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A Napa valley vineyard – a glimpse into the future of coffee farming?

2015-07-06 Comments

(I’m interrupting my series on investment in farms for a few posts on current topics)

I’m currently in Northern California visiting family for the week and happened to have a serendipitous encounter with the CEO of a mid-size winery in the Napa Valley while camping with friends.  This winery is probably a label that Ric Rhinehart (President of the SCAA and known wine connoisseur) would recognize.  I’ll call this gentlemen “Tom”.

This conversation was really interesting and inspirational in the sense that it showed what can be possible farming a high value crop. There are a lot of things that the coffee industry can still learn from the wine industry, not just on the retail or sensory side of things, but also on the farm.

My conversation with Tom focused on the vineyard side of things – how they manage the vineyard and how this reflects the value of the end product, the grapes that are the starting point for great wine. Given the informal setting and the impromptu nature of this conversation, I’m going to sum up some of the interesting points that we talked about and reflect how that might apply to coffee farms.

Above all, given the vertically integrated nature of the wine business, there is a deep understanding that quality comes from the vineyard and that no amount of winemaking will turn mediocre grapes into an amazing wine.  Quality grapes are those that are slightly water stressed and will be picked only when they achieve optimum ripeness for the wine, based upon the amount of sugar in the fruit. The vineyard, which is over 500 acres with 9 varietals, is managed in dozens of small blocks, depending on the varietal/clone/rootstock combination, the condition of the soil and the microclimate of each block.  Each of these blocks gets managed on an individual basis. Tom was especially proud of the relationship that the vineyard has with the farm workers.  110 full time employees work on the vineyard and take advantage of the 5 acre organic garden that is planted onsite and he told me that last month someone retired after 37 years working on the vineyard.  To this label and for Tom, sustainability is this tripartite relationship between the workers, the land and the crop and is evidenced by the 130 years of history of growing grapes on this site.

The quality that comes from this type of management is known and compensated for – an average ton of cabernet sauvignon grapes grown in Napa sold for $5,930 during last years’ harvest, compared to a CA statewide average for red wine grapes of $840 a ton.  That’s a 7X price premium over the average cabernet.  At 69,000 tons of the 510,000 of the cabernet grapes produced just in California, these premium grapes represent 14% of the total.

Over several glasses of wine (Tom’s and others), we nerded out on the farm management of the vineyard and the current challenges facing small coffee farmers. The interesting points I’ve summarized here.

Managing at a granular level  – The unit of management in the vineyard was the block, which represents a unique combination of genetic and environmental conditions and therefore required specific management. In Central America, I see farmers managing on a parcel level.  A parcel is usually defined geographically, not on a genetic nor environmental basis. The coffee that comes from a farm tends to be a field blend – a farmer will not separate their harvest by varietals (there is no incentive to do so).  In a vineyard, the varietals are separated and managed differently Most management is done with a view to productivity and not towards quality.  Which brings us to…

Quality vs. Productivity trade off  –  This is really at the heart of what Caturra vs. Castillo is about and about the other discussions of newer, rust resistant varieties.  Farmers are predominantly compensated on a weight or volume basis and have very little conception of what quality is to their end user.  We are just beginning to compensate for it, through microlots, quality premiums and the like.

Quality premiums –  The current quality premiums aren’t nearly to the level that Napa sees for their grapes. Let’s take Guatemala as our example.  Guatemala produced nearly 3.5 million 60-kg bags of coffee in 2014-2015. Napa cabernet was 16% of the total California cabernet production – it was the –super-premium. Sixteen percent of 3.5 million puts us at half a million bags, more or less.  If we assume an average price of $1.50 last year, a Napa like premium on these half million bags would be $10.50 a lb. Which is about the average price of the top 25 coffees in last years CoE for Guatemala – a total of ~430 bags.

