In June, I participated in Food Security Solutions, a four-day affair convened by a coffee importer (Sustainable Harvest), underwritten by a coffee roaster (Green Mountain), attended by smallholder coffee farmers and dedicated to something other than coffee – reducing hunger in the coffeelands. The event revolved around hands-on workshops in beekeeping, gardening, mushroom farming and organic fertilizer production. It had little coffee-specific content and was not designed to conduct coffee-related negotiations. But if the experience of one CRS partner organization is any indication, this kind of non-coffee activity can have a big influence on how farmers bring their coffee to market.
More than 20 representatives from 11 farmer organizations participating in the CRS CAFE Livelihoods project took part in the food security event. Going in, one of these organizations was seeking buyers for some new coffees it will have to offer for the first time in 2010-2011. When we met over dinner one night to discuss what the group wanted to do with those coffees, the conversation was nested in the context of the event where we had gathered.
Members of the organization discussed the uniqueness of the Sustainable Harvest business model. The group had never heard of another importer offering value-added services like four-day hands-on workshops that address the (non-coffee) challenges to smallholder farmer livelihoods. They talked about the vision and generosity of a roaster like Green Mountain that would be willing to underwrite such an event, which had so little to do with coffee but so much to do with the quality of life among the smallholder farmers who grow it. The next day, the group offered all of its new coffee to Sustainable Harvest and explicitly asked Sustainable Harvest to try to place some with Green Mountain.
In this case, it seems that the organization incorporated social criteria into a commercial decision. In a competitive marketplace where negotiations tend to revolve around price, quality and volume, social investment at origin that responds to the needs of smallholder farmers can be an important source of differentiation, even especially when it responds to needs outside the coffee chain.
Interesting piece. I think what you witnessed at this workshop is an important shift from, broadly speaking, a buyers market towards a seller’s market. In the past, small holder organizations competed to become ”preferred suppliers’ to buyers by demonstrating their capacity to offer high quality products at competitive prices. Buyers responded by playing organizations off against one another and seeking to buy the highest possible quality at the lowest possible price point. Discussions about sustainability and livelihoods rarely, if ever, came into the discussion.
Fast-forward to the post 2008 food crisis world and looming climate change and you see an emerging shift underway. Powerful buyers of critical commodities are now far less sure of being able to source the commodities their businesses depend on that they were a decade or so ago as a low-price point. This situation is clear in cocoa (see the recent noise around traders trying to corner the world cocoa market) but even more so as we move from basic, commodity products towards what might be called higher-end or specialty products.
Small-holder coffee is a great case in point. Specialty coffee, much of which comes from smallholder producers, is one of the fastest growing niches in the US coffee market and one where inherent product quality leads to direct product differentiation and price differentials. But this growth niche depends on a relatively small supply of specialty coffee that is not growing at anything near the rate of demand . Hence some people in the coffee community see a looming supply crunch. If your business model depends on selling relatively higher quality coffee to a discerning public, you may well have a problem.
As a result, the tables are beginning to turn and we see buyers moving towards a more holistic position — like offering non-coffee related training that directly supports farmer livelihoods or developing long-term relationships with co-investment — as a way to become preferred buyers. Are the days of preferred suppliers over? Probably not, but there seems to be a clear move towards more integrated and holistic business models that seek to guarantee access to high quality coffee and, in turn, offer a better deal to farmers.
I will finish by saying that I don’t think that either Sustainable Harvest or GMCR went into the event with this goal in mind. Nonetheless, the lesson should be clear to any business that depends on high quality agricultural products for its business: a better relationship with your producers that goes far beyond buying and selling is an important tool for keeping your business healthy towards the future.
Wow. Thanks for the very thoughtful comment and bringing some analytical rigor to my anecdote. Also, I think you managed for synthesizing in one tight paragraph the point I tried to make — perhaps less successfully! — in four:
That was precisely the BIG IDEA I was trying to get across. Thanks!
The BIG IDEA you introduce into the conversation puts the Food Security Solutions anecdote in the broader context of what you call “an important shift from, broadly speaking, a buyers market towards a seller’s market.” In general terms, and based on what I have seen and heard in the industry, I would say I agree with you. Increasingly, issues like hunger and climate change are moving from the margins to the mainstream of the industry. They are being gradually reconceptualized as investments in a company’s core business model rather than Corporate Social Responsibility activities precisely because they are less and less a luxury and more and more necessary for companies to access to great smallholder coffees. (A recent conversation with Ben Corey-Moran of Thanksgiving Coffee illustrates this point well, I think.)
