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Show Me The Money: Direct Trade Volume 3

Show Me The Money: Direct Trade Volume 3

“We need to make people on this end of the supply chain understand that Direct Trade should have tangible results, not just marketing results.” 
—Andrew Daday, former Director of Coffee, Stumptown Coffee Roasters.

Does the Direct Trade sales model produce the kind of tangible results Daday calls for? Does it put more money in the pockets of farmers and improve the quality of life in their communities? Looking for concrete answers to these elusive questions, Michaele Weissman follows the money trail in this final installment of her landmark three-part series on Direct Trade in 2017.

People sometimes ask me, “What’s changed in the last decade since you wrote God In A Cup?” In today’s competitive environment, coffee buyers pay attention to the bottom line or they disappear. Talking with these roasters about money, I quickly realize that “the sky is the limit” grandiosity of an earlier era is gone.

Colby Barr, co-founder of Verve Coffee Roasters, the always-growing Santa Cruz-based roastery founded in 2007 that now sells a million pounds of coffee a year, exemplifies the dollars and cents orientation of today’s specialty owners, particularly those who entered the business during and after the 2008 economic collapse. Barr and his partner Ryan O’Donovan prefer to buy coffee directly from farmers—that’s their business strategy—but they insist these sales make sense financially.

“Even when Ryan and I didn’t know what we were doing, we understood that we couldn’t do good in the world if we weren’t financially sound,” he tells me. “We opened our business with two checking accounts. One for our cafe. One for the roastery. And we would not sell coffee to ourselves at cost…”

When Barr buys expensive coffee, “I make sure we can sell it at a profit. It’s not good for our company, our staff, or the farmers to make decisions that show up in the red,” he says. His concern for the bottom line goes both ways.

“When I ask a farmer to pick only ripe cherry,” Barr adds. “I take into consideration that doing so will triple his labor costs.” And he pays accordingly.

A Peek Under the Sheets at Fixed-Price Contracts

When Barr and other roasters buy directly from farmers, they spell out details of their purchases in “fixed-price contracts” signed prior to harvest. For farmers, these agreements spelling out the price per pound are a ticket out of the C-market. All contracts, however, are not the same. Some elevate farmers into the coffee firmament, committing roasters to astronomical prices for coffees that later sell at retail for $30.00 and up per pound. Most contracts are far more modest, however, paying in the environs of 25 cents a pound above the C-market. “Farm to farm, country to country they vary significantly reflecting market conditions, labor costs, and other factors,” says Drew Pond of Milwaukee’s Stone Creek Coffee, which sold about 450,000 pounds of coffee last year.

Meredith Taylor, the sustainability manager at Counter Culture Coffee, which contracts for most its coffee, notes that, “Contracts enable both sides to plan ahead. Farmers have a certain degree of financial stability and we know where we are getting our coffee and what we are going to pay.”

There are risks, of course, for both sides. If a contracted coffee cups within specialty parameters, but is a disappointment, roasters eat the loss. If the coffee exceeds expectations, the roaster benefits and the grower loses out on a potential windfall.

Some in the specialty industry believe fixed-price contracts constitute the very heart of the Direct Trade system, but that is an overstatement. Plenty of un-contracted coffee is traded directly. The El Salvador grower Maria Botto—a big believer in Direct Trade—who was quoted extensively in the previous installment of this series told me, for example, that she doesn’t know anyone in the Alotepec Metapan region with signed contracts, although elsewhere in El Salvador contracts are common.

Counter Culture’s contracts delineate how lots are to be separated; the moisture level of coffee when delivered; and the company’s expectations regarding ongoing projects. Contracts generally cover the present year’s harvest, although Irving Farms’ Dan Streetman says that in the past he has contracted for coffee a full year before delivery because having a signed piece of paper made it easier for the farmer to arrange pre-financing.

When roasters and farmers negotiate and contract directly, growers get bigger pieces of the pie and they have a greater understanding of how the supply chain works and how much middlemen are earning.

Even so, farmers are vulnerable. “Growers take a massive hit when they have off-years (often due to circumstances out of their control) and their cupping scores fall even slightly below specialty grade to 79/80,” Drew Pond explains. “Instead of earning $2.50 or $3.00 a pound, they may have to settle for $1.50 on the commodities market.” This loss has all sorts of consequences beyond the obvious. “Facing shortfalls, farmers may not make improvements to their farms that would improve coffee quality in the long run,” Pond says.

