Farmer Profitability: Managing Risk in the Supply Chain

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By David Piza

Currently, 80 percent of the world’s coffee–specialty and otherwise–is produced by only 25 million smallholder farmers. The average age of these farmers is 56 years old. As the younger generation sees less and less to attract them to coffee farming, and more and more to attract them to the big city—it is this very human factor that poses the greatest risk to our supply chain. Many factors influence the decision: to farm or not to farm? Let’s take a look deeper look at a few of them.

Screen Shot 2015-08-04 at 11.15.05 AMSmallholder profitability: Let’s picture the situation of an average smallholder with two hectares of land, an average yield of 2,032 lbs of green coffee per hectare, receiving a bit less than 90 percent of the export price (approx. $1.68/lb). The annual gross income of this coffee grower would be approximately $6,814, or $568 per month to support a family of four or five people. As noted by a recent study done by La Mision Cafetera, many Colombian producers face high costs of production, with the national average price close to $1.40/lb. Inputs like fertilizers/agrochemicals and labor account for about 15 percent and 58 percent of those costs, respectively. Higher farming costs eliminate farmers’ profits. Those costs can account for about two-thirds of the farm gate price, leaving the grower with a net income of $2,340, or $195 per month. These calculations are not taking into account the value of the labor provided by the family.

For that paltry return, how can we as an industry expect the grower to invest in the farm, pay workers properly, provide benefits and suitable labor conditions, send children to school, and take care of the environment? Increasing productivity and reducing the cost of production must be immediate goals in order to encourage profitable and truly sustainable small coffee enterprises.

Aging rural population and youth migration to cities: As stated in a recent Technoserve report, in Colombia the average farm size has been diminishing due to a combination of demographic and economic factors, including inheritance traditions. Again, let’s imagine that a rural family with three hectares of land has two or three children to inherit the property. This will lead to splitting the farm into ever-smaller production units that have an ever-harder time being economically viable.

But not many families are able to retain their children on their farms. Youngsters are continually overwhelmed with massive amounts of information via technology and social media, making migration to the cities look like the way to a “better future.” Many young rural adults grew up in food-insecure families, and may equate coffee with poverty and hardship. Migration to more profitable and appealing industries is an increasing trend as emerging nations grow and transition from agriculture to manufacturing and service-based economies.

If those patterns continue, who will grow the coffee we all love 15 years from now? According to the report, “the youth are more likely to adopt new farming practices and technology and manage the farm more as a business,”[1] providing a unique opportunity for coffee to prosper along with them—but only if they take on the job to begin with. Therefore, coffee has to be an economically appealing and dignified profession that provides development opportunities for young women and men in rural communities, both on a personal and professional level.

Insufficient access to finance: Lack of access to formal credit for inputs and pre-harvest activities with commercial banks has led producers to commit their crops in advance to unscrupulous middlemen who charge them high interest rates and force them to deliver their coffee. Those coffees might not even be paid for at market price, and often times do not receive any economic premium for quality.

Absence of sufficient financial resources threatens the long-term viability of the farmers in many ways. Growers need the working capital to make the necessary investments in tree renovation, processing infrastructure, and production inputs that could allow them to reach optimal output, improve quality, reduce costs, and gain efficiencies over time. These circumstances impact productivity and price, the main pillars of farmer profitability.

Building resilience among coffee farmers requires collaborative industry efforts to create a strengthened sector that is better equipped to overcome environmental and economic pressures. The trade and the industry are already looking for ways to channel investments into their own supply chains to mitigate risks and assure the intended quantities of a quality product. Yet, it is important to acknowledge that given the magnitude of the challenges coffee faces, we alone cannot and will not solve them all.

Upgrading will also require investments in innovation, extension services, and improved market knowledge. Best agricultural practices are well known, so it is a matter of disseminating them effectively and efficiently. Technical assistance must include not only best-in-kind agricultural and sustainability practices, but also financial and managerial training that enables smallholders to position themselves as entrepreneurs capable of driving change and economic growth within their communities. Financial education for both producers and medium-size roasters is fundamental to manage supply and price risks, so all parties work with, and not against, the market and the tools it offers to better safeguard the interests of all stakeholders.

The fourth wave of specialty coffee will be driven by engaged, responsible supply chain management, where financial transparency and traceability are guaranteed, and a higher quality product will continue to deliver joy and energy for the consumer, and real benefits and pride for the growers.

[1] Colombia: a business case for sustainable coffee production. An industry study by TechnoServe for the Sustainable Coffee Program, powered by the IDH.

DavidWorking with S&D Coffee & Tea’s sustainability team, David Piza supports the implementation of S&D’s sustainable sourcing and direct trade strategy in Central and South America. Based in Medellin, Colombia, he cultivates relationships with trading partners, coffee producers, and S&D sourcing communities with the goal of strengthening the economic position of the farmer through practices that also lead to environmental and societal improvements.