What can be done?

Today, farmers suffer from depressed coffee prices

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InternationalCoffeeOrganization’scompositeaverage coffeeprice 1989-2003

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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

The basic problem:too many beans

Due to an ongoing over-productionof coffee compared to demand,coffee bean prices are at historicallylow levels. In 2002/2003, 111 millionbags of coffee were produced,while about 109 million bags wereconsumed. This has added to thealready large stock of coffeeaccumulated over the past years,resulting in a disturbing increase in poverty among some coffeefarmers and their families.

Green coffee prices are cyclical,and the present phase follows a long period during which prices far exceeded production costs.When prices were high, a significantnumber of farmers – sometimesencouraged by third parties –decided to increase their productionor simply to start growing coffee.

Simultaneously, many Brazilianfarmers reduced the cost ofproducing coffee through modernagricultural techniques, whileVietnamese farmers investedheavily in an expanded plantingprogramme. This resulted in anoversupply, with stocks amountingto nearly 50% of the annualworldwide consumption. It will taketime to reduce these stocks.

Who determines theicoffee price?i

Coffee prices are based on two commodity exchanges: the LIFFE, in London, and the New York Board of Trade. Commodity futures markets are a way of managing risk by establishing a basis to determine the price of the product for producer, exporter, shipper and consumer. At inception there were, in the main, only coffee-related companies involved. Today, with the active presence of funds playing in this field, futures markets risk adding to the volatility of prices, as demonstrated by the fact that the volume traded on coffee markets exceeds the global production by a factor of ten.

At the most fundamental level,two factors can positively impactthe imbalance in the market: a slowdown in production and an increase in demand. Given thissituation, what can be done toimprove the income of coffeefarmers and improve the social andeconomic situation of their families?

This document describes themeasures which Nestlé considers tobe the most important in improvingthe lives of coffee farmers, as wellas Nestlé’s contribution to theirwell-being.

Coffee price (US cents/lb)

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Move to speciality coffeesand niche markets

To obtain better prices, one strategyfor coffee farmers is to engage inniche markets, such as specialitycoffees or coffees labelled asorganic or Fair Trade.

Speciality coffees are superiorquality products made from beansthat are available in limitedquantities and for which the price is set according to origins andquality. This translates into higherprices for the farmers who producethese beans.

Companies such as the fast-growing Nespresso business,which sell these products, provideincreased opportunities for farmers,given the premium prices thesecompanies pay for the specialqualities of coffee they buy.

However, while high quality andlabelled coffees provide somecoffee farmers with an opportunityfor greater revenues, they accountfor a relatively small percentage ofthe consuming public and do notrepresent a solution for the broadcoffee market as a whole.

Nestlé and Fair Trade i

Nestlé recognises that Fair Trade is a useful way to raise consciousnessabout the coffee issue and forindividual consumers to expresstheir solidarity with a group ofcoffee farmers in the developingworld.

However, if on a broad basis,coffee farmers were paid Fair Trade prices exceeding the marketprice the result would be toencourage those farmers toincrease coffee production, furtherdistorting the imbalance betweensupply and demand and, therefore,depressing prices for green coffee.

Worldwide, the Fair Trademovement accounts for less than25 000 tonnes of green coffee.

Nestlé’s direct purchasingaccounts for 110 000 tonnes ofgreen coffee per year. This systemenables the farmer to retain agreater portion of the price paid byNestlé, therefore improving hisincome (see page 6).

Speciality coffeebrand Nespressopays higherprices to thefarmersaccording toquality

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“I grew up with coffee, and it isimportant for me to have myown farm”

Bongsong Kanakrut has a two-hectare farm in Sawi, Thailandwhere he grows coffee andtropical fruits (durian andrhambutan). “I started to plantdurian three years ago, whencoffee prices started to decline.But it needs six years toproduce. So now, I work withNestlé to have some moremoney,” he says. During theharvest season, he is a driver at the buying station and therest of the year, he grows coffeefor a Nestlé research project.“My job on the Nestlé projectallows me to learn newcultivation techniques that I can apply on my own farm.”His wife takes care of theplantation but he gives her a hand at the weekends.

