It was the year of Live8, making poverty history, buying goats on behalf of bemused relatives and pledging huge sums of money for disaster relief. In 2005, too, a conscience was stirring in the world of the 'Big Four' coffee roasters. In August, Kraft (the world's second-largest food and drink company) announced the launch of Kenco Sustainable Development - an instant coffee sourced from eco-friendly farms certified by the Rainforest Alliance, a US conservation charity. Available to caterers since 2004 and also blended into Kraft's mainstream brands (Maxwell House, Kenco and Carte Noire) since then, it hit supermarket shelves in October and is meant to bring 'ethical coffee' - so far a niche market - to the masses.

In the same month, Nestlé - the world's largest coffee roaster - launched its controversial Nescafé Partners' Blend, made from beans bought under the Fairtrade system. Though endorsed by the Fairtrade Foundation, the product was boycotted by campaigners who saw Nestlé's entry into the ethical sector as cashing in on a growing market with no guarantee of a long-term commitment.

'The real worry is that these guys are coming in just to grab the current growth,' says Albert Tucker, managing director of Twin, an alternative trading company that puts North-South equality first. 'When that's done and chewed up, they'll walk away from it and we'll be in a worse position to continue the momentum.'

Nestlé had no doubt been impressed by the success of Cafédirect, a small company linked to Twin that sells only Fairtrade coffee, pays more than the usual Fairtrade premium and ploughs eight per cent of its profits back into producer development. In 2004, it achieved sales of more than £22 million while the mainstream market stagnated. Cafédirect is now the sixth-largest coffee brand in Britain.

Encouraged by this and consumer demand for Fairtrade (UK sales topped £140m in 2004, a 51 per cent increase on the previous year), Nestlé undertook a spectacular U-turn. As late as November 2004, it had strenuously argued that artificial Fairtrade premiums made the plight of farmers worse by attracting more of them into the market and causing oversupply - the reason for tumbling prices. A year later, the Nescafé Fairtrade product was launched.

For some, the volte-face smacked of tokenism. According to Twin, Nescafé Partners' Blend accounts for just 0.02 per cent of Nestlé's total coffee purchases (Nestlé would not be drawn on a figure). However, the Swiss multinational plans to launch similar Fairtrade coffees in Sweden and Ireland soon.

To cloud the issue further, Sara Lee (another of the Big Four) has some of its Douwe Egberts coffee certified by Utz Kapeh - a Dutch organisation whose participating farms meet certain criteria on labour rights and sustainability. Procter & Gamble (the final Big Four contender) stamps its Millstone gourmet coffee with the Rainforest Alliance seal - the 'green frog' logo that also adorns every bag of Lyons Original blend (in which 30 per cent of the coffee is Rainforest-certified) and will shortly appear on Lavazza's new Tierra brand.

It's a state of affairs that irritates the Fairtrade Foundation, which believes the proliferation of ethical labels confuses the consumer. 'I'd assumed the multinationals would either say, "We need to do Fairtrade because it's a growing market", or "We need to make the whole of our business secure, in terms of human rights and the environment - and then we won't have to do Fairtrade", says Ian Bretman, deputy director of the Foundation. 'What I didn't expect was something in-between, saying: "We're going to tick certain products and offer these to customers with an ethical guarantee." To me, that doesn't make sense.'

Despite such reservations, it's a far cry from 2002 when Oxfam (with Coldplay's Chris Martin and the actor Colin Firth as its frontmen) launched a full-blown attack on the Big Four for failing to address the problem of plummeting prices - the lowest, in real terms, for 100 years. In Vietnam, the world's third-largest producer after Brazil and Colombia, these covered only 60 per cent of the farmers' production costs. In Honduras, the World Food Programme reported, 30,000 people were going hungry as a result of the crisis. Throughout Central America, thousands fled to the US to clean kitchens for McDonald's, sending their earnings home to feed starving families. According to the Oxfam report, 'Mugged: Poverty In Your Coffee Cup', farmers from Vietnam to Uganda and Peru could no longer afford to send their children to school, blighting a generation.

How were the Big Four implicated? First, they are the coffee industry, together buying almost half the world's crop. In Britain (where the vast bulk of the coffee sold is instant), Nestlé and Kraft account for 80 per cent of the market; Fairtrade accounts for 4 per cent. Rather than being the farmers' custodians, the Big Four bought coffee cheap, added value through processing - mainly in the prosperous North - and sold it at a huge profit. According to Mugged, Nestlé was making 26p on every £1 of instant coffee sold, while an earlier report estimated that 90 per cent of the retail price was creamed off by exporters, shippers, roasters and retailers; only 5 per cent went back to the growers.

