11 Second, while it learns from the failure of supply retention and price support schemes to sustainably raise the returns to coffee, the prescribed avenue of increasing farmer incomes through quality premiums relies, at least on the second order, on perfect input markets. This has been recognized in agricultural commodity policy more generally: Models for the incomplete price transmission of tariff policies and market reforms in the presence of market power have already been developed and applied to a variety of agricultural commodity markets (MacMillan, Rodrik, and Welch 2002;McCorriston 2003;McCorriston and Sheldon 1996). Its relevance to the new breed of coffee commodity policy is clear: Strategies aimed at improving the returns to coffee through quality premium earnings can address the ‘crisis’ of low incomes for producers only to the extent that price transmission is complete.<sup>15</sup> Incomplete price transmission is often the consequence of imperfect competition in the marketing chain. The issue of market power is, in fact, acknowledged in policy documents: One of the benefits of quality improvement policies is to strengthen the bargaining position of exporters and to “increase their ability to negotiate prices...” (Varangis _, et al._ 2003c, p.25). A World Bank study on linking smallholder farmers to markets identifies the potential of market power as a key characteristic of agricultural commodity markets (Bienabe _, et al._ 2004). In sum, all of the activities aimed at increasing the premiums earned on coffee production rely on efficient price transmission to producers. While this is acknowledged, ( “...it is vital that promotional policies focus on the local benefits – rather than the price premium or market benefits” (Varangis _, et al._ 2003c, p.31)), the consequence for policy in markets characterized with market power are not explored or addressed in the new commodity policy context.

Third, the application of market-based price risk management strategies to dealing with price volatility depends critically on the organizational development of producers (Bienabe _, et al._ 2004;Varangis _, et al._ 2003c).This is also true for new policies aimed at raising producer returns through the reduction of transaction costs by eliminating middlemen and increasing direct dealing with retailers (Varangis _, et al._ 2003a). Producer organizations such as cooperatives have been identified as critical prerequisites for both strands of policy. One of the limitations of such policies is the cost associated with building the capacity to the high level of quality and quantity demanded by the market. It is precisely the perceived difficulty of delivering the necessary organization and capacity to producers that has proved to be a limitation to the ‘new’ commodity policies (Gilbert 2002;TechnoServe 2003;Varangis _, et al._ 2003a): Many producer organizations often do not have the skills, capital, or dedicated personnel to take on the market oriented roles of middlemen. Although training individuals in such organizations may be helpful in terms of achieving market

> 15 Empirical work on price transmission has tended to refer to the transmission of variability (Hazell, Jaramillo, and Williamson 1990) and is often used to assess the success or failure of stabilization schemes (for an example, see Cardenas 1994). If the price intervention is constant, such as constant export taxes or consistent market power mark-downs, these studies would still permit perfect price transmission of price variability. So for example, Cardenas finds perfect price transmission in Costa Rica, where stabilization schemes are not in effect, but where market power may be present. For coffee, in particular, studies have found that price transmission from world to domestic (producer) prices to be low, both relative to other commodities (Mundlak and Larson 1992), and in absolute terms (Quiroz and Soto 1995).