Contracts between farmers and roasters do not replace the comprehensive contracts signed by importers and buyers spelling out details relating to expediting, storing, transporting, warehousing, and maintaining quality control.

Multi-Tiered Contracts and the Law of Unintended Consequences

During the past decade, the Direct Trade sales model has proved to be surprisingly functional and flexible. DT’s very nebulousness has enabled roasters to adapt it to meet their needs. Huge changes have taken place almost without notice as buyers have broadened their notions of what constitutes quality worthy of purchasing via Direct Trade.

Most notable is the expanding of what Intelligentsia’s Michael Sheridan calls the “quality pyramid.” Just as you don’t need an IQ of 165 to be considered smart, coffees no longer need cupping scores of 91 to be marketed as Direct Trade. Beans rated 84 to 87 also qualify. This expansion speaks to the array of quality levels roasters marketing micro-lots, single origins, and blends require. Agreements to buy multiple quality levels from a single farm are called multi-tiered contracts.

Sheridan believes contracts like these are game-changers for farmers and for the specialty industry. Growers, he points out, cannot improve their lives or the lives of their communities selling 50 or 100 pounds of super-elite coffee for $5.00 or even $10.00 a pound. They need to sell hundreds or even thousands of pounds of specialty coffee to make coffee-growing a worthwhile enterprise.

“When we [at Intelligentsia] contract directly with a farmer to buy a container of coffee, we write one contract for five different quality levels at five different price points,” Sheridan says. The idea, he adds, is to provide the company with a “quality pyramid,” as opposed to a quality mountain peak.

“Figuring out how to solidify the quality pyramid,” Sheridan comments, was the intent of the Borderlands Project that introduced Direct Trade into the relatively underdeveloped coffee-growing region of Nariño, Colombia. The idea was to find out what Direct Trade could accomplish when supported by all sectors of the economy, non-profit, for-profit, and governmental. A number of specialty roasters based in the United States, including Intelligentsia, Counter Culture, and Stumptown participated, offering advice and technical support to growers. (Today the menus of all three companies include Nariño-grown coffees offered at different price points.)

Working with stakeholders from every sector over the course of five years, convinced Sheridan, the former head of Catholic Relief Services agricultural programs, “That multi-tiered pricing is the single most important means of commercially developing the specialty coffee industry in Latin America while expanding the supply of beautiful coffees.”

In Sheridan’s view, multi-tiered contracts can accomplish what all other development schemes undertaken in the last 20 years have failed to do: increase the available supply of specialty beans while raising living standards for significant numbers—tens of thousands, perhaps hundreds of thousands—of coffee farmers in Latin America.

Transparency: FOB and Farmgate

Talking about fixed-price and multi-tiered contracts highlights the importance of transparency in the specialty supply chain.

No company has done as much to promote transparency as Counter Culture. The Durham-based roaster has gone public with a mind-boggling mass of information about how it buys coffee and how it interacts with its farmer partners. The company’s annual online, available-for-all-to-see Transparency Report is the Lady Godiva of transparency efforts revealing: the average weighted Free On Board (FOB) price Counter Culture pays for coffee shipped from origin; each coffee’s weighted cupping score; country and farm or coop of origin; the name under which the coffee is sold; the number of pounds imported; and the year it was first imported—many of Counter Culture’s Direct Trade relationships extend back to 2004.

“We figured we should let everyone see what our supply chain looks like so they will know how things work in good years and bad and they can decide for themselves about our buying practices,” says Tim Hill, Counter Culture’s quality director and chief buyer. The company, Hill says, no longer uses the term Direct Trade. “We think the metrics we have developed describe our buying practices much more accurately and reveal our sincerity,” Hill explains.

Another company with a strong commitment to trading transparently is the ten-year-old Copenhagen-based Coffee Collective, which last year sold some 130,000 pounds of directly traded coffee. Peter Dupont, one of the Collective’s four owners, patterned his company’s transparency effort on the pioneering work of Intelligentsia’s Geoff Watts. Beginning with a promise to always pay more than 25 percent above C-market, Coffee Collective includes a commitment to visit farmer/partners once a year. As to its outreach efforts, “We see ourselves as a facilitator, bringing the consumer closer to the farmer,” Dupont says. Which is why three years ago the company began printing the following information on each of its bags:

“The coffee’s FOB price per pound; a calculation determining the percent above market price the company paid; the number of years they have visited the producer and/or the number of years they have bought from the producer.”