This reality does shift some real market power away from buyers toward sellers. Right now, with coffee prices at record highs and showing no signs of falling off anytime soon, it may be hard to distinguish some of the momentary pressures for social investments from the ones that represent underlying structural shifts. But I agree that even when prices fall off, much of this investment will stick.
Finally, for me, it is somehow important to distinguish between companies whose supply projections have pulled them into the direction of more “social” investment and those that have made social investment a part of their business models from the outset. Sustainable Harvest, for example, was created as a social enterprise that built reinvestment at origin into its model from the outset. The pioneering Fair Trade organizations like Equal Exchange and Cooperative Coffees have based their models on a holisitic vision of direct sourcing and responsiveness to issues that go way beyond the price and quality of coffee. Perhaps this is an academic distinction or my own personal hang-up, but it is my sense from years of working with smallholder farmer organizations that they place special value in their relationships with companies that have accompanied them from the beginning and began to do so with an explicit developmental agenda.
In the end, the key point for the broader industry — and the countless millions of smallholder farmers not fortunate enough to be in relationships with pioneering companies like these — may be that these companies will have shown a viable way forward for others who may be coming to these issues for different reasons.
Thanks again for the great comment, Mark.
What an exciting time to be working with coffee producers! The above-mentioned transformation of the past few years (from a buyer’s market to a seller’s market) is especially obvious in specialty coffee, but it is increasingly apparent that everyone is coming to terms with a new reality – did you notice that earlier this week, JM Smucker raised prices by a whopping nine percent?
Michael, I respect your distinction between companies that treat social responsibility as a department or a box to check on a scoresheet and those, like the ones you mentioned, that live and breathe social responsibility. I greatly admire folks like Sustainable Harvest and Equal Exchange, and I give a lot of credit for the success of their companies’ long-term relationships with coffee growers to their deep-seeded, philosophical commitments to justice in trade. No doubt, these great companies will continue to benefit from the value that they bring to partnering coffee communities outside of the coffee trade that initially connected buyer and seller. I also believe that a seller’s market will bring more parity to ALL coffee-trading relationships and I hope that eventually, we all (buyers, sellers, consumers, growers, importers, etc.) approach the negotiating table on equal terms. I can’t help but wonder if those terms will make value-add projects and programs more relevant, as you suggest, or less relevant. I like to imagine that someday, Counter Culture’s purchasing relationship with a farmer co-op in Peru will be like a coffee shop’s purchasing relationship with Counter Culture, or like my purchasing relationship with a tomato grower at the local farmer’s market: a mutually beneficial partnership, based on shared values, driven not by a sense of moral obligation or dependence but rather by each party’s belief that this trade is our best option. Here’s another way of explaining what I mean: can you imagine if Counter Culture announced a price increase and a coffee shop said, “Well, we can’t really afford to pay you ten dollars a pound wholesale, but we’ll make a contribution to your health insurance program or teach you how to raise chickens at your roasting facility.” Actually, on one hand, I think that would be great! My partner, Kieran, makes leather goods for a living and it’s inspiring to watch him trade shoes and wallets for everything from vegetables to website-design services. On the other hand, I think that most people would balk at the idea. The same idea goes for the grower at market, whom I would expect to finance a new tractor by raising the price of her tomatoes, not by putting a collection jar on the table. This vision might be a little more free-market utopian than anything we’ll see during our lifetimes (maybe ever), but at least the market is moving in the right direction to encourage that kind of change.
As a believer and strong proponent of fair trade ( and I include direct trade and relationship-based trading under that umbrella) I wonder whether we have gotten consumers too attached to the idea that fair trade is the goal, as opposed to the means to an end. Not that we ever misled them, but we did oversimplify things and as the balance of power continues to shift from buyers to sellers, we buyers have our work cut out for us in explaining to customers that coffee is getting more expensive not because growers need our help but rather because they DON’T need us – they’re empowered, educated and in control of a valuable product. It’s awesome! And to return to the initial point, it puts the power in the hands of growers to tell buyers what is valuable to them, whether it’s higher prices, social programs, pre-financing or something that we, on this side of things, have never imagined.