Their two daughters go to the local school. He would likethem to study at university. “It all depends on their capacityand the way I manage my farm.If I am successful, I will be ableto pay for their studies.” He hopes that, if they go touniversity, they study agronomyand then come back to the farm“because I like coffee growingand I know that it is a goodoccupation.

“With the money I make withdurian, I will be able to earn a good income in the future.”

Diversification toother crops

For farmers who do not have thepossibility to produce the qualityrequired for speciality coffee, it isvital that they reduce their over-dependence on coffee. They needto find new sources of income inorder to be less vulnerable to theinevitable fluctuations of coffeeprices. These sources of income can be either alternative crops orother activities.

However, it is not a simple matter for farmers to shift toalternative crops. Farm subsidiesand other trade barriers in theUnited States and the EuropeanUnion currently impede access tomajor markets. They hamperattempts to sell agricultural goodson a profitable basis to Europe andNorth America. Nestlé hasrepeatedly spoken out for theelimination of these trade barriers.

“A significant reduction in tariffs on farm products and the ultimatephasing out of farm subsidies andprotection of the rich countries[would offer third world farmers]real benefits”Peter Brabeck-Letmathe,iCEO of Nestlé, The Guardian,i08.09.2003i

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Direct procurement:helping farmers to retainmore of their coffee’s value

Nestlé’s plantletsdistributionprogrammesallow farmers to cultivate bettercoffee trees

Due to the fact that coffee is oftengrown in remote areas, the cropfrom these isolated regions isusually sold to middlemen who are often inefficient and may tend to take advantage of their situation.Prices can be set with exaggeratedcommissions, high transportationfees are charged and farmers areleft with the bare minimum for their green coffee.

Though middlemen play animportant role by transporting thecoffee from remote cultivation areasto the traders or to the coffee mills, a shortening of the supply chainhelps farmers to retain more oftheir produce’s value.

Several mechanisms to increasethe supply chain’s efficiency have been developed. Amongthem, farmers have gathered in co-operatives to act as exportersand some large-scale farmers,particularly in Brazil, have developedprivileged relationships withroasters.

At industry level, Nestlédeveloped a direct procurementsystem over 20 years ago. In coffee-producing countries where thecompany has a Nescafé factory, it has set up buying stations where farmers can sell their coffeedirectly to Nestlé, thus retaining forthemselves a larger portion of thevalue of their coffee.

Retaining value:idirect purchasing in Thailandi

Nestlé is the world’s largest direct buyer of coffee. In 2002, the company bought about 110 000 tonnes of coffee directlyfrom farmers and cooperatives. This was a 10% increase over the previous year.

In Thailand, where directprocurement has been in placesince 1991, Nestlé purchases some34 000 tonnes of green coffeeannually directly from farmers. The company has opened six buyingstations in the coffee growing areasin the south of the country, reachingsome 16 000 farmers.

In these buying stations, thefarmers are allowed to sell theircoffee at transparent conditions. In 2002/2003, the average pricepaid by Nestlé for coffee was THB 38.7 (about USD 0.97) whilelocal traders typically paid around THB 17 to THB 25.

The agronomists responsible for the buying stations during theharvest season spend theremainder of their time providingfree technical advice to the coffeefarmers. They also provide themwith free plantlets in order to helpthem renew their plantations withproductive varieties.

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“Making compost andreducing fertilisers helpsme to save money”

“I started growing coffee in1985. In the beginning, I wasselling it to the local traders andI relied on my neighbours toteach me the best way to growcoffee,” Surachet Silpsorn says.

Since 1992, at the same time as the launch of the directprocurement in the Sawi area,Nestlé has provided technicalassistance to farmers. This freeadvice is primarily focused on better use of fertilisers,productivity increase and overallquality improvement.

