Hugh and I are in the Netherlands, where we are getting ready to participate in the Sustainable Food Lab Summit, a meeting that gathers together different stakeholders in supply chains and facilitates a great discussion about finding solutions to ensure the future of our global supply chains. It is against this backdrop that I start to process the news that Blue Bottle just raised $70 million dollars in venture capital. This is after Philz Coffee raised $15 million and just 18 months after Blue Bottle secured $24 million dollars injection of venture capital funding. I think that this is great news for the specialty coffee industry as a whole and I salute Blue Bottle, James Freeman, Philz and the other retail leaders of specialty coffee for their vision and for elevating the coffee experience for the public. I’m looking forward to watching (and drinking!) the continued innovations. However, I long for the day when we can publicize and get excited about multi-million dollar direct investments into farmers and farmer organizations at the base of our supply chains. Not loans or donations or grants, but investment, with an expectation that returns can be made through investing in farms and farmers.
Unequal investment flows into opposite sides of the supply chain are intrinsically linked to a recent report the World Bank released a few weeks ago that caught my attention and has taken me a while to digest. Entitled Risk and finance in the coffee sector – this 140 page study takes a look at the myriad of challenges that a coffee farmer and farmer organizations face through the lens of risk and risk management, and how this ultimately determines the access to finance.
The authors of the report have constructed a very compelling argument. Put simply, the study argues that the inability of the farmer and of farmer organizations to properly address and manage risk limits their access to loans and other financial products, whereas the firms and businesses working on the retail end of the sector have less exposure to risk, understand how manage it better, and therefore receive financial support from banks, hedge funds and venture capital and others.
Yet, there is an inherent contradiction here. The segment of the coffee supply chain that needs investment the most and the one that receives it the least also happens to be the most vulnerable (just look here. And here. And here…). So the question is, how we help create the conditions so that we foment and develop opportunities for investment at the base of the supply chain? How can we invest the next $70 million dollars into the foundations of our supply chain?
And to understand how far that $70 million would go, let’s do a quick back-of-the-envelope calculation. Let’s take El Salvador – the Central American country that has been hit the hardest by roya and having the hardest time coming out of the crisis. Assuming a renovation cost of $4,000 per manzana (0.7 hectare) would mean that $70 million would fund the renovation of 17,500 manzanas. Considering that the entire amount of land dedicated to coffee production in El Salvador is approximately 218,000 manzanas means that the most recent injection of venture capital 218,000 manzanas, it would be enough to fund the renovation of about 8% of coffee from El Salvador. It is estimated that 60% of the parque cafetalera needs to be renovated, or approximately 130,000 manzanas. Using our estimated renovation cost, this would be a $520 million investment to ensure the future of coffee in El Salvador. For perspective, Root Capital has $100 million in active loans this year across the globe. It is not enough at the moment.
I’m hoping to engage with innovators in this area to help me understand and to explore ideas on how we can make a collective effort to work towards creating environments at origin that are attractive for investment. Specifically, what are new ways we can share and or transfer risk from farmers?
I hope to share some ideas with all of you in future posts.
“$520 million investment to ensure the future of coffee in El Salvador.”
I don’t think you can claim that – renovation would only take care of roya, but farmers are exposed to a slew of other risks. If they have to borrow to the hilt to renovate, they could be worse off if they subsequently get hit by a period of low prices and drought for instance.
Nice post, Kraig. Thanks for raising the issues. I think that Peter is right when he says that renovation alone is not enough. In addition to renovation, access to instruments to effectively manage price risk in terms of market volatility is a huge issue. Some industry leaders have worked successfully on this with positive results but the effective use of price hedges and the like is still far too uncommon among coffee producer organizations and completely unheard of among less organized farmers.
The other issue to tackle at the production end of the chain to reduce risk is diversification. Normally we talk about crop diversification which is a good strategy for production risks (e.g. roya) but this may be somewhat outdated. Recent data coming out of Latin America show an increasing level of connectivity between rural and urban spaces so we might better focus on income diversification at the household level (e.g. on and off-farm income streams) to reduce exposure to volatile coffee prices.
Finally, the 800 pound gorilla in the room continues to be the use of NYC ‘C’ prices as a reference point for specialty coffee. More effort needs to be invested in actually costing out what is feasible to pay to producers for quality. Quite simply specialty coffee in terms of consumer willingness to pay has very little relation to commodity coffee but yet we still reference the NYC price as valid. If roasters want long-term producer partners, more innovation is needed in terms of business models that deliver value all along the value chain and not just at the retail end.
Thank you for the post, and I applaud your focus on the farmers. The replies are also very correct. However, we need to consider that the cost of renewing a coffee farm in El Salvador ($4000/mz), is based on outdated technology and practices, and I have visited farms that have renewed their plantations at less than half that cost by incorporating relatively unsophisticated technology and a heavy dose of rational use of resources. So not only do we need to look at Peter and Mark´s comments, but also at practices at the farm level. A newly begun USDA-NCBA project is working to promote these practices, but it will require a paradigm shift for many farmers and, perhaps more difficult, agronomists.
Thanks for your reply. When I was last in El Salvador, many folks were talking about this “new” renovation technique, yet upon further probing, were reluctant to take us to farms that were using them. I’d love to see it first hand.
Hi Peter and Mark.
Thanks for the taking the time to comment on the post.
I absolutely agree with both of you – it will take more than just renovation to save El Salvador’s coffee industry. The exercise was more about showing how far the 70 million would go and what is needed to renovate the estimated 60% of the parque cafetalera in El Salvador that is in dire need of renovation.
And the point here is to not just look for loans to finance this work – but innovative forms in which we can attract private investment as well. I’m hoping to talk more about some new ideas on investing in renovation – not just loans.
Mark – I agree with this. In the World Bank report, they identified 3 types of risks that farmers face: Production, Enabling Environment and Market. I think CRS has focused on providing resilience through improved soil and water management and we’re learning from what others have done for market segment.
Just curious why rule of law, political instability/volatility and the drug war are not mentioned as risk factors. If we’re talking about attracting foreign investors, aren’t these key considerations? You can renovate, but if laws and governments are changing and corruption is rampant as well as loss of labor to more lucrative work on cartel crops….this doesn’t make potential investors super excited to jump in. I’m fascinated with this conversation and want to learn more. Micro-finance is in motion to empower women producers. That I’m aware of, but to attract larger investment, or traditional investors…just seems like there’s a long way to go…