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A New World Coffee Order

coffee seedling.

CC BY 2.0

Here we go again: A new cycle of low coffee prices is upon us. And here we go again: The devaluation of the Brazilian real makes the race to the bottom a tangible reality for millions of coffee farmers.

Despite two decades of efforts by “Third Wave” roasters and coffee enthusiasts, as well as thousands of good faith initiatives to pull coffee away from the commodity trap, it seems that we have not made much progress. This is particularly disappointing in the face of impressive industry growth, both in volume and, even more so, in revenue. It would appear that coffee is expected to be grown by poor people around the world so that rich people can commercialize it and enjoy it, even as it becomes evident that coffee growers are increasingly worse off, aging and migrating to cities.

The Fallout

And here we go again: Coffee farmers and producer organizations have started complaining about the injustice implicit in their share of coffee industry revenue. Academics will write papers explaining how a market-driven value chain works, justifying a static and deterministic coffee world. They will consider that it is obvious and natural  that some of the giants of the industry impose increased payment terms to suppliers by several months, knowing full well that the financial costs of their inventories will be offset by the lower prices paid to farmers. In the meantime, these companies will continue publishing compelling, visually enticing sustainability reports.

As expected, NGOs and certifying agencies will claim, yet again, that they add value… but to whom? Themselves? The farmers? The industry?  They will continue to host their fancy galas in museums and ballrooms celebrating case studies of happy farmers in nicely produced videos. These model farmers will also show up at the events — but not in tuxedos, because they are expected to be authentic. They will thank everyone for coming. Awards and prizes will be given to the sponsors.

Of course, the political debate in coffee producing countries will also start to heat up. Studies with preconceived solutions will be once again written by economists whose training focuses on industry growth and increasing production of inexpensive coffee, rather than on capturing value. Their proposals once again will lack substance to solve the real problems at hand. Many of them still haven’t noticed that we are living in a “post-2008 financial crisis” world, a world where income distribution is as important, or even more important, than income growth. Big coffee brands, in order to appease their stockholders and the media, will upend their current PR efforts in order to make “on point” headlines about their cause-related donations, financed, of course, by their lower procurement costs.

Proactive Proposals and Market-Driven Solutions

There is an urgent need of a New World Coffee Order. Rather than complaining and diagnosing, or worse yet, continuing as usual, we need proactive proposals and market-driven solutions that can create growth and unlock opportunities for all industry members. Clearly, the demand for coffee can grow and, the prices all along the value chain can be increased and more fairly distributed among all actors. But in order to do this, the industry needs to address the growing segment of consumers that expect innovative experiences, high quality and strong narratives in order to justify the higher prices.

In this New World Coffee Order, the industry would be able to rely on the future supply of high-quality coffee — provided, of course, that it is ready to partner collaboratively and convey to consumers the value generated by coffee growing communities, their know-how, their origin and their images. In this new scenario, coffee brands will measure relevant impact to farmer communities, not merely outsource their sustainability efforts to certification seals, or imposed standards that may or may not be relevant to coffee origins farmer communities.

Potential in Marketing

The past few decades of coffee have given us some important insights. For example, we have seen that the most successful, profitable brands — which also happen to be the kind the big conglomerates are now buying — are those that are consistently differentiated by three basic pillars: quality, transparency and knowledge. We can use these insights to reach out to coffee growing communities and view them as long-term partners rather than interchangeable sourcing possibilities.

Marketing professionals would then see farmers as the heroes of coffee, realizing that providing recognition to their farmer-partners is consistent with their brand values, enhances their product portfolio, and satisfies the growing need for authenticity and transparency through proximate origin narratives. Coffee roasters will essentially co-brand with farmers and origins.  

Gone will be the days when industry members disguise the origin of a coffee they buy, and gone too will be those anonymous breakfast or house blends, in which the price of the ingredients governs the selection process. Successful coffee brands will reveal to consumers that coffee growing is difficult — it is a life, not a job — and that only through partnerships and collaboration will conditions be improved for everyone involved. Consumers will know that there is no Disneyland of coffee, where everything is perfect, as some certifying agencies would have them think. Coffee roasters will even consider producing country-based representatives as independent board members or internal review boards to make sure that this spirit of collaboration becomes part of the DNA of their brands.