Innovations and applied research –  Looking at the GxExM framework at a vineyard shows how much research, innovation and technology is available to make decisions.  Grapes are also another crop with a vary narrow genetic base, and who have suffered through devastating diseases as a result of this (Phylloxera, Pierce’s disease).  The response has been to graft rootstocks that are more resistant and more research into breeding.  For the “E” – there is so much more data available to a grape grower on environmental conditions, than that for a coffee grower.  As Tom mentioned – he manages for water and knows fairly well what the requirement for each block is and what they have received so far.  Which gets us to M.  I think the biggest difference is that the management leads towards a defined idea of quality, which is at odds with production.  You don’t want a really fecund vine, with lots of fruit and leaves.  Well watered and fertilized grapes do not make the best wines.

The bottom line is that every decision on the farm is linked to the quality of the final product.  There are clear financial incentives to do so.  For a coffee farmer, the incentives for quality aren’t quite as strong and not as clear. It isn’t new news – Michael brought this up last year, and Paul and our colleagues are trying to link coffeeland watersheds, the downstream users and how to create market incentives for farmers to adopt practices that promote increases in the quality and quantity of water downstream.  However, when we look at the precision management of Napa valley vineyard and the focus on quality, it shows us what management tied to market and quality incentives looks like and gives us a model to improve upon.

 

Kraig Kraft

6 Comments

  • Mark Lundy says:

    Nice article, Kraig. I’d like to share a story that shows how the vineyard concepts have been applied to coffee in Colombia.

    When CIAT started working on the interplay between GxExM in coffee several years ago in the Department of Cauca, Colombia we found exactly the same situation you describe in Central America: mixed lots of different cultivars, no differentiated management and no real understanding of what quality means to the roaster and end consumer. On top of this the coffee sector was in a prolonged period of low-prices.

    Despite these challenges we received a call from an economist, let’s call him Juan, who wanted to get into coffee production. Juan had access to land and was interested in exploring how different varietals performed at relatively high altitude (1800 to 2100 meters). Juan managed to access 26 varietals which he planted as a varietal garden with small numbers of each and waited. When the first harvest arrived, Juan harvested each varietal separately and sent them to buyers asking them which they preferred. Based on those answers he planted out lots with individual varieties and set up varietal specific management and harvesting / post harvesting plans.

    Long story short, 15 years later Juan receives a significant premium for individual varietal lots and has replicated the model on other farms in Colombia and beyond. One of his recent offerings sold for US$ 30 for 150g of coffee (US$ 90 a pound). Compare that today’s price for coffee in Colombia (US$ 1.25 / lb).

    The wine model can work well in coffee. It is profitable. The challenge is developing the tools and approaches in ways that can be applied not only by the well-resourced and connected Juan’s of the coffeelands but by small producers and their associations. This is something CIAT hopes to explore in more detail with the Borderlands project in Nariño and should perhaps be the focus on a new blog post…

    • KK says:

      Hi Mark.
      Thanks as always for your comment and willingness to engage in a discussion.

      I am aware of a small number of sophisticated, well capitalized producers who are able to apply a number of lessons adapted from the wine model and reap the rewards. In my experience, the majority of producers in Central America are no way near this level of sophistication.

      I’d love to have a more in-depth discussion about the tools and techniques. Perhaps some of it can make it up here on the blog.

  • Thanks for the article Craig.

    I think that the wine analogy is interesting and for sure there is always going to be a place for farmers to produce better coffees that get marketed uniquely, allowing farmgate prices to get pushed upwards.

    When you look at the economics of coffee, it is hard to make the analogy back to wine. You mentioned that the average wine price in California was $840 per ton. If you break that down per pound, an average California grape farmer is going to get payed 42 cents per pound.

    When you compare that to prices that farmers are getting payed for coffee cherry, even top prices in top countries like Kenya and Ethiopia, farmers are getting farmgate prices of (9-14 birr per kilo of cherry in Ethiopia,40-60 shillings in Kenya) 18-31 cents.

    Now, you have to factor in the reality that most of the world farmers are making quite a bit less than Ethiopian and Kenyan farmers, some farmers are making 15 cents or less. Also, most of the world’s coffee is grown by small scale producers who own 1-3 acres. Compare this to the average sized vineyard in California which is well above 50 acres and usually more than 100 acres.

