BACK ISSUE

PONDERING THE PATH
TO SUSTAINABLE PREMIUMS

Buying on the Road
Less Traveled

ON THE EVE of the 2007 Rwanda Golden Cup competition in Butare, Rwanda, 18 international jurors assembled to meet and prepare for a week of cupping the country’s finest coffees. Not surprisingly, the discussion focused on the amazing and meteoric rise of Rwanda’s specialty coffee industry and the underlying factors which propelled it.
     From the vantage point of those of us who watched a coffee transformation improve the economic livelihoods of tens of thousands of coffee farmers, the answer lay in the abiding commitment of a host of specialty coffee roasters. By offering quality-based incentives and assisting in the development of communities and organizations, coffee buyers worked in concert with dedicated farmers to improve coffee quality to a level that could sustain them. The benefits to farmers came by way of hefty premiums paid on the basis of quality.
     Among this group of specialty coffee importers and exemplary roasters, this presented the logical sustainable solution to increasing competitiveness and reducing dependency among coffee farmers. The Fair-trade coffee model was then introduced for comparison. After a long, heated discussion that involved many solutions, one question was left unanswered: Among the channels available to producers to differentiate their coffee (specialty, geographic indications or appellations, organic, Fair-trade and other certifications) how does coffee differentiated on the basis of the Fair-trade model best operate as a useful strategy to combat poverty for high-quality producers?
     A recent experience had puzzled me personally as I mediated a hefty certification fee to FLO-CERT on behalf of a Fair-trade cooperative in Rwanda. With just over two containers of coffee production in 2007, proceeds from the sale of its coffee did not cover the cooperative’s annual Fair-trade certification fee. Monthly invoices from the certifier led to a “third reminder” in which FLO-CERT stated they “would be forced to take legal measures,” which presumably meant the withdrawal of the cooperative’s certification. With no reserves to pay, the cooperative enlisted support from one of its buyers, a relationship roaster who purchases half of the cooperative’s annual coffee production. In addition, this roaster supports the cooperative’s community development, accumulating $1 from every pound of roasted coffee sold to make its annual contribution. From this reserve, the $3,460 certification fee was paid and the cooperative’s Fair-trade certification kept intact.
     On the surface, this case naturally raised doubts about the relative benefits of Fair-trade coffee where monetary costs for certification appear so high. After all, the costs of producing high-quality coffees in Rwanda amounts to extra time and diligence on the part of coffee farmers to carefully pick and sort the coffee beans, but in one of the most densely populated countries in Africa, this cost is easily absorbed among the many smallholder farmers who grow coffee. Still, there were questions that loomed larger in defining a realistic approach to this dilemma.
     Speaking recently about the exponential “growth of quality coffee segments as more affluent markets upgrade,” World Bank consultant Daniele Giovannucci provided assurance that “there is plenty of room for further differentiation.” However, his caveat that “not everyone can produce quality” was followed by his estimate that “the entire market for differentiated coffees (including specialty and certified) is still only 10 percent of the global green bean exports.”
     The question that seems to need an answer is how to incorporate differentiated segments of the specialty coffee marketplace in order to maximize a coffee producer’s potential for premiums and meet the needs of buyers. For those of us who inform the design of coffee development projects, it is a subject worthy of deeper exploration. Maybe with more clarity we could command broader agreement within the coffee industry and together collaborate on providing profitable and sustainable business solutions to coffee farmers.

