) affirm that the choice of a more complex governance mechanism within a supply chain depends on the quality strategy adopted by one or more agents. This is because the signs of quality to the market involve high contractual risks in downstream transactions. According to the authors, signs of quality should lead to the adoption of hybrid (or contractual) forms or vertical integration rather than the spot market to be able to deal with the risks. César et al. (2008) have portrayed that the certification process requires a new structuring of the agents and their commitment when analyzing certification and the influence of the governance of the transactions. When evaluating the coordination in the production of fine cheeses in Brazil, Rezende et al. (2005) also support those ideas. According to the authors, the search for new attributes and quality tools leads to new structures of

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coordination between actors to meet the demands of consumers, governments, and other links in the chain.These structures are based on a systemic conception of quality, in which simple control of each step is replaced by coordination through proactive structures. In the case of coffee, sector deregulation encouraged the introduction of the differentiation strategy that requires the coordination of the production system and, consequently, new institutional arrangements are formed, different from market relations. The structure of governance went from the spot market to vertical integration or long-term contracts (Zylbersztajn and Farina, 2001; Barra et al., 2007; Saes and Silveira, 2014).

8.5  The institutional environment of GIs GIs are governed worldwide by the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement, which treats them as an intellectual property right and provides that members should establish laws aimed at not leading the public to mistakes about the origin of the product, as well as unfair competition.The Agreement also guarantees protection against the misuse of a signal that can be understood as a GI. In Brazil, the Intellectual Property legislation that governs the operation of the GIs is quite recent; Law No. 9279 of May 14, 1996, determines that the GIs can be of two types: IP or DO. The IP consists of the geographical name of country, city, region, or locality of its territory, which has become known as a center for the extraction, production, or manufacture of a particular product or service. The DO consists of the geographical name of a country, city, region, or locality of the territory that designates product or service whose qualities or characteristics are due exclusively or essentially to the geographical environment, including natural and human factors (MDIC, 2018). The DO goes beyond the recognition of the product in relation to the local because the quality or characteristic of the product must be exclusively or essentially of that geographical environment, including natural and human factors. It brings more details, such as quality, flavor, and relation with the history of the region and with the local people. Therefore, standards and controls become more specific. In Brazil, the GIs are regulated by Normative Instruction No. 25 of August 21, 2013, of the National Institute of Industrial Property (INPI), which establishes the conditions for the registration of GIs. The INPI is responsible for granting the use of registry and issuance of the certificate, even if it is for agricultural products. In the case of agricultural products, the



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Ministry of Agriculture, Livestock, and Food Supply (MAPA) provides technical support to those territories that wish to obtain registration. Brazilian Agricultural Research Corporation (Embrapa) is the federal agency linked to MAPA, which provides support through the Consórcio Pesquisa Café. When involved in a GI, changes are observed in relation to the organization of the actors involved, in relation to collective logic. Such changes can be made even more difficult due to the characteristics of family farming, such as the difficulty of access to information, low level of education, low level of investment capacity, reduced use of management tools, or difficulty in accessing extension services (Lourenzani and Silva, 2009; Barham, 2007). The GIs are collective products managed by a group of local actors and, as such, are linked to practices for the protection of environmental resources, farmers knowledge, and cultural practices, enabling production to be only within the local area but also access extra local markets (Bowen, 2010). The GIs have several advantages under the perspective of rural development and access to markets, such as: the rise of a collective right because, in signaling, intellectual property rights not only allows protection of products or productive process but gives all farmers in a geographical area the exclusive right to use a distinctive sign to identify their products (Addor and Grazioli, 2002; Caldas et al., 2005; Petit and Ilbert, 2015); the maintenance of traditions and collective decisions, with additional economic value and investments in the quality, reputation, and authenticity of the product (Addor and Grazioli, 2002); protection of local traditions, knowledge, and resource of the environment associated with typical products, helping maintain the diversity of local food crops (Bowen and Zapata, 2009); and providing income and employment opportunities, preventing migration from rural areas to urban areas (Dogan and Gokovali, 2012). Caldas et al. (2005) further explain that the regions and places of GIs assume a unique perspective of opportunities for new forms of territorial organization, technological development, social inclusion, and improvement of the quality of life of local communities. The role of GIs goes beyond the possibility of access to markets because it is a strategy capable of promoting local development and strengthening family farming. In this sense, governance is fundamental for encouraging and controlling the operation of GIs. Governance is defined by Niederle et  al. (2017) as an analytical field that involves forms of coordination and a set of actors, networks, guidelines, rules, and shared norms that contribute to the stabilization of a system. The authors clarify that the governance of GIs consists of a network of public and private actors that work in the territory and

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involve diverse agents. Such agents may have interests that are sometimes distinct but which have, or should have, an alignment of common interests (Marcório, 2018). In addition to public institutions, the activities of private organizations, such as the Brazilian Service for Support to Micro and Small Enterprises (SEBRAE), a private entity that promotes the competitiveness and sustainable development of micro and small enterprises, are important to GI development. The performance of this organization was important in the case of the Norte Pioneiro do Paraná, where it provided extension services through the SEBRAE Leadership Program, which has resulted in the valorization of the rural young farmers, and the 100% Quality Program that fostered technological innovation, mainly in relation to the overcoming of the difficulty of maintaining the quality of coffee even with the humid climate that predominates in the territory. Another institution that exerts influence in the market for specialty coffees in Brazil is the Brazilian Specialty Coffees Association (BSCA). It aims to raise the quality of Brazilian coffee through the dissemination of quality control techniques and promotion of products, and also acts as a certifier of specialty coffee and, for that, it is necessary that the producer is associated and the property is certified. The institution itself carries out the certification process. The methodology used by BSCA is the same as SCAA. In Brazil, BSCA is responsible for promoting the Cup of Excellence Quality Contest, which, since 2000, has announced the country as a producer of high-quality coffee, awarding the winners of the contest through the auctions held post-contest. This contest dictates rules in the market in that the criteria for awards are strict, and few participants are able to reach them. Despite this, the contest guarantees visibility to the producer of the award-winning coffee, who can receive a good price at the auction and receive visits from international buyers.

8.6  Family farming and the GIs of coffee in Brazil Brazil has six GIs for coffee, with five IPs and one DO (INPI, 2019). Studies were carried out in 2015 in the regions of Mantiqueira de Minas, Norte Pioneiro do Paraná, and Cerrado Mineiro, aimed at analyzing how the GI records promote coordination of the agrifood system of coffee in family agriculture (Pereira, 2016). The deregulation of the coffee market in Brazil in the 1990s led the States to articulate actions aimed at valorizing the product thus promoting access



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to new markets. The Minas Gerais Incentive Program for Certification of Origin of Coffee was created in Minas Gerais State, which aimed to foment coffee quality. Later, in 2006, Certifica Minas was created to certify properties that adopt good agricultural practices (Dutra et al., 2009). Box 8.1 illustrates the study with family farmers in the Mantiqueira de Minas region. In 2006, the Specialty Coffee Program of the Norte do Paraná was created, with the objective of stimulating the production of specialty coffees, promoting the region as a traditional coffee region, and organizing farmers in collective actions to obtain certifications, technological innovations, improvement in terms of farm management, and promote territorial development

Box 8.1  Geographical indication of Mantiqueira de Minas region. Coffee culture was introduced in the region of Mantiqueira of Minas Gerais at the end of the 18th century. It is a mountainous region with high altitude, favorable for specialty coffee production. The GI registry was granted in 2011 to the Associação dos Produtores de Café da Mantiqueira (APROCAM), the entity that controls its use. This organization is constituted by five other entities: Cooperativa Regional dos Cafeicultores do Vale do Rio Verde Ltda. (COCARIVE), Cooperativa Regional Agropecuária de Santa Rita do Sapucaí (COOPERRITA), Cooperativa Agropecuária Do Vale Do Sapucaí (COOPERVASS), Sindicato dos Produtores Rurais de Carmo de Minas, and Sindicato dos Produtores Rurais de Santa Rita do Sapucaí. The region demonstrated well-structured vertical coordination, where cooperatives played a key role in accessing markets. Although the region has obtained GI in a recent period, the organizations that compose APROCAM have experience in coffee commercialization, because most of the entities were founded more than 50 years ago. COCARIVE was the cooperative that carried out the coffee transactions with the IG registry. The cooperative, following the requirements of the buyers, identified the farmers who had lots with the requirements. GI registry had in its norms the requirements based on SCAA methodology. The use of this registry was sometimes concomitant with other certifications, such as organic coffee, fair trade, UTZ Kapeh, and Rain Forest. The cooperative also encouraged the participation of family farmers in the Cup of Excellence Coffee Competition of Brazil. The region of Mantiqueira de Minas has been outstanding in the participation of this competition, obtaining excellent positions, and providing visibility for the territory and considerable gains in the auction of the winning lots. The family farmers who achieved differentiated quality were able to access high value national and international markets. Thus, the IG was important to promote valorization of the territory.

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Box 8.2  Geographical indication of coffee of Norte Pioneiro do Paraná. Coffee was introduced in the Norte Pioneiro do Paraná in the mid-19th century. The region was once a major coffee producer in the world, but the crop was almost decimated in the “Black Frost” in 1975. The region has re-emerged under a new production logic focused on specialty coffee markets. In 2006, the Paraná Specialty Coffees Program provided the creation of the Associação dos Cafés Especiais do Norte Pioneiro do Paraná (ACENPP), which received the GI registry in 2012. In 2011, the Cooperativa dos Produtores de Cafés Certificados e Especiais do Norte Pioneiro do Paraná (COCENPP) was created with the objective of commercializing the coffee produced in the region. Unlike in the Mantiqueira de Minas region, coffee in the Norte Pioneiro do Paraná region was at the time of the research commercialized only with fair trade certification, and the GI registration was used to identify the territory and protect it from free-riders. However, there was a strong involvement of family farmers in coordination and strategic decisions. The presidents of the association and the cooperative at the time of the survey were young family farmers, and the organization of the association was composed of 12 nuclei that also had family farmers as leaders. Institutions such as SEBRAE provided training and technical services. Family farmers learned about SCAA methodology. In this way, even if it did not access high-value markets, this program allowed family farmers in the Norte Pioneiro do Paraná to acquire knowledge and capacity to manage their production and market strategies. The efforts made by the agents to reach IG allowed the producers to organize themselves into collective actions and exchange information to align them strategically. In this way, horizontal coordination was strengthened.

(Lourenzani et al., 2013). Box 8.2 presents the GI of the Norte Pioneiro do Paraná region. The Cerrado Mineiro GI comprises the areas of 55 municipalities, with 4500 coffee farmers and produces approximately 5 million annual bags, distributed in 210,000 ha (ha) of cultivated area. Cerrado Mineiro Growers Federation is the controlling entity of the Cerrado Mineiro DO and certifies the quality of the coffee through certification of origin and quality, following the SCAA methodology (Cerrado Mineiro Region, 2019). The Cerrado Mineiro region production system is intensive in capital and technology, result from the Green Revolution in the region.The introduction of mechanized harvesting and the use of chemical inputs such as herbicides and fertilizers had led the region to reach high levels of productivity.The results referring to the study of this region are observed in Box 8.3.



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Box 8.3  Geographical indication of Cerrado Mineiro region (Nagai, 2016). With favorable soil and climatic conditions favorable to the production of specialty coffees, the Cerrado Mineiro region obtained the IP registry in 2005 and the DO registry in 2013. The production with DO, at the time of research, was concentrated in small and medium farms, whose owners were family farmers. As in Mantiqueira de Minas and in the Norte Pioneiro do Paraná, the Cerrado Mineiro farmers also used the fair trade certification in concomitance with the registration of GI. DO protocol of use requires strict control of processes at the farm level, as well as other certifications, thus family farmers were able to attend the requirements. However, one of the requirements of the Cerrado Mineiro DO is that coffee must be produced at a minimum altitude of 800 m. Thus, even if farmers invest in innovation, with the introduction of advanced cultivation, harvest, and postharvest techniques and farm management, the altitude factor is a potential barrier for farmers’ inclusion.

8.7  Final remarks The regulation system in Brazil ensures the functioning of the GIs and gives security to the agents involved. Thus, farmers and organizations involved in collective actions can develop strategies to encourage the production of specialty coffees and use the information to develop differentiation strategies and access higher value markets. GIs present great potential to promote access to markets by family farmers through incentives to quality, farmers organization, valorization of local tradition and know-how, promoting income,and access to well-being (Niederle, 2009; Bowen and Zapata, 2009; Dogan and Gokovali, 2012; Pereira, 2016). However, it is noted that there are barriers for farmers to access the benefits of GI. One of the barriers is the difficulty in meeting the quality standards established in the protocols of use of each region. In general, there is a great number of family farmers in the GI territory, but few are able to reach established standards. Usually, those who attend the standard are involved in associations or cooperatives, as in the case of Mantiqueira de Minas and the Norte Pioneiro do Paraná. In the Cerrado Mineiro, the farms located below the minimum altitude do not have access to the DO, even though it is within the territory delimited by the registry. Another difficulty is the use of the registry as a strategy to transact specialty coffee. The requirements of buyers rely on measurable characteristics

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like the SCAA methodology or third-party certifications. Thus, GIs have not been used as the only strategy to add value to the transactions. There are also positive results from coffee GI in Brazil. In the case of the Norte Pioneiro do Paraná, it was observed that the organization for accessing the registry promoted the horizontal coordination and the inclusion of the rural youth in decision making. The valorization of the rural youth has resulted in the participation of young family farmers in the management of collective actions. This is very important in family farming because it can mean a reduction of the rural exodus. The horizontal coordination allowed investments in product quality and standardization. The GI promoted greater vertical coordination, mainly between farmers and cooperatives in regions with tradition in the cultivation and commercialization of coffee, such as Mantiqueira de Minas. Such alignment allows for the governance of the GI in the territory aimed at the valorization of the attributes linked to the local. Studies have shown differences between regions, however; GI records are used in all cases as an instrument of recognition and protection of the territory against opportunistic actions. The GIs in these territories have mainly promoted horizontal coordination, as it strengthens the links between the actors within the territory. However, because they involve a small number of actors, there is still a need for greater internal dissemination and efforts to improve quality and reach the standards. Finally, the GI has high potential to fill your cup of coffee with quality and intangible values such as tradition, culture, social value, and local development incentive. To do so, multiactor governance must be designed.

