How specialty coffee inspires new agriculture niches with fairer prices

It is one of the cruelest ironies that farmers in developing countries suffer poverty and hunger more than their city-dwelling counterparts. After all, farmers control the production of food – a precious and increasingly scarce good. They are also relatively efficient at doing so, with higher land productivity than industrial operations. How can it be then that those who work to put food on our tables, can barely do so for their own?

One reason is that world food prices are becoming increasingly governed by globalized commodity markets. These have a troubling tendency to be highly erratic, answering not just to changes in supply and demand, but to the whims of financial speculators. For the farmer, this means not knowing the value of the next crop, making it difficult to make decisions on planting, harvesting, and household spending. When prices swing low (as they inevitably do), farmers are forced to sell everything for rock-bottom prices, leaving the pantry low on food and the bank (or the mattress) low on cash.

This was not the way it was supposed to be. After all, farmers have spent that past century learning to dramatically increase output, largely due to new high yield, disease-resistant seeds that swept across the world in the so-called “Green Revolution”. Crops steadily took on a more standard look, feel and taste, allowing farmers to more easily aggregate them into national and international markets. One would think that rising food production and growing global trade would have muted supply swings and calmed price volatility. Unfortunately, this has not been the case, thanks to a sudden interest in financial derivatives.

Party crashers

For most of human history, the agriculture trade was about buying and selling actual goods, be it a bushel of wheat or pork belly. But since the 1970s, the increasing sophistication of technology and financial markets changed the game.  “Futures contracts”, which until that point were simple agreements to fix prices for goods at certain time in the future, suddenly became widely traded, with no intention of physically taking delivery of the goods they represented. The new players in this market included hedge funds, pension funds, and investment banks who used these commodity futures to diversify risk from other financial investments. As trading became more computerized, even the smallest price differences could be quickly exploited for financial gain. According to the World Development Movement, 61% of investment on wheat futures market were made by purely financial players. Goldman Sachs, the largest player in the agricultural commodities market, earned ￡600m from food speculation in 2009. This activity has exacerbated the price fluctuations that are already getting worse from increasingly frequent climate shocks.

Unfortunately, the main losers from price volatility are those who can least afford it – smallholder farmers across the developing world. For them, international markets can often push prices precariously close or under the cost of production.

Fortunately, not all food has become a commodity. Where more variety is appreciated, it’s harder to force the market to choose a single reference price to bet against. Many vegetables, like tomatoes, still have enough varieties to escape futures trading. Processed products also become too complex to price in bulk, even if its ingredients are commodities (think of bread or beer). So, how can we (re)introduce more varieties and quality to roll back the influence of commodity markets on farmers?

In caffeine we trust

The budding specialty coffee industry may provide some clues. First popularized in the Middle East in the 15th century, coffee gained popularity across Europe over the following centuries and was soon grown from Java to Brazil. In the 20th century, Folgers and Maxwell House popularized coffee across the United States as a standard breakfast drink, dramatically increasing demand. Heavily roasted to standardize the taste, traders and consumers paid little attention to bean quality. As a commodity, producers simply focused on volume and scale to drive earnings.

Over the last 25 years, a new approach to coffee has been emerging. Companies like Starbucks created a new appreciation for coffee, complete with welcoming cafés and exotic preparation methods. More recently, a new “third wave” of coffee shops is educating customers on different plant varieties, geographies, altitudes and a host of other variables to find distinct flavours for the consumer. In order to satisfy this new thirst for distinct coffees, the entire supply chain is having to enter into one-on-one negotiation with local farmers to secure small batches, or “micro-lots”. Coffee, you might say, is beginning to look a lot more like wine.

It starts with the cost, not the price

Azahar, a coffee exporter and retailer based in Colombia, is a great example of this business model. The company’s quality team is fully dedicated to tasting hundreds of coffees on a monthly basis, painstakingly noting characteristics of flavours, aromas, acidity and more. It then suggests certain coffees to international buyers, based on their profiles. The buyers then negotiate prices with Azahar in close consultation with individual farmers and their cooperatives. The price negotiation is built up beginning with the farmer’s cost, and then adding value for the quality and uniqueness of the coffees. This is fundamentally different than the “premium” approach used by certification schemes like Rainforest Alliance, Fairtrade and others, which use the commodity price as a reference. Since 2012, coffee farmers in Azahar programs have earned stable prices anywhere from 20-100% higher than the bulk market.

The work of specialty coffee traders, buyers and consumers is allowing product to escape the confines of the commodity market, safe from futures trading and global market distortions. While currently a mere 5% of the entire coffee trade, specialty coffee is expected to make up 30% of the market within the next decade.

Not all products will escape “commoditization”, but specialty coffee provides an example we can use to evaluate other candidates. First, how can we help customers recognize unique and appetizing characteristics? Second, how can we provide access to these products? To achieve this, traders will need to take more risks to deliver alternate varieties. Retailers will need to take more care to educate customers. Under this approach, there are advances in single origin cocoa, new strains of quinoa and exotic fruits, however more effort is needed to seek out alternatives to the standard foods we have become over-accustomed to. We could not be in a better era to push this agenda. After all, we live in a world of unprecedented last mile logistics, supply chain tracking and consumer access to information. We have a responsibility to use these tools to evolve the system to both feed the planet and ensure farmer welfare. The hand that feeds cannot be bitten forever.

Photo credit: Daily Coffee News (2015/07/21) "Specialty coffees place on the new global food frontier"