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Constraints on product differentiation in the Pacific

13 June 2013

A paper presented on third-party certification (TPC) of coffee producers in Papua New Guinea (PNG) has highlighted the opportunities and constraints in using TPC to differentiate products in a way that secures price premiums, which can range between 2 and 10%. While third-party-certified coffee currently represents only 8% of the global market, it is growing at around 25% per annum, compared to overall growth in coffee consumption of 2% per annum. Supply is not at present keeping up with demand for certified coffee. This creates market opportunities.

However, most third-party-certified coffee comes from Latin America, “where there are well-established cooperatives and rural institutions, as well as public subsidies, to assist smallholders [to] gain access to TPC”. This is significant, as “costs of compliance often lead to the exclusion of smallholders.” This is seen as posing particular problems in the Pacific, where the volumes of production are relatively small, which can make private-sector-based TPC economically unsustainable.

In PNG this problem is compounded by the fact that 92% of the country’s 600,000 tonnes of coffee is produced in three highland provinces, where poor roads mean that an estimated 40% of production fails to reach the market. In addition, smallholder producer yields are low as a result of “poor crop and pest management”.

In 2009, some 5% of PNG’s coffee production was third-party certified, but the government aims to raise this to 25% as part of its coffee strategy. An investigation of costs and benefits of private-sector TPC in 2012 found that:

  • TPC “is beneficial for smallholder coffee producers in PNG for UTZ and FLO” schemes;
  • “UTZ provides farmers with by far the most benefits”, since “the standard places relatively fewer demands on smallholder time, despite offering a lower rate of premium”;
  • “The quantity of coffee supplied by a farmer is the most important factor in determining whether a farmer benefits from certification.”

Significantly, it was found that the failure of companies that supported farmers with certification to make a sufficient number of buying trips meant that 50 to 85% of potentially certified coffee is “sold to alternate ‘predatory’ buyers at a much lower rate”.

Overall, it was concluded that while “in most cases the benefits of TPC for farmers outweigh the costs…, only a few thousand farmers supply this market”. Government interventions to improve infrastructure and strengthen producer organisations could reduce the costs and increase the attractiveness of TPC.

Elsewhere, organic, fair-trade and region of origin certification are all being explored as vehicles for maximising revenues in the face of the small scale of production and remoteness from markets (e.g. in the Vanuatu cocoa sector and more generally in organic production of coffee and coconuts – see Agritrade article ‘ Going organic seen as way forward in Vanuatu’, 18 May 2013). 

Editorial comment

Similar problems of securing price premiums through private third-party certification are likely to be faced across the Pacific ACP. The costs of certification can in many instances undermine the net benefits to producers of the price premiums available, with these price premiums themselves falling as competition increases among retailers of certified products. However, these challenges vary for different products under different certification schemes.

In this context, in the area of organic certification, potentially lessons could be learnt from the participatory guarantee systems (PGS) approach adopted in East Africa. The International Federation of Organic Agricultural Movements (IFOAM) defines these as “locally focused quality assurance systems that certify producers based on active participation of stakeholders”, with the system being “built on a foundation of trust, social networks and knowledge exchange”. This system reduces certification and verification costs, and can improve the net benefits to primary producers serving organic market components that accept such schemes.

Such schemes are currently limited to local markets, where key customers can be actively involved in inspection of the farming processes practised by supplier farmers (see Agritrade article ‘ Report highlights expansion of organic production for local markets in t...’, 13 June 2013). They are not an option for international markets requiring internationally recognised certification, thereby limiting its use in the coffee and cocoa sectors.

Nevertheless, the scope for the use of such PGS schemes in serving organic markets in the expanding tourism sector (for horticulture products and even locally processed coffee, tea and spices) could usefully be explored. 

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