The Perspectives of Coffee Industry in Latin America - Case Study Example

The Coffee Industry in Latin America

The coffee industry is dominated by large multinational companies that supply generic and low-priced products in the country. Four multinationals (Sara Lee, Proctor & Gamble, Nestle and Kraft) control the coffee production and distribution across the world (Wyant, 2012). Twelve thousand coffee cups are consumed every second in the world and the top three (Kraft, Nestle and Proctor & Gamble) in the trade use 60% of the total green bean volume (World Vision, 2012). However, while efforts have been made to discharge corporate social responsibility (CSR) by these conglomerates, there is little sign that ethical production and fair trading takes place.

The farmers are denied the safety codes in Latin America and Africa. Brazil and Colombia have plenty of rainfall which makes the soil well-drained and rich, and this is the reason that coffee farming thrives there (Wyant, 2012). Because of the unfair practices adopted by the multinationals, rural communities, even though are important stakeholders, they seem to be disappearing (Haight, 2011).

Any business has the responsibility to fulfill the needs of, and be sensitive to the requirements of all its stakeholders. However, the conditions of farmers, their families and the environment condition in Latin America dispel all doubts of CSR being implemented by the multinational companies. Five major concerns affecting coffee production in Latin America include exploitation of human labour, child labour, price setting, fair trade and unethical production.

Exploitation of human labour

Exploitation of human labour takes place in the form of unpaid labour, or appalling working conditions that labour has to undergo (Haight, 2011). This is despite the fact that coffee farmers live in rural communities and coffee harvesting is their primary source of income (World Vision, 2012). The farmers, mostly small farmers with a single plot of land engage in coffee cultivation but are seldom paid fair wages. However, the farmers remain the most deprived stakeholders in the entire chain of coffee growth and delivery to consumption. Coffee production is linked to colonialism and slavery (Food Empowerment Project, 2016). Farmers in Latin America work in unsafe working conditions. They do not have the right protection equipment when at work; they lack training and protection in pesticides application (Zamora, 2013). In Brazil farmers may have the necessary training but they are exposed to risks to workers’ health.

Price of Coffee Beans

Labour intensive – from the time coffee seed is sown and it grows into a tree it takes three to four years. Coffee beans in the form of cherries are hand-picked, husked, sorted and packed into bags after which they are shipped to countries where they are manufactured, packaged and sold (Wyant, 2012). The farmers responsible for nurturing the seeds and sending them onwards are not given a fair price for their labour. Only 5-10% of the retail price of a pound of coffee goes to the farmer.

Prices in this labour-intensive industry are not set by farmers. Instead, prices are determined in the industrialized world in conference rooms or on the floors of the stock exchange (World Vision, 2012). When prices fall farmers struggle to make both ends meet. Because of instability in prices, farmers often resort to illegal or dangerous conditions to survive.

Fair Trade

The fair trade movement had been started to ensure that farmers and producers in developing countries are paid a fair price for the coffee beans. Fair trade is a strategy for sustainable development and poverty alleviation. Fair Trade in coffee has been debated and discussed for several years now because coffee is important to the economies of the countries it is grown in. In fact, coffee is the second most valuable commodity exported from the developing countries. The coffee growers are small farmers running small businesses. The irony is that coffee is produced in the world’s poorest countries but consumed by people from the world’s richest countries (Haight, 2011).

Fair-trade movement did bring awareness of the social and environmental concerns in coffee production but there are strict certification requirements resulting in uneven economic advantages for farmers whereas the consumers receive low quality production (Haight, 2011). A price floor was created which restricted the small farmers from charging more but the quality of Fair Trade coffee suffered because to get good quality coffee market price has to be paid. The farmers may obtain a certification for organic coffee and the consumers pay a premium price as well. However, the farmers do not benefit because the produce is low as they have to adhere to norms to obtain the certification.

Several certifications can be witnessed in the coffee world giving an assurance of ethical production and sustainability. These include Fair Trade, Rain Forest Alliance and UTZ all of which can be found on coffee packaging (World Vision, 2012).

Ethical Production

Because of growing consumer consciousness to consume ethically produced coffee, a number of certifications are applied to ensure coffee is produced ethically (Food Empowerment Project, 2016). The environmental benefits of producing organic coffee are many but the economic benefits are few, which tempts the farmers to resort to unethical means such as not using shade trees for coffee production. Sun-grown coffee production depletes the soil of essential nutrients but farmers prefer not to use shade as the yield is low. Sun-grown coffee requires the use of fungicides, agricultural chemicals and chemical fertilizers making coffee the most heavily sprayed crop in the world. However, here the role of the government is critical in saving the biodiversity, in ensuring chemical-free production and in saving the biodiversity.