The Coffee Collective tried for several years to rally other small Danish roasters in an effort to enforce binding industry-wide Direct Trade standards. That effort was short-circuited by the legal objections of a large consolidated specialty roaster owned by JAB, the holding company that owns Peets, Stumptown, and Intelligentsia. The objections have now been dropped.

As for transparency at the producer end of the supply chain, that work is in its infancy. Colby Barr of Verve grew up on a pear farm in Lake County, California owned by his parents. As a teenager, he worked as a picker and he has a special feel for farmers and farm workers.

“Farm ecosystems are the opposite of transparent,” he says. “When we pay a cooperative, we don’t know if the farmers we work with are getting the money they have earned…. On private farms, it’s the same story. There are some relationships I have with growers where labor costs are part of the discussion, but mostly the door is shut,” Barr says.

“The best we can do,” says Irving Farm’s Dan Streetman, another buyer concerned with wages and living conditions on coffee farms, “is ask a lot of questions, keep our eyes open, be skeptical, and try to keep the conversation going.” Streetman’s concern about these matters has led him and others in the industry to appreciate the once-maligned work of Fair Trade International.

Shortly after returning from this year’s SCA convention, Counter Culture’s Meredith Taylor told me that she had heard, “A lot of talk in Seattle about the ‘Farmgate’ price of coffee… This seems to be the next big issue,” she said, adding that roasters can pat themselves on the back for paying well above C-market,” but if farmers can’t (or won’t) pay pickers enough to keep them from moving elsewhere in search of better-paid work (Costa Rica, for example). “In twenty years, roasters may find themselves unable to source the high-quality coffee they need.”

Perturbations, Innovations, and Last Thoughts

Given the rapid growth in specialty coffee, roasters should follow Taylor’s advice and start worrying about demand outstripping supply. The Specialty Coffee Association estimates that there are between 4,500 and 5,500 independent coffee roasters in the US today. “This statistic,” says SCA Executive Director Ric Rhinehart, “probably is an understatement,” adding that the organization will have more accurate figures later this year. It is not clear how many of these roasters are or claim to be sourcing their coffee directly.

The most dramatic change roiling the specialty industry is consolidation. In recent years, half a dozen of the most prestigious coffee roasters in the US have ceased to operate as independently-owned entities, or they have taken on significant venture capital or private equity investment. In 2015, the European-based holding company JAB bought Keurig Green Mountain, which manufactures coffeemakers and the wildly popular Keurig pods for an astonishing $14 billion. Following that purchase, JAB acquired Peet’s Coffee for $974 million, which in turn used its newly-deep pockets to acquire Intelligentsia and Stumptown for undisclosed amounts. All JAB coffee entities continue to operate independently.

What consolidation means for the specialty industry and for Direct Trade is not entirely clear. Tim Chapdelaine, Managing Director in the Americas for Trabocca, the Dutch coffee trading company, points out that JAB’s US coffee holdings, “Taken as a whole, are the equivalent of Proctor and Gamble’s…with potentially massive power in distribution.” Chapdelaine predicts that JAB, known for playing a long game, will someday dominate the emerging high-end supermarket coffee sector with a segmented menu of high-end coffees.

The possibility of JAB beating out the competition in supermarket aisles is not what worries Chapdelaine. His concern, one that SCA’s Rhinehart also expresses, has to do with JAB’s “net 180” policy. Translated into English, “net 180” means that when the importer sends the roaster a bill for just-delivered container(s) of coffee, the JAB-owned roaster does not pay for six months. Farmers, needless to say, can’t wait that long for their money. That means importers are left holding the bag. Unless they have vast reserves of cash, they must borrow to pay their farmers. The cost of this debt will inevitably be passed up the supply chain to the farmer or down the supply chain to the roaster or both. None of these eventualities add anything to the value chain. JAB, meantime, has six months to make money on its money.

No one knows how “net 180” will play out in the long term, but it’s hard to believe it will not further tip the playing field to the advantage of the largest buyers. One thing is certain: large importers with deep pockets and lots of borrowing power are at an advantage. This could lead to consolidation among importers—to some extent that is already happening. It is possible that the debts accrued and the additional interest paid will be offset by increased profits that come with higher sales.