With 25 million poor farmers desperate to sell to the multinationals, coffee is still the most heavily-traded commodity after oil, shifted through competitive markets in New York (for the milder, high-quality arabica) and London (for the stronger and cheaper robusta, used to give body to instant coffees). As befits such markets, coffee has had its Big Bang and endured its Black Monday. In the late 1980s, the cartels that set export quotas and controlled international supply broke down, allowing poor countries to plant as much coffee as they wanted. When the crop matured, the market was flooded, provoking an economic crisis.

It is against this background that Nestlé and Kraft have embarked on their ethical crusade. While the first has opted for the Fairtrade system - which guarantees a minimum price to farmers of $1.21 (68p) per pound of arabica regardless of market fluctuations, plus a social premium of five cents to invest in infrastructure and community projects - Kraft has chosen a different route. It pays farmers extra for producing high-quality coffee and managing their farms sustainably, fulfilling the strict ecological criteria set by the Rainforest Alliance.

These include the provision of shade, the condition under which coffee grows best - but it 'must have diverse structure, with at least two strata present' and 'be diversified with at least 12 species of native trees'. Similar minutiae govern wildlife conservation, pest management, conservation of soil and water, housing and services for workers, labour contracts, recycling and community relations.

'While the New York and London markets set a day-to-day price, the actual basis on which coffee is traded is quality,' explains Annemieke Wijn, senior director of commodity sustainability at Kraft. 'If it's a good, strictly high-grown El Salvadorean bean, it will get the New York price plus a quality differential. We then add a further differential for ethical sourcing, which over the past three years has amounted to 10 to 12 cents per pound of coffee.' At most, Kraft calculates, the combined premium equates to 20 per cent of the erratic world market price.

Ironically, at this month's high prices (122 cents per pound), Rainforest-certified farmers would get slightly more than the Fairtrade price - but when the market is more typical, say 80 cents per pound, they receive about 20 per cent less. If the market crashes, there is no minimum price to protect them. Critics say Kraft's decision is a way of avoiding the higher costs of making Fairtrade purchases (as is the policy of making poor farmers themselves pay the Rainforest auditors for the privilege of being certified; under Fairtrade, Kraft would pay). Wijn denies this. 'From a business perspective, we have no interest in low prices,' she says. 'We have an interest in stable prices which makes things much more predictable.'

While agreeing that Fairtrade prices are the most stable of all, Wijn points out that, in a highly competitive market, 'people will switch between their favourite brands for just a few pence' - and for some, the Fairtrade premium is an issue. 'We sell mainstream coffee and we have mainstream consumers - what our American friends call "armchair environmentalists". They like to do something good but they don't want to be bothered with variable quality and prices that are way higher than they are used to paying. That's asking too much.'

To grow the ethical brand, she argues, 'you have to find a way that fits into what your consumers want to do' - which happens to be saving rainforests, conserving water and cutting down on pesticides and fertilisers. However, by starting with better, more sustainable agricultural practices (including workers' rights such as access to water and medical facilities) rather than price alone, the Rainforest Alliance system is said to benefit farmers and their communities, too.

'A well-managed farm understands that, if you treat people well, that is also an economic benefit,' Wijn insists. 'The good workers will come back next year, people will be well motivated, they won't get sick - and if the coffee is grown using good agricultural practices, good social practices, it will be of higher quality and draw a higher price because there is a market for that. All these different aspects of sustainability come together - and each one feeds the other.'

In the high cordilleras of north-eastern El Salvador, I see this virtuous circle of sustainability for myself. Here, where the horizon is interrupted by the low silhouettes of the Cacahuatique and Chapparistique volcanoes, there are two contrasting landscapes: lush forests of native amate, zapatillo, guaycuma and mango trees sprawling up the sides of mountains and tumbling into valleys; and, next to them, pale dry patches of barren wasteland where no flora can survive.

'This is where the cattlemen have burnt the grass,' says Prospero Trejos, a farm manager from the Ciudad Barrios Co-operative (which includes four Rainforest-certified fincas that sell direct to Kraft), leaping from his Isuzu pick-up to scuff the dusty surface with his boot. 'It makes the grass grow greener for a while,' says Chris Wille, head of sustainable agriculture for the Rainforest Alliance, 'but it kills the living organisms in the soil. That destroys the fertility.'

