Spilling the Beans on the Coffee Supply Chain

Spilling the Beans on the Coffee Supply Chain

Coffee has been a popular drink for centuries, yet supply chain challenges—fragmented production, commodity market instability, climate change—continue to brew.

Each day, more than 60 percent of Americans—about 200 million people—enjoy one cup or more of joe, the National Coffee Association (NCA) reports. In the 12 months that ended September 2016, individuals across the globe consumed more than 150 million 60-kilogram bags of coffee, according to the International Coffee Organization.

Coffee has been a popular drink for centuries, yet its supply chain faces ongoing and emerging challenges. Production is fragmented and most often occurs in remote and developing areas, coffee prices are vulnerable to swings in the commodity market, and climate change threatens many of the world’s coffee-growing regions.

The coffee bean actually is the seed of the red-colored fruit, often referred to as a cherry, of the coffee plant. The fruit is typically harvested by hand, and the seeds or beans removed, dried, processed, and milled. Most beans come from the “bean belt,” or the countries that straddle the Equator, running between latitudes 25 degrees north and 30 degrees south, according to the NCA.

Coffee beans don’t require refrigeration and don’t rapidly spoil, but exposure to moisture can cause mold and degradation. Ideally, the beans start their export journey within several weeks after being processed and milled, says Ted Stachura, director of coffee with Equator Coffees & Teas, a coffee roaster and retailer based in San Rafael, California. However, it often takes longer.

Most roasters in the United States work through green coffee importers, who provide numerous services, including logistics and financing, says Al Liu, vice president of coffee with Colectivo Coffee, a Milwaukee-based roaster, wholesaler, and retailer.

Exporters typically sell FOB, or freight on board. Payment is made once the importer receives the shipping documents, even though the coffee has just left the exporting country. It may not arrive at the importer for another one to three months.

Even many large roasters lack the time and resources to manage the chain of financial transactions. Importers act as the “wizard behind the curtain,” Liu says. They monitor the coffee’s movement and manage risk. For instance, an importer will work with the producer or exporter if a specialty coffee’s quality is lower than it should be.

While the demand for coffee continues to grow, the coffee supply chain faces inherent challenges. Many coffee farmers live in developing countries, often in remote areas, says Colleen Popkin, senior manager of sustainability with specialty coffee company Keurig Green Mountain. Most work just one or two hectares (about 2.471 acres) of land. No one-size-fits-all solution can help ensure production remains sustainable for the millions of coffee farmers.

Because coffee is farmed once each year in most countries, farmers are challenged to manage cash flow. Some rely on other crops for food and additional income.

Viable Supply Chain

Keurig and other coffee companies have taken steps to establish a viable coffee supply chain that benefits all involved. Keurig, for instance, has funded Blue Harvest, an initiative coordinated by Catholic Relief Services that trains farmers on water-smart agricultural practices. This helps improve yields and promote sustainable infrastructure.

When Sustainable Harvest started operations in 1997, concepts such as fair trade, sustainability, and transparency were almost nonexistent in the coffee supply chain. “Today, they’re standard,” says Jorge Cuevas, chief coffee officer with the Portland, Oregon-based coffee importer and B corporation.

One reason may be the increased focus on quality. In the 1990s, the quality of fair trade coffee often lagged behind other types, Stachura says. It has since improved.

At the same time, fair trade hasn’t always helped coffee farmers to the degree many hoped it would. A 2014 report by Harvard researchers, The Impacts of Fair Trade Certification: Evidence From Coffee Producers in Costa Rica, found that while fair trade certification was associated with increased incomes of a small group of skilled coffee growers and farm owners, other workers in coffee production saw no income gains from fair trade certification.

One solution? “More coffee roasters are forging direct relationships with farmers,” says Thaleon Tremain, CEO of Pachamama Coffee Cooperative. “Farmers are posting on Instagram and communicating directly with consumers.”

More than 140,000 coffee farmers in Peru, Guatemala, Nicaragua, Mexico, and Ethiopia own and govern California-based Pachamama, the first global coffee cooperative owned and governed by coffee farmers in Latin America and Africa, Tremain says.

The farmers in these relationships typically are larger and possess solid English language and communication skills. In return, “they can make more money per pound sold,” Stachura says.

Roasters benefit by gaining access to outstanding coffees. “You get unique coffees no other roaster has,” he adds.

