Behind La Palma y El Tucán - Part three: Sustainability

THIS BLOG POST IS THE THIRD IN A THREE-PART SERIES. READ PART 1, AND PART 2. 

In Part 1 of this blog series, Nico wrote about La Palma y El Tucán’s (LPET) impressive social impact. In Part 2 he outlined LPET’s rigorous approach to quality. 

In this final blog post, I will tell you about BIODIVERSAL, a new project from the founders of LPET which seeks to support coffee growers and their land by diversifying and marketing their crops. 

Barriers to sustainable coffee production in Colombia

Coffee has been integral to Colombia’s rural economy for decades, but its current model is unsustainable. With the C-Price at an historic low, farmers struggle to cover the cost of their production. For some, it seems if they want to put food on the table their two options are to stay on their farm and grow a more profitable crop, often illicit products like coca, used in the production of cocaine. Alternatively they can head to the city where there are more economic opportunities. 

“As the average age of coffee farmers rises above 60 and their children seek non-farm employment or migrate to cities, the coffee sector will lose its viability,” said Felipe Sardi, cofounder of LPET. 

Additionally the mono-culture farming often practiced today is depleting the soils and requires more and more expensive chemical inputs. 

“We are convinced that coffee alone cannot generate adequate income to enable sustainable progress out of poverty or opportunities for the next generation of farmers,” Felipe said. 

They also see that monocultural coffee production is environmentally damaging, and vulnerable to global warming, which threatens to reduce viable coffee growing land in Latin America by 88% by 2050, according to the SCA. 

Biodiversity is one answer 

Felipe and cofounder, Elisa María Madriñan, see crop diversification as the answer to many of these issues. This involves cultivating other agricultural products in addition to coffee, to give farmers an additional source of income, and reduce the environmental impact of monoculture agriculture. Of course, this is LPET, so rigorous processing to uphold the highest quality in all products is the foundation of their project, giving farmers access to specialty markets for all of their crops. This is the core ideal behind BIODIVERSAL. 

“It brings forward a diverse pool of value-added agricultural products cultivated and sourced in a way that protects the community and the environment,” Felipe explained.  

“In today’s system, farmers have been encouraged, and eventually forced, into producing monocultures. We want to break this cycle. With the collaboration of our neighboring farmers, we will produce, transform, and commercialize value-added products in an array of local and global markets.”  

While this appears simple on paper, it involves great risk for the producer. Many come from a long line of coffee growers, so coffee is the crop they understand. Removing coffee trees and planting alternative crops presents many challenges, they may not know what will grow well on their land, or have access to the market for that agricultural product. 

With BIODIVERSAL, Felipe and Elisa plan to raise capital for the necessary agricultural research and development, to learn the highest standard processing methods, and to find the specialty markets for these new products.  

Crop trials at the BIODIVERSAL experimental farm

Crop trials at the BIODIVERSAL experimental farm

Seeing the immediate impact of biodiversity at the BIODIVERSAL experimental farm in Cundinamarca, Colombia

LEPT will bring their skills in marketing to help farmers find specialty markets for value-added agricultural products

LEPT will bring their skills in marketing to help farmers find specialty markets for value-added agricultural products

Holistic business model

The core idea behind BIODIVERSAL is to generate added value. This means transforming raw materials into something closer to the final product. Felipe noted, this requires a process of “continuous innovation in production, processing, and marketing to establish more direct, relationship-based trade between farmers and consumers in a high-quality agricultural market.”

Farmers involved in the project will benefit from LPET’s experience and expertise in design and marketing. The team intend to focus on the local market first, to reduce the carbon footprint of their products. “While we understand the importance and value of an international market,” Felipe said, “we want to focus on our local niche markets before branching out.”

Felipe refers to the multiple players required to make this business model work as a “symphony of collective efforts.”

Farmers are the production experts and caretakers of our ecosystems. Experienced entrepreneurs and investors bring the capital and experience to create value-added products through investments in technology and innovation. Conscious consumers support the project by seeking quality and the highest standards of ethical and ecological principles in the products they purchase.