Thanks for another thoughtful comment. I love your example of the tomato grower at your local farmer’s market, which led me to a deeper reflection on this issue (which is the point of posting comments to a blog, after all).
Initially, I thought it did sound awfully silly that a tomato farmer would put out a donation jar to collect enough money to buy a tractor rather than seeking to generate that investment capital through her core business of selling tomatoes. As I reflect on it further, however, I think there may be limitations to this analogy as it is applied to the coffeelands, and still a compelling case to be made for investments in activities that go beyond the core business.
In this context, there may be some limitations to the strategy you propose – raising prices to capitalize the business. The most important one seems to be that there is a limit to degree to which a farmer can raise her prices and still have a customer base! By all means, farmers can earn higher prices for their coffee through investments in improved quality. I know Counter Culture invests in this function and we do, too, in our work here. In the end, however, and notwithstanding the extraordinary cases in which a farmer may earn as much as $12.55 a pound at auction for a small lot of coffee, there is a limit to the return on investment in quality. Farmers can’t raise their prices indefinitely because the market for the $9 cup of coffee is finite.
The other thing that strikes me is that the ability of the tomato grower to raise prices depends not only on her ability to differentiate her product on the basis of quality but also on her ability to reach the kinds of economies of scale she might achieve with a tractor. In other words, she can’t invest in the tractor because she hasn’t got the money, but her best way of earning the money is to buy a tractor. In both cases – your tomato grower and the coffee farmer – a commercial loan would seem the most appropriate option. And in fact, some farmer organizations have used loans to invest in the kinds of post-harvest infrastructure that can help generate higher returns on coffee. Many, however, have not had access to such loans.
Finally, the singularity of purpose of the tomato grower example isn’t perhaps the best reflection, as you know, of the reality here on the ground, where there are usually multiple and simultaneous needs for investment at the farm and cooperative level, many of which are critical to securing stable smallholder livelihoods but not the kinds activities that are generally financed.
In the end, I think the investment needs to be in “core business” activities – tomato and coffee growing and harvesting – and in “social” activities beyond the core business.
And while I don’t necessarily think this kind of investment will become less relevant over time, I sure do hope it becomes less remarkable!
Thanks again for your thought-provoking comment, Kim!
Like you, I believe in balancing core and social missions and I see many coffee-buying companies I love and admire searching for a way to provide value to coffee producers simultaneously through price and value-add services. What I am less sure of, however, is the role the social mission plays in selling coffee to consumers.
This may be a topic for another blot post or discussion, but I am stuck on the $9 cup of coffee. Sure, there is a limit to the amount that a farmer or a retailer can raise selling prices, whether for tomatoes or for coffee, but when you refer to a finite market for the $9 cup of coffee, are you suggesting that we are nearing that point? I believe that we’re only beginning to explore the upper reaches of price differentiation to the consumer and that farmers will continue to benefit from increasing consumer awareness of specialty coffee and rising demand. Also, as opposed to jumping to nine dollars, let’s talk about the market for a three-dollar cup: three dollars is very different from nine dollars and yet still represents a 30-50% increase over what most shops charge per cup for great coffee.
Returning to tomatoes (I don’t have a tomato fetish, I swear! it’s just the season here and a useful, if imperfect, analogy), the price of supermarket tomatoes is artificially low and the market for a $7 heirloom tomato is undoubtedly a limited market, but the knowledge that in-season, heirloom-variety farmer’s market tomatoes taste better than their supermarket counterparts seems to bridge race, geography and socioeconomic class. Folks won’t always choose the heirloom (which doesn’t cost $7, I’m exaggerating), but they understand they’re choosing an inferior product in the supermarket tomato. I don’t think most coffee consumers understand their coffee purchases that way. Yet!
If (and increasingly, when) coffee growers have direct access to coffee consumers, what strategies do they use to sell their product? In my experience, coffee growers are, again, not so different from tomato growers in that taste is always drives the way they marketing of their own product. My heirloom-tomato grower gets to make personal connections at the farmer’s market and he might explain his need for a tractor to the consumer, but he is always, always selling his product based on taste. Unfortunately, coffee growers typically do not have direct access to their market and hence, responsibility for amplifying the market for the $3 cup of coffee lies with the roaster and the retailer. And when we intermediaries rely too heavily on the language of programs and social development, we run the risk (and we run it for the whole supply chain) of $3-a-cup coffee being conflated with charity as opposed to reflecting a new economic reality.
