Shady business–some thoughts on the regulation of the coffee sector in Puerto Rico

I got interested in Puerto Rico’s coffee market because I decided to embark–solo, as it should be done if you are to have fun for an unnecessarily long time– on the adventure of conducting some research on the possibility of implementing agricultural policies to further environmental service provision and biodiversity conservation in PR.

After almost a year of passive research, the marketing and regulation of coffee in PR and the objectives of the institutions governing the system remain very puzzling to me.  I’ve been struck the general opacity at every layer of the system: form coffee farmers, to ecologist researchers, to social scientists, to government officials. The lack of clarity over goals, restrictions, and the general rules in the system strike me as a “red flag” that someone is making money at the expense of someone else–and perhaps unfairly, or how we prefer to say in positive economics: in a non-egalitarian way.

You can find a description of the research motivation in the “papers” tab in my website’s home (or by clicking here). Here I’ll just elaborate on my personal –and rather pessimistic–perception of where things can go.

In conducting my study, I ran into several inconsistencies in the data that raised my awareness of additional structural factors in a rather complex system of which coffee farmers are a small component. If the intention is to use agricultural policy to further environmental goals, the environmentalist agencies will need to gain much deeper understanding of institutional idiosyncrasies governing the microeconomics of coffee production in Puerto Rico. With the risk of overstepping, I will discuss two examples of “the tip of the iceberg” that illustrate how difficult it will be to successfully intervene in Puerto Rico’s coffee sector in order to improve biodiversity conservation and environmental service provision in the island.

The first issue is an example of what could be the prevalence of pernicious incosystency in monitoring, recording and measuring of economic performance in the coffee sector. Coffee in Puerto Rico is sold by almuds or quintals. These are non-standard metrics that  have different definitions—and indeed, are used to measure different properties (say volume instead of mass) —across Latin America and the Caribbean. The USDA defines these units as one almud equaling 28 pounds, and one quintal equaling 100 pounds. However, after speaking with officials and researchers, there is reason to believe that farmers, researchers, government agents, and consumers may have different ideas of what exactly these units constitute. The lack of transparency in the metric system itself may be enough reason to worry about some agents taking advantage of the system to exploit illicit profits. Although I have no evidence of illicit profiting, in the data I do find that average coffee prices vary drastically depending on whether the farmer sells by almud of quintal. The average price per pound that farmers selling by quintal received was $3.16 (with standard deviation of 1.37); on the other hand, the corresponding figure for farmers selling by almud was 0.54 (with standard deviation of $0.49). Although, theoretically those receiving $3.16 are “beneficiadores” (business that are in charge of processing the coffee at a commercial scale) selling coffee beans, while farmers receiving $0.5 are growers selling coffee cherries; there is no certainty over this issue and the data does not support this distinction entirely. This large discrepancy in prices is reason of concern, particularly for distributional considerations and compensatory public policy.

The second issue that clearly reflects the level of convolution in the system, shows how uncertainty as to the implementation of public policy by one state agency can escalate rapidly and affect the actions of other regulatory agencies and the industrial organization of coffee markets itself. In Puerto Rico, the Department of Consumer Affairs (DACO) sets the price of coffee. By law, since 1973, the DACO is supposed to review the price of coffee every 5 years and fix an increase based on recommendations by the Department of Agriculture and the University of Puerto Rico through the Agricultural Science Department and the Agricultural Extension Service. However, coffee prices have not been reviewed systematically.[1]

The DACO is also in charge of systematically setting import tariffs on coffee. Historically, imported coffee had been taxed heavily, keeping its price artificially higher than that of local coffee. However, since 2015, DACO signed an order imposing a Price ceiling of $322 per quintal of imported coffee—making local coffee less competitive from a pricing standpoint. DACO’s neglect and apparent favoritism for coffee consumers—local and multinational—over local producers has likely had an impact on subsequent political actions taken by interested parties such as the Department of Agriculture and certain large multinational companies operating in Puerto Rico. In turn, these actions may have spurred interactions with existing disruptions and inefficiencies of the market, making the situation for coffee farmers even more complicated. I will elaborate on these thoughts to make their meaning more explicit.

With the objective of relieving some of farmers’ financial pressures, since 2001, the Department of Agriculture has established a series of incentives programs in addition to the existing  programs subsidizing seeds, fertilizer and labor. The effectiveness of these new programs is highly questionable based on anecdotal observations. Certain legal records document the flaws in these programs. Among them, high uncertainty as to the priority given by the administration to the appropriation of funds to said programs. Additionally, payments conceded by these new schemes are often received late, and sometimes never. Yet, within the last year, DACO’s failure to revise the prices systematically has risen legislation proposals to have the PR Department of Agriculture establish coffee prices instead. [2]

On the other hand, DACO’s neglect is certainly not helping farmers who are facing higher input prices and a fiercer competition from abroad. However, an artificially low price of coffee may be disproportionally benefiting large consumers.[3] Although I have no evidence and no way of showing that monopsonistic power is related to DACO’s public policy, it is a worry supported by recent news and media analysis.[4]

The coffee industry in Puerto Rico has been struggling in the last few decades. The reasons behind this collapse are multiple and likely to be interrelated. From natural reasons (like pests and hurricanes) to shocks in the labor market to public policy initiatives to market organization, these reasons obscure the fundamental factors determining farmer behavior and thus, make matters ever more complicated for parties interested in targeting coffee producers to further environmental objectives. I want to conclude this paper with the following thought. Although much progress has been made in the areas of economics and ecology in terms of understanding the micro-economic foundations of human behavior and the interactions between humans with the environment in an economic setting, taking these lessons to action will ultimately depend on the functionality, reliability and transparency of political and legislative systems.

Adam Smith wrote in his book “The Wealth of Nations” about the infamous invisible hand. The counter-intuitive, and counter-catholic idea that the common good is attained by people being selfish–that is, people are guided by an invisible hand (prices) to make decisions that bring them personal profits and also create the goods and services that society needs. That means, that people can do good without having to be selfless and altruistic. This is very foundation of market capitalism.

He wrote “Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nos knows how much he is promoting it… He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never know much good done by those who affected to trade for the public good.”

I’d like to believe this is the generally case. I don’t know. Maybe there’s reason to put emphasis on the fact that Puerto Rico is truly a Caribbean country, not a U.S. territory. There seem to be different institutions in place offering perverse incentives causing individuals to behave selfishly and yet not attain the public good. It is as if in Puerto Rico, the invisible hand belonged to a blind master.

 

[1] It took 13 years since the enactment of the “Ley Organica del Departamento de Asuntos del Consumidor” for DACO to adjust coffee prices. In 1986 it set them to $3.12 per pound. In 1991, the price was adjusted to $3.64 per pound. Then, in 2005, prices were raised by 20%. The last time DACO reviewed coffee prices was in 2015. Then, DACO set the price of ripe coffee cherries to $0.52 per pound (and $0.35 for green cherries) and the price of coffee beans to $379 per quintal—or $3.79 per pound.

[2] http://cb.pr/sen-ruiz-proposes-agriculture-department-set-coffee-prices/

[3] http://www.oslpr.org/download/en/2008/A-0222-2008.pdf

[4] Since 2013, Puerto Rico Coffee Roasters (which is domain of Coca-Cola Co.) controls 80% of the coffee market.

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