Farm Profitability Q&A — Ed Canty

Farm Profitability Q&A — Ed Canty

The Sustainability webinar series on Farm Profitability and Prosperity generated great discussion and many questions from viewers. This post is the second of four in which panelists from the second webinar, which took place September 25th, will answer your questions. You can watch a recording of webinar #2 here.

Ed Canty is the General Manager of Cooperative Coffees. His coffee career began two decades ago in a Portland, Maine, coffee shop where he learned the craft of roasting and the pleasure of customer service. This led him to Green Mountain Coffee Roasters’ cupping lab in Waterbury, Vermont. His interest in coffee quality and growing communities began a 15-year career as Green Mountain’s Fair Trade and Organic Coffee Buyer before joining on with Cooperative Coffees in 2015. He values transparency, principled negotiations, intelligent system design, and innovative and regenerative agricultural practices that improve quality and producer livelihood through trade. Ed also serves on the Food 4 Farmers board of directors.

Is Cooperative Coffees only interested in fair trade certified  [coffee]? Mainstream coffees are most affected by the prices, what advice does Cooperative Coffees have?

I’d like to back into answering this question by explaining where the industry’s arabica coffee comes from. Without better information available, most of the math below I calculated myself a few years ago and could use a welcomed update. However, the following still helps put the product we all buy in context:

  • 20% of the world’s arabica coffee comes from large estates who hire workers to pick coffee on their land. These workers are paid local rates averaging three dollars a day, allowing estates to operate separately from the commodity market.

 

  • The remaining 80% of the world’s arabica coffee is grown by 25 million Independent Small Holders (ISHs) who own and work smaller parcels of land. The majority of ISHs sell their coffee to collectors for local expression of the current commodity price. In recent years, larger multinational import/export corporations have invested in vertically integrated systems that allow them to better manage risk, track the individual farms they collect from, and in some cases offer agronomy training back to ISH producers.  However, the majority of these producers are disconnected from the markets their coffee is intended for and receive very little feedback or support from their buyers.

 

  • About 25% of ISH coffee exports are from producers who are members of fair trade producer organizations (20% of all arabica coffee exports). The majority of these organizations are cooperatives. However, they could also be associations, cooperative unions, and societies. I refer to them all as Fairtrade Producer Groups.

 

  • On average, members of fair trade producer groups sell two-thirds of their coffee through their organization, with only a third of it sold under Fairtrade terms. The remainder is sold outside of their organization (through collectors). However, the training, leadership, and empowerment they receive through their cooperative effects all the coffee their members produce.

 

The point this information illustrates is Fairtrade Producer Groups are as mainstream as any other participant in our supply chain with the potential to be even more influential. Until there is more demand for Fairtrade coffee, they deal with many of the same issues facing other models of collection and export.

For Cooperative Coffees, we find working with Fairtrade Producer Groups an extremely efficient and scalable way to engage with ISH producers, empower them to be good business partners and global citizens, while lining up with our core values.

Regardless of our approach, my advice to other buyers is to stay engaged with your producer partners, consider establishing a minimum price to solve for a low C market, and work through problems together.  

How does having the model of a cooperative differ in providing a livable wage for those who are growing commodity crops?

Like all organizations working with ISHs, producer cooperatives must offer at least the minimum daily (sometimes hourly) commodity price of coffee as they collect coffee on the mountain. Without a producer organization, this mountainside sale commonly ends the engagement and transaction with the local buyer.  With a cooperative structure the engagement with their members continues:

  • In the case of cooperatives selling Fairtrade, a 20 cent/lb social premium is voted on by members to invest in their cooperative, community, and/or increase revenue to the producer at the end of the harvest.

 

  • Additional revenue from the minimum price either enforced by the Fairtrade criteria or established on its own by negotiating with buyers.

 

  • Technical services offered by the cooperative to its producer members.

 

  • Maximized value to producer members in shared profits from milling, triage, and applying specific coffees to a customer contract.

 

All this said, I question what an ISH would consider a “living wage.” First, ISHs are farm business owners, not employees; instead of a wage, they receive profits. USD 1.00$/lb green is what most consider the Cost of Sustainable Production (COSP) for coffee in what I have read in the industry lately. However, this number does not consider what a fair profit is for a farmer or address the opportunity they might have in switching to a different crop. Further, many of these communities have such eroded or never-existing social services that the concept of a livable wage could not be addressed until barriers to basic community needs are solved (i.e. water, education, roads, electricity, etc.).

For this reason, the services that a producer cooperative offers these communities is extremely important. Commonly these communities are marginalized from government support and the producer cooperatives act as the municipality that offers and builds services that are a precursor to any discussion of a living wage.

What percentage of coffee do you buy of the total production of a specific producer group?

For Cooperative Coffees, this varies greatly from producer group to producer group and whether we focus our relationship with a particular producer (for micro lots), primary cooperative (community who collect coffee), or the secondary cooperative (responsible for managing all primary relationships and export of the coffee). Naturally, if we focus on the farm or primary cooperative, we buy a greater amount of their total production. However, the overall volume sold by the group is lower.

If you run the straight math, we purchase an average of 3 containers from each producer group in our supply chain; which accounts for 21% (on average) of each group total exports. However, there is tons of variation from group to group that makes these figures slippery.

What is the average weighted sale price of the coop?

Cooperative Coffees averages the pricing on all of our inventory and incoming shipments of a particular coffee (same quality, producer group, and crop year) as a way to manage price spikes in the commodity market. We consider this a service to our roasters.

However, I believe this question is also asking about Cooperative Coffees’ margin for importing and selling coffee. In short, we are not the cheapest importer in the room but we strive to be the most transparent.