    Also, the labor that goes into specialty coffee is very high compared to grapes. Think about picking for instance. Top grape farmers are pulling grapes cluster by cluster where as top coffee farmers are pulling cherries one by one.

    Also, let us not forget that if a farmer is lucky enough to have land above 1500 Meters and decides to make a go at something really specialty like Geisha or Sidra or SL28, he will have to pull out his plants and wait for 4-5 years before he gets any return. These are farmers who are barely feeding themselves as is. For the average coffee farmer, this is just not possible.

    I appreciate the analogies to wine and surely there is an analogy to be made there but I don’t know many winemakers who are struggling to feed their families…

    The economic situation for the majority of coffee farmers is very much a struggle of scale. A small scale coffee producer simply cannot afford to pull out their coffee for 5 years, even if they have the potential to produce world class, boutique coffees, and that is the minority.

    Only middle class farmers who have financial means would be able to make this leap into anything that resembles an analogy to wine. I think it is good to talk about that, but I am more interested in constructing a paradigm that can address the poverty that exists for the majority of small-holder farmer which is the majority of coffee farmers in the world.

    The only way to do this, is to simply pay more for coffee and figure out how to help farmers increase yields.

    Once we do that, perhaps a farmer can afford to plant some geisha or sl28 but first things first.

    Cheers,
    Caleb Nicholes

    • Kraig Kraft says:

      Hi Caleb.

      Thanks a ton(!) for your comment and your willingness to engage in the discussion. I was trying to make a couple of points – perhaps not so cleanly or clearly. I think for me the biggest one is that if we consider a “specialty” Cabernet – Napa vs. Cabernet from Fresno, the price differential is 700%. For me, the analogous situation in coffee would be a specialty arabica vs. a Brazilian. A 700% premium would mean that the average price for a specialty coffee was $10.50 a lb. This is true for a really small number of coffees – those that are auctioned off on the CoE, which represent less than 1% of the total coffee produced in a country (I think I used Guatemala as my example). In contrast, Napa produces 17% of all the Cabernet grapes in California. There is much more room at the top value range for wine grapes in California than for coffee.

      I agree about the low prices for cherry. At CRS, we are trying to increase the % received by the farmer of the final FOB price. This means we need to focus on quality, and on helping farmers and farmer organizations identify ways to add value to their processing. The emphasis on quality and the link to farm management is another interesting observation from the vineyard. Managing for quality means that the farmers know which varietals produce in their region and of the trade-offs that each have (See Caturra vs. Castillo). Managing for quality means that the farmers understand how to manage their soil and their fertility by adding fertilizers that match the soil deficiencies and are timed to match the plant’s nutrient needs. Managing for quality means that each plot on a small individual basis, based on the exposure, the soil, the varieties planted needs to be managed slightly differently. Managing for quality means that for harvest, each coffee cherry needs to be harvested at the peak of ripeness and promptly processed. I could go on. The bottom line is that there needs to be clear financial incentives for doing all of these practices – I think for a handful of estates, cooperatives and producers who understand this, there are incentives and the result is that they have great direct trade relationships with roasters in the US and they provide excellent coffee. For the majority of the producers in Central America, we are really far from this.

  • Jeff Stern says:

    Kraig, I do not know you but I really enjoy reading your and Michael’s posts. I am in the chocolate and cacao sector, and I took this post as an inspiration for a piece I wrote, as there are many similarities in the sectors. Cacao might be even more challenging than coffee, and here are my thoughts.

    Cocoa is grown worldwide by an estimated 5 million households. Most of these households farm average 3-4 hectares in size, and have limited access to capital, financing, or agricultural inputs. In brief, the vast majority of cocoa producers lack basic inputs and knowledge crucial to improving not only yields, which has been the focus of most cocoa sector assistance, but to improving overall quality and flavor. The challenges facing cacao growers, and ultimately chocolate makers, to bringing fine flavor chocolate into the mainstream, and raising the overall level of quality in the chocolate sector, will require creating a new model for the entire supply chain.