“I benefit a lot from the freeassistance provided by Nestlé.One of the key lessons I learnedis the floating of my coffee. It isan easy technique, which allowsme to identify the inferior qualitycherries just after harvest. SinceI built my two floating tanks, I now manage to sell my coffeeat a higher price because it is of a better quality.

“Nestlé’s agronomist taughtme how making compost andmixing it with the fertilisers is a good way to save money. Nowthat I do it, I have more money at the end of the year.”

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Assist the farmersto improve the qualityof their coffee

It is evident that quality improvementhas a direct impact on farmers’income. Quality coffee will bebought at a higher price and willcompensate for the reducedquantities of coffee produced.

Technical assistance to coffeefarmers is an efficient way to helpthem improve their farmingtechniques. Based on a win-winphilosophy, the free assistanceprovided by Nestlé AgriculturalServices allows farmers to benefitfrom state-of-the-art training whileensuring the company that it willreceive the quality it needs for itsNescafé factories.

Nestlé and the ICOiResolution 407i

The International CoffeeOrganisation (ICO) recently passeda resolution aimed at eliminatinglow-grade quality coffees from thesupply chain (ICO Resolution 407).

The Nestlé Quality ControlCentres (NQCC) were created over30 years ago to ensure that thequality of exported coffees complieswith the requirements of the Nestlémarket, which ordered the product.

Nestlé believes that the NQCCnetwork in producing countriesencourages and enhances a betterunderstanding of quality and thiscontributes to the objectives of ICOResolution 407.

Nestlé’s technicalassistancecontributes to the improvementof the quality of coffee

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“If the coffee we producedhere were not of high quality,I wouldn’t expect Nestlé to buy it”

“My name is Florentino AsísAnastacio. I am in charge of quality control at theLimonestitla mill in Veracruz,Mexico. When the coffee isbrought here by the farmers forsale, I carry out an inspectionto establish its quality.”

The Limonestitla mill wasbuilt in 1997 after the coffeefarmers of the region decided toestablish a central place fromwhich to trade their coffee. Their hope was that by workingtogether as a group they couldnegotiate a better deal for thesale of their coffee. And theyhave succeeded. Whereasbefore they were sellingpiecemeal to local middlemen,they are now selling directly to Nestlé.

“First, I check the moisturecontent. If it is too high, thecoffee must be rejected and put through the drying processonce again. Then I check theconcentration of defects – suchas stones and bad beans – in thesample. Once again, if this is too high, the coffee must berejected and resorted. I thenroast and grind some of thecoffee and prepare a sample for tasting.

“I learnt these activities withNestlé’s assistance. I haveattended two courses in MexicoCity and two here in Veracruzstate. Martín Vázquez, whoworks for Nestlé, also supports

me. If I have any questions, I can always ask him. I mustadmit that the first time I did thisjob, I was a little confused. Thesecond time, it was a bit easier.By the third time, I knew exactlywhat I was doing.

“For me, like all the people inthis community, coffee is veryimportant. I consider my job tobe very important – of course, if the coffee we produce herewas not of high quality, I wouldn’t expect Nestlé to buy it.

“Yes, I drink coffee. In fact, the first thing I do every morningbefore work is have a cup!”

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Helping developingcountries’ local economies

Too often, the developing world issolely the producer of agriculturalraw materials that are directlyexported to be transformed indeveloped countries, with theresult that the added value is notretained in those developingeconomies.

Some companies, however,decided to locate their factories in the emerging world. In the case of Nestlé, nearly half of itsemployees and factories are locatedin developing countries. Lookingmore specifically at Nescafé, Nestléoperates 27 factories of which 11are in coffee-producing countries.Some 55% of Nescafé is producedin developing countries.

55% of Nescaféis produced indevelopingcountries,including in thisfactory in Abidjan,Côte d’Ivoire

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“I have tasted over half a million cups of coffee!”

Koffi Kouame works as a coffeetaster in the Nescafé factory inAbidjan. He is 42 years old andmarried with four children. Heworks from 7.45am to 4.30pm,with a 45-minute lunch break.