Our margin varies greatly depending on the amount a roaster is buying from us (full container, down to a few micro-lot bags) and what risk we are sharing on the import (pre-shipment vs landed approval). Our margin also includes services we offer our members/owners such as storage of green; average pricing to protect against market volatility; marketing support; producer engagement; our carbon, climate, and coffee initiative; and industry representation.

On average this adds a margin of 35cents/lb above the cost of import. But again this varies greatly depending on the services provided. As we grow, we strive to lower this margin to offer more competitive rates to our members and increase the markets we can sell coffee to on behalf of our producer partners.

For the collective of roasters, what is the gap between your price bottom and the actual cost of production for your suppliers?

As a policy, our minimum price to producers for Fairtrade Organic is USD $2.20/lb FOB. In reality, this minimum price was USD $2.41/lb FOB for the past fiscal year, taking into consideration different local market forces and quality expectations for the coffee. Some of these contracts were fixed when the market was higher. So at the end of the day, we paid our producers an average of USD $2.54/lb FOB for Fairtrade Organic coffee in our last fiscal year (ending June 2018).

But the question specifically asks what is the difference between our floor price (on average USD $2.41/lb FOB) and the producer’s cost of sustainable production. The answer to this question is elusive and intimately different for every producer group for several reasons:

  • The price we pay is relative to the quality we are purchasing. Who in the value chain is responsible for improving quality? Was this related to work on the farm, or was the miller responsible? Who should receive this extra premium?

 

  • We not only want producers to make enough for the cost of production but also earn a profit. One of the hardest things for any farmer to do is determine how much profit they should make.

 

  • Most producer organizations approach negotiations not as equals, but as victims to the trade. Buyer behavior commonly is to bid for the cheapest coffee and not engage in detailed negotiations to find solutions with their supply chain. Therefore producer organizations approach negotiations with a “What price will you give me?” attitude rather than information on “What price do I need?” Further, if trust is not built with a producer organization they might misunderstand your request and consider it a tactic to lower prices to the organization.

 

I am not going to pretend to have all the answers to these questions. For Cooperative Coffees, we continue to dive into the individual details of our supply chain and learn more about them each year. Right now our focus is on understanding how the prices we pay compare to the average price a Producer Group receives and the average price paid to the producer.

Our approach is to stay engaged with our supply chain each year and build trust across the negotiating table. 94% of the coffees Cooperative Coffees buys are from relationships we have maintained for three years or longer. I consider this the single most important metric about our supply chain. It shows our level of engagement, the ability to work through supply issues, and helps build trust with our producer partners. These are precursors for any buyer to get a true understanding regarding the cost of production or profitability of farmers.

What are the qualifications for the producers who are in the cooperative and do these prevent some from joining to the cost of certifications, etc?

I want to make sure we are clear on this point. Cooperative Coffees is a cooperative of roasters. We buy coffee from Producer Groups, the majority of which are organized into cooperatives themselves. I want to make sure I am not giving the impression that we are owned by producer cooperatives. Only roasters are member/owners of our organization.

Like all cooperatives, producer cooperatives have various conditions to joining them. Some require several years of probationary membership before being allowed full membership. Most only allow membership for certain regions and communities. Secondary Producer Cooperatives bring in primary (growers) producer cooperatives into their membership and manage such tasks as milling and export for them.

Particular to Fairtrade certification managed by Fairtrade International, the big conditions of producing Fairtrade coffee is that they are from small farms (less than 5 hectares I believe) and this list of pesticides are not used on the farm. However, I would check with Fairtrade to confirm updated standards.  

Certification costs (Fairtrade, Organic, Rainforest, etc)  are a reality for cooperative organizations and have an expense in both time and money. However, I have never heard of these as barriers to producers joining a cooperative.

Do you purchase only certified organic/fair trade? Do you also consider organic practices vs certification? How much more is the price that you pay for certification vs noncertified specialty green beans? Do you have a model for high specialty coffee cupping scores?

Cooperative Coffees is interested in Organic coffee from producer groups organized as cooperatives that follow the values of fairtrade. Certifications are important to our roaster members. However, we also consider certifications as “consultants” that help build better agricultural practices and infrastructure for producer groups.  

We also look within our supply chain to define best practices and provide farmer-to-farmer training in regenerative soil and organic composting. There are techniques being developed by organizations like COMSA in Honduras that go far above any certification in building resilient soils and increasing productivity.

Good to see this topic back on the agenda and thanks for hosting this convo! Could Ed tell more about the risks that coops face when prices rise? This is often not understood, as members find alternatives to their low contracts. Can he share some examples or how price risk management tools can help?

Market volatility in the true challenge to our industry. Low prices are bad for producers, high prices can be challenging for roasters. However, it is the swinging of the market that can break any organization. Producer Groups, who operate on thinner margins, are particularly at risk.

When using a Floor Price in your contracts, producer groups can also lose skills in executing Price Risk Management (PRM) strategies. So when the market suddenly rises, organizations are thrust into new market conditions that they are not prepared for. For this reason, I believe it is important for producer organizations to negotiate contracts that can be fulfilled in any market condition. A fixed price contract might look great today, but what happens if the market was at $3.00/lb?

In addition, all organizations should have a written Price Risk Management policy that they can follow in the event of a market rise (without needing to consult with their board, members, or other owners). Producer Organizations (like many of us in the supply chain) are both buyers and sellers. As such, market volatility can quickly shrink their margins when they buy high and sell low. You can read more about this in an interview I did with CRS a few years ago here.  

One quick PRM policy producer groups can develop is only committing to a selling price when they have collected xx% amount of coffee to fill the container. This assumes you already know the majority of pricing that you bought the coffee for. Exact percentages vary from group to group. I know a cooperative in Indonesia who will not price until 100% of the coffee is collected. It isn’t uncommon in the Americas for this amount to be around 80%. What is important is that it is a written policy.