Inequality in the global coffee trade | Blockchain and digital identities
Author: Johannes Ebert (https://twitter.com/aalfraarauscher)
The global coffee value chain is a complex network of people and companies engaged in growing, picking, processing, trading, storing and roasting. Because of the many processing steps involved, your coffee might have changed hands up to 150 times before it arrives in your cup! [1]
All of these players have to excel at their task for you to enjoy a world class morning brew. And all of them need to earn a living. And despite coffee being such an incredibly popular product, this somehow doesn't work out that well. The huge amount of revenue generated from coffee sales isn't very equally distributed along the supply chain.
Source: UNCTAD - Commodities at a glance, No. 10
High demand - low income
Coffee is one of the most highly consumed beverages in the world. Demand for it has been growing steadily for 500 years. Over 2.25 billion cups of coffee are consumed every day all over the globe. These are facebook levels of reach. And there's no end in sight: demand in non-traditional markets like China is expected to double in the next 10 years.
Given this incredible success, it seems crazy that many farmers struggle to make coffee growing a profitable undertaking. In part, this is due to a lack of professionalism in farming practices. Most coffee growers are small-scale farmers, 10 million in Africa alone. That's more than a third of the total number of people employed in the coffee industry world wide. Many of them just "happen to be" farmers, because they inherited a piece of a coffee farm from their parents. But growing coffee is difficult and requires know-how, time, and investment. Without all of this, the end product is of poor quality and will not have the characteristics that allow farmers to sell at a higher price, make a profit, and reinvest.
The root problem however, which prevents this situation from changing, are the market dynamics along the chain. All these millions of farmers sell their coffee to only a handful of buyers. The Top Five international trading companies handle over 40% of the global coffee trade. These big companies can essential dictate the price for green coffee and, given their small number, find agreements to split the market up between them.
Even in countries with regulation that is designed to help farmers, the situation is no different. Kenya, for instance, has a coffee auction through which all Kenyan coffee, apart from a few exceptions, is marketed. The auction mechanism should ensure optimal prices for everyone. However, the big coffee trading companies have sibling companies along the whole supply chain. As a result, the miller who buys the coffee from the farmer is also the marketing agent who brings it to the auction who is also the buyer bidding for it. Since there are only a handful of big buyers, it is easy to make agreements ahead of time on who is going to bid for which lot of coffee. This constellations drives profits for farmers close to zero.
Source: UNCTAD - Commodities at a glance, No. 10
Challenges for farmers - Low margins, delayed payments, and price volatility
According to research from UNCTAD (the UN trade agency) on the value chain for Ethiopian coffee, farmers receive only 2%-3% of the retail price. Note that this is not profit. The costs of growing, harvesting, drying etc have to be deducted from this. In the end, farmers often make no profit at all.
Source: UNCTAD - Commodities at a glance, No. 10
Another thing that this chart doesn't show, is that farmers have to wait for several months after the harvest before they receive their payment. For any business, delayed payments are a strain on the cash flow, preventing investment and making it difficult to sustain livelihoods. For small scale farmers that do not have a lot of liquidity to begin with, this is an even bigger challenge.
And to make everything just a little more complicated, prices for green coffee move a lot. Between 2011 and 2017 alone, the benchmark price for Arabica coffee at the New York Coffee Exchange fluctuated between $3.0 per pound and $1.0 per pound.
For the big coffee buying companies, this is a nuisance. However, they employ financial experts that help them hedge against these price movements by buying future contracts and other financial instruments.
For farmers, this is a completely different story. Most small scale farmers don't understand the dynamics and reasons behind these price fluctuations (which might be an overproduction in Brazil or Colombia). All they know is that they bring their coffee somewhere, and three months later, when the payments finally arrive, they get a third of what they expected (and maybe less than what they invested).
And there's no one to explain the reasons. We asked the director of a co-operative in Kenya what they tell their members when prices plummet. "We just tell them it will go up again next year"
It takes five years before a new coffee plant produces yield, and a lot of effort and investment before and after, to keep it alive and strong for many years. Inputs are expensive. It's hard to find precise numbers on the cost of production for farmers but they likely range between $0.9 and $1.5 per pound. Making this kind of investment in your small farm if you can't be sure whether the price is going to be $3.0 per pound or $1.0 per pound the next year is understandably a difficult decision.
It doesn't come as a surprise then that small-scale growers around the world neglect investments and good practices or abandon their farms altogether because they can't make ends meet.
It's a detrimental cycle that does get the even the coffee buyers worried. If farmers can't afford enough fertiliser, the quality reduces, the yield reduces, and the demand for the stuff that's selling - specialty and organic coffee - might soon not be satisfied anymore. In Kenya's main coffee growing region, on the slopes of Mt Kenya, a majority of coffee trees are up to 30 years old and need to be replaced. However, the market dynamics never created the incentives to make this investment. Many farmers in the region are their way out.
Source: UNCTAD - Commodities at a glance, No. 10
Solutions
In the end, there is only one thing that will reverse this trend. Farmers have to consistently earn margins that incentivise them to stay in the business and invest to improve on quality and sustainability. There are many things to be done in order to achieve this, some of which require action from big industry leading companies and governments.
But brands can do better, too. This is why we created insidecoffee.com, a coffee brand that pushes the envelope on transparency, creates value in the country of origin, and rebalances the value chain in favour of the farmers.
Transparency
At insidecoffee.com we believe in the power of you, the consumer. Most of us want to consume responsibly, but aren't provided enough reliable information about the origin and profit distribution of our products. This is why we are giving everyone in the supply chain a voice to reliably record this information themselves. And we bring all this information to you at your fingertips with a beautiful digital twin for every bag of coffee that you can access through a QR code. This way, we are empowering you to make the right decision.
Value
Insidecoffee is roasted in Kenya, supporting local jobs and incomes and capturing a much higher share of revenues at the origin. In addition, it is often more economical. Instead of hauling green beans several times around the world, the roasted coffee is directly shipped from the source to the retail outlet.
Transfer
Insidecoffee allows you to convert the loyalty points you earn with every package into a tip for the farmer. This tip allows us to increase the farmers revenues by more than 30%.