Quality Upgrading and Pass-Through in Uganda’s Coffee Sector

Credit: counterculturecoffee

On international markets, higher quality coffee that is ripe, undamaged, and washed can receive premiums of over 90% compared to lower-quality coffee. Yet in coffee-producing low-income countries including Uganda, many farmers produce lower-quality coffee that does not meet the standards demanded by international markets. For example, many farmers do not take actions known to improve the quality of their beans: applying fertilizer appropriately, trimming their trees at the recommended intervals, selectively harvesting only ripe cherries, and engaging in appropriate post-harvest drying, processing, and storage behaviors. A previous study¹ estimates Uganda’s Rwenzori region alone forgoes $20-30 million per year by not quality-upgrading production. This could mean missed business opportunities for small-scale coffee farmers in the region. However, coffee has a long supply chain of intermediary traders and processors, and only a small portion of quality premium offered on the world market appears to “pass through” to farmers. When compared to the returns farmers receive from selling lower-quality coffee, this limited pass-through may not be enough to incentivize farmers to invest in the costs of shifting their production practices to meet international market standards.

The research team is working with Kyagalanyi Coffee Limited, Uganda’s largest coffee exporter, to understand how particular price schedules offered to traders affect price pass-through to farmers, and the quality of coffee produced and purchased in the value chain as a result. They will randomly select supplier markets to assign to one of three conditions:

  • offer traders a high price premium for higher-quality coffee,
  • offer traders only a small difference in the price paid for high-quality coffee compared to the price for low-quality, and
  • a randomly-selected half of the traders within a given market are offered the high premium.

Farmers’ reports and traders’ records will reveal how the size of the price premium offered to traders, and competition among traders in a given market, impact the price and quality of coffee along the value chain. The study will specifically measure the prices that traders offer to farmers, and the quantity and quality of coffee that farmers sell to traders, including any impacts on farmers’ production practices related to quality-upgrading.

This pilot is ongoing, and results are forthcoming.

 

(1) Morjaria and Sprott (2018)