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Saes, M.S.M., Silveira, R.L.F., 2014. Novas formas de organização nas cadeias agropecuárias brasileiras: tendências recentes. vol. 22(2). Estudos Sociedade e Agricultura, Rio de Janeiro, pp. 386–407. Schneider, S., 2001. A pluriatividade como estratégia de reprodução social da agricultura familiar no Sul do Brasil. 16. Estudos Sociedade e Agricultura, Rio de Janeiro, pp. 164–184. Schneider, S., 2016. Mercados e agricultura familiar. In: Marques, F.C., Conterato, M.A., Schneider, S. (Eds.), Construção de Mercados e Agricultura Familiar. first ed. UFRGS, pp. 93–142. Schneider, S.; Gazolla, M., 2017. Cadeias curtas e redes agroalimentares alternativas. In: Gazolla, M., Schneider, S. (Org.). Cadeias curtas e redes agroalimentares alternativas, first ed., vol. 1, Editora da UFRGS, Porto Alegre, pp. 9–24. Souza, R.P., Buainain, A.M., 2013. A competitividade da produção de leite da agricultura familiar: os limites da exclusão. vol. 21(2). Estudos Sociedade e Agricultura, Rio de Janeiro, pp. 308–331. Spers, E.E., Saes, M.S.M., Souza, C.M., 2004. Análise das preferências do consumidor brasileiro de café: um estudo exploratório dos mercados de São Paulo e Belo Horizonte. vol. 39(1). Rev. de Adm. (RAUSP), pp. 53–61. Trienekens, J.H., 2011. Agricultural value chains in developing countries a framework for analysis. Int. Food Agribus. Manage. Rev. 14, 2. Vandecandelaere, E.,Teyssier, C., Barjolle, D., Jeanneaux, P., Fournier, S., Beucherie, O., 2018. Strengthening Sustainable Food Systems Through Geographical Indications: An Analysis of Economic Impacts. Food and Agriculture Organization of the United Nations, Rome. Vieira, A.C.P., Pellin, V., 2014. As Indicações Geográficas como estratégia para fortalecer o território? O caso da Indicação de Procedência dos Vales da Uva Goethe. In: II Seminario de Desenvolvimento Regional, Estado e Sociedade—Sedres, 2014, Campina Grande. Anais II Seminario de Desenvolvimento Regional, Estado e Sociedade—Sedres. vol. 1, p.1. Wilkinson, J., 2003. A agricultura familiar ante o novo padrão de competitividade do sistema agroalimentar na América Latina. vol. 21. Estudos Sociedade e Agricultura, Rio de Janeiro, pp. 62–87. Wilkinson, J., 2010. Transformações e perspectivas dos agronegócios brasileiros. Rev. Bras. Zootecnia. vol. 39, pp. 26–34. Zylbersztajn, D., Farina, E.M.M.Q., 2001. Diagnóstico sobre o sistema agroindustrial de cafés especiais e qualidade superior do estado de Minas Gerais. Relatório Final PENSA-FIAFEA-USP, São Paulo.

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SECTION 3

Coffee industry strategies: Case studies

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CHAPTER 9

Procurement strategies in the coffee industry: Cases of local coffee roasters in Paraná state José Paulo de Souza, Sandra Mara Schiavi State University of Maringá (UEM), Maringá, Brazil

9.1 Introduction Discussing the coffee agrifood system (AGS) in Brazil is of great relevance. Not only because of its economic importance to Brazilian agribusiness, which stands out as the world’s largest producer and exporter (USDA, 2017), but also because of its technological and productive dynamics in the last decades (CECAFE, 2018). An important phenomenon is increasing consumers’ awareness of Brazilian coffee quality and the satisfaction possibilities the beverage can offer. Those findings have added new levels to the grading system expressed in the consideration of qualities of the various coffees produced and provision of new adjectives that come together with their grading, such as special gourmet and premium, as well as certifications such as organic, Rainforest Alliance, and fair trade. This differentiation and complexity in the final product affects the whole productive system, demanding different forms of organization in the coffee chain (Saes and Silveira, 2014). The different characteristics presented in the product increase competition between producers and buyers, who seek to ensure that coffee values, linked to each special attribute, are adequately remunerated. This valorization, in turn, reflects the whole productive system, also affecting the conventional coffee system. Thus, it is understood that the coexistence of different products in terms of quality and grading implies a greater complexity in that chain. It is observed that, although the sale of these specialty coffees has grown considerably with an impact on the system, most of the coffee produced in Brazil is considered a commodity. In turn, the increase in product quality, promoting value aggregation, tends to spread among the different segments, especially the producer, increasing the agents’ expectations regarding product and price. This movement affects buyers’ export and domestic market strategies. Although the Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00007-X

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effect on exports is not accentuated, as the competition environment with coffees around the world already raises demands for quality, the domestic market is different. The increase in demand for quality and diversity of raw material requires greater capacity of the buyers to acquire grains suitable for commercialized coffee. In this respect, the opening of several markets involving the diversity of coffee produced affects the acquisition strategies of traditional coffee buyers, who need these varieties to make their blends. It should be noted that, in the case of the Brazilian coffee system, two coffee species are produced and marketed: Conilon (Robusta) and Arabica. According to the Ministry of Agriculture, Livestock, and Supply (MAPA, 2017a), Arabica coffee (Coffea arabica L.) presents itself to the consumer as a finer product, comprising higher quality and refinement. Originally from the East, this type of coffee is found mainly in the fields of Minas Gerais, São Paulo, Paraná, Bahia, Rio de Janeiro, and part of Espírito Santo. Robusta or Conilon coffee (Coffea canephora), mainly produced in the states of Espírito Santo and Rondônia, is more commonly used in the production of instant coffee and has a regular flavor, lower acidity, and higher caffeine content (MAPA, 2017a). This type of coffee is also present in roast and ground coffee (Conilon and Arabica coffee blend) usually sold in retail and even exported. Thus, the coffee production chain in Brazil must be organized to serve a domestic consumption and external market, which involves different quality levels. Among the particularities present between segments of the chain, we highlight upstream conflicts between farmers and buyers. This dispute is for the value created due to variations that the grain can present, given the new qualitative differentials that farmers begin to identify, produce, and exploit (Saes, 2009). Although there are mechanisms to analyze both physical conditions and flavor attributes, among others, with price impact, the variation in these analyzes and the consequent disputes are constantly reported. This is intensified when considering the inherent variability of the product, which increases potential difficulties in measuring quality attributes involved in the transaction. This productive and competitive diversity has brought new dynamics to the chain.The explosion of special coffee consumption has influenced chain operating and the relationship between agents, often raising complexity to the transactions. On the other hand, the market structure also influences the functioning of this sector. In the Brazilian case, when considering the processor segment, there are large national and multinational companies dominating the market and a large number of small processors, characterizing



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a fringe oligopoly (Possas, 1987). According to data from ABIC (2015) on the production of associated companies, the nine largest coffee roasting and grinding companies accounted for 73% of the production volume in the 2014/2015 harvest. Large brands direct the downstream market and influence the upstream segment, in terms of availability, quality, and raw material price (green coffee). As already noted, market options and product quality variations, besides influencing its price, presses processors, notably smaller processors, which operate regionally with their own brands who need to procure raw material specific for their blend. This demand for specific raw materials, with its impact on marketing prices, may imply different ways to coordinate procurement. Particularly, processors who market their own roasted coffee brands need green coffee supply, in quantity and regularity, at a competitive price to face large brands in their regional markets. Paraná is currently the fifth largest producer state in Brazil and accounts for just over 2.5% of the gross value of Brazilian production (MAPA, 2017b). In the past, the state was the largest coffee producer, its position interrupted by the great black frost in 1975. According to the Paraná’s News Agency (AEN, 2017), the main producing regions of the state cover the municipalities of Cornélio Procópio, Jacarezinho, Londrina, Ivaiporã, and Apucarana. According to this agency, although Paraná produces coffee with quality and great acceptance in the foreign market, it still has to buy coffee from other states to supply its internal demand. It is noteworthy also that the state is representative in the processor segment, with important industrial park in roasting and grinding coffee. According to IBGE data (2018), in 2015, Paraná had 60 coffee roasting and grinding units, representing 10% of the national total, generating 16% of the gross value of industrial production and employing 14% of the labor force in this sector. This chapter deals with those aspects. Its describes how these occurrences and changes (re)defined the strategies of local coffee processors in the north and northwest of Paraná, in the search for raw material needed to manufacture their coffee. Some factors may affect the strategies of these companies in the process of acquiring their raw material, such as the reduction of coffee production in the 1970s, with the almost complete interruption of production due to frost that decimated the coffee plantations of the state; the commercialization of blends, which demands a coffee with the necessary adaptations and with a competitive price; and the influence of differentiated coffee on the market. In this sense, the objective of this chapter is to understand how the strategies of processing companies located in

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the north and northwest of Paraná are presented for the acquisition of raw material for supply roasted coffee in the local consumer market. The understanding of this process in the coffee chain implies considering that it is a productive chain, with interdependent relations and objectives, often conflicting, which demands coordination. In that sense, Transaction Cost and Measurement Cost Theories, which deal with chain governance and vertical integration strategies, as well as with coordination problems, are considered as consistent theoretical contributions and adopted for this study. These theoretical currents, being concerned with the process of coordination of the economic relations involving the agents, present themselves as a robust orientation to portray this process in the coffee processors in the State. When considering institutions as responsible for establishing positive conditions for survival and performance of agents in these chains, at their various levels, a comprehensive systemic contribution is identified to understanding the various influencers present in the relations.

9.2  Previous theoretical discussion For this discussion, the assumptions of Transaction Cost Economics (TCE) and Measurement Costs Theory (MCT) will be considered. As part of the New Institutional Economics (NIE), TCE divides the efficiency arm with MCT, so called by Williamson (1985).These theories are guided by a search for transaction cost economizing, resulting from efficiency in the forms of governance that involve bilateral trading relations between agents integrating productive chains. Efficiency, therefore, is configured in reduction of transaction costs, which focuses on managerial costs of coordinating transactions within the firm or between firms. With roots in Coase’s (1937, 1960) work, the search for efficiency in transactions between agents of a productive chain focuses on ensuring that agents did not seek to appropriate ownership rights, nor the quasiincome generated in the transaction or even promote contractual breaches, from efficient institutional arrangements to coordinate the transaction between agents. For Williamson (1996), these institutional arrangements are structures that guarantee the integrity of transactions, and their efficiency lies in the ability to reduce transaction costs. In this case, Barzel (2005) states that not only goods but also property rights are transacted between agents of several production chain segments, which need to be guaranteed by different mechanisms (enforcement). For the authors, transaction costs are the costs arising from the search to guarantee the use of an asset, even changing its form or obtaining returns



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on the use of it. For Williamson (1985, p. 20), in this case, “Transaction costs of ex ante and ex post types are usefully distinguished.The first are the costs of drafting, negotiating, and safeguarding an agreement.” In the ex post situation, the author distinguishes the costs of adaptation to new contractual conditions, ex post negotiations or adjustments, adequacy of governance structures to ensure transactions, and costs to ensure commitments. Following this idea, Barzel (2005) considers that transaction costs arise in searching for a guarantee over economic rights over an asset. Considering measurement as a transaction cost, the author adds that transaction costs arise to guarantee and protect agents against transfer of low performance, generating value capture, as well as from the losses of an ineffective transaction, due to the high costs of making a deal. Efficiency then characterizes the effective reduction of these costs from appropriating governance structures or, as the author calls them, “forms of enforcement.” In TCE, these institutional arrangements characterize a continuum between market and vertical integration (hierarchy) presenting as an intermediate hybrid form (Williamson, 1975, 1985). The choice of the most efficient arrangements to conduct transactions would have as a main influencer the analyzed specificity of the transacted asset, in addition to the attributes of uncertainty and frequency present in a transaction. These attributes, together with the assumptions of limited rationality of agents and the natural possibility of their opportunistic behavior, make up the rationale that defines the efficient choice of the governance structure. In this case, assets of high specificity, as part of a recurring transaction, in which environmental and behavioral uncertainties arise, would lead the transaction to hierarchy or vertical integration. This structure would avoid transaction costs inherent to the possibility of opportunistic behavior, given the prevailing conditions. On the other hand, agents transacting low specificity and nonrecurring, assets in low uncertainty conditions could make use of the market mechanism for their transaction, given the low possibility of opportunistic behavior between parties. In MCT, Barzel (2005) proposes that information in a transaction is relevant and has a cost. Thus, a guarantee of property rights depends on generation and transmission of information. In this line, the availability or not of information influences the guarantee of legal rights (guaranteed by the state) and economic rights (agreements or negotiations). This guarantee is inherent to the adopted enforcement mechanism, which configures governance structures for the purposes of this study. By not indicating a continuum, the author proposes that adequate enforcement mechanisms for