THE PILOT PROJECT 

BIODIVERSAL will begin with a pilot project, working with twenty small-scale farms located around LPET´s farm in Cundinamarca, Colombia. The team have already leased a two hectare farm that meets all the characteristics of an average coffee farm in the region. They plan to implement four different BIODIVERSAL farming designs that will include over 24 species in addition to coffee. The results of these experiments will be shared with the local community and farmers. Farms will be divided into four groups, five farms will replicate one design, so that twenty farms can help test all four designs. Sixteen farms have already signed up for the challenge, all of which belong to LPET’s Neighbors & Crops Program. 

Some of the agricultural products that they intend to produce include:

• Coffee

• Pepper

• Inca nuts

• Archira (a local root vegetable used to make flour)

• For shade:

  • Fourteen varieties of trees including Cedar, Chachafruto, Yarumo and Palm

• For essential oil:

  • Lavender

  • Tumeric

  • Rosemary

  • Thyme

  • Citronella

  • Vetiver

• For syrup:

  • Yacon
    
    

Following Colombia’s peace agreement and the withdrawal of FARC guerrillas from many parts of Colombia’s countryside, Felipe and Elisa see an opportunity to bring this new approach to conflict-prone areas. This could help farmers transitioning into legal crops create a more sustainable business model, strengthening peace in one of the world’s largest coffee producing countries. 

Transparency is hard

“No one is crying for the poor Napa Valley vineyard owner,” said Peter W. Roberts, speaking at the Transparent Trade Coffee Colloquium in Hamburg late last month. Peter is a professor at the Goizueta Business School, Emory University and he began his academic career investigating the wine market, which he says functions well. 

“Markets work best when there is a lot of information, and a lot of opportunity,” Peter explained. “A vineyard owner can deliver their grapes to the back door of a winemaker, then walk around to the front door to find out how much their wine sells for,” he explained. As a result, “Napa Valley vineyard owners are paid well. Coffee farmers are not.” 

Several industry veterans attended the colloquium, including Peter Dupont of Coffee Collective, Geoff Watts of Intelligencia and Mark Dundon of Seven Seeds Coffee. All agreed that after 20 years working in this business, little has changed for coffee producers. They still struggle to make a living, they work at the mercy of the market, and they remain at the bottom of the supply chain, with no power to change their situation. 

Part of the solution is to increase the amount of information available, or in other words, increase transparency. “Get roasters to origin. Get farmers to places where coffee is sold,” Peter W. Roberts suggested. And, when this is not possible (and it rarely is), those of us working in green coffee purchasing need to be the conduit of information, providing negotiating power to producers, the kind enjoyed by Napa Valley vineyard owners.

Sounds easy enough. So why is it so hard? 
 

The barriers to transparency in a long and complicated supply chain are many, but we have to try anyway. 

BARRIERS TO TRANSPARENCY: Business and competition

The first and most obvious obstacle is business. Sharing sensitive financial data makes us uncomfortable as it could negatively impact our bottom line. Will customers complain when they see the margin we earn for our labor? Will our competitors use that information to steal our precious coffees by offering producers slightly more than we pay? 

These are valid concerns and highly probable scenarios. The only defense against them is trust, the kind of comes from long term and mutually beneficial relationships. Customers must trust the work we do and the value we add. Producers must trust us to come back to buy the coffee year after year, which would make it less attractive to sell at a higher price to a one-off buyer. We must also welcome the competition and pay higher prices, trusting our customers, and their customers, will be willing to pay extra too. 
 

BARRIERS TO TRANSPARENCY: Which number do we share?

Percentage above… 
You may have seen claims like “we pay an average of 20% above,” “twice the market price,” or some other multiplication of the C-Price. This is an easy way to contextualize the high prices paid for specialty coffee, and we admit to doing something similar ourselves. But it is a fundamentally flawed comparison because, as most in the specialty industry would agree, the commodities market is a flawed system. 

FOB
The most common number shared by specialty coffee companies who practice transparency is the FOB. This stands for Free On Board and it represents the price paid by the importer to get the coffee out of the country. Consider it the moment the crane carries the container of coffee from the dock to the ship.   

