BRINGING VALUE TO YOUR COFFEE

AS CONSUMERS, most of us are used to thinking that the prices we pay for the things that we buy are well correlated with their value. We expect to pay more for quality products, for example, because we believe that they are more valuable and cost more to produce.
     Notwithstanding “perceived value,” or value based solely on designer-brand marketing, the general value/quality relationship fails when we consider commodity products, such as fuel, milk, wheat and pork bellies. The prices of these basic products vary with supply and demand and generally have little or nothing to do with value/quality or the cost of production. This is a very serious problem for most of the world’s coffee growers, particularly smallholders, because unfortunately coffee is a commodity just like pork bellies.
     Anymore, it is nearly impossible to consider the value of coffee without exploring how this value is also related to quality and certifications, such as Utz Kapeh, bird-friendly, fair trade and organic. The time is ripe to address how much of the value of coffee ends up as money in the hands of the farmers that grow and produce it.
     In the aggregate, this is a discussion about sustainability. In the words of the United Nations World Commission on Environmental Development, it is a discussion about “meeting the needs of the present generation without compromising the ability of future generations to meet their needs.” For coffee to be sustainable for smallholders, at least some of it must be differentiated from the commodities market. Quality is the most conservative, time-tested method of differentiating a product, and quality is closely tied to value and sustainability.

The Economics of Coffee

Did you know that coffee as a commodity is second only to oil? Is oil sustainable? Not a chance. But coffee could be, if we all worked together to find ways to sell some of it outside of the commodities market for stable prices that more accurately reflect its quality, value and cost of production. With attention to coffee quality and non-commodity markets, coffee could become the world’s largest sustainable commodity.
     To be sustainable, coffee producers need to de-commodify a portion of their harvest, or in some way differentiate it from the commodity product. For smallholders, reliance on coffee prices that are pegged to the NY Commodities Market is the road to poverty, not sustainability. Certifications help, but certifications alone are not the solution. Consider the following: the commodity market price is derived through a world wide auction system that is only loosely tied to quality and has no relationship to the cost of production in any one country; prices are often lower than the cost of production. Small-holders in Mexico and Central America (where the cost of production is relatively high) simply cannot withstand commodity market lows. Premiums for certifications help, but they do not solve the problem because they always ride atop of the commodities price and in low markets, the producer still loses money. Commodities prices are not related to the true value of the product as measured by its quality and cost of production. What is needed is a non-commodity market that rewards quality; the producer seeks value for value and more stable prices.
     Even though certifications help, they are not a panacea, because the costs to certify coffee can contribute to the problem. Producers always need to exercise care when considering the investment to certify their coffee.
     Lawrence Pratt, the director of El Centro de Inteligencia de Mercados Sostenibles, a part of the INCAE Business School in Costa Rica, gave a presentation at Sintercafe 2005 on just this topic. In this presentation, Pratt maintained that although there is growth in the purchases of all certified coffees, there is presently considerably more certified coffee than is purchased.
     Conrad Hilton, founder of the Hilton hotel chain, was a great promoter of international relations. In his autobiography, Be My Guest, he points out that a fair price negotiation is not possible unless both parties know the value of the item being sold. The buyer and the seller then arrive at a fair price that is related to the value of the product. The problem is that what is a “fair” price in a commodities market is not generally fair to individual producers in the face of international competition because the value of the commodity is based on its availability and not its quality or cost of production. The big guys have systems to deal with this. Smallholders, who incidentally hold the keys to environmental sustainability, do not.
     Thus, to raise the value of coffee and differentiate it from the commodities market, it is necessary to focus on a conservative, historically proven method: raising quality. History has amply demonstrated that quality is one of the best differentiators.
     Interestingly, this point was also made by Pratt in his 2005 Sintercafe presentation. Through quality, a coffee producer is able to sell his product at a fixed, high price that is independent of the commodity market. Certifications do not offer this opportunity as they yield premiums that ride atop the roller coaster of commodities prices. Pratt shows that quality alone can stabilize prices for producers.
     Since quality drives price stability, it is critical for sustainability that each producer knows how to evaluate his coffee and improve it. Each producer should be able to select out the best of his coffees and reserve them for customers who are willing to pay what they are worth. Coffee roasters who are dedicated to sustainability have figured this out; they know that it is quality, not just certifications, that best nourishes and sustains their own business, and they seek out and buy the best coffee possible.
     In my experience as a seller of green coffee, many roasters talk the talk, but not enough walk the walk, no matter how it is justified. If you are a coffee roaster and you bought excellent quality coffee at commodity prices without a premium, chances are fairly good that you took advantage of someone, somewhere, even if you did it inadvertently.

