#56 | Re:co Podcast – Ric Rhinehart on Coffee in Crisis: A Call and Response (S1, Ep. 1)

In his opening remarks at this year’s Re:co Symposium, Executive Director Emeritus Ric Rhinehart set the stage for two days of learning, collaborating, and acting to address the coffee price crisis with his “dire warning speech.” This talk has been a fixture at the event for the past ten years. Unfortunately, many of the things Ric has brought to our attention in the past are now happening and – to make matters worse – many of the systemic problems we face (climate change, market consolidation) haven’t gone away yet, either.

But there is hope! As he works through all of the challenges facing our industry, Ric also begins to introduce some of the individuals and ideas that took to the stage at Re:co this past April and who you’ll be hearing from in the coming weeks. 

Special Thanks to Toddy

This talk from Re:co Boston is supported by Toddy. For over 50 years, Toddy brand cold brew systems have delighted baristas, food critics, and regular folks alike. By extracting all the natural and delicious flavors of coffee and tea, Toddy Cold Brew Systems turn your favorite coffee beans and tea leaves into fresh cold brew concentrates, that are ready to serve and enjoy. Learn more about Toddy at http://www.toddycafe.com.

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Table of Contents

0:00 Introduction
2:20 The coffee price is prone by severe booms and busts, driven by misaligned fundamentals
10:00 Coffee is in a bust crisis today
14:40 Climate change is real and getting worse; production has consolidated in Brazil and Vietnam (partly because they are so efficient) and there is now an oversupply of coffee
25:10 Specialty coffee is a quality, differentiated product that can garner a premium to help producers out of this boom and bust cycle

Suggestions for what coffee buyers can do to help
32:00 Changing the conversation between buyers and producers from a buyer-driven monologue to an equal dialogue
36:00 Roasters switching from a Buyers Option Fixed Contract to a Sellers Option Fixed Contract
37:30 Align price and value
38:30 Baby boomers are leaving the coffee-drinking market – Millennials are becoming the majority and have a wider set of values to which roasters need to cater
40:30 What the SCA is doing to confront the problem of low prices
43:00 Outro

Full Episode Transcript

0:00 Introduction

Peter Giuliano: Hello everybody, I’m Peter Giuliano, SCA’s Chief Research Officer. You’re listening to an episode of the Re:co Podcast, a series of the SCA Podcast. The Re:co podcast is dedicated to new thinking, discussion, and leadership in Specialty Coffee, featuring talks, discussions, and interviews from Re:co Symposium, the SCA’s premier event dedicated to amplifying the voices of those who are driving specialty coffee forward. Check out the show notes for links to our YouTube channel where you can find videos of these talks.

This episode of the Re:co Podcast is supported by Toddy. For over 50 years, Toddy brand cold brew systems have delighted baristas, food critics, and regular folks alike. By extracting all the natural and delicious flavors of coffee and tea, Toddy Cold Brew Systems turn your favorite coffee beans and tea leaves into fresh cold brew concentrates that are ready to serve and enjoy. Learn more about Toddy at toddycafe.com. Toddy: Cold brewed, simply better.

Re:co Symposium and the Specialty Coffee Expo are coming to Portland in April 2020. Don’t miss the forthcoming early-bird ticket release – find us on social media or sign up for our monthly newsletter to keep up-to-date with all our announcements.

Today, we’re very happy to present the first episode of “Macroeconomic Dysfunction in the Coffee Trade,” a session recorded at Re:co Symposium this past April. This session convened experts to understand the functions and challenges of the coffee system responsible for the volatile shifts in the coffee market.

In his opening remarks at this year’s Re:co Symposium, Executive Director Emeritus Ric Rhinehart set the stage for two days of learning, collaborating, and acting to address the coffee price crisis with his “dire warning speech.” This talk has been a fixture at the event for the past ten years. Unfortunately, many of the things that Ric has brought to our attention in the past are now happening and – to make matters worse – many of the systemic problems we face (climate change, market consolidation) haven’t gone away yet, either.

But there is hope! As he works through all of the challenges facing our industry, Ric also begins to introduce some of the individuals and ideas that will take the stage at Re:co.

Also, to help you follow along in this podcast, I will chime in occasionally to help you visualize what you can’t see.

