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The Coffee Paradox
Global Markets, Commodity Trade and the Elusive Promise of Development
By Benoit Daviron, Stefano Ponte Zed Books Ltd
Copyright © 2005 Benoit Daviron and Stefano Ponte
All rights reserved.
ISBN: 978-1-84813-059-3
CHAPTER 1
Commodity trade, development and global value chains
In this chapter, we provide some essential historical and analytical elements for interpreting the 'commodity problem' and its development implications in the South. This analysis, in turn, will introduce the reader to the case study of coffee presented in the following chapters. The first part of the chapter is dedicated to a brief history of the evolution of labour mobilization systems, forms of coordination and the use of standards in tropical commodity production and trade. The second part builds upon this history to analyse the debates on the relationship between commodity trade and development that emerged after the Second World War — debates that are still at the core of international policy discussions, most recently in relation to World Trade Organization (WTO) negotiations. The third part introduces the reader to global value chain (GVC) analysis. It lays out its methodological and theoretical contribution (and limitations) in understanding the development-relevant issues of governance, power, equity and upgrading. The fourth and final part of this chapter takes the discussion of commodity trade and development in a new direction. Here, the commodity problem is linked to the ability/inability of producers to create and control the value embedded in material, symbolic and in-person service quality attributes of a product. In following chapters, this typology, and its related quality focus, will help understanding the distribution of value along coffee chains and its dynamics.
Division of labour and coordination in commodity production and trade: historical background
During the last century, value chains for tropical products have been organized around a fairly stable division of labour based on the following succession of independent agents: producer, primary processer/middle person, exporter, international trader, industrial processer, wholesaler, retailer and consumer. This specific division of labour supposes the existence of market transactions between each of these agents. One of these transactions (the one between exporter and international trader) entails the exchange of a specific category of good called 'commodity' — the description, identity and price discovery mechanism of which are internationally recognized. In international trade, the description of a commodity is incorporated in a grade — within the framework of a standard. The identity of this commodity is based on national origin, sometimes coupled with a generic regional identity, rather than on a brand or a specific terroir (a smaller region with specific and unique agro-ecological traits). Finally, the price of the commodity is defined in relation to the price set in a futures market, where transactions are not about the physical exchange of actual products, but about paper contracts. The purpose of futures markets is to provide hedging against risk. Futures prices are short-term syntheses of market fundamentals (production, consumption and stocks) and technical factors (hedging, trend following, reactions to trigger signals). This organization, which we call the 'classical organization' of tropical value chains, emerged between the middle of the nineteenth century and 1920 (depending on the product).
In the rest of this section, we first highlight the historical transition between the plantation model, which characterized production and trade in tropical commodities between the fifteenth century and the second part of the nineteenth century, and the classical organization. Second, we explain how the latter system evolved as a result of the development of standards.
Value chains for tropical commodities: from the plantation complex to the classical organization
Invented in the fifteenth century for sugar cane, the plantation model dominated the production of tropical commodities until the last quarter of the nineteenth century (Curtin 1990). The planter — or planteur, fazendeiro, finquero — was a central actor in this model. Owner of the land and of the processing equipment, the planter was the entrepreneur of tropical export agriculture. For centuries, African slaves supplied almost all the labour for the plantations. After 1830, in response to the abolition of slavery in the British colonies of the Caribbean, a new indenture labour system was developed. This system brought contracted Indian labour to work in the sugar plantations (Northrup 1995).
According to Chandler (1977: 64) 'until the nineteenth century, in both the United States and Europe there were many more large-scale enterprises in agriculture than in industry'. However, tropical plantations differed from manufacturing enterprises in the US and Europe not only in terms of scale (the former were larger) but also in terms of labour organization. As Fogel (1989: 25–6) notes,
the plantation success was closely related to the development of a new industrial labour discipline. ... The industrial discipline, so difficult to bring about in the factories of free England and free New England, was achieved on sugar plantations more than a century earlier — partly because sugar production lent itself to a minute division of labour, partly because of the invention of the gang system, which provided a powerful instrument for the supervision and control of labour, and partly because of the extraordinary degree of force that planters were allowed to bring to bear on enslaved black labour.