Strategies for Sustainability

In the context of this discussion, any strategy that helps growers consistently avoid bankruptcy is good. We have shown above that differentiated coffees can help; coffees differentiated by certifications bring premiums that ride atop commodities prices, and coffees differentiated by quality can bring fixed, high prices.
     Strategies that combine a measure of vertical integration with a differentiated product can help even more. Consider a coffee grower such as Don Benjamin Ocampo, in Xalisco, Nayarit, Mexico. Ocampo has a 100-percent vertically integrated business. He grows, harvests, processes, and roasts the coffee, and sells it roasted whole-bean and ground. He controls the costs at each stage of the business, he selects his highest-quality coffees for his best customers, and sets his prices to ensure a modest profit; his business is sustainable. And his business is essentially disconnected from the commodities market.
     Bill McAlpin of Costa Rica’s Café La Minita, is a well-known example of someone who has benefited from combining quality and vertical integration. McAlpin carefully selects his very best coffee, which represents only a portion of the harvest, and sells most of it to a base of loyal customers for prices that are not related to the commodities. It helps that he also owns a roastery in the U.S.
     Café Britt’s Steve Aronson is another example from Costa Rica. Aronson selects his best coffee, roasts it in Costa Rica and sells his roasted product all over the world. He too enjoys a measure of insulation from commodities pricing, and has built a sustainable business by differentiating his coffee and vertically integrating.
     Although this strategy for sustainability clearly works when production is controlled by a single entity, it has been shown that under certain conditions it can also work when applied to multiple cooperatives of smallholders in Mexico, and it is bringing sustainability to over 500 coffee growers whose combined farms cover about 1,600 acres (about two and a half square miles) of shade-grown coffee in the state of Nayarit.

Putting Theory to Practice: The “Malinal” Model

Cafés Sustentables de Mexico (SCM), a coffee quality control company, and the Integradora de Cafes Sustentables de Nayarit, along with San Cristobal Coffee Importers (SCCI), work together to emulate the vertically integrated sustainable models of the single-entity enterprises mentioned above. For the past 10 years this group has used quality to consistently get growers more than they would have gotten with any certification, particularly in times of market lows, when avoiding losses is critically difficult for smallholders.
     The group acts as a team; a single vertically integrated organization. From top to bottom the team members are dedicated customers who want a more stable and consistent supply of coffee: the integradoras (organizations of cooperatives of growers), CSM, which acts as the fiscal control agent, and SCCI, the buyer and importer.
     Working together allows a number of things to happen:

The importer and the quality control agent work with local educational institutions to formally educate the growers on critical coffee evaluation and improvement

     Financing for the harvest is critical. The growers need money to bring the harvest to the market. The fruit must be harvested, processed and sold before they earn anything for their work. In the first years of this program, the importer financed the harvest with help from banks in the U.S. and a local bank in Mexico. Last year, aided by the success of the program, the growers were able to get their own line of credit from Ecologic Finance. The growers were amazed that through their good track record, level of organization and focus on quality, they were able to obtain third-party financing from outside of the country.
     Buying all of the coffee is another essential commitment. Too often growers work hard and invest their life’s savings to become certified only to be told that just 10 percent of their coffee will be bought with a certification premium and the rest must be sold into the commodity market. In my experience, this is common with fair-trade certification. It is essential to buy all of the coffee, show the growers how to select it for quality and help them to find the best home for all of it. This quality-focused and integrated group has clearly shown that this approach gets far more money directly to the growers.
     Immediate premiums for quality fruit are another critical component of the business. Often the only way to attract small holders and help them to organize is with premiums. Every grower believes that his coffee is the best in the world. It is essential to show him how coffee is evaluated and why we are paying premiums for quality fruit. After growers are attracted by higher prices, it is possible to get them organized to the point where they have the political will and the financial means to become certified.
     The establishment of quality control and tracking systems is crucial. It is not easy to produce consistently excellent coffee and there is a general lack of specific education in the rural coffee sector. It was necessary to establish quality control and tracking systems in conjunction with educational programs offered through the auspices of a local University, Universidad Autónoma de Nayarit (UAN). The educational programs were focused on quality assurance and quality improvement. Growers are taught how to critically evaluate their coffee with an eye towards improvement and selection for quality.

