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.Such coffee natu-rally grows in the shade of a forest canopy that supports a rich floraand fauna and is not uncommon for many small farms in CentralAmerica.Some investment will be required to have this traditionalpractice certified as organic or shade-grown but the benefit forthe smallholder of such certification can be illustrated as seen inFigure 2.14.© 2004 Tony Cleaver SupplyD1 D2PriceP2RMNP1QuantityFigure 2.14 Demand, supply and price for sustainable coffee.Assume the supply of smallholder coffee increases with price asindicated by the standard supply curve shown.Demand in themarket place is given at first by the demand curve D1 but, overtime, there is an increasing growth in consumer preferences for thistraditional, environmentally friendly product such that demandshifts to D2.If the old market price, P1, were to persist, supply would equalthe distance P1M but demand would now exceed this, at P1N.Theexcess demand MN would force the price up in the market to a newpremium price P2.Such a price induces more smallholders to enterthe market, to certify their product and increase the supply of thissustainable coffee, corresponding to a movement along the curve,MR.Meanwhile, the price rise from P1 to P2 has reduced thedemand somewhat, illustrated by the move NR.The new equilib-rium quantity of coffee now traded has grown overall to the amountrepresented by the distance P2R (Box 2.8).Thus we see the effect of changing consumer demand, transmittedby higher prices, signalling to producers that increased earnings andprofits can be had by switching agricultural practices to more envi-ronmentally friendly techniques.By such market mechanics, inducedby the invisible hand of the price system, both the wishes ofconsumers and the needs of the planet are efficiently met.These are the workings of the price mechanism an automaticdevice that operates to balance supplies and demand for all goodsand services marketed.There is no national or international govern-ment or bureaucracy involved, no official targets set and orders© 2004 Tony Cleaver Box 2.8 Sustainable coffeeThe World Bank Rural Development Department identifiesdifferent standards of sustainability: organic coffee, which isgrown without synthetic fertilisers and pesticides; shade-growncoffee, farmed under a forest canopy which provides differentspecies habitat; and fair trade coffee which guarantees minimumprices and a living wage for poor farmers when world marketprices are low.To qualify for certification in any of these categories, farmers orsmall producer co-operatives must establish appropriate moni-toring and documentation of their agricultural practices for anumber of years.This can be an expensive process.Investmentin these procedures is essential however both for convincingbuyers that their product is genuinely complying with sustain-ability criteria and to ensure a high quality taste.Gaining accessto high value markets is the key to success.This is critical ifproducers are to reap the rewards for the costly and time-consuming expenditures necessary to certify their product.Asubstantial reduction in yields (down by 66 per cent!) can beexpected at first if farmers switch from high chemical inputs toorganic or shade-grown methods.Studies show that it may takeup to five years for yields to recover.The longer-term pay back willbe high since environmentally beneficial practices do not exhaustthe soil, but in the meantime punishing costs must be endured.Provided marketing links can be established, long term contractswith coffee buyers in niche European and North Americanmarkets can ensure access to significant price premiums that cangenerate high farm incomes, even if yields are lower.There areexternal benefits too.Higher farm incomes mean that the exodusof young people to city slums in poor countries is reduced, as isthe temptation to farm illegal crops.Additionally, the process ofcertification and the requirements of village level organisationtogether promote entrepreneurial practices that have a directeducational and developmental benefit that may impact on a widerange of rural activities.Environmentally sustainable farming thusmay produce a sustainable rural economy.© 2004 Tony Cleaver given other than private contracts signed to purchase supplies andpromise payments.The prices paid and earnings gained are notdesignated by some central authority and any changes that takeplace are not necessarily planned or co-ordinated they aresolely the outcome of privately agreed deals between buyer andseller.But the result is that due to the combined efforts of dealersall pursuing their own interests we can buy a decent drink at anaffordable price in a local coffee shop.The free market may, as we have seen, reward people sometimesarbitrarily and, according to its critics, unfairly (we will return tothis theme in a later chapter) but the system works and adjusts effi-ciently to exogenous shocks that are part and parcel of the world welive in.It signals where people can work for profit, which produc-tion techniques are best employed and what goods and servicesserve society s needs most.Quite some mechanism!Summary" Resources transfer their employment in response to price/incomesignals, subject to their occupational mobility." Consumers buy those goods and services that maximise their utility,subject to income constraints.A change in price of any one goodthat a consumer purchases represents a marginal change in realincome such that it may effect a change in consumption patterns ofthis good and/or others." Demand or supply for any good is said to be price-elastic if it is veryresponsive to a change in price; price-inelastic if not." Other factors which affect demand for goods can be consumersincomes, tastes, advertising, etc.Other factors affecting the supplyof goods and services can be sudden changes in costs or technologyor exogenous shocks and disasters." Any change in the factors affecting market demand or supply willtrigger price changes and thus a reappraisal of consumer andproducer decisions
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