Child Labour

Child labour and forced labour to repay debts are very common in Brazil (Food Empowerment Project, 2016). When the price of coffee rises, the families withdraw their children from schools to increase production. At the same time, when coffee prices fall, the children are still deprived of school because families cannot afford it due to extreme poverty conditions. In Brazil child labour rates are 37% higher and school enrolment 3% lower than regions where coffee is produced. In Honduras almost 40% of the labour comprised of children that work 8-10 hours per day in unsafe conditions.

The Stakeholder Theory Approach

The stakeholder theory demands businesses to be ethical but few businesses have formal training in ethical trade, according to Crane and Matten (2010). The larger organizations do have a formal approach to ethics in business but they are under pressure to focus on maximizing shareholder value. This conforms to Milton Friedman’s contention that the only business of organizations is to maximize profits. It is the responsibility of the managers to focus on the shareholders’ interest whereas the social concerns and issues should be left to the state to handle.

However, a corporation is a legal entity or an artificial person that is responsible for its actions and decisions (Crane & Matten, 2010). At times firms do take up causes of social responsibility but there is selfish motive behind it. For instance when Nestle launched a Fair trade-certified coffee brand in Britain in 2005 it was aimed at enhancing the company’s global reputation (Vidal, 2005). They claimed to be spending £1m in promoting the new brand and a similar amount on health and education projects in Latin America for their new suppliers. There are also allegations against Nestle that in their bid to enhance customer satisfaction, they would reduce the price of coffee but this is at the cost of the farmers’ wages and livelihood. Firms seldom demonstrate altruistic motives through their actions.

Starbucks too, claims that their coffee beans are ethically sourced as far as labour laws are concerned, and their Shared Planet label is an assurance that their coffee is responsibly grown without the use of pesticides and without damaging the biodiversity. However, only 6% of the coffee is fair trade certified (Dirksen, 2015).

The stakeholder theory approach clarifies that businesses have to be responsible not only towards the stakeholders but towards all the shareholders involved. The theory states that there are a range of stakeholders with legitimate interest in the corporation (Crane & Matten 2007). A stakeholder has been defined as one who derives benefits from or is harmed by the corporation; one whose rights can be violated or have to be respected by the corporation. Therefore anyone who affects or is affected by an organization can be termed a stakeholder. However, the Principle of Corporate Rights states that the corporation is obliged not to violate the rights of others. Companies are also responsible for the impact of their actions on others (Crane & Matten 2010).

The various stakeholders include the shareholders, the suppliers, the civil society, the banks and financial institutions, the customers, employees and trade unions. The shareholders own a share of the company which the other stakeholders do not and hence importance is given to protect the interest of the shareholders.

Profits today have become the sole purpose of a company’s existence. A corporation is created with limited liability as it enables people to pool in resources, manage risks, exploit opportunities, and through synergies thus created, achieve something which they could not achieve on their own. What communities around the world expect from the corporations differs based on individual needs. The Latin America population needs fair wages for their own survival and sustainable coffee production.

Ethical theories

Utilitarianism

The large corporates that are exerting downward pressure to reduce prices is not morally right. Utilitarianism is based on the principles of collective welfare. This implies that an action is morally right if it results in the greatest amount of good for the greatest amount of people affected by the action. However, in this case the good is only for the firm that sources the coffee beans; it is good only for the shareholders and directors of the company that share a profit from reduced prices. The farmers and their families suffer; the consumers pay higher prices.

Improving the quality of life of their suppliers, here the coffee farmers, is an important responsibility that corporations have towards their suppliers. Because of selfish interests and actions devoid of morality, coffee farming in Latin America has resulted in poverty, human rights abuses and low life expectancy rates (Wyant, 2012). Industry wage earners are known to earn less than one dollar a day.

Locke Ethics of Rights and Justice

Locke’s ethics of rights and justice claims that every individual is entitled to certain basic rights such as the right to live, freedom of speech, privacy and entitlement to a fair and legal process. Based on this ethics of rights and justice, the government in Latin America should stand up and support the farmers; the government also has the responsibility to protect the farmers from exploitations.

According to Paiva (2000) governmental intervention in the market place is necessary to support the coffee industry in Brazil. They should also be able to provide subsidies to the farmers when the prices in the international markets fall. The government is pursuing fiscal equilibrium so that public resources need not be used for price support programs. Government is now a provider of public goods and less of an investor so the price support programs may not be required at all.

