Sustainability Standards, Welfare Impacts, and Risk Attitudes Among Coffee Farmers in Uganda

Agriculture is still the most important sector in driving economic growth and poverty reduction in developing countries. In recent times, global agricultural food systems around the world are undergoing a rapid transformation with modern retailers, private standards, and vertically integrated supply chains gaining in importance. This transformation, which is partly driven by changes in consumer preferences, has led to a sharp increase in the production and trade of high-value foods such as fruits, vegetables, milk, meat, eggs, and fish. At the same time, the demand for luxury commodities such as coffee, tea, and cocoa that fulfill sustainability standards is also growing. In response, the number of sustainability standards is also growing, with the most common being Organic, Fairtrade, Rainforest Alliance, UTZ Certified, and CAFE Practices. The main emphasis of sustainability standards is on production systems that advance social equity and economic prosperity of producers, while maintaining or improving environmental quality. But what are the implications for smallholders in developing countries. Several studies have explored the impacts of different sustainability standards on for different crops in developing countries. Some of these studies are qualitative in nature. Other studies used quantitative techniques, but without accounting for non-random selection of farmers into certification schemes, means that the impact estimates may be biased. For sustainability standards in the coffee sector in particular, there are still only very few studies that properly control for selection bias; those that do, mostly assess the impact of only one standard, without comparing different standards and certification schemes. Furthermore, gender and nutrition effects of high-value food trade and modernization of supply chains remain almost unexplored. This is despite the high levels of malnutrition among smallholder farming communities and the fact that sustainability standards have a social component that goes beyond mere income effects. The first objective of this dissertation is to analyze the impacts of three sustainability standards — Fairtrade, UTZ, and Organic — on the living standard and poverty of smallholder coffee farmers. The second objective is to estimate the nutrition impacts and nutrition impact pathways of sustainability standards among smallholder coffee farmers in Uganda. Since compliance with sustainability standards involves making investment decisions and investment decisions involve risk, the third objective of this study involves measuring risk attitudes of farmers. The specific objective is to compare different risk elicitation methods regarding consistency of risk attitude measures as well as inconsistency rates in the response behavior. The analyses of these objectives rely on two datasets that were collected in 2012. The first dataset consists of a comprehensive household survey comprising of 419 smallholder coffee farmers in Uganda. The second dataset consists of data collected from a framed field experiment that elicited risk preferences of 332 farmers, which is a sub-sample of the 419 farmers interviewed in the household survey. To analyze the first objective, we use survey data and propensity score matching with multiple treatments to control for selection bias. We find that farmers complying with all three sustainability standards have significantly higher living standards. However, disaggregation by certification scheme, Fairtrade certification improves living standards by 30% and significantly reduces the likelihood of being poor by 50%. However, we also show that participation in UTZ and Organic certifications is not associated with higher living standards or lower poverty rates. Much of these differences in results are due to Fairtrade farmers receiving higher prices through a minimum guarantee system, having better bargaining power, and adding value to their certified coffee compared to the other two schemes. We conclude that overly general statements about the effects of standards on smallholder livelihoods may be misleading. For the second objective, again we use household survey data to analyze the impact of sustainability oriented certification on household nutrition, while controlling observed and unobserved factors using an instrumental variable approach. In addition, we have used structural equation modeling to identify the main nutrition impact pathways. Econometric results reveal that compliance with sustainability certification standards increases household calorie consumption by 19% and supply of micronutrients including iron and zinc by at least 35%. Furthermore, using structural equation modeling, we find that income and gender are the two main pathways to nutritional gains from sustainable certification. Participation in sustainability oriented certification leads to improved household nutrition through increased income and through improved bargaining power of women. We use experimental data to analyze the third objective of this research. The objective is to compare two innovative experimental methods that can be used in eliciting individual risk attitudes. The two methods were modified from the original lottery-choice experiments by replacing probabilities expressed in percent with images of bags of colored balls to represent probabilities of different payoffs in order to apply them to individuals in a rural developing country setting. The results show that both methods reveal high proportions of farmers who are classified as risk averse, which is consistent with literature on risk among smallholder farmers in developing countries. We also find that observed inconsistency rates in the response behavior are relatively low compared to other studies in this field. The main policy highlight from this objective is that different risk elicitation methods may lead to different risk classification categories, which consequently may result in different policy recommendations.