According to Sheridan (1969: 8) '[s]lave labour called for large-scale units of production and control, partly to take advantage of specialization and division of labour, partly to minimize the cost of supervision, and partly to distribute fixed capital cost over a wide range'. In addition to these factors, the emergence of large-scale units was also linked to the marketing system of the product. As argued by Weber (1927), the distance from the production site to the consumer market was an important variable in the organization of production. Access to the consumer market for tropical products was particularly problematic and entailed longer distances and transit times. For the agent owning the product during its transportation from the tropical region to the consuming country, distance and time implied risk and need for credit. Until the middle of the nineteenth century, in most cases, the planter owned the product until its point of sale in a European country, and therefore assumed the related risk. The operation of bringing the product from the plantation to the European market was centrally organized by a specific actor: the factor.
The factorage system had its origin in the West Indies sugar economy. 'The factor was the home agent of the colonial planter. He was at once his merchant and banker. He bought the goods which the planter has to purchase at home and sold for him the product return in exchange' (Holt Stone 1915: 557). In practice, the factor was much more than an agent of the planter in the European market. The factor dealt with: (1) the transportation of the product by contracting with the railway company and the shipper; (2) the storage of the product by contracting with warehouse facilities owners in the country of destination; (3) insurance and payment of taxes and harbour fees; (4) the sorting of the product in grades; and (5) the broker in charge of the sale. The factor could also arrange the supply of new slaves for the plantation, provide equipment and consumer goods to the planters, and even act as a guardian of the planter's children while they were schooled in England. Later, in the Southern United States, the factor also kept the account book of the cotton plantation.
The factor did not own the product. He/she received the product, sold it in auction markets on behalf of the plantation owner, and received a commission. The provision of credit to the planter was also an important activity carried out by the factor. Credit was initially conceived as an advance on consignment but in fact, as a way to secure product supply, the factor provided credit well before he received the product and even before the beginning of the harvest. Moreover, most of the goods the factor supplied to the planter were provided on credit. Based initially in Europe, and above all in England, the factor system partly moved to the producing territories, such as the US.
It was around the middle of the nineteenth century in the US that the classical organization of commodity markets appeared. Two innovations played a decisive role in this evolution: (1) the introduction of a standard to grade products; and (2) the development of a futures market. These two institutions emerged first in the grain trade in Chicago. They resulted in the transformation of the commission merchant into a buyer merchant. Later, these innovations spread to cotton and other products. In the case of cotton, changes were not limited to marketing technologies, but also involved a radical transformation of labour organization that followed the Civil War and the abolition of slavery. Former slaves became small-scale tenants. Thus, the previous gang system and the extreme division of labour in the plantations disappeared.
Cronon (1991) offers a fascinating account of the historical process that led to the creation of grains standards and the Chicago Board of Trade. Until the middle of the nineteenth century, grains (mostly corn and wheat) produced by the prairie farmers were sold in New Orleans or in the East Coast cities under a marketing system that was similar to the one seen above for tropical products. The ownership rights to grain remained with its original shipper until it reached the point of final sale. A commission merchant, the equivalent of the planter's factor, organized the transportation, storage and sale of the grain and sometimes provided credit and insurance to the shipper. Using the river, the grain was transported in sacks and remained untouched from the farm to the flour mill. According to Cronon (ibid.: 109) '[a] farm family, sending a load of wheat from Illinois to New York, could still have recovered that same wheat, packed with a bill of lading inside its original sacks, in a Manhattan warehouse several weeks later'.
The first impulse for change came from the expansion of railroads. Grain flows were reoriented from St Louis and New Orleans to Chicago and the Great Lakes. New incentives to achieve 'economies of speed' appeared. The response to these incentives was the development of a specific technical innovation: the steam-powered grain elevator. Built in the 1850s, these elevators changed the whole organization of marketing. The ability to handle and transport grain without the use of sacks, and to mix grains from several farmers in the bin of an elevator, meant that the ownership could not remain with the farmer during handling and transport as before. Here the response was institutional rather than technical, and led to the creation of the Chicago Board of Trade (Cronon 1991).