“My job mostly involves thesampling of coffee. I alsosample cocoa, but I prefer coffeetasting. I taste about 120 cups ofcoffee each day, but I drink justtwo: one in the morning with mybreakfast and one in theafternoon.“

“Yes, I enjoy my work. It makes me proud to know that I am in some way responsiblefor ensuring the quality of the Nescafé that we producehere. I believe that I am very wellqualified for the job becauseI have 15 years experiencein this position, which meansI have tasted well over halfa million cups of coffee!“

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The way forward: industry’s efforts to improve thefarmers’ situation

SAI coffee working groupCo-founded by Nestlé, Unilever and Danone in 2001, theSustainable Agriculture Initiativeaims at promoting farming methodsthat ensure decent living conditionsfor the farmers, while respecting theenvironment and securing sociallyresponsible labour practices. Sinceits creation, Nestlé has promotedthis platform to companies active in the coffee sector in order toencourage viable discussion forumsto jointly define sustainabilityguidelines agreed upon by theindustry. In 2003, facing thecomplexity of the coffee supplychain, SAI Platform membersinvolved in coffee decided to createthe SAI coffee working group whichaims to implement sustainability all along the coffee supply chain.To date, seventeen companies havejoined the SAI Platform and thecoffee working group, nowcomposed of eight companies, andhave defined strategic orientationsfor sustainable coffee cultivation.

CCCCInitiated by the German CoffeeAssociation (DKV) and the Gesell-schaft für Technische Zusammen-arbeit (GTZ) the Common Code for the Coffee Community is a multi-stakeholder platform aimed atdefining a code for establishingsustainability from the coffee tree to the end product. Representativesof the industry, the civil society andthe growers work together to define the way forward towardssustainable coffee production.Through DKV, Nestlé is one of thefounders of CCCC and is presentlyan active steering committee

member. All member companies of the SAI coffee group activelyparticipate in this initiative.

Increase consumption to help reduce stocksAs stated on page 3, the basicproblem with coffee prices is thatsupply exceeds demand, androasters can play a significant role in increasing coffee consumption.

Collaborative efforts andindividual marketing campaigns arenecessary to promote consumptionaround the world. To evaluate thepositive impact of promotion, it isinteresting to observe that over the past decade, total coffeeconsumption increased by 17%.Over the same period, driven by Nescafé, soluble coffeeconsumption increased by 35% and Nestlé alone increased itssoluble sales by 40%.

Under the auspices of the ICO,the most important roasters haverecently committed to the PositivelyCoffee Initiative. This project isaimed at promoting coffeeconsumption by giving a positiveimage of coffee to consumers.

Over the past twenty yearsconsumers have listened to manynegative messages concerningcoffee and caffeine intake.However, new scientific data from worldwide research centresare providing us with anotherperspective. This initiative aims atsharing balanced and consistentinformation about the positiveaspects of drinking coffee.

Over the pastdecade, Nestléincreased itsNescafé sales by 40%

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“My objective is that the coffeefarmers earn a decent livingin the long term”

Patrick Leheup is an agronomistworking for Nestlé. He spends a great amount of his time oncoffee plantations around theworld, providing advice to thefarmers. He is also a member of the SAI coffee and CCCCsteering committees. For him,working on the sustainability of the coffee farmers is not a matter of charity, but ofresponsibility. “For a companylike Nestlé, it is vital that thecoffee farmers receive fairprices. Otherwise they will haveno incentive to produce the quality of coffee that weneed for Nescafé.”

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Nestlé: our contribution

Nestlé has been contributing to thefarmers’ well-being for many years.Over the past year, this contributionhas been strengthened, bothindependently and in partnershipwith the industry. Here are someexamples of Nestlé’s initiatives:

School children in the Tezonaparegion of Mexico

Technical assistance in Vietnam Nestlé hired an agronomist toprovide technical assistance for theDong Nai province in Vietnam.

