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268. “Whole-of-business” trading solutions

In this article in the current issue of Roast Magazine, Fair Trade USA CEO Paul Rice again expresses optimism about the future of Fair Trade Certification in the United States.  Before you panic, let me say this is not another post about Fair Trade for All.  At least, it is mostly not.  Mostly, it is about the term Paul uses to explain why he believes his grand gamble on FT4All will pay off: because it provides big brands with “whole-of-business solutions” to certification.

Last week, I asked whether bigger is better when it comes to how well coffee companies can service their partners at origin.  Earlier today, I wondered whether there may be a “sweet spot” between “Small is Beautiful” and “Bigger is Better” from which coffee companies can combine the best of both.  Today, I suggest that “whole-of-business solutions” require relationships with all kinds of partners — small, big and everything in between.

Whole-of-business solutions in the marketplace.

In the Roast article, Paul argues that lots of companies limited themselves in the past to certifying only one or two coffees because they didn’t see enough volume coming from a cooperative-only certification to make a deeper commitment possible.   He sees the eligibility of estates and independent smallholder farmers as a game-changer that makes it possible for larger companies to make a deeper commitment — perhaps even a “whole-of-business” commitment — to Fair Trade Certification.  In this case, it is the diversification of supply chain relationships — from the coop-only approach to certification to coops+estates+independent smallholders — that may make a “whole-of-business” commitment possible.

Whole-of-business solutions at origin.

The idea of whole-of-business solutions is as relevant at origin as it is in the marketplace.  Smallholder cooperatives seek to develop direct, high-value relationships across-the-board to best serve their members.  But no single trading partner — or business model — can deliver enough value for all their members or all their coffee.

Some buyers are quality-obsessed Direct Trade roasters who will pay extravagant premiums for coffee that meets their exacting standards, even if the cooperative can only produce a few sacks of it.  But very little of the overall volume makes the grade, meaning that coops have to look elsewhere for the bulk of their business.

Other buyers are seeking Fair Trade Certification.  Some of these are roasters that are committed to direct and developmental trade, paying handsome social premiums and seeking opportunities to invest in other ways to improve the well-being of coffee communities.  These are obviously desirable relationships for cooperativers.  But there are precious few roasters out there who operate in this way, and they tend to be relatively small.  (See “Whole-of-business solutions at CRS” below for more on this idea.)  So coops sell as much of their Fair Trade Certified coffee to these buyers, and the rest to buyers who are more committed to the certification than the underlying relationship.  These sales generate less value for coop members than the sales to fully committed Fair Trade roasters, but still more than conventional trade.

And so it goes for successful, well-managed cooperatives — they seek to maximize the value of their trading relationships by migrating as many of their members and as much of their volume as possible to higher-value channels, minimizing the amount of coffee they sell on a commodity-trading basis.  The keys to whole-of-business solutions at the coop level are coffee differentiation, market segmentation and relationship diversification.

Whole-of-business solutions at CRS.

Finally, I would say the concept of whole-of-business solutions can help explain why we have migrated in our work at origin beyond our initial and narrow embrace of fully committed Fair Trade companies to engage a broader and more diverse range of industry allies.

When we started our coffee work at origin in Nicaragua back in 2003, we were working exclusively with fully committed Fair Trade importers and roasters, who helped a CRS-supported cooperative sell its first container of (Fair Trade and organic) coffee into the U.S. market.  This was a natural approach for us.  The fully committed Fair Trade Organizations we collaborated with in the field were partners in our Fair Trade Coffee Project in the United States, and we were excited about the developmental potential of their approach to trade, which was based on direct contact with farmer organizations and fair, transparent, long-term trading relationships.  We felt that as long as we could continue to connect CRS-supported farmers with companies like these, we would do so.