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guarantee of agents’ property rights, i.e., structures that reduce the possibility of value dissipation in the transaction, should be sought. Barzel (1997, 2002, 2005) proposes that different forms of guarantees can govern transactions. The main reference for this is the possibility of measurement and the consequent generation of information. In this case, the difficulty of obtaining information or measuring and transmitting information would lead, in one extreme, to vertical integration. Long-term relationships could be an alternative mechanism to this structure as a way of guaranteeing economic rights without carrying out measurement. The ease of measuring and generating information, in turn, allows the contract to be used, and the state (legal rights) can, by the availability of information, guarantee the transaction (Barzel, 2005). It should be noted that, in a transaction, dimensions can be guaranteed in the contract (legal rights) and part can be subject to economic law, when difficult to measure, generating transaction costs. The author still considers that multiple mechanisms of agreement, involving long-term relationships and contract, supported by the state and the existing rules, configure an alternative mechanism of enforcement (guarantees). On the other hand, risk transactions or auctions demand exante information, or at the moment of the transaction, as a way to guarantee that losses of property rights do not occur. In this case, the presence of a third party may be required for the effective guarantee. As mentioned, this theoretical support is based on the notion of contractual signature and, at its macro level, considers that institutions are important for generating economic growth, by offering guarantees and incentives, and reducing uncertainties for agents in the market. These assumptions are used to characterize the cases studied and guide the organization and analysis of information, to understand how coffee roasters agents seek to organize their transactions to obtain adequate coffee that meets their competitive strategies.

9.3  Methodological procedures The methodological procedures adopted for the study are qualitative in nature, and the form of data collection and organization characterizes descriptive research. For this research, three cases of coffee roaster companies in Paraná were intentionally chosen: Café Atalaia, Café Basa, and Café Jandaia (Fig. 9.1). These companies are located in the northern and northwest regions of the state, and have as common characteristics the procurement of green coffee (Conilon and Arabica), its processing (roasting, grinding, and packaging), and commercialization of various types of roast and ground coffee blends.



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Atalaia coffee company Basa coffee company Jandaia coffee company

Fig. 9.1  Location of coffee roasters interviewed in Brazil.

The collection of information about these companies was carried out through semistructured interviews with the purchasing manager of Café Atalaia, the CEO of Café Basa, and the commercial director of Café Jandaia. These interviews were carried out during the years 2016 and 2017. In addition, nonparticipatory visits and observations were made in the companies during this period. These interviews were transcribed and stored in digital format, in the archives of the Group of Studies in Coordinated Structures (GECOR). After collection, the information was organized into analytical categories involving institutional environment, transaction attributes, governance structures, or mechanisms of enforcement, information, and measurement in acquisition process. This procedure was guided by the content analysis method, following Bardin (2004) guidelines. The use of this method sought

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to understand how transactions between these agents and their suppliers occurred, and the influence of governance structures in processing and defining raw material acquisition strategies. For the discussion of the cases, the general aspects related to institutional environment, transactional attributes, and dimensions involved in the coffee transactions were initially presented. Subsequently, in a particular way, it is described how these characteristics are observed in the studied companies and their influence in strategies for acquiring raw material.

9.4  Procurement strategies in the coffee industry The assumptions of transaction and measurement costs are relevant for understanding transactions in the coffee AGS. Transaction costs arise due to variability of transacted coffee and variation in the forms of arrangement used to accomplish coffee purchases.This is because, to determine the value of coffee, there is a dynamic market price definition, partially variable according to physical and chemical coffee attributes, which can increase or reduce the price of marketplace. The transaction has the support of formal rules, such as normative instruction n. 8, dated June 11, 2003. This regulation indicates the expected variations that can affect the definition of coffee quality.This involves different physical aspects, such as size, defects and hardness, and chemical aspects, such as aroma and taste. At the time of sale, these aspects are taken into account and may define the product price. For the cases studied, this is a common activity in which coffee suitable to a mix of products offered to the various consumers is continuously sought, competing with traditional brands in the market. The three companies buy the coffees Arabica and Conilon (Robusta). All of them perform what is known as blending, which is the mixture of the grains of these two varieties of coffee. This is due to, according to the interviewees, the custom of the Brazilian coffee consumer who, in general, appreciates dark coloration and full-bodied taste coffee.

9.4.1  Cases presentation The company Café Atalaia is located in the northwest region of the state, in the municipality that lent it the brand, Atalaia.The company does grain processing, roasting, packaging and marketing, produces the brands Atalaia of traditional coffee powder, vacuum packed, and in the system denominated cushion, and the coffee of Homemade brand, packed only in the system of cushion. The company uses grains, already peeled, of Arabica and Conilon



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coffee, purchased directly from producers, brokers, and cooperatives in the nearby region. In the case of Conilon coffee, the main origin is the state of Rondônia located in the northern region of the country. Its product is commercialized regionally. The company Café Basa is located in the municipality of Maringá, in the northern region of Paraná, which markets a traditional powdered coffee of the Basa brand, and a coffee powder, directed to the bids, of the Estoril brand. The company uses Arabica and Conilon grains, also benefited, to compose its blend, and the acquisition takes place at the counter, when the producer offers the product directly from the company or through brokers. In this form of acquisition, although Arabica coffee may come from the various producing regions of Brazil, Robusta coffee is purchased directly from Rondônia. Its product is commercialized regionally and, also, for public organs. The company Café Jandaia is located in the municipality of Jandaia do Sul, in the northern region of Paraná, which markets Jandaia brand coffee powder, as well as other brands, in different variations (cushion, vacuum, espresso machine), and a premium coffee called Fazenda Ubatuba.The purchase of coffee, Conilon and Arabica (already discarded), by the company usually occurs with brokers and rarely directly with the producer.The company still maintains its own production. Coffee comes from several regions, such as Espírito Santo, Paraná, São Paulo, and, in great part, Minas Gerais. It operates mainly in the north and northwest of the state of Paraná.

9.4.2  Attributes and dimensions When analyzing the cases studied from the transactional attributes in the Williamsonian orientation, asset specificity is considered the primary one, followed by uncertainty and frequency as influencing attributes for the purchases of these companies. As can be seen in Table 9.1, Arabica and Conilon coffee are considered assets specific to the activity of the companies studied, but as they commercialize conventional coffee, the obtaining of raw material is not subject to greater losses due to opportunistic behavior related to the use of the asset, as indicated by the interviewees. This indicates that medium to low specificity assets are observed. It should be considered, however, that although considered low or medium specificity, coffee should be adequate to the blend, requiring specific characteristics or attributes of quality that must meet the specifics of this blend, particularly to each roaster. As for the frequency, transactions may be recurrent or occasional. In all cases, it was identified that, according to Fig. 9.2, the companies studied have

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Table 9.1  Transaction attributes in green coffee procurement Attributes

Café Atalaia

Café Basa

Café Jandaia

Asset specificity

Low: Arabica and Conilon coffee to made a conventional blend

Low: Arabica and Conilon coffee to made a conventional blend

Frequency

Recurrent with producers and occasional with cooperatives Variability in the price of raw material

Occasional with brokers

Low: Arabica and Conilon coffee to made a conventional blend Medium: to make premium coffee Occasional, with some recurrency with brokers

Uncertainty

Variability in the price of raw material

Variability in the price of raw material

Fig. 9.2  Agents involved in Arabica and Conilon coffee procurement by the companies.

suppliers from whom they have long-term acquisitions, recurrent relationship with brokers or intermediaries, and sporadic relationships with anonymous suppliers (producers or brokers). Only the companies Café Atalaia and Café Jandaia reported receiving producers from time to time trying to market their products. Café Atalaia buys processed coffee and also coconut (coffee that needs to be peeled). The company acquired its Arabica coffee from about 300 suppliers, mostly through brokers, and also from cooperatives in the region. Conilon coffee is purchased by the company through brokers, because it comes from other regions of Brazil, such as Espírito Santo and Rondônia. Café Basa only buys coffee (Arabica and Conilon) from brokers. Café Jandaia buys conventional coffee from intermediaries and has part of its needs served by its own production (Arabica coffee). The uncertainty for the three cases is in price. According to the interviewees, the instability in the price due to variations in forecasting product supply and by several occurrences (climate, crop, exchange rate



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variations, politics) makes the purchase surrounded by uncertainties and cause for concern. With problems of passing on to the market variations in price, because they compete regionally with traditional brands that operate at the national level, the possibilities of gain for the three companies studied is to achieve the purchase. For Arabica coffee transaction, asset specificity is directly linked to the product measurable dimensions, which is in accordance with Barzel’s (2005) propositions. To ensure that coffee has the required characteristics for the blend and the appropriate price, the measurement takes place at several levels. Arabica coffee is double measured in the three companies studied, which requires a trained and experienced person, especially for the classification of beverage. The first measurement occurs in the sample presented by the seller (farmer or intermediary), which may result in purchase. The second measurement occurs at the time of product delivery, and portions of each bag to be delivered are evaluated.This process may result in the purchase, renegotiation, or loss of purchase (Fig. 9.3). In these two phases, physical and beverage conditions are evaluated, and the price is negotiated or renegotiated. It should be noted that Conilon coffee is obtained without a sample evaluation, and the intermediaries usually present a description of the beverage; the second evaluation is applied only when the product is delivered. In addition, such evaluation, conducted to verify the coffee adequacy to the company’s blend and to meet market price parameters, seeks to guarantee property rights for producers and buyers, thus generating transaction costs, according to Williamson (1985) and Barzel (2005). In some cases, the farmer himself already has a previous evaluation, which adds another measurement cost to the transaction, confirming what Barzel (2005) identified about the search for information.The company Café Jandaia reported that, in some cases, they reach arbitration to get an official coffee assessment to eliminate any doubt. As it can be seen, transaction costs are nontrivial in all three companies. Although the costs associated with explicit opportunistic behavior are lower (the reports for the three companies are an attempt to offer lower quality coffee than the evaluated one; search for price renegotiation in the occurrence of market price variation), costs are associated with implicit opportunistic behavior. The need for double measurement in all companies ratifies this possibility. The aim is to avoid attempts to transfer low-quality coffee, to maintain the adequacy of the product purchased to the expectations of blend composition, or to avoid the costs of not performing the transaction. Put another way, transaction costs through measurement seek to minimize the possibility of occurrence of other transaction costs.

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Fig. 9.3  Procurement flow of Arabica and Conilon coffee for the cases studied.

Note that these possibilities are present in transactions made directly with producers, relational or occasional, or in those involving intermediaries. As a result, the three companies reported problems in the delivery of coffee. In some cases, the coffee delivered is not the one promised or does not correspond to the sample sent; in other cases, the delivery of the coffee does not occur (abandonment), even after closing the purchase; and in others some variation in the market price, at the time of delivery, makes sellers try to renegotiate. These occurrences, according to the respondents, either generate loss of purchase or generate losses by renegotiation.

9.4.3  Organization strategies in coffee procurement by small and medium roasters The understanding of the way of carrying out transactions with the coffee vending segment by the companies studied considers the TCE, which confirms the Williamson (1985) alignment hypothesis. The transactional specificity and form of organization, however, is better clarified by the



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Fig.  9.4  Transaction attributes, measurement aspects, and governance structures for the cases studied.

c­ ontributions of the MCT, proposed by Barzel (2005). In this case, it is observed, as summarized in Fig. 9.4, that the predominant governance structure is the spot market. The search for flexibility and incentives, related to the best price and suitability of the beverage for the composition of the blend, justify this choice and aligns with the attributes of the transaction. The conditions of low and medium specificity in the transacted assets, associated to a particular recurrence condition in which the predominance of the purchases involve intermediaries and an instability in the definition of the price, are aligned to the market choice. When considering the transactional dynamics, it is identified that this structure of governance involves, for the most part, short-term contracts and a situation of constant measurement, aiming to obtain adequate information about the coffee to be marketed and carry out the transaction. In this case, these conditions indicate that enforcement mechanisms, detailed in the MCT, offer more robust explanatory conditions for these transactions. In this case, these governance structures align with caveat emptor enforcement mechanisms and use of short-term contracts, even for futures market transactions, where contract guarantee and measurement, for purchase and delivery, seek to ensure the property rights, legal and economic, involved. In the case of Café Atalaia, coffee is bought in the spot market, in a “caveat emptor”-type transaction. In this case, a contract with coffee delivery commitment is signed on the sample characteristics analyzed and quantity defined. The purchasing manager explains: “The document is the simple over-the-counter, to guarantee coffee delivery and payment, and also generate the invoice.” The company has transactions that involve a low number of recurring (relational) producers and a large number of anonymous producers represented by brokers (Fig. 9.5). According to the interviewee, the reduction in the number of producers in the region reduced the system of attending producers at the counter.