 

2:15 The coffee price is prone by severe booms and busts driven by misaligned fundamentals

Ric Rhinehart: Morning, everybody. Nice to be back. Nice to see you all here. This is an interesting moment in time for me. This is my probably last time to be on the stage in front of you and talk about this stuff which, you know, as one would have somewhat mixed emotions about that. It’s great to be here. It’s also great to be looking forward to a little rest. But before I take that rest, I wanted  to address one more time the thing that we’re going to talk about here and traditionally I’ve come out here and given my dire warning speech where I’ve tried to look at all the things that loom out in our future that are potentially threatening to our industry, to coffee writ large and to specialty coffee, the niche that we ostensibly occupy and in the process of preparing for today I went back and I looked at a lot of those other dire warning speeches that I’ve given over the years.

Peter Giuliano: Ric is showing a black and white photo, probably taken sometime in the 1920 or 30s, of a man hawking newspapers to the crowd of people around him. The headline is big and legible: “Earth Doomed.”

Ric Rhinehart: I recycled some slides because as I was going back and looking at these dire warning speeches and, you know, I have been for a while telling you hey, this terrible thing is likely to happen. I don’t want to brag too much, but a lot of the things that I anticipate happening are happening right now.

So, we’re going to talk about some of those things. But I want to set the stage a bit because some of the conversations that we’re going to have we have to be very thoughtful about how we have those conversations and one of the presenters in this cycle is a lawyer with some expertise and antitrust law, and he’s going to talk to us about the boundaries of how we talk about some of the things that we want to talk about here and when I thought about this, I thought, you know what do we really want to talk about Peter. Peter was fairly direct about it. I always think about it in the following fashion, and I’m going to do a disservice to people who are not, who weren’t born and raised in the U. S. But if you’re born here and raised on our sort of a national story there’s an old thought that when you’re skirting an issue that you haven’t come to grips with its the conversation with Mrs. Lincoln the day after, which was other than that, “Mrs. Lincoln, how was the play?” This, by the way, is the play that Lincoln was attending when he was assassinated.

Peter Giuliano: Ric is now sharing a black and white photo of the playbill for “Our American Cousin” at Ford’s Theater in Washington D.C. on April 14, 1865.

Ric Rhinehart: And we have to overcome that. We can’t wait to ask how other than that, how is the play?

We’re going to talk about some things and the thing that we’re really going to talk about, and that is going to be the biggest challenge for us. We’re going to talk about price, and we have to be very thoughtful about how we talk about price and we’re going to give you a whole session on what the limits of that, but we are the SCA. We’ re a trade association, and we are governed by the laws of the United States and now that we’re global we’re also subject to the laws of the European Union in this so we have to be mindful of the conversation and we’ve got a speaker coming up Jeff Glassy who will really sort of be clear on this for you. But I want you to be thoughtful about this because we are going to talk about price. We can’t not talk about price, but we’re going to talk about it in a way that doesn’t violate the law and still gets us to the places that we got to go.

Here’s the second one, I predict you’ll see about 30 of these today. Here’s a second version of the of this coffee price chart. This one’s maybe a little longer historically.

Peter Giuliano: A graph showing the coffee “c” price from approximately 1975 to 2019 is now on screen. What’s notable about this graph is that, although the peaks and troughs are pretty far apart, the peaks never really get above the US$3.00 mark. The graph is also very obviously entering a steep decline as it approaches today’s date.

Ric Rhinehart: We’re going to talk about price in some ways like this. This is the C market, the future’s price over the course of what’s the total there 40 years or so and today it’s occupying that space between 90 and 95. A terrible space if you are in the business of growing green coffee and growing coffee and selling it. That’s not a comfortable space and for some in the business who are buying that coffee it may seem like a very comfortable space, but I’m going to suggest it’s not. But let’s take a look at this. This is this coffee price chart and you can see it’s got a particular behavior. It tends to run up into big spikes and then slowly drop down into an awful place and then climb up and then get a big spike and we can usually identify those spikes, there’s something that happens. So, the first one all the way to your left there is going to be a frost in Brazil, and we went short coffee and supply and demand laws took over and we had lots of demand and not enough supply, and prices went way up and then as coffee came back in the market, it came down again. You can see a low in just after 1989 coasting into 1993 I think, was the actual low and that was driven by the end of the ICOs international coffee agreement that had the quota system.