The reason the FOB is the most commonly shared number is because it is the number those of us working in the markets know and can verify. As importers, this is the price CCS pays for the coffee, and we can prove it with our purchase contracts. 

The problem with the FOB is that it says little about how much the producer was paid. Included in the FOB price are many additional costs, such as milling, storage and transportation. There may also be an exporter’s fee, which covers their work in sourcing the coffees, supporting and training the teams that cup these coffees, possibly paying agronomists who advise the producers. Often it includes origin country taxes and insurance. 

Return to Origin (RTO)
Based on the FOB, several roasters have begun publishing percentage they call Return to Origin, or RTO. This is the FOB as a percentage of the final cost of roasted coffee. A 20% RTO means that 20% of the final price of that roasted coffee was paid to people in the country where that coffee was cultivated. 

This is an interesting initiative, and hats off to the roasters who use it. However, the risk of publishing the RTO as a percentage is that a higher percentage looks better, it suggests more money in the pockets of people at origin, but that isn’t always true. It really depends on the final price of the roasted coffee; 10% of a high-priced coffee might mean more money than 20% of a cheaper coffee.  

FOT
Free on Truck (FOT) is the amount paid when the coffee is transferred to a truck for transport, and it is hard to know if this was paid to a producer, or another actor along the supply chain. FOT might be paid to a farmer, but it is more likely it was paid to a washing station, dry mill or exporter who must then transport the coffee to port.

Farm Gate
A more accurate reflection of what a farmer earned is called the Farm Gate price. This is the price paid the moment the coffee was transferred from the hands of the producer. Once again we encounter problems with this figure. 

Firstly, the Farm Gate  price is almost never the price paid for green coffee, as producers usually deliver cherries or parchment. Calculating the price paid for green coffee based on the Farm Gate is complicated by a number of different factors, all of which impact the amount of green coffee derived from the delivery. Even when the producer is delivering dry parchment, coffee in its final state before milling, there is no easy equation to calculate the amount of green coffee purchased. This depends on the yield factor, which is the amount of green coffee produced after waste from parchment and any impurities like stones and sticks is discarded. As you can imagine, the yield factor can vary from lot to lot. 

Each step in processing coffees carries with it loss and risk. The loss is in the form of cascara, pulp, humidity and parchment. The risk is that something goes wrong during processing that could impact the quality of the coffee, lowering its value. The more loss and risk a producer carries, the more they are paid for the product they deliver. This makes it almost impossible to compare a Farm Gate price paid to a producer in Colombia, who processed their own coffee and sold it as dry parchment, to a Farm Gate price paid to a producer in Ethiopia, who sold fresh cherries to a washing station. 

Similarly, it is difficult to compare these numbers without understanding the cost of production in each origin. And imagine the producer delivered their coffee over a series of weeks, with differing yield factors, price fluctuations and changing currency valuations. 

The calculations get complicated.
 

LACK OF CONTEXT

The biggest obstacle to transparency is context. A single number can not communicate the long and complicated supply chain of coffee, and the costs associated with delivering it. Nor can it account for variations in cost of production, cost of living, currency fluctuations or volumes produced.    

There are efforts to improve this. Colombian coffee exporters, Azahar, presented data to those gathered in Hamburg from their own study into providing their producers with a living wage. Working with 100 farms in three departments in Colombia, they determined three price points for a carga (125kg) of parchment, which is how most Colombian producers sell their coffee. The three price points indicated the price Azahar needed to pay in order to:

1. Meet the poverty line 
2. Meet the minimum wage in Colombia
3. Meet the minimum wage, plus enough extra to reinvest in developing the farm.

The fourth column, which contained only question marks, asked “How can we do better?”

This data goes a long way to contextualize the Farm Gate price, and is a great potential model for other companies buying green coffee. However, for now, its scope is limited. 

MARKETING TRANSPARENCY

“Transparency is not marketing,” Peter Dupont noted, “but we do need to market these numbers better.” 

Our customers do not have time to investigate the supply chain of every product they buy, they need at-a-glance information in order to make their purchase decision. This is something Fair Trade understands well. 

More importantly, consumers need to believe transparency matters.
 