I’ve drifted away from where I began, but I wonder what you think: is the market for quality too limited, or unstable to provide long-term benefit to growers without some sort of value added outside the coffee price?
Greetings from San Salvador and thanks sticking with this conversation.
In keeping with the journalistic principle of the “inverted pyramid” – big stuff on top, narrow in as you move down, and finish up with the fine details – I will try to respond first to what I see as your most important questions.
I think that investing in quality improvements may be too limited on its own as a livelihood strategy for smallholder coffee farmers.
There is no question in my mind that quality improvements – when rewarded with corresponding price premiums – are providing long-term benefits to growers. Our own strategy here in the field reflects this belief – we are investing in helping farmers improve quality precisely because we believe it is generating real benefits for farming families. I didn’t mean to call that into question. What I meant to suggest is that even at the $3-per-cup price point you mention (more on that below), increased coffee revenues may not be enough to ensure that farm families meet their basic needs, to say nothing of achieving a continual increase in their living standards. That is why we are also working to identify ways smallholder farmers might invest in other, non-coffee activities, and highlighting here the innovative ways that industry actors are doing the same.
The social mission becomes relevant to selling coffee to consumers, in my mind, when a roaster’s ability to source coffee depends on social investment.
When would this happen? When the prices paid to farmer organizations are not sufficient to ensure the ability of roasters to source the quantity and/or quality of coffee that the market demands. At origin, there are perennial downward pressures on both the volume and quality of smallholder coffee, and these have only intensified now that prices are at historic highs and showing no signs of falling anytime soon.
This is where the reference to the $9 cup of coffee comes in. There are only so many consumers willing to pay that much for a memorable cup of coffee. In other words, the ability of a roaster or café to raise prices is limited. At a certain point – and I don’t have a good handle on where this magic point is – cafés just can’t charge their customers any more. In turn, roasters can’t pay their farmers any more. At this point, non-coffee investments – or “social mission” as you put it – seem like a good direction to pursue. Roasters can continue to offer high-quality coffee to consumers and farmers can get the investment they need to keep the good stuff coming.
I do think there is some stability for the $3 cup of coffee, but I don’t know that it is enough on its own for smallholder famers and their families to thrive. (I actually paid $3 or more for your lovely Michicha natural this summer at both Peregrine Espresso and Spro Coffee!)
I mentioned the $9 cup because it was the highest-ticket item I saw on any café menu during my recent travels in the States, and to stake out what you call the “upper reaches of price differentiation.” I agree that we are only beginning to explore those altitudes. What seems less clear is whether there will be enough space in that rarefied air for us as a development agency to make access to that segment a primary strategy in our work with smallholder farmers.
At this point in the evolution of the market for differentiated coffees, a $3 cup quality level may be feasible for smallholder farmer organizations, which tend to be undercapitalized and less able to make the kinds of investments necessary to ascend to more stratospheric levels of quality and price. But even at this price level, many smallholder farmers with only a few hectares of coffee would not be able to rely only on coffee revenues and would continue to seek what you call “value added outside the coffee price.”
Thanks, Kim! Somehow I suspect this conversation will continue!
Just want to let you, and your great correspondents, know how beneficial all your posts, like this incredible one, is to non-specialists like myself who have the job of integrating a nuanced discussion on Fair Trade into our teaching. Although I don’t have much to add, I read everything here and learn a lot. Thanks for your blog and for everything you and your colleagues do.
Great to hear from you, despite your baseball loyalties. (Mine lie at the other end of the Turnpike — We Are Fam-i-ly!) Thanks so much for the very kind words — I am glad to know you are finding the blog helpful as you continue to engage Cabrini students, faculty and staff around sustainable trade issues. It is particularly gratifying to hear you use the word “nuanced” in connection with the content of this blog. It seems that all too often it is precisely the nuance that seems to be missing from a lot of the messaging in the marketplace around sustainable trade and its impacts at origin. Good to know you are finding some here.
Looking forward to seeing you and your students on your next visit to Guatemala.