When that dissolved in ’89. prices start to trend downward and then in ’94 we get another peek there. That’s two frosts in Brazil, a small frost and a more significant frost drove those prices up. As coffee flowed back into the market, the prices came down again there was another secondary peak there which is actually a bit of a market play that was actually some body’s trying influence the market but then you could see this long glide down into 2,000/3 where prices got below 50 cents and then a slow climb out and then that last big peak you see there was Columbia being short washed Arabicas and it’s the last time the market sort of responded to that distinction between washed Arabica and all the rest of the coffee in the world. But the thing you’ll note about this is it’s a cyclical pattern. It is a classic boom and bust cycle. So, an event happens, the market goes short, prices go up, and in response to prices going up, farmers fertilize, prune, plant new trees, do all the things they can to increase their production supply goes up again and overtakes demands and prices fall again and this kind of cycle is very typical for tree crops, orchard crops like coffee where they have a relatively long cycle of production and you can influence that production fairly quickly and then you can also add to that production.

 

10:00 Coffee is in a bust crisis today

Ric Rhinehart: So, we get this thing. This is something that we have to confront here, that we have to actually talk about this. This behavior in this market is fundamental market behavior. It’s what one would expect, and we’ll talk a little bit more about that. Somebody else is going to give you a great indication, though, of something pernicious in this cycle and that is, if you drew a straight line through this, you able to find a median point and you’d be able to say, hey, coffee seems to hover around this number all the time, But this is nominal pricing, so this is the price in US dollars on the day that this was quoted. There’s no adjustment for inflation in this, none.

Peter Giuliano: If you draw a straight line through the peaks and troughs of Ric’s chart, it would suggest the average price of coffee over the last 40 years is roughly $1.20 per pound.

Ric Rhinehart: So if you shot that line down the middle, what you would see is a nominal price that’s consistent over 40 years, apart from its boom and bust cycles but when you adjust that for inflation, you’re going to get a whole a different story and so we’ve got another speaker who just did some brilliant work thinking about this, and she’s going to give you a chance to see what that means.

Peter Giuliano: A yellow road sign looms against a grey and cloudy sky, declaring “Crisis Ahead.”

Ric Rhinehart: Peter alluded to this, and I think it’s fairly critical and we want to talk about a crisis and I just told you this is market behavior and it’s cyclical. It happens all the time and it’s the pattern we would expect and it’s not unreasonable as many people have said to me, “Rick, how’s this a crisis? This is the normal behavior of the marketplace. It’s not a crisis, it’s normal, expected behavior,” and I thought about that, and I’ll share something with you.  I’m a cardiac patient. I have a cardiologist and I’ve had a cardiologist since I was 43 years old because I have a chronic heart disease which is entirely my own fault for not managing my lifestyle. So, I have the kind of arterial sclerosis that you get if you already have high cholesterol genetically and if you compound that by being highly stressed and eating a lot of fatty foods and not sleeping properly and failing to exercise and all the things you can do to make your life more pleasant but shorter and I was incredibly self-indulgent and some might say, still am incredibly self-indulgent. But I was really self-indulgent until I was 43 and then I had a heart attack and when I think about our scenario with pricing here, it is both chronic and endemic, like my disease is. I have a chronic disease., self-generated albeit, but still a chronic disease. When I had a heart attack, I can assure you it was a crisis. It was the same disease. It’s just a different manifestation of that disease but it was definitely a crisis. If you don’t believe that, ask my wife who was there and she elevated it to a crisis for me because in my wisdom, I was going to think of it as just a thing. You know, maybe I just had a little gas, and this will pass but this is for me the analogy of what we face today.

Yes, there is a chronic failing in the fundamentals of our marketplace that drives us to this boom and bust cycle. But at this exact moment in time, there are hundreds of thousands, perhaps millions of folks who depend on coffee for their livelihood that find themselves in crisis. and so, it’s incumbent on us, just as it was incumbent on me to get to the hospital. It’s incumbent on us to find out how we can treat the immediate crisis while never losing sight of the underlying chronic disease that we have to figure out how to manage. So, that’s our task. That’s the big task is how do we address the heart attack of the moment but what’s our plan for the future to get our industry healthy again?