Relationship Coffee Model

Borne out of the belief that fostering closer and direct linkages with buyers and roasters would put producers in a better position to meet demands of the specialty coffee marketplace, the relationship coffee model continues to evolve. In specialty coffee origins across the globe there are increasing numbers of roasters working in partnership with the producers of their coffee. Roasters committed to this model offer growers:

• Technical assistance and development of infrastructure to advance quality

• Well-defined incentives to produce better-tasting coffees

• Reliable economic security over the long term

• Support to effect changes toward environmentally sustainable methods of producing and processing coffee

• A system of transparency so that all actors in the supply chain (from grower to consumer) have access to the same information and can make informed decisions

According to Geoff Watts, director of coffee for Intelligentsia Coffee Roasters and Tea, companies desiring high-quality coffee become engaged directly with producers because they know that ultimately “quality goals cannot be met unless the producer is engaged. It’s pretty clear cut the producer holds the key to quality green coffee and must be made a stakeholder in the process.”
     An early pioneer of this model, Sustainable Harvest lives up to its name through its Relationship Coffee Program. Engaged predominantly with Fair-trade-certified cooperatives, participating roasters are guided by the Sustainable Harvest principles of transparency, training, traceability and trade credit in their business relationships with farmers to reach exceptional standards of coffee quality.
     While an expensive proposition for roasters, increasing numbers of those who make quality a top priority are regularly traveling to origins to identify exceptional coffees, working with growers to improve quality to their customers standards and paying a premium in the process. According to Jason Long, managing partner at Café Imports, “The number of roasters seeking exceptional quality coffees from us is growing. When the roasters start paying higher prices for coffee based on the cup, not just the grade or certification, the farmers develop a personal sense of pride in their work.”
     Serving as the bridge between exemplary roasters and producers of high-quality coffees is the Alliance for Coffee Excellence (ACE) Cup of Excellence competitions and auctions. Since its inception in 1999, the Cup of Excellence program has steadily expanded and will make its Africa debut in Rwanda in 2008. Each competition comprises a large international jury of cuppers and “even if they don’t buy the coffees,” Cup of Excellence director Susie Spindler observes, “they join juries to discover exemplary coffees.” For the growers the competition offers an opportunity to be recognized for producing quality coffee and, according to Spindler, is a compelling “incentive and goal to shoot for.” Indeed, according to the 2006 report by McKinsey & Co. measuring the impact of the Cup of Excellence in Nicaragua for its first five years, the program has not only been a motivator for quality improvements in that country and greatly improved the reputation of Nicaragua specialty coffee, but it has helped strengthen and deepen relationships between buyers and sellers.
     When asked about the long-term benefits and reach of specialty coffee auctions, Giovannucci agrees that the, “Cup of Excellence has provided a great springboard for the industry. With other efforts joining in, particularly the Q system, now it seems that the upper tier will expand and be better recognized. It serves not only producers to know what quality is and what is possible but also an increasingly fascinated consumer that wants more.”

Differentiation

In the scheme of each individual coffee cooperative or business, there is broad agreement among roasters that the goal of improving or maintaining quality is essential. Put simply by Steve Leach, Diedrich Coffee vice president, “In order to be sustainable there has to be a quality component.”
     However, in the context of the total coffee enterprise, whether co-op or private, SCAA Executive Director Ric Rhinehart concedes, “There are tiers of quality—it’s just a reality.” With that reality come the choices to allocate varying levels of quality to their respective markets.
     From exemplary coffee at one end to the commercial grade coffee at the other, the priority for coffee producers wanting the best possible return for their coffee is to explore options at each tier. In the context of this analysis comes the sometimes fuzzy reality that there is no implied quality for Fair-trade coffee and it in no way certifies quality.
     However, Leach echoes a view held by many specialty coffee roasters when he asserts that “even though you may support Fair-trade for its social justice, you have a right to expect a certain degree of quality.”
     Café Imports has found one way to reconcile these themes in their relationship with a Fair-trade certified Peruvian cooperative. For the past five years, all of the co-op’s coffee grown above 1,200 meters has been purchased by Café Imports. Production at the co-op has increased each year, and today Café Imports purchases a total of 12 containers. Working in partnership to create a cupping criterion for higher-quality coffee a micro-lot project was recently instituted. For coffees that meet the quality standards of the project a significant premium is paid by Café Imports above the Fair-trade price. While the micro-lot coffees constitute a small percentage of the total coffee purchase, the quality premium presents a strong incentive.
     At the same time, Long is realistic about the volatile nature of coffee markets and feels more confident about the cooperative’s future because of its Fair-trade certification. “It is an insurance policy—I think the stability from the Fair-trade floor can provide longer term stability to Fair-trade producers.”
     This view is also shared by Rick Peyser, director of social advocacy and coffee community outreach at Green Mountain Coffee who admits that “in our current market it is easy to forget… but there is no question that at some point coffee prices will plummet… Think of fair-trade as a safety net.”
     Weighing in on the same theme is Giovannucci, who reminds us that coffee “prices are like a roller coaster, so that when that cyclical price occurs Fair-trade producers are in a much better position.” He goes on to make the point that “we sometimes overlook that buyers benefit as well. They are more likely to get a constant supply and a more consistent quality when (with Fair-trade support of infrastructure improvements) producers have money to make long-term investments in their production.” And he underscores, “consistency is likely to be just as important to develop sound long-term relationships.”

