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March 16, 2004
Starbucks Provides Loan Capital for Coffee Farmers
    by William Baue

Starbucks is providing a $1 million loan to the Calvert Foundation to support microfinance to Latin American coffee farmers, and it answers critics of its Fair Trade commitment.


Late last week, Starbucks (ticker: SBUX) announced its distribution of a $1 million, 2-percent, 3-year loan to the Calvert Social Investment Foundation to support microfinance to Latin American coffee farmers. The Calvert Foundation funneled this funding to growers in two ways.

First, it disbursed some through EcoLogic Finance, a Massachusetts-based nonprofit that provides microfinance loans to eco-enterprises in Latin America. Second, the foundation provided financing to 3 cooperatives in Costa Rica, Mexico, and Nicaragua, which support 10,000 members collectively. The co-ops engage in Fair Trade certification, a program that guarantees coffee farmers a fair price while also encouraging social and environmental sustainability.

"Timely access to supplier credit is an essential ingredient to the success of Fair Trade, and our collaboration with Starbucks helps us open the way for thousands of small-scale farmers and their families to benefit from better schools, healthcare and social services," said Shari Berenbach, executive director of the Calvert Foundation. "Starbucks has taken a leadership position in corporate social responsibility by demonstrating what a company can do to be a good global citizen."

In the months leading up to harvest, small-scale coffee farmers' financial reserves from last harvest often fall short, impinging their ability to see their crops through or feed their families. Typically, farmers must turn to local banks or money lenders that often charge exorbitant interest rates. Fair Trade addresses this problem through what is called prefinancing, whereby purchasers pay in advance a percentage of the price to the grower to help them bridge the financial gap until harvest revenues arrive.

The Starbucks loan seeks to address this problem in a slightly different way. Instead of directly prefinancing its contracts with growers, it provides an infusion of capital into the microfinance community, which in turn provides financing to farmers at more reasonable interest rates than they could access on their local market--half-year, 5-percent loans (10 percent per annum), in this case.

"I applaud Starbucks, as any dollar that you give to a farmer at a time of crisis is an important dollar," said Dean Cycon, CEO of Massachusetts-based Dean's Beans, a roaster that deals exclusively in organic Fair Trade coffee. "However, I don't see this loan as a serious socially responsible commitment."

Dean's Beans is currently running an advertising campaign that calls into question large coffee roasters such as Starbucks that devote relatively small percentages of the coffee they purchase to Fair Trade. According to Starbucks spokesperson Megan Behrbaum, Starbucks has purchased more than 4 million pounds of Fair Trade Certified coffee since 2000. According to Mr. Cycon, approximately 1 percent of Starbucks coffee is Fair Trade certified.

"How do you decide which farmer to treat fairly?" asked Mr. Cycon. "I see this phenomenon of paying only a small percentage of your farmers a fair wage as a redistribution of wealth from the south to the north: if you look at how much money Starbucks made by not paying a fair wage, then the $1 million looks like peanuts."

Fair Trade certification guarantees a price of $1.26 for coffee, or $1.41 for organic coffee. Three years ago, Mr. Cycon points out, the market price for specialty coffee was $2; now the price is 60 cents. So coffee companies can buy Fair Trade certified coffee and still pay significantly less than they did three years for specialty coffee that was not Fair Trade certified, Mr. Cycon reasons.

However, Ms. Behrbaum points out the challenges of a large company like Starbucks buying Fair Trade certified coffee.

"The Fair Trade system currently includes 670,000 farmers, out of an estimated 25 million farmers worldwide--less than 3 percent of the world's coffee farmers," Ms. Behrbaum told SocialFunds.com. "The certification is limited to small-scale farmer cooperatives and does not include many of the farmers who produce Starbucks coffee."

Because most of the coffee Starbucks buys is not eligible for Fair Trade certification, the company says it seeks to ensure fair prices in other ways.

"Starbucks is engaged in a number of practices, from innovative ways to provide access to credit for farmers to introducing Coffee Sourcing Guidelines that give financial incentives for sustainable growing practices, which help ensure that we are trading fairly with all of the farmers from whom we purchase coffee," said Ms. Behrbaum. "Starbucks pays premium prices that are substantially over and above the prevailing commodity-grade coffee prices."

The day after announcing the loan, Starbucks met with a wide variety of stakeholders to review its Coffee Sourcing Guidelines and Preferred Supplier Program. Those present ranged from allies such as Conservation International to severe critics such as Global Exchange.

"I express my appreciation to Starbucks for taking the risk of including several outside critics in the meeting," said Stephen Coats, executive director of the U.S./Labor Education in the Americas Project.

 

 
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