 

14:40 Climate change is real and getting worst, production has consolidated in Brazil and Vietnam (partly because they are so efficient) and there is now an oversupply of coffee

Ric Rhinehart: So, this conversation now is going to go down two different paths and one of them is really about commercial coffee, just an ordinary cup of coffee and some of you in the room here this is your business. Your principal businesses is coffee with a small c. You grow or roast or distribute or vendor somehow deliver coffee into the world and you have an important place and all coffee ultimately, there’s a sea of coffee. So, we have to be concerned about all coffee, and then some of you are here for this. This is the Specialty Coffee Association Re:co Symposium and so there’s some people in the room who are in that niche of specialty coffee and who are very, very focused on this sort of exceptional coffee experience that we identify in specialty coffee and I’m not actually here to sort of count you off and go specialty commercial, commercial specialty. You guys know who you are. I’m just going to tell you that if you’re a commercial, in the commercial end of the business, you probably want to listen to the next three or four slides, and then you may or may not want to pay too much attention after that. If you’re in a specialty side of the business, you want to sort of listen to it all although you may have a tendency to look at the next few slides as, you know, the problem is big and I’m small and what can I do about it? But this is the framing.

So here you go for all these in the commercial side of the business. I traditionally have gotten up here and given this dire warning speech and there’s a whole bunch of things that we still need to be worried about. They haven’t gone away. We haven’t successfully addressed them and normally I like to sort of lead into the rough stuff but I’m just going to go right out. So, first there’s this.

Peter Giuliano: On the screen, there’s a big illustration of the earth engulfed in flames.

Ric Rhinehart: This has not gone away, and you don’t have to search very far to understand what we’re talking about here. There is definitely anthropogenic global warming taking place, and it is having impacts on our planet, and it’s having substantial impacts on agriculture and it’s having particularly substantial impacts on sub-tropical agriculture, mostly manifested as huge variations in traditional weather patterns. But there’s more to come, and it none of it’s going to be very good and this is one of those. The problem is big and I’m small, but we have to be cognizant of this in spite of what certain individuals may tell you, this is very real and very much a concern and very much writ large in the background of our discussion about coffee, any discussion about coffee. There’s one. Here’s another one.

Peter Giuliano: The image has changed: in place of the illustration, there’s an infographic showing the increase in market share of the top five coffee-producing countries across 1996, 2006, and 2016. What’s interesting is that there’s an increase of nearly 10% with every ten years. In 1996 the market share of the top five coffee producing countries was 57% and in 2016 it increased to 74%.

Ric Rhinehart: I first produced a slide like this in this city in 2013 and an interesting phenomenon has taken place over the last 20 some odd years.

The production of coffee, the coffee produced by the individual countries that produce coffee has consolidated dramatically, dramatically and if you take a look at this, you see that that’s dated 2016. The number for 2018 is actually just a shade over 75% but the top five producers in the world today produce north of 75%, north of 3/4 of all of the coffee produced in the world and let’s count it down just for a minute. The top two producers just Brazil in Vietnam between them in the past coffee year produced just a little under 100,000,000 bags of coffee. That’s for a world that in its totality wanted to drink about 160,000,000 bags of coffee but on the export side really only wanted about 105 to 110,000,000 bags for consumption. So, just two countries. and then there’s a rotating cast of a rotating cast of characters behind there, another three or four or five countries that make up another 15% of that marketplace. So, production has consolidated down to just a very narrow band of producers. By the way, this is important, not just because it’s kind of scary. I presume many, many people in the room or in business, and one of the things you think about is you would hate to have a single customer and you’d hate to have a sole supplier with no real backup and this is a condition that’s heading towards a sole supplier scenario and that’s a terrifying thing and if you have to have a sole supplier, you should be a really good partner with a really good relationship with that sole supplier and I don’t think we’re there.

Again, if you’re on the specialty side, remember, this is aimed at the people unnamed in the room who were really in the commercial side of business. But this is not going away, it has continued to get worse and it will continue to get worse in particular because this consolidation is largely due to efficiency. So, the most efficient producers have risen to the top of production. So, our friends in Brazil, haven’t done anything wrong. They’d done everything right. What they’ve done has become very, very efficient coffee producers, and that’s allowed them to grow and to thrive in most of these market cycles which is great. Our friends in Vietnam have also become very efficient. They’re producing a lot of coffee at a relatively low cost. They’re efficient producers. They get it to market well. Three, four and five which this year is Columbia, Indonesia, and Honduras in that order are much less efficient. and if you look at that efficiency when you slip below the cost of production and become inefficient for the market you’re going to deliver into you’ve got a really existential crisis and of those three countries, really two of them for sure, are at an existential moment in their coffee world and the third may or may not be. But for all of us, we’ve got to think about this.