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Fig. 9.5  Agents involved in coffee procurement from Café Atalaia.

In the company, only one future delivery contract was identified with a producer, with a stipulated price and guaranteed coffee reception in December. In this case, the intention of the buyer was to guarantee price, locked at the time agreed. As described, the systematic of receiving the sample from the producer or intermediary involves the physical analysis, the drinking test, and the determination of the price. The reference price, taken from the stock exchange, may rise if the drink is good or reduced if the drink is lower. For this company, however, the need for the raw material leads to purchase of all supplies. According to the purchasing manager: “I do not reject any coffee, you have to buy what is offered, no requirement. It has outlet for all the coffees I get.” In this case, the blend is adjusted considering the various types of coffees received. The purchasing manager states that, if the producer has information about the characteristics of his coffee, and if it is a quality coffee, he hardly buys it. This is because he cannot afford the price that an exporter can afford. If he buys this coffee, this would raise his costs. In the past, the company has adopted strategies to finance the producer, to advance payment, to provide bagasse, and to keep the producer loyal, but these actions are not considered as effective strategies at the present time, being abandoned, due to the reduction in nearby producers, as already mentioned. In the Café Basa company, the owner describes the acquisition process, summarized in Fig. 9.6, as follows:“I go into the market, I report that I need this type of coffee, such a drink, and the amount of bags, they see what they have, they send me a sample, I do the tasting, the proof, I see if it serves in the blend or it does not fit, and then I separate it for this or that coffee.”The owner notes that maintaining Brazil’s standard blend is essential. As he says,

Fig. 9.6  Agents involved in coffee procurement from Café Basa.



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“The coffees here are weak in the drink, not in the type. Weak coffee is always very strong.” In this company, the biggest requirement is for the level of impurities, if “[...] it has no impurities or if it does not have straw that is not allowed, I buy it.” Because this transaction is performed in the spot market, if the coffee does not meet the standards at the time of delivery (second phase), three options are given to the supplier: take the coffee back and standardize; renegotiate with a discount (makes a hit); or return definitively. In any case, the company requires a negotiated coffee delivery schedule (Arabica or Conilon). For the owner, the strategy is to make a good deal on the acquisition. Transactions involving various suppliers and intermediaries in the spot market and even on-the-counter producers, and the production of Arabica coffee (vertical integration), identify the forms of acquisition (Arabica and Conilon) of Café Jandaia (Fig. 9.7). For the purchase of their coffee, the interviewee states that the company’s coffee buyer usually makes a classification of the lot. Arabica coffee is classified by type and beverage, and in the case of Robusta (Conilon), it is just the type. From this classification, the buyer evaluates the price to be paid. A contract is then made when the deal is closed for just one transaction. He says, “I make the contract and buy a single load, it's a oneoff contract.” In the company, if the coffee delivered does not match the sample presented when it is made available, and the seller must come and get the coffee returned. In some cases, a discount is negotiated. This policy is associated with the strategy of maintaining inventory to meet his blend. The interviewee says: “I always have stock, it's okay not to receive a delivery because I can keep production for a period with this stock, but I try not to buy more from that supplier.” In determining the value, the owner considers the market price and requires fewer defects and less than 1% of impurities. However, according to him, the definition of price depends very much on the negotiation considering “[...] interest of the company and the interest of the seller. If there are a lot of people wanting to sell, we can buy cheaper. If it does not have an offer, we end up paying more. It depends on the condition of the moment.” From the classification that follows the official table, the owner defines value, with this value established in the contract (purchase commitment). It is then defined in the contract: the quantity of bags; the value; and the previews classification. This standard is required on delivery and is considered out of order if not fulfilled, generating cancellation. The company has no policy to invest in farmers and makes the contract, usually, with

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Fig. 9.7  Agents involved in coffee procurements from Café Jandaia.

brokers for their acquisitions. According to the interviewee, the purchase is more guaranteed in this type of relationship. In addition, this policy can be justified by the fact that the company also produces part of the coffee it needs, with part of it used in the roasting and part exported. Fig.  9.8 summarizes the companies’ acquisition strategies. One can identify that the strategies fit the marketed product, the size of the company, and the market in which they operate. These companies have concentration of sales in the local and regional market, which leads them to look for the coffee that aligns with the commercialized blend. While on one hand, the maintenance of the blend favors consumer preference, on the other hand, it requires efforts to acquire adequate raw material at a competitive price, given that the regional market faces competition from major national brands. Maintaining a blend at a competitive price (cost) leads the coffee company Atalaia to buy any coffee offered and adjust any inadequacy during the blending process. At Café Basa, the relationship with brokers allows obtaining a greater offer and possibility of better negotiation. The quest for Company

Procurement strategies

Café Atalaia

Buying all offered coffee and from local producers

CAFÉ Café BASA Basa

Buying from brokers to guarantee the blend

Café Jandaia

Maintains stock and own production to guarantee quality

Fig. 9.8  Procurement strategies adopted by surveyed companies.



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maintaining quality parameters that meet the requirements of its customers makes Coffee Jandaia maintain strict standards in raw material control, which is only feasible by maintaining stock and its own production to meet part of its needs. In general, the acquisition process organization forms are aligned with the transaction attributes and the possibilities of variation in the dimensions of the transacted assets. Price uncertainty makes short-term contracts, as a governance structure close to the market as indicated by Williamson (1996), preferable to make coffee purchase. Changing prices can turn a good buy into a bad buy, because it is not possible to transfer a price increase to the retailer or the consumer. Blend specificity, however, turns transactions to a “caveat emptor” type, as proposed by Barzel (2005). In other words, it is measured at the time of purchase and, if the characteristics of the final product (double measurement) are confirmed, the purchase is accomplished. Although the market structure guarantees better incentives (Williamson, 1985; Azevedo, 2000), transaction costs are added to raw material costs (Arabica or Conilon coffee) to guarantee the transaction. It should be noted that transaction costs are presented not only to avoid explicit opportunistic behavior associated with attempts to pay less (processor) or to receive more (producer) for a given coffee, transaction costs arise from the need to measure the coffee to identify the adequacy to the parameters of the blend and to maintain the standard in the acquired lots. The measurement process, in turn, can motivate transaction costs of not performing the transaction, in cases in which the sample does not correspond to the amount delivered.These are costs that, regardless of the strategy adopted and the roasting companies, are far from eliminated from the transactions. Although the raw material is accessible, these costs tend to rise as the market becomes more demanding for quality or standard in marketed products, given the possibilities of variation in the traded product and export competition.

9.5 Conclusion In this chapter, we discussed the strategies of coffee roasting and commercialization companies, located in the north and northwest region of Paraná. These companies process coffee blend and are part of a framework in which the raw material supply is influenced by the global aspects inherent to the Coffee AGS. Also, they also have their strategies affected by the local ­conditions of raw material supply. It is considered that the growth of exports, the reduction of production in the state of Paraná, and the growth

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in the consumption and supply of specialty coffees are factors that affected the companys’ studied decisions in the process of coffee acquisition. In general, price changes due to variation in the product supply and the qualitative variation of the beverages. These conditions justify the relationship between these companies and their suppliers through short-term contracts. Given the high availability of the product in the domestic market, these contracts have characteristics of market governance structure in which price incentives are prioritized. On the other hand, the need to adapt the coffee, both Arabica and Conilon, to the individual blends allows the classification of the relationship with its suppliers as a caveat emptor type. In this case, under the legislation that guides the physical and beverage classification, systematic measurements of all commercialized coffee are carried out per sample and at the moment of delivery, indicating that the specificities are present in a nontrivial way. These strategies range from maintaining inventories, seeking effectiveness in acquiring coffee, or even maintaining broader and relational transactions with brokers. However, what is observed is that transaction costs are presented and added to production costs. Doubts about the possibility of holding up the fulfillment of short-term contracts, the need for double measurement in the company to guarantee standard in the product acquired, and to avoid possible opportunism, and of previous measurement by the producer to avoid appropriation of value by buyers part, present themselves continuously and effectively in the acquisition process of these companies. These costs hinder the strategies of these companies that operate in a local and regional market. Suffering direct competition from major national and imported brands, both in purchase of raw materials and in blend marketing, they fight to survive. The market changes and consumer demands are factors that can affect the strategies of procurement of these companies.The rise in production costs, due to quality raw material price, that seems to be a tendency in this market, should reflect transaction and measurement costs, and must be followed. Studies related to the strategic environment in which companies are involved and the lack of alignment with coffee producers’ strategy must be important research agenda.

References ABIC, 2015. Indicadores da Indústria. Available from: http://abic.com.br/estatisticas/indicadores-da-industria/indicadores-da-industria-2015/. (Accessed 11 October 2017). AEN, 2017. Agência Estadual de Notícias. Exportações de Café do Paraná Crescem 33% de Janeiro a Julho. Available from: http://www.aen.pr.gov.br/modules/noticias/article. php?storyid=85372. (Accessed 20 October 2017).



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Azevedo, P.F., 2000. Nova Economia Institucional: referencial geral e aplicações para a agricultura. Agric. São Paulo 47 (1), 33–52. Bardin, L., 2004. Análise de conteúdo. Lisboa, Edições 70. Barzel, Y., 1997. Economic Analysis of Property Righ, second ed. 175 p. Cambridge University Press, Cambridge. Barzel,Y., 2002. Standards and the form of agreement. In: 3rd International Society for New Institutional Economics. ISNIE, Budapeste. Barzel, Y., 2005. Organizational forms and measurement costs. J. Inst. Theor. Econ. 161, 357–373. CECAFE, 2018. Café Brasileiro: História de Sucesso e Inovação em Processos Produtivos Sustentáveis. Available from: http://www.cecafe.com.br/sustentabilidade/artigos/ cafe-brasileiro-historia-de-sucesso-e-inovacao-em-processos-produtivos-sustentaveis-20160610/. (Accessed 1 February 2018). Coase, R.H., 1937. The nature of the firm. Econômica 4, 386–405. Coase, R.H., 1960. The problem of social cost. J. Law Econ. 3, 1–44. IBGE, 2018. Pesquisa Industrial Anual—Empresa. Available from: https://sidra.ibge.gov.br/ pesquisa/pia-empresa/tabelas. (Accessed 16 February 2018). MAPA, 2017a. Café do Brasil. Available from: http://www.agricultura.gov.br/assuntos/politica-agricola/cafe/cafeicultura-brasileira. (Accessed 10 October 2017). MAPA, 2017b. Valor Bruto da Produção Agropecuária (VBP). Available from: http://www. agricultura.gov.br/assuntos/politica-agricola/valor-bruto-da-producao-agropecuaria-vbp. (Accessed 10 October 2017). Possas, M.L., 1987. Estruturas de Mercado em Oligopólio, second ed. Hucitec, São Paulo. Saes, M.S.M., 2009. Estratégias de diferenciação e apropriação de quase-renda na agricultura: a produção de pequena escala. . Annablume, São Paulo, Fapesp. Saes, M.S.M., Silveira, R.L.F., 2014. Novas formas de organização nas cadeias agropecuárias brasileiras: tendências recentes. Estud. Soc. Agric. 22 (2), 386–407. Available from: http:// r1.ufrrj.br/esa/V2/ojs/index.php/esa/article/view/389. (Accessed 15 March 2015). USDA, United States Department of Agriculture, 2017. Foreign Agricultural Services. Available from:http://apps.fas.usda.gov/psdonline/psdQuery.aspx. (Accessed August 2, 2017). Williamson, O.E., 1975. Markets and Hierarchies: Analysis and Antitrust Implications. Free Press, New York. Williamson, O.E., 1985.The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. Free Press, New York. Williamson, O.E., 1996.The Mechanisms of Governance. Oxford University Press, New York.

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CHAPTER 10

Cerrado Mineiro Region designation of origin: Internationalization strategy Luciana Florêncio de Almeidaa, Juliano Tarabalb a ESPM, São Paulo, Brazil Cerrado Mineiro Federation, Minas Gerais, Brazil

b

10.1 Introduction Although the appellations of origin are older than the world’s history with examples known as Carrara marble, carpets of Persia, and silk from China, it was only in the 18th century that a region was formally discriminated as the origin of a product. In 1756, Marques de Pombal requested the demarcation of Porto region to indicate the geographical perimeter of wine production. In Brazil, Law No. 9.279/1996 determines in articles 176–182 the protection of geographical indications (GI) for products and services, defining the National Institute for Industrial Protection (INPI) as the body responsible for defining procedures for creating GIs, and the Ministry of Agriculture and Supply (MAPA) for regulation and control. In Brazil, INPI is also responsible to release the indication of origin (IO) and designation of origin (DO). For the institution, the difference is described as follows: The Designation of Origin recognizes the name of a country, city, or region whose product or service has certain specific characteristics thanks to its geographical environment, including natural and human factors. The Indication of Origin refers to the name of a country, city, or region known as a center of extraction, production, or manufacture of a particular product or service provision. (INPI, 2018).