    Managing at the Plot Level – Most cocoa farmers manage by the plot of land they own, however large or small, which is defined geographically. And that plot is often composed of numerous different crops depending on the time of year, what the outlook is for other crops, and what other economic opportunities are available in the community. The decision to grow cacao (or to even farm at all) and how much effort to focus on it specifically is not one made in isolation, but is a complex decision based on a variety of economic factors.

    Only larger, more sophisticated farms might have parcels within their farm that they may manage on a genetic, quality, or environmental basis. The cacao that comes from small farmers tends to be a blend of whatever is out there, and because cacao trees can vary genetically from tree to tree, any management done is generally performed with a view to productivity and not towards quality.

    As such, it is paradoxically the larger, well-financed farms that are mono cropping, that have greater potential to bring to market fine flavor beans. Not only because of better farm management, but because of access to capital, know-how, and international markets. At the same time, those who need financing, technical assistance, and other inputs most – small farmers – are least likely to have access to them.

    Quality vs. Productivity Trade Off – Farmers are predominantly compensated for beans sold on a weight basis and have very little concept of what quality is to their end user. At the farm gate or broker patio, farmers are compensated by weight, with adjustments made based on moisture content of beans and a quick cut test for fermentation in the case of fermented beans. Most farmers seek cash in hand as soon as possible, so are usually less inclined to carefully dedicate time to fermentation and drying because these steps are given little importance and not compensated for.

    Compensating for micro lots through quality premiums is difficult for a number of reasons. First, cacao by nature lends itself to large economies of scale; a micro lot would have to be at least a few hundred pounds because of the economy of scale required for processing. This may be more than a family farm produces on a year basis. Transporting a micro-lot is not cost effective and the lack of transparency in the industry currently makes obtaining micro-lots difficult. Because cacao is frequently sold on to several potential parties, and in most cases consolidated with other beans before being exported, control at a micro-lot level is unheard of. The parties beans might pass through include a) the cooperative or producers’ association-which might sell directly as a single origin bean, though this is usually the exception and not there rule; b) a trader or broker who may again sell on to yet another party; or c) directly to a broker/exporter. Guaranteeing that a specific lot or micro lot of beans had not been adulterated with other (inferior) beans somewhere along the supply chain is nearly impossible.

    Quality premiums – The current quality premiums aren’t nearly at the level seen in other commodities i.e. coffee. We might see quality premiums of anywhere from $500 to $3,000 per ton or occasionally more over world market price. However, the premiums on the higher end are usually commanded by large scale, well-capitalized farms or well organized cooperatives who can export directly. There is no established or recognized market for fine flavor beans, so chocolate makers buying such beans in many cases have to buy directly or through a trusted third party. The bottom line is that most decisions on the farm are not clearly linked to the quality of the final product, as there are few financial incentives to do so and the supply chain is highly dysfunctional.

    Only when the public understands and is willing to support quality chocolate through their pocketbooks by paying more for a chocolate bar, and when the movement of chocolate manufacturers (both large and small, both in fine flavor and mass consumption) pushes for quality over quantity, will a model evolve that focusses on quality from the very beginning, at the farm level. Such a model might look to other industries, such as wine, where precision management starts with the raw materials all the way to the end product.

    • Kraig Kraft says:

      Hi Jeff. Thanks for taking the time to comment. In my role in CRS I support both coffee and cacao projects. I agree with you 100% that cacao is still really far from being managed like a vineyard. There are a number of reasons for this. While there are many industrial applications for coffee, the specialty coffee industry is fairly large when compared to the chocolate equivalent. Aside from Theo, Tcho, Taza, Guittard, Lake Champlain and a handful of other smaller chocolate makers – Mast Brothers, Dandelion, there aren’t too many chocolate makers who buy and grind their own beans. On top of this is that just a handful of the bars produced here really focus on bean-to-bar, where the intrinsic sensorial qualities of the cacao bean can really shine through.

      The bottom line is that in cacao, there are no financial incentives to manage the farm or the product through post harvest any differently. I’d be happy to share with you what CRS is doing in cacao. Feel free to email me.

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