Elsewhere, the rainforest has been scarred by plots of land where maize once grew, abandoned by subsistence farmers who work in the US and wire their money home. Such 'remittances' are now the main source of income for El Salvador, amounting to $2 billion (£1.1 billion) when the total national budget is only $2.6 billion. 'It's a countryside mostly populated by women and small children,' says Wille - and more than 40 per cent live below the poverty line.

In-between the dried-out pasture and plots of land marked with 'lotificacion' signs (meaning they have been sold off for real estate), the lushly forested hillside indicates where coffee grows. At this high altitude, the leaves of coffee shrubs would burn if they were not protected by 40 per cent shade - the conditions, determined by Rainforest Alliance scientists, in which coffee thrives.

Without coffee, this majestic home to endangered birds, plants and animals would go the same way as the rest of El Salvador. 'This country has lost all but about 5 per cent of its natural vegetation,' says Juan Marco Alvarez, executive director of SalvaNatura - the conservation NGO that has certified 100 farms for the Alliance (a further 160 should be approved by April). However, 10 to 12 per cent is 'coffee park', where coffee and rainforest co-exist. 'Altogether,' says Alvarez, '20 per cent of the country has significant vegetative cover. The rest is sugar cane, cashew, cotton and urban areas.' It is his hope that the coffee parks will serve as a corridor linking El Salvador's national parks, increasing the gene flow between them and boosting biodiversity. If the coffee goes, everything goes.

Prospero Trejos outlines his plan for saving the dwindling habitat - planting thousands of pines, cypresses and native trees. These provide shade, make the hillside cooler, conserve and generate moisture in the soil and improve its quality as well as providing a refuge for wildlife. While the Alliance insists on reforesting on its certified farms, especially alongside watercourses where birds and insects live, the co-operative's programme for its land beyond the fincas is voluntary.

'This cordillera has a high capacity for retaining water, the life force of our 17 communities,' says Trejos. 'The only way to preserve the watershed is to plant forest. It's our responsibility, because all these communities are part of the co-operative, even if people work part-time. Everyone is deeply involved in coffee.'

This is the social aspect Annemieke Wijn told me about. On a plateau of dry earth near the Ciudad Barrios coffee mill - where workers spread beans in the sun to dry, on vast patios the size of football pitches - there can be no clearer example. 'This is a blessing from God, Kraft and the co-operative,' says Hilda Roxana Lopez, headmistress of the Ciudad Barrios Co-operative School, gesturing towards a conspicuously new breeze-block building for 200 pupils.

It cost $55,000 (£31,000) to build, part of the premium from coffee sold to Kraft - $13.48 per quintal (or 100lb sack), according to Trejos, of which 8,700 were shifted in 2005. This year's sales will fund a health centre. Before the Kraft commitment, Hilda Lopez says, children studied in a tiny, near-derelict house that was rented for $40 (£21) a month. It could accommodate 107 pupils in several shifts. 'To begin with, the teachers paid $20 each but we asked for $1 each from parents. Most couldn't afford it, so we made up the difference. The co-operative then told us that, if a little miracle took place, they might donate some land. Then they said, "Where do you want us to build the school?" That was a big surprise.'

Best of all, the new school is free. Second, it does not insist on a uniform, which parents of pupils at the two schools in the town can hardly afford. 'It's bigger,' says David Antonio Oreana, 12, whose father works at the co-operative, adding that 10 of his family share a home the size of the old school house.

Dinora del Carmen Garcia, 10, thinks the books donated by Kraft are the best thing. 'Normally,' she says, 'there are no books.' As we talk, it seems at first that she has grasped the Rainforest ethos: 'Science and the environment are my favourite subjects,' she says. I ask why. 'I like learning the names of body parts.' Armed with this knowledge, she hopes to be a doctor at the new health centre.

At Los Nogales (another certified farm near San Salvador, the capital) there are more edifying scenes. There, workers bring their children to see Dr Amaya Rodriguez, a paediatrician who visits the finca once every three weeks - paid for by economies made by adopting the Rainforest approach. Silvia Marisol Garcia, 21, has brought her four-year-old son, Hector, for a check-up after a hernia operation. 'I wait no more than half an hour here,' she says, 'usually 20 minutes.'