Peter Giuliano: A new graph is now on the screen, showing global production vs. consumption for the past five years.

Ric Rhinehart: I want to reinforce again this is a supply and demand issue. This is a terrible graph, my apologies for it but this is production versus consumption and what you with the notable feature is, is that in 2014/15/16 we’re more or less a parody. We more or less had, we grew, produced exactly as much coffee as we consumed as a planet, as all the people on earth. We were in good equilibrium and frankly, equilibrium is a great thing in this world because you can identify your costs and your potential sales pretty easily there if you have equilibrium. But if you look in the last two cycles in 17 and 18 what you see is a surplus of production, and in total, it’s seven or eight million bags across those two years but that’s enough to dramatically depress prices.

So, this downturn you’re seeing in the nominal price is fundamental. It’s driven by what you would expect to drive it. There’s more coffee than there are buyers, and I want to get that out there because the temptation when you’re in pain. The temptation when you’re having your heart attack is to want to find that soul cause who caused this? In my own particular case, I got to stand in front of the mirror, and I could see the culprit, but the causes were many, you know. My propensity to consume things that gave me pleasure but not health was high, and my propensity not to do things that would have given me health but not pleasure was very low. I was good at ignoring those things, but it’s always this. There’s a range of causes here, but the background cause is the same. I didn’t take care of my cardiovascular health. This market is fundamentally disposed to respond to supply and demand and we’re in an oversupply scenario. Again for the commercial folks in the room, the commercial traders always will tell you the cure for low prices is low prices, and what they’re saying is that market fundamentals will apply if prices stay low enough long enough, people will stop producing coffee and stop selling it and eventually the oversupply will go away and you’ll pass through equilibrium into one of those boom cycles where prices will go up and it’s true. It’s very true but it’s terrible, you know, one of the cures for heart disease is to die and I just read an obituary of somebody who died, and they said he didn’t lose his battle to cancer because when he died, the cancer died with him so, technically it was a draw, and I think about that. So, that’s one cure one of the cures for heart disease, death. It’s not the preferred outcome for people most of the time. Certainly, for me at 43 it wasn’t the preferred outcome and if you told me I could at least wrestle heart disease to a draw this year, I think I’d opt out of it. I would rather be fighting and losing. But for producers who are in this wrong end of this cycle, who are producing coffee below their cost of production and have been for a number of years to suggest to them that the cure is very simple, to fight price to a draw is insufficient. It’s not enough so we’re going to talk about that too.

 

25:10  Specialty coffee is a quality, differentiated product that can garner a premium to help producers out of this boom and bust cycle

Peter Giuliano: Ric has a graph up showing how efficient different countries are at producing coffee in terms of bags per hectare. Of the countries shown, Brazil and Vietnam outstrip the others by a fair distance, but it’s especially interesting to note that Vietnam’s bar is nearly double the size of Brazil’s.

Ric Rhinehart: This is a just a look at where this coffee comes from, and one of the things that you’ll note here is I’ve cleverly put on both ends the two most efficient producers, Brazil and Vietnam. And this is one of the reasons that they’re efficient is that they have relatively high yields per hectare so what you’re looking at there is a graph of coffee production per hectare expressed in 132 pound or 60 kilo bags and Brazil across the whole spectrum has roughly 25 bag per hectare yield finished green coffee. Vietnam is just under 40 bags per hectare and then you could see places like our friends in Mexico who, you know, just eke out a little over five bags per hectare. That is one of the hallmarks of inefficiency. There are many other kinds of inefficiencies that can creep in here, and there’s tons and tons of things that drive efficiency. One could easily point to Brazil and say the opportunity mechanize and to reduce labor cost is one of the ways that they become efficient besides very high ideals and that’s true and in fact, in many places, coffee has simply chased low-cost labor and make no mistake, the system was set up to do that. This idea of a colonial trading system that takes advantage of nearly free land and nearly free labor to deliver a nearly free product to people who can commercialize it. This is the description not only of the coffee business but of cocoa and a dozen other tropical commodities and it’s true. That’s the end of the run for those you are commercial actors in the room. You can check your email, go grab a cup coffee, talk to the people next to you. I want to talk a little bit about everybody else in the room, especially coffee folks, just to define a little bit about what we’re talking about here and I’m going to start by giving you a disclaimer. This is Ric Rhinehart’s thinking about specialty coffee. This is not the SCA’s official position on it. It’s not vetted, worked over and tested by experts. This is what rolls around in my weirdly preoccupied mind about specialty coffee and they tell you when you do these kinds of presentations not to put a lot of words on the screen and I couldn’t resist the temptation.