The Chicago Board of Trade was initially a voluntary association of grain traders aimed at promoting the city and at dealing with the day-to-day problems of the grain market. In 1856, however, the Board created a uniform wheat standard for the city — based on three grades. This act was decisive for the reorganization of the grain trade in the US. Cronon states that
[a]s long as one treated a shipment of wheat or corn as if it possessed unique characteristics that distinguished it from all other lots of grain, mixing was impossible. But if instead a shipment represented a particular 'grade' of grain, then there was no harm in mixing it with other grain of the same grade. Farmers and shippers delivered grain to a warehouse and got in return a receipt that they or anyone else could redeem at will. Anyone who gave the receipt back to the elevator got in return not the original lot of grain but an equal quantity of equally graded grain. A person who owned grain could conveniently sell it to a buyer simply by selling the elevator receipt, and as long as both agreed that they were exchanging equivalent quantities of like grain — rather than the physical grain that the seller had originally deposited in the elevator — both left happy at the end of the transaction. (1991: 116)
After 1848, the building of the telegraph network led to the synchronization of price movements between Chicago, the hub of prairie grain supply, and the East Coast — its major consumer market. The emergence of the telegraph and the grain standard enabled the sale of a grain lot before it moved from Chicago to New York (on the basis of a so-called 'to arrive' contract). The standard enabled the buyer to know exactly what would be received. The telegraph enabled the two parties to build a contract on a common price basis. According to Cronon, the '"to arrive" contract in combination with standardized elevator receipt made possible Chicago's greatest innovation in the grain trade: the futures market' (1991: 124). Indeed, from then on, a trader could sell a 'contract to arrive' without owning the grain. The trader would then hope to buy the grain, just before the time of delivery, by buying elevator receipts at a cheaper price than the one stipulated in the contract. Until delivery, or just before delivery, this contract could be resold several times between traders.
Based initially on the 'contract to arrive', this speculative activity was subsequently (after 1865) organized by the Chicago Board of Trade through a 'future contract'. This contract defines a specific grade of grain, a specific volume and a specific date of delivery. This contract 'could be bought and sold quite independently of the physical grain that might or might not be moving through the city' (Cronon 1991: 146). The last step in the building of a modern commodity market was the invention of hedging. Hedging emerged and spread along with futures markets in the third quarter of the nineteenth century (Rothstein 1983). Hedging means using future contracts as insurance. In practice, it entails the buying (or selling) of a future contract simultaneously with the selling (or buying) of 'real' grain. Hedging enables operators, anxious to buy grain and to keep it for a while before selling it in the same form (or in a transformed form, flour for example), to protect themselves against price fluctuation (specifically, a price fall). Because the fluctuations in the future contract are linked to the fluctuation on the 'real' grain market, carrying out the inverse operation in the futures market enables the trader to minimize the loss (or the gain) realized in the 'real' grain market.
Hedging seems to have been first used by traders who bought grain in Chicago and sold it to exporters in New York (Rothstein 1983). The diffusion of hedging, as an insurance against price fluctuation, occurred simultaneously with a change in the merchant function, where merchants increasingly bought grain on a cash basis rather than on consignment. Being protected against the risk of selling at a lower price than the price paid at purchase, the merchant could now become the owner of the product and hold it for a long time. Because of this new ability, previously distant market transactions were suddenly brought close to small towns or even the farm gate. Subsequently, the necessity for the farmer to hold the product for months before selling disappeared.
The organization of cotton marketing in the US followed more or less the same evolution observed in grains. With the emergence of the new railway and telegraph network, cotton factors were substituted by traders buying the fibre directly in the countryside (Woodman 1966; Woodman 1968). As a consequence, in 1870 the New York Cotton Exchange opened its doors. The New Orleans exchange opened one year later. The major organizational change in the cotton sector was the emergence of tenants that displaced the plantation system. Related to this was the replacement of the gang system by a labour organization system based on kinship. As soon as the North defeated the South, the former slaves refused all labour organization that in any way resembled that of the former slave plantations. The wage-earning system promoted by planters that were seeking to conserve their previous organization was widely rejected. Furthermore, the abandoning of any agrarian reform project strongly limited the establishment of direct farming systems. Although the percentage of black families (as categorized by Kolchin) in the South purchasing farmland increased from 2 per cent in 1870 to 21 per cent in 1890, it reached only 24 per cent in 1910 (Kolchin 1993).
After a brief trial period, the former plantation owners massively opted for sharecropping. First, just after the Civil War, owners paid sharecroppers in kind (a sixth or an eighth of the harvest in the early years, rising later to a quarter) and provided them with a house, draught animals and sometimes seeds. However, the share rental system soon became dominant. In this system, the harvest was divided in equal parts but the sharecroppers had to find their own food, tools, livestock and accommodation. Even if sharecroppers were largely dependent on (and exploited by) plantation owners, the end of the gang system entailed no centralized coordination of labour in terms of cultivation and harvesting times. This constituted a revolutionary change in tropical crop production.
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Excerpted from The Coffee Paradox by Benoit Daviron, Stefano Ponte. Copyright © 2005 Benoit Daviron and Stefano Ponte. Excerpted by permission of Zed Books Ltd.
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