In 2018, there were 49 IOs and 10 DOs officially recognized by INPI representing more than 35 regional activities including coffee production. The first IO was released in 2011 for red, white, and sparkling wines produced at Vale do Vinhedo region in the south region of Brazil. Coffee ­production accounted for five IOs and one DO (INPI, 2018). Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00008-1

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Accordingly, to Giesbrecht et al. (2014, p. 9), an IO mark values: “(..) a production tradition and provides public recognition that a determined region’s products have unique qualities. These are characterized as being areas well known for producing, extracting or manufacturing a specific product. They protect the relationship between the product and its reputation, as a result of its specific geographic origin.” Cerrado Mineiro was the first coffee region in Brazil to obtain the IO in 2005 and the first region in the world to issue a DO seal for green coffee as well for roasting coffee in 2013. In the period from 2011 to 2017, 518,000 green coffee bags were sealed with DO accreditation and, from 2014 to 2017, 624,000 seals were issued for roasted and ground coffee. In 2014, there were 14 brands using the Cerrado Mineiro DO seal. In 2017, there were 57 brands using the DO seal in their coffee packages; among them is one American roaster selling from high-end coffee retailers United States of America. Accomplishing these figures was a long path for thousands of men and women who daily work on coffee lands at Cerrado Mineiro. They have a golden goal: to reach 500,000 green coffee bags issued with Cerrado Mineiro Region DO in the year of 2020. Is this goal reachable? Are they dreamers or visionaries? What are the challenges ahead? This chapter objective is focused on presenting the Cerrado Mineiro Region DO in the perspective of its internationalization process. The chapter is organized into four sections. In the first part, Cerrado history is recounted as a base for the appellation process start in the region. In Section 10.2, Cerrado history is recounted as a base for the appellation process start in the region. Section 10.3 presents the alliance formed with the coffee growers and the evolution of the DO standards. Sections 10.4 and 10.5 discuss the internationalization process and the challenges presented for coffee growers to the continuity and empowerment of the appellation.

10.2  Cerrado history and the basis for the DO process In the 1970s, a Brazilian government policy helped to identify new frontiers for coffee fields. Among distinguished areas in several parts of the country, Cerrado Mineiro appeared to be less attractive due its poor soil. Nevertheless, some pioneers were attracted by the low land costs and governmental subsidized credit line for supporting production cost. At that time, those coffee growers’ entrepreneurs had few existent resources such as labor, roads, technical assistance, or even an established market to sell their



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harvest coffee. In the words of Mr. José Carlos Grossi when he arrived in the region in 1972, “Cerrado was bare-wood vegetation that was worthless. To raise cattle, you needed to have 3 hectares for a head of cattle and still it could starve. Poor land, very weak soil without nutrients.” Four decades after this scenario, the place where Mr. Grossi arrived back in the 1970s named Patrocinio is considered, nowadays, as the major coffee grower city in the world. In 2017, coffee farmer Gabriel Nunes from Patrocínio was the Cup of Excellence champion in the pulped natural category, the largest specialty coffee world competition. Also, he became the world record holder for the highest coffee 60-bag price, reaching US $15,000 per bag. One of the coffee buyers was the Australian Proud Mary coffee shop chain’s owner, Mr. Nolan Hirte (Espresso, 2018). In 2018, Cerrado Mineiro region was the largest coffee producer in Brazil accounting for 12.7% of the national production with 5.7 million bags with an average productivity of 35 bags/ha.The region is formed by 55 municipalities, and the coffee production occupies 200,000 ha divided into 4500 coffee farms (Cerrado Mineiro Federation, 2018). The quality recognition of the coffee produced in Cerrado Mineiro region was first publicly recognized with the first Illy Coffee for Expreso Quality Award in 1991. Ernersto Illy was having difficulty finding coffee beans that met the company’s quality requirements and serve Illy’s unique blend. He flew to Brazil to verify in loco whether the country coffee production could attend Illy’s quality criteria. Surprisingly, a coffee farmer from the region of Serra do Salitre located in Cerrado Mineiro was the final winner of the First Prize. The paradigm that the Cerrado Mineiro’s soil was not conducive to the production of quality coffees fell to the ground. Therefore, it was verified that Cerrado soil, when receiving adequate fertility correction and adequate cultural treatments, allied to the high-altitude characteristics and low rainfall in the harvest, could produce high-quality coffee (Saes et  al., 1997). It is worth mentioning that the Illy Prize is recognized by its own quality criteria based on the following conditions: Arabica coffee type 3 or better with a maximum of 12 defects and a maximum humidity of 11% (equivalent to 9% by ISO 6673) (Clube Illy do café, 2018). In the Second Illy Prize edition, another coffee farmer from Cerrado region won the national prize. From this moment on, farmers perceived an opportunity to obtain higher prices for their product selling to international buyers such as Illy that were interested to pay more for a high-quality coffee (Neves et al., 2003).

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Organized beneath the Association of coffee growers in the region of Patrocínio named ACARPA, and led by the producer and director of the association, Mr. Aguinaldo José de Lima, the coffee farmers started to implement a strategic plan, whose main pillars were: (1) adequate use of technology for coffee processing, (2) creation and implementation of a marketing strategy for the region, and (3) direct trade, reducing the participation of third parties in the sale and distribution of coffee. With the support of SEBRAE, a public-private entity, ACARPA committed itself to assist producers in the technical field as well as managing market and political actions in the defense of the region’s interests (Saes et al., 1997). Other local coffee farmer’s associations began to adopt the same strategic guidelines and, as collective actions were demanded among all entities, the leaders of such associations decided to form a Council of Associations named CACCER that later became the Cerrado Mineiro Coffee Growers Federation (Federation). Currently the Federation is composed of seven associations and nine cooperatives as shown in Fig. 10.1. Also, one foundation is part of the Federation named FUNDACCER.

Fig. 10.1  Cerrado Mineiro Coffee Growers Federation: Affiliated organizations.



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10.3  The search for an alliance: The origin of designation conquest In 1993, ACARPA members drafted an initial plan to use value-adding strategies to market and communicate Cerrado Mineiro’s coffee particularities. In April of 1995, the region was the first area in the state of Minas Gerais to have a delimited geographical area by means of a government official decree. During more than 15 years, the same group of coffee growers, along with consultants and specialists, invested their time and resources to achieve the IO. In 2005, the region was officially delimitated by INPI and was ­described as follows: The coffee of the Cerrado Mineiro Region is the result of the combination of the unique climatic conditions of the Cerrado Mineiro with the quality of coffee produced there, the result of intense and unique blooms, uniform maturity, and concentrated harvest. The authentic coffee of Cerrado Mineiro brings with it intense flavors ranging from caramel to nuts, with delicately citrus acidity and long lasting chocolaty flavor.

The technical characteristics can be summarized by the following ­aspects (Cerrado Mineiro Federation, 2018): • Altitude from 800 to 1300 m (2500 up to 4200 ft) • Annual average temperature around 22°C • Rainfall average above 1800 mm/year • Dry winter favoring the harvest period • Intense sunshine • Plane topography, favoring mechanized harvesting The affiliation process to the IO begun in 2005 and had grown continually each year, but in 2012 it stagnated with 250 coffee growers as members. The main obstacle named by the farmers was the certification protocols required by the Federation as a compliance rule for each new member. The protocol was created back in 2005 based on the UTZ guidelines for agricultural best practices and sustainability. Concerned with the challenges ahead of the IO affiliation and searching for a protocol more adaptable for a DO certification, members of the Cerrado Mineiro Federation flew to Italy aiming to pursue knowledge with connoisseurs of the local DO in Bologna region. The group had an experiential and learning journey into the world renown and prestigious Italian DOs, such as Brunello Montalcino wine, Parmegiano Regiano, Prisciuto di Parma, Aceto balsâmico de Modena, Aceto de Rimini, Prosciuto de Modena, and Lambrusco wine. It was clear at the end of the trip that the certification protocol for a

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DO should be based on origin characteristics and quality standards rather than in agricultural best practices. For Juliano Tabaral, DO leader at the Federation: “It was our first major challenge but also presented to be an opportunity to be ready for the D.O. designation.” Thirty years after the seminal meeting at ACARPA, the DO was officially launched in 2013. In March 2018, there were 833 accredited growers, 939 farms accounting for 88,240 thousand hectares, and around 100,000 coffee bags. To achieve the right to use the Cerrado Mineiro DO seal, the farmer must be in compliance with the several requirements: (1) The coffee farm must be located in Cerrado Mineiro delimited area. (2) The farm must be at the minimum altitude of 800 m (2600 ft). (3) It must produce only Arabica coffee. (4) The farm must be associated to one of the cooperatives and associations affiliated to the Cerrado Mineiro Federation. (5) The farmers must sign a Responsibility Term in accordance with ­efficient agriculture treats and respect to the Environmental and Work Brazilian law.a (6) The coffee batch must be collected at one of the accredited warehouses. (7) It should have achieved 80 points minimum at the Specialty Coffee Association of America (SCAA) sensory and quality scale. (8) The certified batch should be contained into an official coffee bag with the DO seal (Fig. 10.2).

Fig. 10.2  DO seal applications. a

Both legislations, work and environment laws, are considered very severe compared to other coffee-producing countries and is aligned with OCDE countries’ legislation.



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The DO accreditation addresses significant benefits for coffee growers in the region. The more important ones are: (1) Cerrado Mineiro promotion through the use of the DO seal on the coffee green bags or the coffee package for final consumers (2) Protection and control of the DO use (3) Competitive positioning through a differential strategy (4) Internationalization access through specialized fairs all over the world (5) Technological and marketing assistance through partnerships with universities and institutions such as Sebrae (6) Political and institutional representation in relevant forums and governmental organism in the coffee chain at national and international levels Still, Cerrado Mineiro Federation understands that a motivation program is necessary to convert more coffee farmers to the DO accreditation system. In 2016, it launched the program “Integra Cerrado Mineiro” aimed at disseminating the DO philosophy for more than 1000 coffee farmers. During 5 months, seven agronomists visited five microregions, explaining the DO benefits and the process to obtain the seal. In the end, around 60% of the visited growers were engaged in the accreditation process. In 2017, the Federation held a week-long event to deliver the certifications and individual cards for each new accredited coffee grower (Fig. 10.3). Coffee consumers gain confidence in the product origin due to the traceability tool. Using the QR Code, traders, retailers, and final consumers can access an exclusive online page with detailed and updated information concerning the coffee sourcing and processing. The system contains

Fig. 10.3  Farmer’s certifications and individual cards.

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i­nformation on the coffee origin such as (1) the name of the coffee farmer, (2) the farm location, (3) the sensorial analysis, and (4) production and processing information (Fig. 10.4). Totum Institute, a certification body accredited by Inmetro, a Brazilian Institute for Standardization and Safety Norms, is responsible since 2015 for an independent audit process, in charge of analyzing all documentation, processes, and samples in loco at the accredited coffee growers and warehouses. After several improvements, in 2016, the Federation had received from the Totum Institute the Certificate of Conformity for the whole Certification of Origin and Quality process (AGROEMDIA, 2017). In 2015, Cerrado Mineiro Federation publicized its development regional plan for sustainability and promotion for the Cerrado Mineiro region. The plan is based on four pillars: (1) promotion and market development, (2) certification of origin and quality, (3) communication, and (4) research and development. Also, nine work groups were formed to discuss relevant issues for the region: (1) political action, (2) research, (3) training, (4) endomarketing, (5) sustainability, (6) domestic market, (7) international market, (8) origin certification, and (9) new businesses. The main value proposition issued by the plan was to “integrate, develop and connect people, influencing the transformation and evolution of the coffee culture. We help the people of the coffee world to do more and better.” Beneath the research and development pillar, the institution has embraced several actions for the region sustainability development such as strategies toward expansion and maintenance of the agriculture best

Fig. 10.4  Traceability system.



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p­ractices certification. Also, the partnership with SEBRAE through the conjoint program Educampo allows the farmer’s professionalization aiming for the enhancement of farm management and production cost tools.

10.4  The internationalization strategy: The long path from Minas Gerais to the world The last 25 years were incredibly marked by a consistent growth path for the coffee production that culminated in the improvement of Brazil’s image in coffee production. Knowledge evolvement, partnerships, and collaboration were fundamental to achieve a new paradigm that resulted in more competitiveness beyond the quantity and price factors. This new paradigm consisted in changing the farmer’s mindset into a new perspective focusing on quality and origin. Nevertheless, the shift was remarkably challenging considering the consolidated practices on coffee production, processing, and marketing that were passed through thousands of families’ generations. This new mindset had as a wheel of motivation the coffee de-regulation police, the cease of the International Coffee Agreement, and especially for the Cerrado Mineiro coffee growers, the perspective of a new future. Overall, the main drivers of changes were molded by seven milestone events that are graphically presented in Fig. 10.5. The moment Mr. Ernersto Funaro won the very first Illy Prize for Premium Quality Coffee for Expresso, the Cerrado Mineiro region started

Fig. 10.5  Milestones toward the Cerrado Mineiro brand internationalization.

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a new history. Mr. José Aparecido Naimeg, another coffee grower in the Cerrado Mineiro region, portrays the situation in his words: In 1991, Mr Funaro was the winner of Illy Brazil Prize for quality coffee and the coffee sector in that time was suffering with the cease of deregulation and economic crises and coffee prices were down, the coffee growers were desperate for a new path and at this moment I met Mr Funaro (..) I didn’t know him and he told me I could participate at Illy Prize. (..) then I send samples of my coffee to the person responsible to evaluate and at that year we won the 1st place at Illy Prize.