Peter Giuliano: Ric has put a definition of specialty coffee up on the screen. It’s long and has many phrases highlighted in both orange and blue. It reads “specialty coffee may be defined as coffee, from a known geographic origin, that has a value premium above commercial grade coffee due to its high quality in the cup and to particular attributes it possesses. We can think of specialty coffee, whether bean or beverage, as being defined as differentiated coffee products that garner a premium to commodity coffee products in the same markets”

Ric Rhinehart:  but I tried to make it easy, and I put the important words in color for you there.

So when I’m thinking about specialty coffee and by the way, I should say this idea is you know, there’s not a lot of original thinking in the world, and there’s certainly not a lot of original thinking emanating from the weird corners of the world that I occupy to do thinking so it’s really a synthesis of a lot of other smart people’s ideas, and then I sort of squished them altogether so it borrows heavily from a lot of folks. But the key concepts, especially coffee, is from a known geographic origin. We know where it came from. We know that that coffee came from a specific place and its special in part because it carries with it that taste of place. We know that it has a value premium. It gets a better price than commercial coffee, and that’s important we should not ignore that. It’s not the sole definer of specialty coffee, but it is one of the critical definers of specialty coffee. We know that the principal driver for that higher price is not so much market scarcity but the outright quality in the cup and then there are particular attributes.

There are things about that coffee. Anybody who’s ever paid a lot of money for a Geisha knows this that one of the reasons you’re paying a lot of money for the geisha because that flavor, that aroma, that complexity of that coffee is precious and deserves that and we have to get past thinking about coffee as a green coffee bean. We do, a lot of us do and when we talk about specialty coffee and we’ve had an official definition from the SCA. It really focuses on that raw material but there are exactly zero consumers out there who are thinking about coffee in that fashion. Coffee to a consumer is not a coffee bean, it’s not coffee grounds. Coffee is an experience that centers around a beverage that they hold in their hands.

So, we have to think about coffee also as a beverage and finally for specialty coffee we have to be talking about a differentiated product, a product that’s different in the vast sea of commercial coffee and that garners a premium for that difference. It is possible to have a differentiated coffee that doesn’t garner premium. You could buy very, very cheap what we used to call prison grade coffee and let me tell you, it’s differentiated but it doesn’t garner a premium. We don’t get to think about this in a vacuum, so when we think about specialty coffee the temptation for us is to think about quality, to think about that experience, to think about the exceptional nature of this cup of coffee that we have in front of us, and we do. We get to do that, but we can’t do it without thinking about this as well.

We have to think about the sustainability of that product when we’re talking about specialty coffee and this is a piece that I find myself returning to again and again. If coffee produces this great tasting great beverage experience, but it does so at the cost of the dignity, the value or the wellbeing of the people and the land that produced it, it can’t be specialty coffee and I encourage you to keep that thought firmly in the front of your mind.

 

32:00 Changing the conversation between buyers and producers from a buyer-driven monologue to an equal dialogue.

Ric Rhinehart: Alright, so there it is. There’s the specialty world, written against the backdrop of the commercial world. What do we do about it? What can be done? Well, the first thing to be done is to really start to think about your engagement in the value chain here, and I put a chain up there because I’ve said value chain. You can make some other analogies between links and that kind of thing but all of us occupy something of that chain. But what’s critical there is change only work when all the links function. When all the links are more or less equal, there’s, you know, I’m told there’s a television show called “The Weakest Link” which sort of builds on this idea that a chain is only as strong as its weakest link and there’s a whole bit of game theory and coaching theory that, you know the only way to build a team is to build a mutually strong team rather than have one single strong link and we are in a world right now where we have one or two very, very strong links and a bunch of weak links that we have made weak by intention. We’ve got to get past that. We’ve got to start to understand that our value chain is dependent on a relatively equal strength across the chain or it will fail.