Over time, however, as our relationships with coffee farmers expanded to other countries in Central America, East Africa and South America, we found that we couldn’t rely exclusively on Fair Trade pioneers to bring our partners’ coffee to market.  We broadened the circle and developed relationships with other industry allies that are not fully committed to Fair Trade, but are doing lots of great things for farmers: developing and sustaining direct relationships, trading transparently, paying high prices, creating incentives for improved coffee quality, introducing new technologies, reinvesting at origin, moving larger volumes of coffee, etc.  We continue to work with the Fair Trade pioneers who helped us start our journey in the coffeelands, but have been able to provide more effective support to more of the smallholder farmers we accompany at origin by diversifying our relationships with roasters and importers.  We still haven’t got a “whole-of-business” solution for our coffee value chain work, but the more we broaden the circle of our relationships in the coffee industry, the closer we get to that elusive ideal.

 

6 Comments

  • Rodney North says:

    Hi Michael,

    Thank you for another thoughtful post.

    From the teaser for the post that is e-mailed to those of us who subscribe to the blog the suggestion is that you were embracing Paul’s “whole-business-solution” perspective for coffee brands.

    But from the full post it seems your real point is that “whole business solutions” are important for farmer co-ops and that CRS itself has found a “whole business solution” for itself by working with more than farmer co-ops or 100% Fair Trade coffee roasters – which are two points I can understand.

    However, from a rural development perspective I _think_ that the same “whole business” dynamic that well-serves farmer co-ops would – when flipped and extended to coffee brands as Fair Trade USA is attempting – would also flip the effect and work against the interests of those same farmer co-ops, while not necessarily delivering much of a ‘solution’ to other, new stakeholders (eg un-organized small farmers or estate workers’). Let me explain.

    The key is leveraging competition among buyers in a way that maximizes the benefits (short & long-term) flowing to those produce coffee. For a farmer co-op it helps (like you described) to have a diversified roster of buyers for the co-op whole crop, with groups of buyers falling into various categories (Fair Trade, Direct Trade, organic, other, etc) with varying needs and interests and abilities to pay good or higher prices. On the margins between these groups the export managers of the co-ops have some ability to play buyers against others who will pay more, or otherwise offer better terms.

    Now, flip that as Fair Trade USA is advocating. Now coffee brands, too, would have a roster of varying Fair Trade certified suppliers. Now they have the same ability, and now they, too, can, I’m supposing, pit the farmer co-ops against the unorganized farmers, & especially against the plantations (who many say will always be able to undercut the co-ops on price for a host of reasons – not all of them fair). “Well, if you don’t want to sell me X containers at Y price, I can get my Fair Trade coffee from a plantation”.

    Could you see that coming to pass?

    • Michael Sheridan says:

      Rodney:

      Thanks for your careful reading of the post and for your good question. Sorry for taking so long to reply.

      You question about the possible adverse impacts of FT4All on established Fair Trade cooperatives and your assumption about its likely impacts on new entrants to the Fair Trade marketplace both raise important issues regarding the measurement of the impact of FT4All.

      Assessing impact.
      In the fourth paragraph, you suggest that FT4All could “work against the interests of…farmer co-ops, while not necessarily delivering much of a ‘solution’ to other, new stakeholders” such as independent smallholder farmers.

      I understand you are not compelled by FT4All’s vision of change, but I think it is important to let the FT4All pilot projects currently in place run their course before reaching any conclusions about the benefits they may or may not deliver to new stakeholders. I also think it is worth giving some thought to the yardstick with which we measure their success.

      You represent a Fair Trade pioneer that has been building fair and direct trading relationships for more than 25 years with some of the world’s most successful coffee cooperatives. Comparing the impacts of FT4All on the independent smallholders who are organizing for the first time to participate in the pilot projects with the benefits of your trading model hardly seems fair. In my mind, the most relevant comparison is between an FT4All pilot participant and a neighbor who is neither a member of a cooperative nor a participant in an FT4All pilot. In the absence of FT4All, the pilot participant is more similar to her neighbor than a cooperative member.

      The best scenario is measuring the changes in the livelihoods of FT4All pilot participants over time. And comparing them to control groups comprised of neighbors who are not participating in the pilots.

      The race to the bottom.
      The scenarios you describe – one in which a price-sensitive buyer of Fair Trade Certified coffee abandons its cooperative trading partners for cheaper certified coffee produced by estates or independent smallholder farmers, and another in which it uses the existence of lower-priced options to negotiate more favorable prices from its cooperative trading partners – seem conceivable to me. Given that FTUSA is off and running with its pilot projects both on estates and among independent smallholder farmers, I think the important thing at this point is to measure the changes in trading patterns among Fair Trade Certified cooperatives. Are their trading patterns and partners changing? Are average price premiums falling? Are they selling less Fair Trade Certified coffee?