The fact that a well-known Italian roaster with high-quality standards was receiving coffee from Cerrado Mineiro coffee growers attested to the favorable conditions presented in that region to export high-quality coffee to the world. In this sense, the launch of Cerrado Mineiro Brand in July 1993 was remarkable due the objective toward a differentiation strategy to achieve premium prices for the coffee produced in the region.The first coffee batch sold with the new brand was destined to the Belgium market with an overprice of 8% related to current commodity prices (Saes et al., 1997). In 1997, Expocaccer was founded seeking to consolidate the exports for the associations and cooperatives of CACCER. Accordingly, to the institutional Expocaccer website, it has “a well-structured unit of warehousing to provide the best services to its members and clients. There are eight warehouses with total capacity for more than 800.000 coffee bags. Three of the warehouses are owned by Expocaccer and are located inside the cooperative complex, being the largest unit of warehousing of Patrocínio and region. All warehouses are built according to the highest quality standards and receive regular maintenance in order to preserve the best storage conditions for coffee. Expocaccer’s warehouses are certified by UTZ Certified, Café from the Cerrado Mineiro Region, Rainforest Alliance, Fairtrade, 4C’s and Inmetro.” (Expocaccer, 2018). The search for the DO seal had begun years ago when the group of coffee producers reunited at ACARPA started the movement toward quality and client acknowledgment. They also know that this search would require a collective action involving different institutional approaches and partnerships. In 1993, the seed for the DO process was planted with the signature of a letter of intention along with the Minas Agriculture Institute (IMA), the Agricultural Research Company of Minas Gerais (EPAMIG), the Minas Gerais State Technical Assistance and Extension Company (EMATER-MG), the Federal University of Minas Gerais (Uberlândia), and CACCER. The next step was given through the geographic delimitation defining four coffee producing regions in the state of Minas Gerais: South of Minas,



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Cerrado, Jequitinhonha, and Mountains of Minas. In December 1996, by Decree 38.559 of the Minas Gerais Government, a regulation was issued concerning an origin certificate, known as Certicafé, for the geographic regions. The certificate is granted by IMA that has the functions of issuing and controlling the use of the certificate (Saes et al., 1997). It’s currently issued for a great number of coffee farmers located in the delimited area, and it guarantees the coffee traceability and international market access for coffee farmers as stated in Certicafe’s institutional website: “From this program, the consumer can also demand coffee with higher quality, knowing the origin of the product, the aspects of the drink and its type that may even be predetermined in its packaging.The advantages of the program upon the adhesion of the rural producer are numerous, making it possible to add a greater unit value to the product, facilitating commercial transactions, including exports, through the recognition of the Certificate of Origin at the international level.”(CCCMG, 2018). After 5 years, the group felt the need to renovate the brand image of Cerrado Mineiro, mainly to be more competitive in the international market. The main idea was to associate the brand to the unique characteristics of the region such as the altitude and the innovative attitude of the local coffee farmers. In this sense, a new slogan was crafted to position Cerrado Mineiro: Coffee produced with attitude.b The term attitude was used to express the region’s vocation to pursue high technology and innovation in all aspects of coffee production and quality achievement. Three conditions were associated to the slogan’s promise: (1) Ethical: high-quality coffees are produced in a responsible and ethical way. (2) Traceable: online tracking that informs when and how coffee was produced and the farmer’s history. (3) Quality: unique and exclusive features of climate, soil, and cultivation following a strict production process to ensure high quality. Along with the branding strategy, a new website (cerradomineiro.org) was created to gather all information about the region, its history, coffee production characteristics, the region development plan, and DO information (Fig.  10.6). Also, it’s possible to check any coffee traceability by inserting the packaging code in the website homepage. The Internet page has two language versions: Portuguese and English. The brand also has Instagram and Facebook fun pages. In the first semester of 2018, two b

The marketing plan was designed by a private company named BeConsulting in 2010.

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Fig. 10.6  Homepage of Cerrado Mineiro website.

i­ nstitutional films in English were released and are available on the Cerrado Mineiro’s Youtube channel. In 2013, with DO seal conquest, Cerrado Mineiro Federation started a communication plan for international markets. Counting on the financial and organizational support of SEBRAE, the debut was at the Specialty Coffee Association (SCA) annual event in Seattle, United States in April 2014. Five main actions occurred during the occasion: • DO seal official launch feast for 100 special guests including importers, exporters, roasters, and press • Stand of 27 m2 on the convention center • Commercial mission with coffee farmers and authorities from Cerrado Mineiro institutions: 54 persons • Cuppings on the stand to demonstrate the region’s coffee • Campaign advertised in ROAST Magazine for 1 year along with a 2-page article about the DO conquest Similar communication efforts were made in 2017 to launch the DO seal in European markets with different approaches. A road show named Minas Coffee Origins was run in Berlin during the months of January and February. This marketing action was designed in partnership with the Germany roaster Wildkaffe in the department stores KaDewe. The customers had the opportunity to sample the Brazilian coffee from three different Minas Gerais regions: Cerrado Mineiro, Mantiqueira, and Mountains of Minas. The customers could evaluate the coffee and buy the roasted grain in the store. On April 27, Cerrado Mineiro Federation through a partnership with Casa Brasil coffee, an American importer specializing in Brazilian coffee, started to sell roasted coffee with DO seal at a Wholefoods store in Austin,Texas.



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The internationalization strategy is targeting relevant coffee consumption markets such as the United States and Europe. For 2018, Federation expects to continue participating at least in two major global coffee events such as SCA and World of Coffee.

10.5  The main challenges for the Cerrado Mineiro accreditation in the international market The specialty coffee market has been increasing consistently with growth rates above the traditional markets. The number of consumers willing to pay higher prices for coffees of higher quality has increased in recent years. It’s relevant to note that specialty coffee usually has a cupping score above 85, and it is sometimes produced in microlots.This movement has been also accompanied by the proliferation of coffee bars, small and micro roasters, and small local brands and baristas, all of which are characteristic of the third wave (CBI Market Intelligence, 2016). The high-end independent coffee shops, known as HEICS, had spread all over the big cities such as New York, Shanghai, London, and Berlin. At HEICS, consumers and connoisseurs can savor different high-quality coffees prepared by well-trained baristas who can help guide them through their tasting rituals using state-of-the-art equipment (Quintão et al., 2017). In the third wave coffee movement, six consumer trends are important as follows (CBI Market Intelligence, 2018): (1) Individualization of coffee consumption through an increase of capsule consumption (2) Increasing demand for specialty coffee from different producing regions (3) Increasing sophistication of coffee shops and baristas has led to more signature blends such as Jamaican Blue Mountain, Hawaii Kona, Top Kenya AA, and Guatemalan Antiguas (4) Microlot phenomenon carried on by the coffee championships such as Cup of Excellence, allowing for more direct trade between small roasters and producers (5) Coffee subscription websites: trade happens through the Internet, in small packaging sizes, and it is usually linked to the dealers of ­coffee-roasting machines (6) Certification becomes a market requirement: increasingly concerned about the social and ecological impact of coffee consumption Also, there is intense rivalry between coffee producers to position its product as a high-quality coffee producer country. Colombia coffee has

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been a relevant marketing case demonstrating the power of country of origin image. Brazil, instead, has a powerful image as a world leader coffee producer but not necessarily connected with high quality. Considering all the facts presented in this chapter, some challenges might be considered ahead of the Cerrado Mineiro’s goal achievement. Nevertheless, Cerrado Mineiro Federation and its coffee farmers have shown a strong resilience to move forward to a bright future.

References AGROEMDIA, 2017. Auditing Company Approves Certification-of-Origin and Quality Process of Cerrado Mineiro Federation. Retrieved from: https://agroemdia.com. br/2018/02/27/auditoria-aprova-processo-de-certificacao-de-origem-e-qualidade-da-federacao-dos-cafeicultores-do-cerrado/. CBI Market Intelligence, 2016. CBI Trends: Coffee in Europe. Retrieved from: https:// www.cbi.eu/market-information. CBI Market Intelligence, 2018. Which Trends Offer Opportunities on the European Coffee Market? Retrieved from: https://www.cbi.eu/market-information/coffee/trends/. CCCMG (Centro de Comércio de café de Minas Gerais), 2018. Programa Certicafé. Retrieved from http://cccmg.com.br/certicafe/. Cerrado Mineiro Federation, 2018. Institutional Website. Retrieved from: http://www.cerradomineiro.org/. Clube Illy do café, 2018. Prize Requirements. Retrieved from: https://clubeilly.com.br/ premiacoes/premio-ernesto-illy/exigencias/. Expocaccer, 2018. History. Retrieved from: https://www.expocaccer.com.br/expo­/#pagina/ 47/11. Giesbrecht, H.O., de Minas, R.B.A., Gonçalves, M.F.W., Schwanke, F.H., 2014. Brazilian Geographical Indications—Coffee. SEBRAE, INPI, Brasília. INPI, 2018. Indicações Geográficas. Retrieved from: http://www.inpi.gov.br/menu-servicos/ indicacao-geografica. Neves, M.F., Saes, M.S.M., Rezend, C.L., 2003. Estudo de caso: illycaffè e os desafios do crescimento no Brasil. In: Giordano, S.G., Rezende, C.L. (Eds.), Cadernos da Universidade illy do Café. vol. 1. Pensa-FIA, São Paulo, pp. 69–121. Quintão, R.T., Brito, E.P.Z., Belk, R.W., 2017. Comunidade de Consumo de Apreciação e Sua Dinâmica. Rev. Bras. Gest. Negóc. 19 (63), 48–64. Revista Espresso, 2018. Cerrado Mineiro Will Host International Buyers. Retrieved from: http://revistaespresso.com.br/2018/07/17/cerrado-mineiro-recebera-comprador-de-cafe-­ internacional/. Saes, M.S.M., Jayo, M., da Silveira, R.L.F., 1997. CACCER: coordenando ações para a valorização do Café do Cerrado. In:VII Seminário Internacional PENSA de Agribusiness, São Paulo.

Further reading Giordano, S.R., 2018. In: Zylbersztajn, D., Giordano, S.R., de Vita, C.R.L. (Eds.), Denominação de Origem do Cerrado Mineiro-D.O.Cerrado Mineiro. Università del Caffè Brazil Coffee Researches. 2013–2017 (English Edition) Editora Pasavento. Saes, M.S., Hesse Escudeiro, F., da Silva, C.L., 2006. Estratégia de diferenciação no mercado brasileiro de café. Rev. Bras. Gest. N. 8, 21.

CHAPTER 11

Business history and challenges for coffee cooperatives in Brazil: The case of Cooxupé Cooperative Caroline Gonçalvesa, Decio Zylbersztajnb a

Federal University of Mato Grosso do Sul, Corumbá, Brazil Economics of Organization, School of Economics and Business, University of São Paulo, São Paulo, Brazil

b

11.1 Introduction The Cooxupé Cooperative, located in the state of Minas Gerais, is regarded as Brazil’s greatest coffee cooperative. Cooxupé was the object of a case study performed in 1995 by PENSA (Centro de Conhecimento em Agronegócios),1 a research group from the University of São Paulo, that subjected the cooperative to an in-depth analysis throughout 7 to 9 months of interaction. Approximately 20 years later, it is evident that coffee is witness to a key moment in its history. According to Carlos Alberto Paulino da Costa,2 President of Cooxupé, consumption has been considerably increasing at a worldwide level, the supply balances the demand, and there are no surpluses. The appreciation of the dollar has also been contributing to prices, providing the most opportune time to reduce costs and, in turn, increase the profitability of the product. The final documents of the first case study currently serve as a reference for future studies, now under the perspective of Cooperative Business History, which employs theories of history and economy of organizations in an attempt to investigate their past and comprehend their present, the future, and the reasons for adopting certain organizational strategies over time. How and why do organizations change their strategies over time? The answer lies within the association between economic theory and the field of Business History, by establishing a narrative approach complemented by a positivist analysis as a goal. The studies on the behavior and evolution of specific companies, industries, and business practices, and the historical perspective on organizations reinforce the need of a choice between a range 1

Center of Knowledge in Agribusiness. In an interview for the Journal Folha Rural da Cooxupé, January 2016.

2

Coffee Consumption and Industry Strategies in Brazil https://doi.org/10.1016/B978-0-12-814721-4.00015-9

© 2020 Elsevier Inc. All rights reserved.

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of theories of the firm, especially by identifying dynamic elements that investigate alternative hypotheses on how and why companies adopt specific strategies as a reaction to external factors. The option chosen to reach the objective proposed for this study was to revisit the first case study, to verify institutional changes, and identify whether there was any pattern, logic, or rupture of the strategies used by the organization. “Revisitation” is hereby understood as a remake of the original case, performed by our researchers who went into the field to carry out a new case study on the same cooperative to examine its new status. The following section will provide substantial information on the history of Brazilian cooperativism. The third section will present the new strategies of agricultural cooperatives over time. Section four will introduce the methodology used in this research. Then, section five will contain an analysis of this study, that is, the new Cooxupé Cooperative case study.The sixth section pertains to the final discussion of this study, which will contain observations on the verified strategic dimensions related to organizational adaptation and flexibility, and will summarize some final remarks on the study.