So, what can we do about it? I’m going to throw out three or four ideas. You should know if I haven’t told you that I’m spending my year working with a great group of people to try to understand this price crisis, this heart attack with a backdrop of heart disease and what we can do about it, how we can actually influence and act on it and one of things I know with certainty is that we don’t know the answer to that because if we knew the answer, we’re not heartless people. We would have implemented the answer if we actually know it. We don’t know it. We do know a lot of things you can do to help treat the symptoms and I’m going to just run through a few of them for you and ask you to think about them.

Here’s one. There’s a friend of mine in Melbourne, Australia and in California….

Peter Giuliano: Ric had been showing a photo of a bag coffee with the farmer’s name on the bag, next to a branded mug. If you look closely, you can see there’s also a card with information underneath the bag.

Ric Rhinehart: …delivering a coffee grown, micro-lot grown by an individual producer in Huila, Columbia and what’s interesting to me that this is that that farmer is really a partner in his business.

Peter Giuliano: Now, all we see is the front of the card – and then the back. There’s a lot of information on here – not just about the coffee or its producer, but about the importance of transparency. The tasting card that tells the reader how much the roaster paid for this coffee.

Ric Rhinehart: And he’s willing to tell you how much of a partner is. If you look at the bottom right-hand corner there what’s printed there is the farm gate and FOB pricing delivered to that farmer at the point of purchase of this coffee, both farm gate and FOB which is really sort of going out naked in the world but it’s something that this company has committed to doing. To saying hey, we’re going to pay a good price for a good value, and we’re going talk about it out loud. Thinking about being in this partnership, fundamentally changing what your perspective is the most important thing you can do about this. We have for more than 100 years, had a conversation generated by a buyer talking to a producer, talking to a seller in more or less a monologue and this has got to be a dialogue and part of a dialogue unlike my current behavior is shutting the hell up and listening to what the other side has to say and there are myriad ways we can do that and we must. We must discover ways to change our current monologue into a dialogue in which the buyers are attentive listeners and you’ll hear a lot of ideas about how to do that and I promise you we’ll deliver more to you.

 

36:00 Roasters switching from a “Buyers Option Fixed Contract” to a “Sellers Option Fixed Contract”

Ric Rhinehart: Here’s an interesting one. This is one of my favorites. Most you in the room are green coffee buyers out there. If you’re buying coffees, you’re likely buying them. If you’re buying them differential in particular and if you’re buying for the future you are likely buying them and what’s known as a buyer’s option to fix contract.

Peter Giuliano: Ric is showing a schematic outlining how a financial options contract works

Ric Rhinehart: So, you set up a differential price, you decide to buy the coffee and then at an opportune moment before the delivery date, you get to, as the buyer say, I’d like to fix my price today. So, if you’re operating in the current market you probably have been in a flurry of fixations going I can fix it 92 go. Fix everything out to as far as you can. This is an idea. How about if you really change your perspective and you buy coffee in a seller’s option to fix? That’s kind of scary, isn’t it? Sellers option to fix, and it’s scary on its face because you’re thinking, oh my God, you know what if they fix at the top of the market. But the truth is that you have access to risk management tools. You can offload that risk; you can do it. If you can’t do it yourself, talk to your importer your dealer and say, hey, here’s what I’d like to do. I’d like to do a seller’s option to fix contract and I’d like to offset that risk and they’ll know what you’re talking about and it’s going to cost you a couple of pennies, but you can do it.

 

37:30 Align price and value

Ric Rhinehart: And then finally, I’m going to hit you again. A line price and value, a line price and value. If you want to sell coffee at a high price make sure you’re selling a valuable product on both sides of the production and consumption equation. You shouldn’t pay very little money for a great thing, and you shouldn’t pay a lot of money for a lousy thing. We should find that balance because that’s what sustainable. That’s what allows these market dynamics to function when price and value are well aligned, and you can do that and don’t kid yourself. Plenty of companies have said, hey, I can skimp on the price of the coffee and I’ll invest it in the marketing, I’ll get a better return and you can do that and what you’ll get is really good marketing where the price of your marketing in the value of your marketing are well aligned but you’ll also get a product that’s misaligned with its price and value and likely you’ll find yourself in a place where your life is misaligned with your own values.

