In Our Collective Quality Obsession, What Do We Really Know About Microlots?

Ripe Cherries. 2010 Creative Commons photo by jakeliefer.

by Michael Sheridan of CRS Coffeelands Blog

I have a friend in coffee whom I am going to call “Alex.” S/he is brilliant. Driven. Focused. Working hard to make coffee sourcing at her/his company more profitable for people in its supply chain and less damaging to the planet.

Alex and I have had an ongoing conversation over the past few years about the quality-focused sourcing model we are promoting through our Borderlands project in Colombia, and more broadly about the validity of  microlots as a strategy for fostering community development. I think it is fair to say that Alex likes drinking microlots, but at the same time has serious questions about the sustainability, scalability and impact of the model that brings them to market.

The conversation has been rich.  Given that the microlots the marketplace swoons over represent only a tiny proportion of all coffee production, and given how little we have explored the impacts of microlots at origin, I believe it is also an important conversation. So today and tomorrow, we move our dialogue online.

ALEX: Can producers rely on a microlot strategy to improve their livelihoods? Not just in a windfall year, but over a decade?

MS: Wow, you’re diving right in! That’s the question, isn’t it? Two years ago I suggested this was the most important question in specialty coffee, and I don’t think anything has changed.

I believe the answer to your first question is a qualified “yes” — for some farmers, a microlot strategy can improve livelihoods.

And I think an honest response to the second is: “We don’t know.” A convincing response would be based on data: longitudinal, cross-country data that span a full decade and assess impact across origins. Those are data that we plainly do not have, and that is a problem. From the “most important conversation in coffee” post I mentioned above:

Coffee quality evangelists have been preaching the gospel of coffee quality for many years without rigorous evidence to support what amounts to the central article of their faith: that quality of coffee equals quality of life.

In responding to your questions, I will draw on on data from our Borderlands project in Nariño, Colombia. That’s the good news — I will be basing my replies on evidence and not ideology. The bad news is that Nariño is exceptional — what works there may not necessarily work elsewhere. And if I have learned anything from my work in international development, it is that all solutions are local.

Before getting into more specifics about each of your questions, some caveats. I do not believe microlots will save the world. Or even the coffee market. Nor do I believe a microlot strategy is appropriate for every farmer who grows coffee. And, in fact, if we were only talking about microlots, I would say they aren’t likely to have much of an impact at all.

But what you refer to as a “microlot strategy” we call a differentiation strategy; the process by which growers produce microlots is of a piece with our broader segmentation strategy, which involves more than just microlots.

That strategy helps growers capture added value through differentiation, primarily on the basis of “intrinsic” value, or cup quality, but also on the basis of “symbolic” value, or certifications.  Over the past two harvests, this approach has helped a modest number of growers in Nariño increase their options in the marketplace. Previously they had only one narrow price band for all their coffee: the local market price. Now they now have up to six. In addition to the local market price, which is the lowest of the six, these growers now have access to markets for four different tiers — A, AA, AAA and microlot — with graduated prices as growers climb the quality ladder. And growers participating in a Fair Trade for All certification pilot have earned price premiums and the Fair Trade social premium of $0.20 per pound over each of the past two harvests: the sixth different price point and sixth different market segment in our “microlot strategy.”

The margins on the microlots are impressive. Our data suggest that last year’s lucky microlot growers earned an average farmgate premium of $0.96 per pound. But there were only 24 of them. And their microlots represented only 9 percent of the coffee the project helped bring to market; as a proportion of all the coffee produced by growers participating in the project, it was much lower. Like I said, microlots alone are not going to have much of an impact.

The magic of the approach isn’t in single-farm microlots, even though those tend to get most of the attention. The real potential of the approach in terms of economic development lies in the community lots that qualify for premiums even if they don’t qualify as microlots.

The community lots the project helped bring to market last year — mostly A, AA and AAA but also one Fair Trade Certification pilot lot — involved more people (over 300 additional growers) and more coffee than the project’s microlots (nearly 10 times as much). The estimated average farmgate premium of these lots was lower ($0.37/pound), but together they generated nearly three times as much additional income.

