Changing Asset Endowments and Smallholder Participation in Higher-value Markets: Evidence from Certified-coffee Producers in Nicaragua

Introduction Intensify, innovate, and specialize—this was the essential message for governments and donors looking to address the devastations of the coffee crisis in Central America and other coffee-producing regions. Between 1999 and 2005, prices paid for green coffee did not allow producers in Central America to cover their variable costs of production (IADB 2002). Most smallholders reduced investment in coffee productivity, while others abandoned coffee plantations altogether, or uprooted plantations in favor of basic grains and other crops (Castro, Montes, and Raine 2004). Influential publications argued that smallholders had limited opportunities to increase their share of the benefits from trade in commodity coffee markets, given that the overwhelming proportion of economic returns flowed to actors in developed countries (Oxfam 2001; Ponte 2002; Gibbon and Ponte 2005). Consensus emerged that support for building smallholders’ links to specialty coffee markets, including those for certified fair-trade and organic coffee, would improve the prospects for smallholders in the short and long term (USAID 2003; Varangis et al. 2003; IICA 2004; Bacon 2005; Kilian et al. 2005). The specialty market exhibited rapid demand growth, in contrast to slow growth for bulk coffees. Access to these markets required that smallholders meet stricter quality requirements and, in some cases, obtain access to certification. Subsequent development interventions aimed to improve coffee quality and productivity, facilitate access to certification, strengthen collective enterprises in regions where the production of high-quality coffee was most viable, and promote diversification out of coffee for regions with less potential. Recently, however, various studies have tempered expectations regarding the poverty-reducing potential of access to markets for fair-trade and organic coffee. Arguments have centered on the persistence of low yields and relatively high