Moreover, many consumers want some confidence the coffee they’re drinking was derived from sustainable, ethical sourcing practices. “If you’re able to show legitimacy, consumers will support you,” Cuevas says.

Still, removing the middlemen remains a daunting business strategy. Producers must build relationships with numerous roasters, each of which may buy only 10 or 20 bags at a time. “It’s as much work as selling 10 containers,” Stachura says.

It also adds work for the exporter, Liu says. A 20-foot shipping container holds between 275 and 320 bags of coffee beans; the exact number depends on the country of origin, as different countries have different bag weights. A micro-lot of coffee from one farmer can consist of just a handful of bags. The exporter must ensure they remain separate.

Importers also must commit to this business model. Sustainable Harvest imports specialty-grade coffees from more than 15 countries. To forge closer connections between farmers and consumers, its staff works from locations in the United States, and Central and South America. Employees train co-op leaders and farmers on optimal agricultural practices, risk management, and other functions.

For instance, Sustainable Harvest helped train women coffee growers in Rwanda on the methods needed to prepare coffee for North American markets, Cuevas says. The Sustainable Harvest Premium Sharing Rewards program enables farmers to earn points for attending training sessions and implementing the skills they learn. They can use the points to acquire tools or other items, such as mobile phones. Roasters return part of the value-added price they get from roasting or retailing the coffee to the program, helping to fund it.

These efforts aren’t charity, “but true economics,” Cuevas points out. “At the same time, we have to understand how to lend a hand to move the tail winds in the right direction.”

Efforts to build a sustainable supply chain can benefit all involved. In the aftermath of the 2012 and 2013 outbreak of Roya disease, also known as coffee rust, which damaged production in many countries, several characteristics were common to the families that were able to replant their farms and stay on their land, Popkin says. To start, many had diversified income sources.

The farmers also belonged to strong organizations that offered information and access to credit, allowing them to feed their families and replant their crops. “Sometimes you get through challenges by improving and focusing on coffee, and sometimes you get through challenges by making sure you have a portfolio of products and a diversified income stream,” Popkin says.

Is This Enough?

Some still question whether such efforts go far enough to ensure all members of the supply chain, and particularly producers, benefit equitably. On average, coffee farmers are paid at or below the cost of production, Tremain says, citing ICO statistics. “Roasters and retailers continue to reap the lion’s share of the coffee value chain,” he says. “This is unsustainable.”

To counter this, Pachamama created a vertically integrated supply chain. When customers buy roasted coffee from Pachamama, they’re buying directly from farmers. According to a 2015 financial snapshot provided by Pachamama, farmer members were paid $3.08, or 26 percent of the retail price, for each pound of coffee.

In addition, all profits from coffee sales are returned to the farmers as dividends or retained earnings. In 2015, this amounted to $6.34 per pound. “Farmers are guaranteed a good price and a distribution channel that they control,” Tremain says. “This allows them to invest in the future and to continue producing high-quality coffee for a long time.”

Conversely, farmers in the conventional market receive about 15 to 20 percent of the retail price.

Climate Change

One looming challenge to the coffee supply chain is climate change. While U.S. policymakers continue to debate the causes and potential impact of climate change, a number of coffee industry experts have acknowledged its likely effect on coffee production.

On its website, for example, coffee giant Starbucks states, “The potential impact of climate change on farming communities is a key reason addressing our environmental impact is a priority for Starbucks.”

“Without strong action to reduce emissions, climate change is projected to cut the global area suitable for coffee production by as much as 50 percent by 2050,” states The Climate Institute in its 2016 report, A Brewing Storm: The Climate Change Risks to Coffee. Production likely will move farther up mountainsides, where it risks battling with other land uses, including forests, the report notes.

Based in Sydney, Australia, The Climate Institute encourages progressive policies for managing climate change in Australia. In late June 2017, its funds and intellectual property transferred to The Australia Institute.

The report identifies several crop adaptation strategies, such as developing more resilient production systems, diversifying crops, and shifting plantations upslope. It notes, however, that the global trend is toward intensification, as producers try to boost yields. “Ultimately, climate change is likely to push many producers out of coffee altogether,” the report says.

Many involved in the supply chain are working to avoid that. “We think of coffee farmers and our supply chains as partners,” Popkin says. “We need to understand the challenges they face, and how we can share in that risk and in the solutions.”

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