 

Coffee Quality Management and Certification Schools

 

Most of us agree that it is very important to get more money into small agrarian communities as quickly as possible, and to help these communities with environmental protection, thus sustainability. This means that it is urgent to teach small coffee growers and producers how to critically evaluate their coffee so that they can know its value and how to improve it.
     One of the ways this is happening is through educational programs for coffee producers. In one such program, an importer and a quality control company signed an agreement with the State University, Universidad Autónoma de Nayarit (UAN), to jointly teach a 250-hour coffee quality management class. The university provides the classroom and faculty to teach the agronomic aspects of coffee production. The importer and the quality control company jointly teach coffee evaluation techniques using the quality control company’s PortaCafe laboratories which are set up in the classroom to provide professional laboratory capability. The course is taught two days a week over a four month period, and coffee is cupped at every class. By the end of the course there is a well-calibrated team of cuppers who are ready to contribute their skills to the next harvest.
     The Coffee Quality Institute (CQI) helped the group start the course by sending Ed Canty, a Coffee Corps volunteer from Green Mountain Coffee Roasters, to help initiate the cupping program in 2004. I am a member of the SCAA’s Technical Standards Committee and an SCAA certified Cupping Judge; I provide continued guidance for the course and help to maintain focus on accepted international quality standards. Coffee is always evaluated using SCAA/CQI standards and the graduates are well prepared for CQI’s rigorous Q-Grader examination.
     The course emphasizes all of the steps necessary to take a coffee cherry from the farm to the cup. A good coffee evaluator must understand all of the steps and have the ability to perform them manually.
     The students are shown that part of managing quality is the maintenance of good records and they are given the tools necessary to track the coffee through all stages of production from the farm to the bags ready for export. Quality control is primarily procedural; cupping training is important but is only a fraction of what is necessary to manage quality. The students are taught that the critical evaluation of the coffee combined with adequate record keeping is the route to continuous improvement and certification. The students are given example “dos” and “don’ts” taken from the group’s real-world experience evaluating, blending, tracking and exporting coffee for the last four years in bags with barcodes and serial numbers.
     The group has offered the Coffee Quality Management course to growers in Nayarit for the past three years and there are now a total of 37 diplomados. This year for the first time we added “re-certification” to our program. Re-certification of qualified diplomados is kind of like a “check ride.” Licensed pilots must periodically demonstrate proficiency with a “check ride” or they are not allowed to fly. We are now offering check rides to our diplomados. The diplomados must pass an intense two-day testing program that demonstrates they still have the knowledge and skill to grade coffee and differentiate coffees by cup characteristics.
     Nayarit is ready for the emerging era of e-commerce in premium coffees.

 

In Summary

 

Coffee as a commodity is the road to poverty for coffee growers, even in the presence of valuable certifications. It is essential that we work together to find ways to help growers raise the value of their product by raising its quality and to find non-commodity markets for their highest quality products. It is also very important for roasters and consumers to show that they appreciate this value by rewarding value with adequate prices.
     The program in Mexico has clearly demonstrated that this strategy can help stabilize prices paid to the growers and raise significantly the total amount they receive for their product, over and above any premiums for certifications. This strategy keeps the growers from losing money and encourages them to maintain the traditional poly-cultures that are so essential to the well being of the environment, and which are the key to sustainability.
     Let’s work together to make coffee sustainable for smallholders by putting the “special” back into specialty coffee!

 

JAMES KOSALOS is the owner of San Cristobal Coffee Importers, with headquarters in Kirkland, Wash., which he operates with the help of his associate and wife, Devorah Zeitlin. For the past nine years he has been using his scientific background to work with producers in the State of Nayarit.