      Michael

      • Rodney North says:

        Hi Michael,

        Thank you for the long, thoughtful reply.

        From a rural development analysis perspective I totally get your point (allow me to paraphrase) “Try X. Compare the fate of the participants to those of an appropriate control group and _only then_ pass judgement on whether it succeeded. Then, based on the findings _act accordingly_”. (The added emphasis is mine.)

        A problem with this otherwise reasonable approach is that it is at odds with how I (& maybe many others) think the North American consumer and business-to-business marketplace works. Namely that after the data is in the window to act will have been long closed. All of us, on every side of the debate have been forced into a situation where we have to use the information at hand to make our best guess about how this could play out, including the very real risks involved.

        More specifically, if the Fair Trade For All approach is able to move forward with the pilot projects for plantations and un-organized farmers, and they retain they’re current share of the Fair Trade certification market (let’s say its 95%) then in, say, three years – after the pilots have run their course and there’s enough data to constitute a statistically significant sample, and experts have been able to digest the results – it won’t matter what the findings are.

        Most consumers will still be unaware of this distinction in source (and if some do it will only be because some of us are raising objections). Most importers and food brands using certified products will not care either (an insight into the FT marketplace which I think this blog has helped to reveal). And – critically – those who do care, and whose interests we may come to see are not being served by the pilots – will not be in position to end what has been started. And this is because of the nature of governance at the new Fair Trade USA.

        Meanwhile, the new licensees who FTUSA is today hoping to recruit, say, Cargill, Walmart or Kraft, might find they rather like the flexibility, familiarity and low-cost of these new co-op-free Fair Trade supply chains. Their interests, and the licensing fees they’re contributing, and the still larger fees they stand to contribute down the road, could very well be much more influential in what FTUSA does than whether small farmers, or co-ops, or plantation workers are actually being well served by the new Fair Trade For All approach.

        • Michael Sheridan says:

          Rodney:

          All very good points.

          I would suggest that there are some metrics we could measure with a quicker turnaround to get a sense of whether/how the pilots are working, but that is a fine-grained response. More important is the bigger question you raise: whether impact assessment makes any difference now that the FT4All ship has sailed. Again, the scenario you describe seems possible. My sense is that it since we are in a position to measure carefully and communicate clearly the impacts of FT4All, it is better for us to do so than not do so.

          Michael

  • Rodney North says:

    (I had to end my earlier comment before I was quite done.)

    My larger point was that the ‘whole business solution’ approach creates for farmer co-ops a beneficial kind of competition among potential buyers that can* push prices _upward_.
    (*how often or how much I don’t know. But I think many of your past posts shed some light on this.)

    Conversely, the ‘whole business solution’ for Fair Trade green bean buyers and roasters also creates a competition among potential sellers of coffee, BUT in this case presumably forcing prices (or other contract terms) _downwards_.

    A secondary point – which can probably be pursued at one of your earlier “Fair Trade for All” posts) – is that some of the Fair Trade ‘solutions’ now being offered to some green bean buyers really could be seen just as solutions for them (as in how they can more easily/cheaply source coffee that can be labeled “Fair Trade”) but are not necessarily ‘solutions’ for the growers (as in how can the coffee industry deliver a great net positive impact (and a long-lasting one) for producing communities?

    • Michael Sheridan says:

      Rodney:

      As they say in the British House of Commons: “I refer the right honourable gentleman to the answer I gave some moments ago.”

      In summary, I think you are right to be concerned about downward pressure on prices paid to Fair Trade cooperatives with the entrance of estates and independent smallholder farmers. And I think you may be writing off the potential positive impacts on new entrants too quickly. As I have suggested here in the past, we would like to be involved in efforts to measure rigorously the impacts of FT4All on all the grower stakeholder groups — coops, independent smallholders and estates — and are currently working on a plan to do that.

      Michael

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