Diversification and educationin MexicoNestlé supports the TezonapaProject in the Veracruz Province of Mexico aimed at helping farmersto improve the quality of their coffeeand to increase productivity. To thateffect, seedlings have been givenfree of charge to the coffee farmers.Diversification of their sources of income is promoted through fish farming and tropical woodproduction. A junior high school is also being financially supportedby Nestlé (construction, equipment and teaching personnel).

Direct procurementOver the past year, Nestlé hasincreased its direct procurementfrom 100 000 tonnes to 110 000tonnes, which represents 14% of the company’s green coffee purchases.

Sustainable AgricultureInitiative’s coffee groupAn industry working group hasbeen set up by Nestlé, aimed at developing a sustainableapproach in coffee cultivation. Eight companies involved in coffee are already members of this group.

Common Code for theCoffee Community (CCCC)GTZ/DKV initiative is aimed atdeveloping and implementing guidelines for the coffee sector.Nestlé is a member of the steeringcommittee.

Coffee programmes on FM radio stationsin southern Thailand As of June 2003, a weeklyprogramme dedicated to coffee farmers which, until then,had been broadcasted on two radio stations is now also aired onChumphon meteorological radiostation, thus allowing Nestlé toreach all 14 000 farmers who supplycoffee to the company.

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Writing and editingNestlé S.A., Public Affairs

Concept and designNestec Ltd, Marketing Communications,Corporate Identity and Design

with Esterson Associates, London, United Kingdom

PhotographyMarkus Bühler/Lookat Photos, Zurich, Switzerland;

Harmen Hoogland/Nestec Ltd, Marketing Communications, Corporate Identity and Design;

Marc Latzel/Lookat Photos, Zurich,Switzerland

PrintingPresses Centrales Lausanne S.A.,Lausanne, Switzerland

PaperMunken Lynx, totally chlorine free (TCF)

Cover pictureCleaning coffee beans in front of the Nestlé buying station, Gagnoa, Côte d’Ivoire

© November 2003, Nestlé S.A., Public Affairs

Nestlé S.A.Avenue Nestlé 55 1800 VeveySwitzerland

www.nestle.com

Sustainable coffeein the PhilippinesNestlé Philippines committed to provide CARE Philippines with technical assistance for its AWESOME project in Mt. Malindang Range National Park. This project focuses strongly on intercropping and diversification.

Pilot farm in the PhilippinesA coffee-based sustainable farmingsystem is being demonstrated andused in a privately owned pilot farm in the Sultan Kudarat Province.Diversification is one of the mainobjectives of this project, with crops such as peanuts, vegetables,root crops, pineapples and highland bananas.

Farm sustainabilityin IndonesiaSince 2000, Nestlé has beenconducting a campaign aimed at improving farms’ sustainabilityand land optimisation. Strongemphasis has been placed on diversification.

Côte d’IvoireTwo buying stations located in the most dangerous areas of therecent armed conflict becameinaccessible and it was necessary toset up a new station in a very shortperiod of time. It was possible toincrease the volume purchasedwhich reached 30 000 tonnes(increase of 10% compared to2002).

Support to Ethiopia’scoffee sectorNestlé has committed to the Jimma agricultural research centreby assisting them to increase theirscientific capacity in the coffeesector. Nestlé will also support the Goma coffee technologytraining centre.

Advocacy for changeCalled upon by the United NationsGeneral Assembly and under theauspices of the UNCTAD, theEminent Persons Group, composedof 15 people including PeterBrabeck-Letmathe, CEO of Nestlé,signed an appeal for, among otherthings, more liberalised exchangesbetween the developing anddeveloped countries.

Positively Coffee ProjectNestlé strongly supports this ICO initiative aimed at increasingconsumption by projecting a positive image of coffee among the public.

FAO Mould PreventionNestlé supports this project aimedat improving coffee quality.

ISO coffee committeeNestlé actively participates in a standardisation project aimed atassessing the quality of the coffee.