No profit in transparency, yet

Operating transparently requires an enormous amount of work. It means asking everyone in the supply chain to keep and share detailed financial documents, which need to be understood, analyzed, distilled, then formatted, packaged and communicated to customers. It means research into local economies to provide context for these numbers. 

It is difficult for small specialty coffee companies to justify the additional expense unless the customer is willing to pay for it.

This is the crucial link in the transparency chain. We must convince customers to demand transparency, even if they don’t have the time to analyze and understand the data we provide them. “Ultimately, no one will choose to pay producers more for coffee,” Peter W. Roberts said, “the market has to force it.” 

For transparency to make business sense, we need to convince consumers to ask:

1. "How much was the farmer paid?"
and
2. "Is that enough for them to live?" 

If enough consumers ask, everyone in the supply chain will make it a priority to find the answers.
 

Share what you have

The overwhelming agreement in the few days spent in Hamburg was that transparency can’t wait until we have perfect data.

“We have to start somewhere,” Peter Dupont added, “then push the conversation forward,” even if that means we start with the FOB.

Professor Peter W. Roberts is working on research to strengthen transparency in specialty coffee, but even he noted “we can’t ask you to share data you don’t have.” 

This is the reason the research to create a Data Backed Transaction Guide for the Specialty Coffee Market will begin with the FOB. It is an imperfect number, but it is the one we all have and can verify. The hope is that the breadth of the data in this pilot study will be robust enough to encourage further research into producing better numbers. 
 

TRANSPARENCY AT CCS

Transparency is one of our core values, and yet we have struggled, as have so many companies in specialty coffee, with all of the above issues. In the past we have shared the FOB of the coffees we buy with our customers, but we have not published them for fear of misrepresenting what the farmer is earning for that coffee. 

We have been pushing for better data, from our producers and from our partners. We are trying to contextualize the prices paid for specialty coffee with the cost of producing such high quality. We have an initiative to source better data and create a methodology for people at origin to do this on a regular basis. Plus, we will be data donors for the Data Backed Transaction Guide mentioned above. 

And, from today, in the spirit of the Hamburg colloquium, we will start with what we have. Below you will find the FOB of all coffees we have purchased so far in 2018. You can also find them on the origins pages on our website. We will do this for all coffees we purchase from now on. 
 

FOB of CCS Selection, 2018

Kenya
Ethiopia
Colombia
Guatemala

CONTEXT

The FOB represents the price we pay our export partners at origin. To calculate the cost we charge to roasters, we add the following:  

1. Financing and logistics, on average USD $0.3/lb
   (USD $0.4/lb for inland coffees such as Burundi).
   We work with financing partners as we are an independent sourcing company without the capital to finance coffee. Logistics covers shipping, insurance and other costs to transport coffee from ports at origin to our warehouses located in Oslo, Hamburg, New Jersey and Oakland. This price is only for full containers. When we ship smaller quantities of coffee, like from Panama for example, financing and logistics costs are much higher. 
2. Our markup to cover our costs.
   The markup varies, depending on the FOB, volumes purchased, and the need to remain competitive in the market. For example, we take a lower margin on our most expensive coffees. On average, in 2018, our markup is 20%.  

So the equation for all origins, except Burundi, looks something like this:

Price to roasters per pound = (FOB + US$0.3) x 1.2
Price to roasters per kilo = (FOB + US$0.66) x 1.2

The equation for Burundi looks something like this:

Price to roasters per pound = (FOB + US$0.4) x 1.2
Price to roasters per kilo = (FOB + US$0.88) x 1.2

Please remember, these are averages. 
 

Push the conversation forward

“It’s not necessary to go from zero to one hundred in the first try,” said Meredith Taylor, Sustainability Manager for at Counter Culture. Their first transparency report included data on twelve coffee contracts. Now they publish details on over 300. 

Publishing the FOB of all coffees purchased in 2018 is, perhaps, starting at five. Meanwhile we, and many of our colleagues in the industry, are working towards delivering one hundred. 

Do you want to be part of the conversation about transparency in coffee? Share your thoughts below, and join the Transparency in Coffee Facebook Group.