How to invest at origin?
For pioneering roasters and importers whose interest in sustainability goes beyond sourcing certified coffees, the question may not be whether to reinvest at origin, but how? Is it best to go it alone, reinvesting in the farmers who grow your coffee and their communities? Or is it better to work collaboratively at origin with the companies that are your competitors in the marketplace? It turns out there may be a case to be made for both approaches.
Reinvestment at origin: An example from Mexico
In 2011, we concluded a three-year project involving more than 7,000 smallholder farmers in Mexico and Central America. One of our partners in Mexico was a cooperative with almost 1000 members that has been selling organic and Fair Trade Certified coffee for more than 10 years – ostensibly winners in the specialty coffee trade. During my first meeting with the cooperative, its leaders told me they wanted to focus their energies on roasting. After analyzing the numbers, they agreed that the export of double-certified coffee was not economically sustainable. I was shocked by the conclusion, but as the conversation wore on, I came to understand how they reached it – the average level of productivity among the cooperative’s members was just 250 pounds per hectare. At that rate of productivity, they were probably right.
I understood the conclusion but disagreed with it. I felt the cooperative’s surest path to profitability was not to change its business model, but to invest in improving the productive capacity of its members. As it turns out, a number of the cooperative’s trading partners agreed, and began building into their contracts a 5-cent-per-pound premium for a coop-managed rehabilitation fund that will replace its members’ 60-year-old coffee shrubs with new ones. My conversations with roasters and importers suggest that this practice is becoming more common in places like Mesoamerica, where productivity lags and the supply gap can be narrowed through reinvestment in farm rehabilitation.
The case for competitive reinvestment
The anecdote above is a concrete example of reinvestment at origin as a source of competitive advantage. A tight market is a seller’s market, and cooperatives seeking to maximize the benefits of their trading relationships may privilege buyers who don’t just make long-term trading commitments and pay good prices, but also reinvest in farm rehabilitation or other initiatives designed to foster social or economic development. This would be a significant step in the evolution of sustainable trade, embedding community development services into coffee trading relationships and creating competitive incentives for differentiation on the basis of social impact. There are a growing number of examples of this kind of competitive reinvestment. And from the perspective of a development agency whose mission is to serve the poor, there is something awfully appealing in this scenario: the reinvestment that helps roasters source more high-quality coffee in a tight market also promises to increase coffee incomes and reduce hunger and poverty in the coffeelands.
But the pace of change under the step-wise competitive approach is likely to be gradual, and its impact incomplete. The business case for this approach will only prove itself over time, as roasters who do (and don’t) reinvest at origin observe clear trendlines in their performance related to the decision to reinvest (or not). Given that coffee is a perennial crop harvested annually, the feedback loop is long. It will take years of rigorous data collection and analysis to show unambiguously whether such reinvestment does in fact yield a competitive advantage in the marketplace, and even longer for the demonstration effect to set in: colonizers will widen the path blazed by the pioneers in the hope of sharing in the successes they achieved through their reinvestment. A competitive approach precludes the kinds of synergies and economies of scale that are necessary to make the whole greater than the sum of its parts. And its ultimate impact depends on how widely the private initiatives of an enterprising few are adopted by others.
(Readers familiar with the popular book on international development titled “The White Man’s Burden” by William Easterly may recognize here a clear analogy to the approach of the development agents he refers to as “seekers.”)
Farmers and their advocates, who whose daily routines are marked by what Dr. King called “the fierce urgency of now,” may find the competitive approach to reinvestment too gradual. But it may be the most natural one from a commercial perspective, with roasters and importers motivated to innovate their business models (mostly) by the promise of profits and (also) social impact at origin that they will claim for themselves in the form of increased profits and increased returns to brand.
The case for collaborative reinvestment.
Returning to the Mexico example above can also be instructive in understanding the case for collaborative reinvestment.
In the Mexico case, roaster reinvestment to boost the cooperative’s productivity will have impact that is significant but narrow: at origin, a few hundred smallholder farmers will achieve increased coffee incomes, and in the marketplace (five Fair Trade roasters will secure supply of scarce specialty-grade double-certified coffee in a tight market. But this cooperative is not the only one with dismally low rates of productivity, and the five roasters reinvesting in its rehabilitation efforts are not the only ones seeking to source higher volumes of quality coffee. Productivity is well below potential across Mesoamerica, and increasing production of specialty coffee is in the interest of the entire industry. In fact, widespread concern about a looming specialty coffee supply crunch is one of the principal sources of support for the GCQRI; increasing the supply of quality coffee is one of its principal mandates.
The appeal of a collective approach is that it can create a whole that is greater than the sum of the parts — a centralized initiative pooling contributions from diverse stakeholders large and small in the service of a shared objective, along the way achieving economies of scale.
(Readers familiar with Easterly’s “The White Man’s Burden” may recognize here the profile of the classic “planner” embodied in the book by Harvard’s Jeffrey Sachs.)
But inherent in this approach raises the collective action dilemma that is an essential part of the microeconomics canon and experienced more practically every time the local public radio station holds a fundraising drive: if I will benefit from collaborative investments whether I myself contribute or not, what incentive do I have to contribute? Why wouldn’t I free-ride on the investments of others? Perhaps more importantly, this approach requires erstwhile competitors to collaborate.
This post focuses on the issue of reinvestment in farm rehabilitation, but low coffee productivity is only one of a broad range of challenges facing smallholder farmers that the industry has a shared interest in addressing. Others include coffee quality, financial and general management skills, seasonal hunger, water quality, natural resource conservation, etc. In each of these areas, the industry actors who are leading the next wave of sustainability in the coffee trade will need to decide whether they are going to go it alone or seek strength in numbers. Given the promise of a direct return on competitive investments, I suspect the natural approach will be for them to invest separately to address these issues in their own supply chains. Given the scope of the issues identified here, it is hard to imagine that they can be decisively addressed through any approach except a collaborative one.