Holistic Approach

In Rwanda, as part of the USAID initiative Sustaining Partnerships to Enhance Rural Enterprise and Agribusiness Development (SPREAD), attention has been focused on creating a comprehensive market-driven approach to satisfying the varying demands of coffee markets. Through a process of product differentiation, fully washed coffees from both cooperatives and private coffee enterprise undergo evaluation for the purpose of differentiating coffee into four distinct categories: Exceptional or exemplary, specialty, fine commercial or premium and basic commercial. This system of differentiation recognizes that each coffee operation produces a range of quality profiles. And farmers are able to maximize their revenue potential when they match those coffee quality distinctions to the coffee buyers catering to the precise markets those quality categories represent.
     In this scheme there has also been a systematic approach to Fair-trade certification of cooperatives. Many such co-ops in Rwanda are aligned with relationship roasters or importers whose priority is quality. For coffees that fall below the quality standards of exemplary roasters the cooperative is in a favorable position to sell its coffee to a variety of specialty buyers of Fair-trade coffees. Here, Watts suggests that “Fair trade can probably make a big impact if it is adopted by large commercial companies who traditionally buy coffee in bulk and at market or below.” And, as the chart “Premiums of Certified Coffee Vary” (pg. 29) shows, premiums are indeed greatest at these levels.
     At the center of discussion about the relative merits of coffee premiums is the reality of marketplace demand. For those of us engaged in creating sustainable coffee development plans, the marketplace serves as a critical guide. Despite high certification costs to producers, contradictions in the relative return of fair-trade coffee sold and the simplistic high quality guarantee contained in Fair-trade advertising which alienate some specialty coffee roasters, Judith Ganes, commodities specialist, J. Ganes Consulting, is quick to remind us that “customers are actively seeking out the purchase of Fair-trade and other certified coffees and the market for this continues to grow.” And with this growth is the undeniable reality that, as expressed by Al Liu, director of relationship development at Atlas Imports, “Fair-trade is a globally recognized system, as a third-party unbiased presence providing reassurance to the consumer that certified coffees are produced under favorable conditions to farmers.”

The Way Forward

The overriding goal for coffee farmers, in partnership with governments, NGOs, universities, certifiers and coffee buyers is to take into account the many factors that distinguish coffee-producing countries, and the enterprises and cooperatives within them. Then, through the process of differentiating the qualities of coffees produced at the farm level, a sound sustainable business approach to profitable marketing can be defined.
     Mechanisms to achieve this goal are not mutually exclusive. When applied appropriately, direct purchasing between relationship roasters and producers, along with fair trade and other variations of these models, has the potential to connect producers to coffee buyers in a beneficial manner.
     Whether it’s an exemplary roaster invested in a buying relationship with a producer, a premium roaster committed to Fair-trade or a large commercial roaster who devises a fair trade scheme based on sustainable principles but offering greater flexibility, the essential relationship is between the farmer who produces the coffee for the consumers who drink it. The mission for those of us in the middle should be to transparently advocate for both.

ANNE OTTAWAY is a specialty coffee marketing and communications consultant to the USAID/SPREAD Project in Rwanda.