11.2  Brazilian cooperativism Cooperativism as an organizational form arose in Rochelle, England, in 1844, when a group of weavers formed a private business organization called a cooperative (Bialoskorski Neto, 2003; Pinho, 2004). This happened at the time of the industrial revolution, during which workers were frustrated by low salaries and precarious working conditions.Thus, cooperatives were born as a response of the crisis. In Brazil, Pinho (2004) states that a culture of cooperation, which had existed in the country ever since Portuguese colonization and was strongly present during the 20th century, was responsible for launching cooperatives of the most diverse branches into the country. The oldest known Brazilian cooperative is the “Sociedade Cooperativa Econômica dos Funcionários Públicos de Ouro Preto”,3 founded on October 27, 1889, after slavery was abolished (Pinho, 2004). Other sources indicate that, in 1902, settlers of German origin, encouraged by Jesuit Theodor Ambstadt, founded a rural credit cooperative in Vila Império, now known as “Fundação da Cooperativa de Crédito Rural Nova Petrópolis”,4 in the city of Nova Petrópolis, RS, the oldest known active cooperative in Brazil (Etgeto, 2005). 3

Economic Cooperative Society of Public Employees of Ouro Preto. Nova Petrópolis Rural Credit Cooperative Foundation.

4



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The International Cooperative Alliance (ICA), the world’s oldest and largest nongovernmental organization, encourages cooperativism throughout the world and aims to preserve its principles (Bialoskorski Neto, 2003). These principles were approved and put into practice in 1844.As societies and the economy transformed, these principles have been adapted to the demands of their time. Thus, since the last review in 1995, during the Centennial Congress of the ICA in the city of Manchester, seven principles were established: (1) Voluntary and open membership; (2) Democratic member control; (3) Member economic participation; (4) Autonomy and independence; (5) Education, training, and information; (6) Cooperation among cooperatives; and (7) Concern for community. According to Brazil’s Ministry of Agriculture, Livestock, and Supply, also known as MAPA (2008), a cooperative is defined as an administrative structure basically composed of a General Assembly, a Board of Directors, and a Fiscal Council. At the General Assembly, cooperative members meet to jointly define their actions. Each member of the cooperative has the right to one vote.The Board of Directors is constituted exclusively by representatives elected by other cooperative members at a general meeting. This body is responsible for executing proposals approved at a general meeting and may appoint an executive board, composed of three of its members, who manage the day-to-day operations of the cooperative. The Fiscal Council, in turn, is an independent supervisory body within the cooperative, and its councilors are elected by the other members. This body is responsible for frequently and thoroughly examining the cooperative’s management of assets and operations on behalf of all cooperative members. The representative of the Brazilian cooperative system and the government’s technical-advisory body is the Organization of Brazilian Cooperatives (OCB), since 1971, under Law 5,764, art. 105, although the body is not always recognized by it (Pinho, 2004). Each associated member of the cooperative must invest and guarantee the necessary capital to honor the commitments and subsidize the development of the cooperative (MAPA, 2008). The main objectives of the cooperative are to provide services and support to members under a nonprofit policy and with surpluses. According to OCB (2014), the surpluses are “the results of the income minus the expenditures. They are returned to the associate after deductions from the funds, in accordance with the law and the statute of the cooperative.” The system of surpluses, instead of profit, is also regulated by the New Commercial Code, according to Diniz (2014). Cooperatives can be either singular when composed only of associates, or centers, formed by a group of other singular cooperatives.Although cooperatives

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are present in several sectors of the economy, they are especially dominant in the agricultural sector because rural producers assemble cooperatives to add value to the system of production and balance market power (Bialoskorski Neto, 2003).

11.3  Agricultural cooperatives through time—New strategies At the beginning of the 2000s, significant changes and adjustments to strategies of organizations that operate in agroindustrial systems (SAGs) were witnessed. Among those that stand out are the consolidation of organizations, the internationalization of agricultural base systems, the innovation in processes and products, innovations of an organizational nature, the socioenvironmental matter, and the adoption of transparency strategies (Gonçalves and Zylbersztajn, 2013). In addition, studies have revealed weaknesses in the relationship between cooperative members and the cooperative (Pozzobon et  al., 2011), verticalization processes (Williamson, 1971; Hendrikse and Veerman, 2003), and a need for adaptation and flexibility (Zylbersztajn, 1995) in the search for the necessary adjustments to stay in business. Under the perspective of the institutional arrangement proposed by the Economics of Organizations—along with cooperatives within the dynamics of the time—the institutional environment presents some change parameters that influence the endogenous needs of the cooperatives and their members; the latter provides cooperatives their individual behavioral attributes, and cooperatives, in turn, reply to the institutional environment with strategies facing the changes, according to Fig. 11.1: Therefore, changes in the cooperative over time involve an understanding of the variations in the institutional environment in which it is involved and of changes in the organization, and in the profile of the cooperative member, which may reflect strategies or actions adopted by the cooperative over the years.The following section will detail the methodology of the present study.

11.4 Methodology The present study is characterized as qualitative research5 because it describes significant changes that have taken place in the cooperative over the course of 20 years by revisiting the Cooxupé Cooperative case study 5

The qualitative approach was chosen because, according to Triviños (1994), it holds the researcher as the key instrument, because he is more concerned with the process and not simply with results and product, and the meaning is the paramount concern.



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Time Institutional environment 1

4

1. Parameters of change: theory/institutional change 4. Strategy: evolutionism/dynamic transaction costs

Cooperative organization 2

3

2. Endogenous preferences or needs: influence on the individual 3. Behavioral attributes: dynamic individual preferences

Cooperative member

Fig.  11.1  Perspective of the institutional arrangement over time: Cooperatives. Prepared by the author from Williamson, O.E., 1998a. Transaction cost economics: How it works; where it is headed. De Economist 146, 23–58; Williamson, O.E., 1998b. Transaction cost economics and organization theory. In: Halpern, J.J., and Stern, R.N. (Eds), Debating Rationality: Nonrational Aspects of Organizational Decision Making. No. 10. Cornell University Press, Ithaca; Zylbersztajn, D., 1995. Estruturas de Governança e Coordenação do Agribusiness: Uma aplicação da Nova Economia das Instituições. Tese de Livre Docência em Administração. USP, Faculdade de Economia, Administração e Contabilidade, São Paulo; and Zylbersztajn, D.; Gonçalves, C., 2015. Business history: A lantern on the stern? In: 19th Annual Conference of the International Society for new Institutional Economics (ISNIE/ SIOE), Cambridge, MA.

(Saes et  al., 1995), carried out by Pensa/Usp in 1995. This qualitative research also fits the criteria for a descriptive research6 and contains exploratory features.7 The following procedures were carried out: (A) a visit to the Cooperative in the city of Guaxupé, Minas Gerais; (B) bibliographic research; and (C) semistructured interviews (with premade questions, but additional questions were added during the course of the interview) with several cooperative representatives, including Production Engineer, New Product Manager, Superintendent of Finance and Personnel Development, Superintendent of Cooperative Member Development, Superintendent of Controllership and Information Technology, the Commercial Superintendent of Coffee, and the Vice President and President of the Cooperative. 6

According to Godoy (1995, p. 63) “When the study has a descriptive character and what is sought is the understanding of a complex phenomenon as a whole, the most appropriate analysis would be the qualitative one.” 7 Lakatos and Marconi (1991) defend that exploratory research must be carried out via two major elements: documents (primary and secondary sources) and direct contact.

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Table 11.1  Categories of analysis/strategies and elements observed Analyzed category

Elements observed

E1. Environmental practices E2. Social practices

Certification, legislature, sustainable practices Value added to the cooperative member, actions to society, projects for succession International requirements, export, partnerships Cooperative’s expansion, acquisition of other cooperatives, number of cooperative members Suppliers, industries and owned brands, specialized investments Product range, cooperative member production Investments in new practices, technological solutions Traceability, product identification, transparency to Cooperative members Conduction of assemblies, consultancies and audits, functional framework Performance indicators, crises, risks, incentives, investments, surpluses

E3. Internationalization E4. Horizontalization/ territorial growth E5.Verticalization E6. Diversification E7. Innovation E8. Transparency E9. Management/governance E10. Financial transactions

It is important to point out that, during data collection that occurred in 2015, the instrument was composed of eight categories of analysis, as supported by the theory: (1) consolidation of organizations, (2) internationalization, (3) innovation, (4) socio-environmental variables, (5) transparency strategies, (6) the relationship between member and cooperative, (7) verticalization, and (8) adaptation and flexibility. To meet the current characteristics of the cooperative, new categories were added, totaling 10 analyzed categories (see Table 11.1) and their respective observed elements. Therefore, highlights in the cooperative were pointed out, along with institutional changes, features, and elements observed in each analyzed category. Additionally, due to the perspective of the researchers, some challenges for the cooperative were raised, which will be described in the next section.

11.5  Analysis: The new Cooxupé case study 11.5.1  Institutional changes This stage consisted in identifying the main institutional changes (legal apparatus, tradition, and culture) in the first case study carried out with the cooperative and pointing out the main changes in this present study ­considering the passage of time from 1995 to 2015. Such changes have ­influenced the institutional arrangement of cooperatives over time.



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Cooxupé, short for Cooperativa Regional de Cafeicultores em Guaxupé LTDA,8 started its activities in 1932, initially with the foundation of an agricultural credit cooperative that in 1957 would become a cooperative of coffee growers. By the end of the 1980s, the total credit of agriculture fell from $31.8 billion to $20.5 billion, a 35.5% decline, a period in which producers were pushed into default and availability of resources was reduced (Barros, 2014). The repercussions of the economic recession on Brazilian cooperativism resulted in heavily decapitalized agricultural cooperatives, almost unable to cope with inflationary spoliation of their own financial resources, while it simultaneously witnessed the emergence of special types of cooperatives, such as urban, educational, labor, housing, credit, mutual, and rural cooperatives (Pinho, 2004). In the 1990s, some of the main macroeconomic plans for inflation control, such as the Collor Plans I and II, and later the Real Plan, were characterized by a valued exchange that did not encourage exports (Bialoskorski Neto and Ferreiar Júnior, 2004), a problem for agricultural export cooperatives. Additionally, other factors arose, such as the appreciated exchange rate, which affected the coffee and grains sector; the decrease of domestic consumption, causing a negative impact on the price level and on the agroindustrial systems of milk and chicken; and the high interest rates that aggravated the indebtedness of cooperatives. Resolution No. 2193 of August 31, 1995, of the Central Bank of Brazil was a highlight of the year because it allowed the constitution and operation of commercial banks (Cooperative Banks) with the exclusive participation of Credit Cooperatives. In the same year, the case study “Cooxupé: Um Projeto de Diversificação Regional” reported the oscillation of coffee prices and the challenge of finding a solution to reduce the unreliability of paying producers who depended on an unstable product. Thus, Cooxupé attempted to diversify production by introducing products such as corn, soybeans, swine, and poultry. The case study also highlighted Cooxupé’s quest for quality, the matter of the succession of a president who was many years ahead of the Cooperative, the indecision on intensifying investments in either commodity or specialty coffee, and the expansion of the international and/or domestic market. In 1998, the Federal Government established a special program to support cooperatives, RECOOP—Programa de Revitalização de Cooperativas 8

Regional Cooperative of Coffee Growers in Guaxupé.

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de Produção Agropecuária.9 On September 3 of the same year, the creation of Sescoop—Serviço Nacional de Aprendizagem no Cooperativismo10— was authorized. The 2000s were marked by an increase in industrialization in Brazil, a growth that changed the country’s image in the 1990s—from a backward country, still behind others that were building up their economy and undergoing globalization process—by developing the industrial segments of technology, information technology, biotechnology, pharmaceuticals, electronics, and exports. The improvement in income and distribution, which was brought by social programs created in the early 2000s, stimulated the domestic economy and reflected on agriculture, which was still developing its production. Nevertheless, the country’s issues with debt remained in negotiations with the government (Barros, 2014). The years of 2001/2002 were a difficult time for coffee. From 2003 onwards, the development programs were concentrated in the Brazilian Development Bank (BNDES). With the expansion of microcredit, OCB lost its unique representation of Brazilian cooperativism (although it continued to lead the majority of so-called “traditional or pioneer cooperativism”), giving a platform for a multiplicity of cooperative representation.The Central Bank reformulated credit and adopted new criteria for the constitution and operation of credit cooperatives (Pinho, 2004). Between 2008 and 2009, the declining economy as a result of the global financial crisis led the Brazilian government to activate domestic demand by reducing interest rates, loosening fiscal policy, and expanding credit in the so-called “countercyclical policy”, which minimized the impact of the 2009 crisis and assisted the country’s recovery in 2010. Once again, export cooperatives underwent a difficult period, and opting for the domestic market was a strategy to reduce their losses. This new study verifies that Cooxupé invested heavily in export and coffee processing and storage, highlights of their SAG, according to Fig. 11.2. Cooxupé’s SAG emphasizes investments in specific assets (k > 0) in transactions t5 and t6 and also the direct flow of products to retail or via export, and/or national buyers of the cooperative’s coffee (t7 and t8). In addition, the 9

Program for the Revitalization of Agricultural Production Cooperatives. Initially ruled by Decree No. 2769 of September 3, 1998, which regulated the provisions in Provisional Measure No. 1715 of September 3, 1998, in regard to recruitment of credit operations under Programa de Revitalização de Cooperativas de Produção Agropecuária—RECOOP, later revoked by subsequent decrees. 10  National Service of Learning in Cooperativism.