Banks in the region have also been working to reduce poverty in the region by reducing social and economic inequality in the region. The Inter-American Development bank is supporting environment-friendly production as well as devising policies and programs that have a positive impact on the small coffee producers (Paiva, 2000).

Categorical Imperatives - deontology

Deontology is a branch of ethics that focuses on the rightness or wrongness of the actions itself and not on the consequences of the action. Immanual Kant’s deontology theory called the Categorical Imperative defines an action to be imperative or necessary. Companies such as Nestle amply demonstrate that they work in self-interest with no concern of the repercussions that their action has on the society and communities. They consider it imperative to reap profits. However, their actions are deemed wrong because they are not being just and fair in demanding reduced prices from the suppliers.

Virtues

Personal virtues should make us proud of our actions but simply spending money in the name of CSR does not justify that Nestle has or acts on personal virtues. Immanuel Kant also postulates that duties cannot be associated with self-interest or rewards and payoffs (Carrigan, Maronova & Szmigin, 2006). The standard of rationality on which moral requirement is based is known as ‘Categorical Imperative’. However, these standards may be based on individual desires. There is a self-governing reason in every individual that guides them in rational decision-making. Thus, there must be motivation by duty or motivation by respect for law and these govern human actions. The word ‘imperative’ urges us to act in a particular way and there should be no self-interest involved. Duty is imposed by the self but the management at Nestle demonstrates no such duty.

Managers’ commitment to sustainable development can be a source of competitive advantage, according to López-Gamero, Claver-Cortés and Molina-Azorín (2007). However, Nestle has been making no efforts to educate the farmers and suppliers on sustainable production. Abolishing child labour is also sustainable development because it concerns the future of the society. Nestle conforms to Friedman contention that it is not the business of business to be socially responsible; the only responsibility of the business is to make profits (Chryssides & Kaler, 2001).

Economic development is the main cause of the numerous environmental issues affecting the society (York, 2009). When managers are confronted with a trade-off between profits and the environment most would choose profits in order to protect the “shareholders’” interests. This has to be enforced as environmental problems appear to be insurmountable.

Wyant (2012) finds that poverty and environment are linked. Since the farmers do not receive a fair price they exploit the environment for survival. Thus, if they are given a living wage, it could help in sustainable farming methods to produce the highest quality of coffee and also save them from exploiting the environment.

Moral decisions involve emotions and not reason, according to David Hume (Fieser, 2006). As far as the future of the children is concerned, child labour has to end. This has to be an emotional reaction and through this one can take a moral decision. However, Immanuel Kant argued that emotional factors influence human conduct and hence this should be resisted. Kant espoused that moral act should be based on reason alone and not be influenced by desires and emotions not amount of reasoning can justify forced labour and child labour.

Non-egalitarian Approach

A Non-egalitarian approach takes the view that justice in economic systems is ultimately a product of the fair process of free markets (Crane & Matten, 2010). However, in the coffee industry in Latin America there are no signs of a free market; there is no justice in economic systems. The stakeholder theory suggests that “holders’ who have “stakes” interact with the firm and make the operation possible (Onkila, 2009). Stakeholders are identified by their interest in the firm and the interest of each stakeholder should be of intrinsic value to the organization. Companies such as Nestle and Proctor & Gamble do claim that they take into consideration the best interests of all the stakeholders but the reality remains that they focus on maximizing shareholder value. Corporations make declarations that they understand the environmental conditions and would like to support the cause, but action remains to be taken. Corporations decide based on logical reasoning and not on emotional concerns.

Recommendations

The above analysis suggests that companies have not been able to discharge their duty and responsibility towards the stakeholders such as the society, the suppliers, and even the customers. To improve the working conditions and the standards of living of the small coffee farmers, it is time that certain changes are brought about.

The farmers know best the cost they incur in coffee farming and they should be consulted in arriving at the price of the coffee beans. Such a non-egalitarian approach would render justice in economic systems and create free markets. This in turn would reduce child labour, forced labour and the farmers will not feel the need to produce at the cost of environmental degradation.

The governments are important stakeholders and have a responsibility towards the civil society. Based on utilitarianism (The Greatest happiness Principle) the government has to ensure the greatest good to the maximum number of people. This can only be done by the governments. The Latin American government should step in, in controlling the prices, establish minimum price and abolish certain certificates that only encourage more of illegal and unfair trade.

The companies involved should take it upon themselves to act based on moral duty; they should take decisions based on emotions and not based on logical reasoning. If the managers become conscious and act with moral duty, it would be possible to abolish the illegal practices prevalent for decades in the coffee bean industry in Latin America.