This is where the developmental case for the “microlot strategy” begins to come into focus. Microlots are important enticements for buyers and brand-leaders for growing communities, while A and AA community lots create opportunities for larger numbers of families in higher-value segments of the market. The important point is this: there would have been no A, AA or AAA lots if it weren’t for the microlots.

Let me put it another way. If the coffee geek in me gets excited about the Stumptown single-variety Maragogype from Doña Corona Zambrano, the international development professional in me knows that any shot this approach has at lasting and meaningful impact will come through Stumptown’s Piedra Blanca community lot and others like it across Nariño that create more opportunities for more growers.

Creative Commons photo by Neil Palmer for CIAT

We are encouraged by our steady (if slow) progress in expanding participation in these higher-value segments of the market. Still, there is the critical question of scale. We are still counting the number of growers selling to these segments in the hundreds, but there are 40,000 families growing coffee in Nariño. And more than a half-million in Colombia. How many of them need to participate in these higher-value market channels for this to be considered an impactful strategy? For how long? How deep do the benefits to growing families need to be? What does the social return on this investment, measured in additional income to growers, need to be to make this a strategy worthy of development agencies like ours and not just a strategy to feed the growing appetite for microlots in the coffee-is-culinary segment of the marketplace?

Sorry for going on so long in response to your very first question.  In summary, on the basis of everything I have written here, I feel comfortable saying that a microlot strategy — or, a differentiation strategy that includes but is not limited to microlots — can contribute to improvements in smallholder livelihoods.

Can it do that for 10 years? Who knows? Seriously, I am asking…who knows? We sure don’t. We are gathering good data in Nariño now, but don’t have data over that kind of a time span on growers who have been participating in this kind of trading model.

The closest thing I have seen comes from this extraordinary exercise in transparency: Counter Culture’s Direct Trade Certified Transparency Reports. In addition to publishing FOB prices for all their Direct Trade/microlot coffees, Counter Culture has included in these annual reports brief narratives on each of those trading relationships that were remarkable for both their insight into what is possible in the context of long-term trading relationships that build mutual trust, and for their honesty about the ways things went wrong in those relationships: low yields, disappointing quality, logistical challenges, market volatility, etc. Although some of those relationships are now more than 10 years old, the reports have only been published for five years: 2009, 2010, 2011 and 2012 and2013. And they do not reveal anything about farmgate pricing, costs of production or grower margins, to say nothing of the yields and farm efficiencies that are such critical determinants of farm-level productivity. So even the best public accounting of these issues I have seen falls far short of the kind of data you are looking for as evidence of sustained impact of the microlot model.

 “ALEX”: Are there trade-offs in terms of increasing productivity vs. increasing super high quality?

MS: Absolutely. This tradeoff is especially pronounced when a quality-focused production strategy steers growers away from high-yielding, disease-resistant cultivars (Castillo in the case of Colombia) toward low-yielding heirloom or exotic varieties that consistently produce exceptional quality (think Bourbon and Typica, Maragogype and Gesha.)

What we need to get better at if we are going to responsibly support decision-making at the farm level is quantifying that tradeoff: helping growers understand what they may be sacrificing in terms of productivity in their pursuit for quality and what prices they need for their quality-differentiated lots to compensate them for productivity trade-offs, higher risk and (potentially) higher costs, to say nothing of higher quality.  This is, in my estimation, the weakest part of the value-added-through-quality-based-differentiation approach: the fact that we still don’t have a firm grasp of the economics.

In the case of our Borderlands project, we felt comfortable moving ahead with this approach even without all the underlying data because we had done some homework on the context. We knew there were high-quality coffees that were not finding their way to buyers willing to pay premiums for them; we knew that we could help growers capture more value through simple selection and separation processes that didn’t imply any significant changes to their cost structure. In other words, there was was “free money” there for growers if we could just, as our our friends at CIAT like to say, “connect capable farmers with willing buyers.” Making those connections was relatively easy. Sustaining them and growing them into impactful trading relationships — the kind that improve livelihoods over a decade and not just in a single given year — will be harder.

This is the first in a two-part series.  The second will be published tomorrow, 3 June 2015.