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Fig. 11.2  SAG Model—Cooxupé.

present study reported no investment in diversification, an idea proposed at the time of the first case study. Brazil is one of the world’s leading coffee producers, producing 32% of the world’s coffee, followed by Vietnam (18.4%), Colombia (8.6%), Indonesia (8.6%), and Ethiopia (4.3%).11 Cooxupé alone is responsible for 3.5% of the world’s coffee production. Considering the 15 Brazilian states that produce coffee, the major ones are Minas Gerais, São Paulo, Espírito Santo, Paraná, Bahia, and Rondônia. In 2014, the harvest reached 45.34 million bags (60 kg each) of processed coffee. The state of Minas Gerais accounted for 49.93% of the national production.12 Cooxupé operates in the states of São Paulo and Minas Gerais, with 35 subsidiaries, 15 of which receive all the cooperative members’ production. Around 54% of coffee was produced around the south of Minas Gerais, 37% in the Cerrado, 7% in São Paulo (Rio Pardo Valley), and only 2% in other locations, accounting for >200 municipalities.13 About 82.4% of the production stems from family businesses, 14.4% from small producers, 2.5% from medium producers, 0.5% from large producers, and 0.2% from mega-producers.14 All coffee received goes first to Cooxupé’s subsidiaries (>5 million bags in 2014) and, from there, the coffee is transported to the Japy Complex, launched in 2011, where the product is identified, stored, and processed for export. Cooxupé is comprised of 33 nuclei, from branches to advanced facilities that employ agricultural engineers, sales agents, and support staff. These 11 

Source: Map, SPAE, Conab, and OIC. Source: Ministry of Agriculture. Available at http://www.agricultura.gov.br/vegetal/culturas/cafe/saiba-mais. Accessed August 20, 2015. 13  Information is available on Cooxupé’s web site. 14  Idem to previous end note. 12 

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spaces accommodate coffee storages, fertilizer deposits, and stores that sell various goods. In the Advanced Facilities, the producer may request inputs or technical assistance and even sell coffee without having to go to headquarters in Guaxupé. In the branches, the cooperative provides fertilizers and phytosanitary deposits, in addition to face-to-face service with all the operations made available by the Cooperative. All facilities are spread throughout the region in reach of Cooxupé. Since 2011, transport has been made in bulk rather than in bags. Previously, it took 6 employees to load a truck in 48 min. In 2015, we have verified that 1 employee does the same job in 22 min. The new packaging grants Cooxupé R $18.5 million in savings per year and energy savings equivalent to a city of 100,000 inhabitants per year. As a result, it improves employees’ well-being, health, and decreases absenteeism rate, according to Cooxupé. In the Japy Complex, coffee goes through the processes of delivery, storage, shipping, and “big bag” packaging, as seen in Figs. 11.3 and 11.4. This delivery is performed with tipping platforms, ensuring speed and economy (Fig. 11.5). The Japy Complex has a storage capacity for 328,000 tons of coffee, 44.6% in silos (2,443,000 bags) and 55.4% in big bags (3,028,830 bags).15

Fig. 11.3  “Big Bags” and the tipping platform. From Cooxupé Website.

15 

Although the cooperative has banned the use of bags, they still remain as a measurement reference given their extensive use throughout in the country. One bag = 60 kg of coffee.



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Fig. 11.4  The tipping platform. Source: Cooxupé.

Fig. 11.5  Japy Industrial Complex. Source: Cooxupé.

11.5.2  The strategic dimensions over time This study’s findings will be presented under the following categories: Environmental practices, Social practices, Internationalization, Horizontalization/Territorial growth, Verticalization, Diversification, Innovation, Transparency, Management/Governance, and Financial Transactions. 11.5.11.1  Environmental practices In 2012, Cooxupé renewed the certification of its Management System ISO 9001, implemented since 1998. The Cooxupé Management System is ISO 9001:2008 certified, accredited by the RVA (Netherlands) granting Guaxupé,

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Santos, and Monte Carmelo facilities authority over the following processes: delivering, storing, sorting, purchasing, processing, selling, and shipping raw coffee. Through this system, the Cooperative seeks the collaboration and commitment of all involved by carrying out internal and external audits, and taking corrective and preventive actions to continuously improve. Cooxupé supplies companies such as Illycaffè, Starbucks, and Nestlé (and its Nespresso branch), which guarantees a sort of certification from these brands for Cooxupé’s members. Many members supply – and some are awarded16 by—those brands. Cooxupé possesses the “4C Association” seals by following 27 principles, within economic, social, and environmental scopes, for sustainable production, processing, and sale of green coffee.17 They are also “Utz Certified”, which guarantees the traceability of the coffee from the producer to the consumer, from ensuring that the product has been grown and harvested responsibly18 to the moment it undergoes roasting. Finally, they are “Rainforest Alliance Certified” by admitting that a product has come from a Rainforest Alliance certified farm, that is, meets pre-­established risk levels.19 The Cooperative motivates the certification of the cooperative member and advises him to complete the rural register,20 although it is not a membership requirement. The Cooperative is also responsible for the collection of used packages from the members’ farms. The Cooperative promotes sustainable actions, usually demanded by customers, such as: springs protection program; the nursery of seedlings for the producer to plant in riparian areas in forests; partnerships with institutions such as Senar to promote lectures regarding the use of pesticides to producers; actions with Apae; volunteering in nursing homes; and events in small community churches; among others. 16 

In 2011, the cooperative member Esmerino Joaquim Ribeiro do Vale, from Guaxupé (MG) was awarded Supplier of the Year in the 20th Prêmio Ernesto Illy de Qualidade do Café para Espresso (Ernesto Illy Quality Award For Espresso Coffee). More information available at http://www.cccrj.com.br/revista/837/7.pdf and http://www.cccmg.com.br/materias. asp?codigo=5081. 17  Principles are available at http://www.4c-coffeeassociation.org/pt/. Accessed on August 20, 2015. 18  More information available at https://www.utzcertified.org/. Accessed on August 20, 2015. 19  Available at http://www.rainforest-alliance.org/agriculture/certification/coc-port. Accessed on August 20, 2015. 20  Cadastro Ambiental Rural—Rural Environmental Register (CAR) “Created under Law 12,651/12, Cadastro Ambiental Rural (CAR) is an electronic registry, mandatory for all rural properties, which assembles a database for control, monitoring and combat of deforestation of forests and other vegetation forms native to Brazil, as well as environmental and economic planning of rural properties”. Available at http://www.car.gov.br. Accessed on August 20, 2015.



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Some Cooxupé employees are even members of Codema, the Municipal Council for Conservation and Defense of the Environment. At the time of the first case study, some prominent terms were “diversification” and “special coffee”. In this study, “sustainable coffee”, which encompasses both “diversification” and “special coffee”, also has its economic side and raises a great problem to Cooxupé: to implement sustainability in the field, as recommended, especially along with the small producer. Cooxupé still does not work with organic coffee. Challenge: How can the small producer be motivated to adopt sustainable practices on his property?

11.5.11.2  Social practices Cooxupé has a support structure for cooperative members that allows small producers to participate in sustainability programs. This support consists of technical and credit assistance, provision of supply and machines, and security and transparency in the coffee trade. The Cooperative promotes regional economic and social development, especially in small cities that have no other activity. Family businesses represent >80% of Cooxupé cooperatives, that is, 33% of the delivered bags. The greatest change in the scope of social practices was the inclusion in membership of spouses in facilities. For example, the FEMAGRI fair21 provides lectures in accounting and management directed at women who play an important role in administrative tasks on the farm, such as organizing schedules. The Cooperative encourages and sponsors the technical specialization of cooperative members by financially supporting Senar, which, inside the cooperative, provides extension courses and lectures to employees alongside technicians. There are succession programs concerned with educating a qualified cooperative member’s heir, who are often more demanding than the parents themselves. There are fairs and educational events, thematic lectures, analysis labs, and demonstration facilities (UDs). FEMAGRI itself has the “fazendinha”,22 a space to teach the producer up-to-date production practices. Cooxupé also organizes and supports leisure events and social gatherings to bring members together. 21 

Machinery, Implements and Agricultural Supplies Fair (FEMAGRI). Available at https:// www.cooxupe.com.br/femagri/. Accessed on August 20, 2015. 22  “Little farm”.

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However, Cooxupé itself understands that some factors that should have changed over the years remain the same.The cooperative comprehends the cooperativist culture but does not always practice it. Depending on the moment, the members, especially larger ones, seek better commercial conditions, making them unreliable because fidelity is something that cannot be demanded. Nine of the members of the Cooxupé Board of Directors are cooperative members. Superintendents are hired from outside the Cooperative. Challenge: To understand the wishes of the cooperative members and their successors, as well as their current view of the cooperativist culture to implement social strategies that meet the needs of both. How can the Cooperative develop property management strategies, especially alongside the small producer?

11.5.11.3 Internationalization In 1959, 2 years after its formation as a cooperative of coffee growers, Cooxupé already kept exports.The first case study questioned whether the Cooperative should focus its efforts on expanding the international market or dedicating itself to the domestic market. The response can be seen in the export numbers—in 2015, 90% of Cooxupé’s coffee was sent out of the country. Cooxupé is the most important worldwide player as a coffee export cooperative. In 1994, Brazil exported about 12 million bags of coffee. Cooxupé exported about 500,000 bags. In 2014, Brazil exported 36 million bags, whereas Cooxupé alone exported approximately 3 million bags. The data shows that Cooxupé’s grew about 6 times over its size in the foreign market, whereas Brazil grew 2.5 times (Table 11.2). Cooxupé’s coffee is sent to 43 countries. Just in 2014, 3.2 million bags were exported directly by the Cooperative. Additionally, 798,000 bags were sent to exporters, and 571,000 bags to the domestic market, totaling 4.6 million bags of coffee sold worldwide. Table 11.2  Evolution of exports of green and roasted Brazilian coffee Arabica

1994 2014

Robusta

Total

Cooxupé

Brazil

Cooxupé

Brazil

Cooxupé

Brazil

508,545 3,232,663

12,424,049 29,416,575

– –

2,133,280 3,446,818

508,545 3,232,663

14,557,329 36,320,574

The total volume under “Brazil” also includes exports of soluble and roasted coffee. Data from Relatório de gestão Cooxupé (2014) Available on https://www.cooxupe.com.br/wp-content/uploads/2017/06/Relat%C3%B3rio-de-Gest%C3%A3o-1.pdf and CECAFÉ (http://www.cecafe.com.br).



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There are concerns regarding international demands on the use of pesticides—which intensifies yearly—as well as on the eating habits of international consumers. Cooxupé, however, never had any legal nor economic difficulties due to internationalization. The Japy Complex has a special export customs compound called REDEX23 that loaded, sealed, and shipped 7705 containers in 2014. Thus, the coffee goes from Guaxupé directly to the ship more quickly and at a lower cost. Cooxupé does not partner with other cooperatives abroad, but it is open to visitors and also conducts visits to international cooperatives. Challenge: Could the adoption of strategic international partnerships be a path not yet developed by cooperatives?

11.5.11.4  Horizontalization/territorial growth In addition to the Japy Complex in the city of Guaxupé, Cooxupé has an Export Office in Santos, Sao Paulo State, and 33 commercial branches. The five new facilities approved in 2015 will expand territorial growth in regions with a great possibility of mechanization. Cooxupé also relies on SMC Comercial Exportadora de Café S.A.,24 which was created in 2009 to sell and supply fine, specialty, and certified coffees in unique batches and to customers accustomed to buying specialty coffees. Challenge: To what extent is growth sustainable for the cooperative? Could an excessive number of members destabilize the cooperative’s investments?

11.5.11.5 Diversification The first case study questioned whether Cooxupé should invest in diversification and vertical integration in all the presented alternatives (which included horticulture, fruits, maize, and small animals) or whether it should concentrate on only one of these proposals. With the assistance of Rabobank’s consultants, we understand that, in the past, the idea of diversification was associated with the oscillation of coffee prices and their good and bad moments. However, a new strategic study has suggested that the structure of grain storage, an investment made in 2004, could be applied to coffee for better results. 23 

Special Enclosure for Customs Broking of Export. SMC. Available at http://www.smccafe.com.br/. Accessed on August 20, 2015.

24 

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Cooxupé only works with 100% Arabica coffee. It does not work with Robusta coffee. Moreover, there is a tendency toward specialization in finer Arabica for clients such as Nespresso and Starbucks. This is related to another question from the first case study that inquired whether Cooxupé should focus their efforts on expanding its traditional market of commodity coffee, seeing as it presented competitive advantage, or whether it should prioritize specialty coffee, which had an impressive growth potential due to tendencies of the coffee agribusiness. In this new study, we confirmed that the Cooperative expects growth in commodity coffee sales, and special coffee should not be prioritized, due to its connection to certain market niches that represent