Meanwhile, the specialty industry itself and the Direct Trade sales model continue to evolve financially, technologically, and otherwise. On the technology side, Counter Culture’s Tim Hill is using software to decrease the moisture content of coffee beans in transit, thereby extending their shelf life. Hill has also used technology to increase his ability to identify and discard defective beans (quakers) before they contaminate entire roast runs. These advances increase the value and extend the usability of every pound of coffee Counter Culture buys from its farmers/partners.

Technology is also helping to open up new markets. Maria Botto, the President of El Salvador’s Alianza de Mujeres en Café reports that she and other women growers in El Salvador were inspired by the Direct Trade ethos to reach out to potential buyers in Japan, Europe, and the US. To support this effort they constructed an online interactive platform making it easier for buyers to request information and samples. The success of this effort led to a thrilling viral moment: One after another, groups of women coffee growers in Africa approached Botto’s organization asking for help setting up their own online platforms for selling their coffee directly to roasters. “And now,” says Botto, “we are helping women farmers in nine African countries improve their coffee and their sales methods.”

Advances like this change lives. During his years working for Catholic Relief Services, Intelligentsia’s Michael Sheridan introduced the idea of focusing on quality to a group of struggling coffee smallholders in a civil war-torn area of El Salvador. When the growers finally made their first direct sale to a specialty roaster, Sheridan asked them how they hoped their lives would improve. “What do you want?”’ he asked them. The answer blew him away. “We want our nombres, our Spanish names, our first and last names. We don’t want to be anonymous anymore. We want to sell single-origin coffees and be recognized as human beings.”

“When I heard that, something clicked,” says Sheridan. “Because of Direct Trade, these growers were never going back.”

Back to the Beginning

So now comes the end of the story and a lady’s got to choose. So what is it? Is Direct Trade a collection of heart-warming anecdotes or is it a structured solution capable of solving specialty’s most serious problems?

Certainly, as Heart Coffee’s Wille Yli-Luoma said at the beginning of this exploration, there is a great deal of mist surrounding Direct Trade. That’s a given. Still, I am putting my money on the kind of informed optimism Intelligentsia’s Sheridan expresses when he talks about DT as a “game changer,” and “the best hope” for specialty industry producers and roasters alike.

There are no guarantees that Direct Trade will live up to its promise, but neither in my view is there much choice. Unless farmers’ lives improve—and again, buyers and sellers seem to agree that trading directly is the best hope for that—millions of coffee smallholders around the world, the ones high up on the mountain producing quality, will abandon their farms, accelerating a dire trend. At some point, specialty as we know it—an industry selling an affordable luxury to tens of millions of reasonably affluent people every day—will cease to exist. What will remain is a Rolls Royce industry selling astronomically priced coffees from a handful of farms, (many of them in Panama). Beyond that, there will be industrial grade beans traded on the C-grade market. Armageddon for coffee lovers outside the one percent.

I do not believe market forces will allow this to happen. I suspect specialty will prevail as a product available to an upper-middle demographic while the DT sales model evolves to meet changing market conditions. Some of these changes are already taking place and they are concerning. As the top roasting companies increase in size and power, they may continue to buy coffee direct from farmers, but can it be said that these negotiations take place between equal partners? In other words, can the ethical ideas embedded in the Direct Trade sales model survive the consolidation of the industry?

The answer, I believe, depends on how groups of farmers interested in and able to devote themselves to growing and selling quality coffee respond to consolidation. Maria Botto in El Salvador and Felipe Croce in Brazil both described successful efforts to form vertically integrated farmers’ associations that own their own mills, possess their own export licenses, and are able to have the heft to effectively represent their own interests. Will this form of independent grower consolidation develop into a full-blown trend?

One can only hope.

In a world of empowered coffee farmers/artisans, the beautiful cup of coffee I drink each morning, like the glass of wine I enjoy at dinner, would come to me from a producer who knows his or her own worth, whose children are proud and see in coffee a future for themselves and the generations to come. In this way, Direct Trade, different though it may be from the expectations of its founders, would have lived up to its most fundamental promise. We are only at the beginning.

Michaele Weissman is a special correspondent to Sprudge Media Network. Weissman is the author of God In A Cup: The Obsessive Quest for the Perfect Coffee, published in 2008 by Houghton Mifflin Harcourt, and a freelance journalist writing for The New York Times, The Washington Post, The Wall Street Journal, and many more. Read more Michaele Weissman on Sprudge.


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