 

38:30 Baby boomers are leaving the coffee-drinking market. Millennials are becoming the majority and have a wider set of values to which roasters need to cater.

Ric Rhinehart: A couple other thoughts. I’m way over time so please forgive me. It’s time to wave goodbye to us. There’s a generation of consumers of which I am part. We are the baby boomers and turns out that we’re starting to exit the consumption stage. Some of us don’t drink as much coffee because we got sensitive to caffeine. Some of us are fighting cancer to a tie but we’re all leaving the stage and so the way that we bought coffee or thought about coffee. The way you sold us coffee, how we were price sensitive, that’s changing, and we’re being replaced by a new generation of coffee consumers and they have a different perception of coffee. For starters, they tend to think of coffee as a cup of coffee, not as a pound of coffee. Ask any millennial or basic young person out there how much does coffee cost and they’ll all give you the same answers. Again, oh 2/3 bucks a cup, something like that. I would have answered at the same age it’s about $4 a pound. That’s really dating myself but that’s what it costs. This new generation of consumers thinks differently in a lot of ways, but this is an important way that they think differently.

The purchase drivers, the things that make these new consumers buy coffee group heavily around this concept of responsible sourcing which means the coffee is environmentally friendly but there are good farming practices, their workers are treated fairly and that this whole basket of ideas about sustainability, both environmental and economic and social are wrapped up in that purchase decision and they don’t just say it. They’re exhibiting the behavior. My generation had a tendency to say these things and then behave quite differently. We’ve got a new set of consumers who are starting to behave this way.

 

40:30 Explaining what the SCA is doing to confront the problem of low prices

Ric Rhinehart: So, what are we going to do? We’re going to a bunch of stuff here today and tomorrow. I want to talk to you very expressly about one of the things we’re doing. My current role with the SCA, you heard the emeritus tag on there which is a way of saying I don’t have my hands on the wheel. There’s a whole management team and a new CEO driving the ship of the SCA but I am still lingering around the edges and what I’m focused on is trying to come to grips with this chronic, endemic disease of an economically unsustainable marketplace that we live in as well as the crisis manifestation, the heart attack of these extraordinarily low prices and in order to do that we formed a group of really, really smart people and we put a plan into action.

Peter Giuliano: Up on screen is a diagram showing the steps the crisis group is taking. In this order, these are their steps: Identifying stakeholders, listening, analyzing, testing and listening and finally, building trust.

Ric Rhinehart: So, what we’re looking to do here is to move through this process, identify the stakeholders, listen, analyze, test those results and listen again and build trust in and disseminate and we’re in the middle of that listen part. So, the second step in this in this path to understanding what we as an industry can do to confront our chronic disease, we’re right in the middle, we’re right in that second step. So, we’ve got a good assessment of who all the stakeholders are, and we’ve started quite a bit of outreach and now we’re heavily into listening mode and we’ll keep driving forward with this. Many of you have already talked to us and many of you will hear from us saying hey, we’d like to listen to your story. We want to be those active listeners and from there we’ll move into analysis. Simultaneously we’re trying to amplify existing work, existing success is out there and there are a lot of interesting things happening out there that represent good reactions to the crisis that we’re in. So, we want to give a chance for those things to be apparent to you, to raise the profile of those things, to allude to them, to direct them and to examine them as ways to help address this and you’ll hear a lot of those over the next couple of days and you’ll see work and activity from our group at the SCA in amplifying those existing successes. This is what we’re focused on.

 

43:00 Outro

Peter Giuliano:  That was Ric Rhinehart at Re:co Symposium this past April. We’ll be releasing Jeff Glassie’s talk in a few week’s time.

Remember to check out our show notes to find a link to the YouTube video of this talk, a full episode transcript, and a link to speaker bios on the Re:co website.

Re:co Symposium and the Specialty Coffee Expo are coming to Portland in April 2020. Don’t miss the forthcoming early-bird ticket release – find us on social media or sign up for our monthly newsletter to keep up-to-date with all our announcements.

This has been an episode of the Re:co Podcast, brought to you by the members of the Specialty Coffee Association, and supported by Toddy.

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