Changing Attitudes Throughout the Chain

Producers and their associations will need to adapt to the new circumstances. Grower institutions will need to create and defend their collective intangibles, associating them with quality and incremental improvement towards sustainability. They will need to develop unified institutions and strategies with strong governance and establish bonds of reciprocal loyalty between growers and buyers. They must be ready to share the knowledge, create the brands and sustain the geographical indications that will add equity to their product. Only with this strategy will small scale high quality producers and regions be free to move to new production models such as contract farming where the risks of producing coffee can be shared.

Exporters and importers will also need to rethink their role in the value chain, abandoning the current “conveyor belt of a market-driven value chain” attitude and building relational and mutually dependent value chains between farmers and industry. In the New World Coffee Order, exporters and importers also become origin brand ambassadors, shining a light on coffee origins and communities, and replacing the “Indiana Jones story” of heroic buyer journeys of exotic coffee discovery with honest narratives with growers and origins as the heroes.  

Creating and scaling this New World Coffee Order will require all coffee industry stakeholders to rethink their current roles.  Contrary to current thinking, the New World Coffee Order does not mean that we need to enter into a zero sum game of winners (roasters) against losers (farmers). We can, and effectively have, expanded the pie. We just need to adjust the rules and make sure that the intangibles of all those that create value are protected and remunerated.

Comment

4 Comments

Dean Cycon

Bravo, Luis! It is refreshing to see such a clear and honest account of what is really going on in coffee. Here we go again, indeed.

Dan Cox

Outstanding article and perspective Luis. Very well composed and written. Should be a model in MBA schools and taught to all baristas and CONSUMERS!

If the Third Wave coffee retailers can afford (?) to sell coffee for $4-5 per CUP it seems like the farmer should be able to collect at least $1.75-2.0 per POUND based on a minimum quality standard.

Mireya Asturias Jones

I join Dean and Dan in commending you for a very well written article to bring us into the reality of what we must all do and expect today. As a grower/roaster/retailer, we are challenged by all sides of the industry. I am a 4th
generation grower encouraging our 5th and 6th generations to understand and live it. None of us could afford to live on producing coffee, but, we have many families who came with my great-grandmother that do and we need to protect them and provide for them as best we can. Most growers like ourselves have abandoned their farms and left the people to fend for themselves. We hope that we won’t have to do this. Please listen to Luis!

Dr. Tim Raynor

Luis,
100% agreement. The old supply chain is obsolete and benefits everyone upstream.
Advancements in technology as well as consumer preference have accelerated the growth of online shopping. US consumers have shifted their purchase patterns away from traditional retailers. Over 30% of the malls in the US are projected close within the next two years. Once dominate retail brands as Sears, Kmart and Sports Authority have closed thousands of stores. In 2016, online product sales amounted to 360.32 billion US dollars and is projected to surpass 638 billion US dollars in 2022. Total US Amazon retail ecommerce sales (gross merchandise value) is expected to hit $258.22 billion in 2018, up 29% over 2017—far exceeding total US retail ecommerce’s growth of 16%. Internet sales of coffee is increasing every year in United States. Amazon has experienced 35% growth rate in their coffee sales from 2015 to 2016. Online sales growth outpaces traditional retail.

I believe that cooperatives can take advantage of major technological disruptions and change coffee’s supply chain by developing E-commerce programs. These programs would capitalize on innovations in technology, changes in global retail patterns, transition away from a commodity driven market to a branded product. This strategy would allow cooperatives to market a brand directly to consumers all over the world or work with E-commerce retailers that would market on their behalf. This strategy eliminates the reliance on fluctuating commodity markets, strained production networks, and it creates jobs, develops peripheral industries, provides increased revenue to the farmers, as well as promotes overall economic growth in their communities. The business model would require cooperation between cooperatives, some initial investment for a roaster, bags etc. and a centralized facility (possible grants.) The facility and or facilities could be either community or regionally based depending on volume and access to shipping.
Tim

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