Before the farm was certified, she had to take her daughter Karen, now aged six, to a clinic in Santa Tecla, which took a whole day. 'I'd either go privately and the medicines would cost $2 to $3,' she says, 'in addition to the cost of transport' - half what a coffee picker would earn in a day - 'or I'd go to the seguro [social security] and they wouldn't have the right medicines. Here, everything is free.'

In his clinic, the only building left after a devastating earthquake in 2001, Dr Amaya dispenses cough medicines, antibiotics and ear drops. 'It's important that children from the farms see me regularly,' he says. 'I can treat them before it's too late. One girl today has a flat foot, which could have become a big problem.'

At his practice in San Salvador, Dr Amaya sees children with malnutrition and gives them vitamins and iron. Here, where pickers are paid in meals as well as cash earnings of $1.05 per arroba (basket) of cherries, compared to the minimum wage of 65 cents, nourishment isn't a problem. In the newly built kitchens, I eat a thick tortilla loaded with beans and pepped up with a squeeze of lime. I am full. Some workers eat five in a day. Compared to the kitchens, accommodation is basic, like a barn for humans, but workers at non-certified farms sleep outdoors.

Much of this infrastructure is the result of cost-cutting and efficiency, two of the main considerations when certifying Rainforest farms. This coffee mill, which uses friction to strip the slimey coating (mucilage) from beans rather than fermentation and washing, consumes 40-60 gallons of water per sack instead of 90-140. The water from fermentation, as contaminated as sewage, is usually dumped in rivers; here, there is less pollutant and the mucilage is used as mulch.

The best example of efficiency is the limited use of agrochemicals. 'We make a tea from marigold to control insects,' says Diego Llach, the fourth-generation coffee farmer who runs Los Nogales with his father Roberto. 'It's good for fungus, too,' Roberto interjects. Similarly, pheremone traps are used to attract coffee-drillers (pests) and drown them in plastic bottles. 'We needed 2,000,' says Diego, 'so we told kids we'd pay three cents for a Coke bottle. We got 10,000.'

Nor does the farm use herbicides, because weeds can be beneficial to coffee and help maintain humidity. Roberto estimates that this alone saves $150 (£85) per hectare in a year - to be invested in social projects. 'The biggest gain is not money,' he insists. 'Everybody on the farm becomes infected by this culture, which is a tremendous step forward for them. They wash their hands before eating, they know how to take a shower, children from rural schools come with their professors to learn about ecology. It has an effect way beyond our borders.'

It's impressive, but is Kraft doing enough? This year, it will double its purchases from Rainforest-certified farms (as it has done every year since 2003), buying 14,300 tons - 2 per cent of its total. 'It's not very much,' concedes Annemieke Wijn at Kraft, 'but compared to what is being traded out there, it's not bad.'

When I explain the concerns of Albert Tucker at Twin, she says: 'This is not a short-term marketing thing that you can turn on and off. There are people, farms and systems involved. However, we have to be careful with our estimates going forward. We have to make sure we can swallow what we bite off - in terms of our own ability to pay these premiums and satisfy our shareholders. If we don't do that, we are not in business, we don't sell any coffee and people are worse off.'

For his part, Albert Tucker believes Kraft should be changing its entire business culture to resemble that of the old Quaker companies that 'wanted to build communities rather than thinking people were there to serve them'. He advises consumers suspicious of Kraft's motives to avoid the Sustainable Development brand and 'continue buying 100 per cent Fairtrade goods' to keep the pressure up. 'What Kraft should be doing,' he argues, 'is Fairtrade plus huge tranches of other things around large plantations and the environment. I'd say, "Go for it, you can do it. Being the size you are, you'll come out well from it".'

At his offices in San Salvador, José Antonio Salverria Borja - the commissioner for coffee appointed last year by El Salvador's new President, Antonio Saca - seems more than happy with the situation. A timely hike in the world price of coffee has created a party atmosphere. 'You should come here more often,' he jokes, then stops and frowns. 'Mind you, they have forecast three or four days of rain which could be very bad news; it may ruin the crop.' It seems like a perfect demonstration of the high-risk world of the coffee farmer, but Salverria sees no risk in the entry of the world's Big Four coffee roasters into the ethical market.

'On the contrary, that is what we, the producers worldwide, have been waiting for,' he says. 'We welcome the big companies pushing these deals. I'd like one of them to make it five or 10 per cent in the next five years, and it will happen. If we join forces - on quality, marketing and the social aspects - that is the future.'