Continuing from our article How to Buy Coffee 101, in this article we examine how to align with your suppliers: premium payments for premium quality
FINANCING
Here we run into our next major challenge, which is about to be compounded by another– so we’ll assess the two together.
The challenge is that most financing does not extend past the export level. So instead, you’ll find exporters checking ICE prices and hedging via the futures market, and will involve bank accounts, trade and inventory financing.
However, at the farm level, none of these tools exists, and what is more, the cash crunch for farmers comes right when they need it the most.
By the beginning of harvest, farmers are near the end of their savings from the last crop. In addition, they face the fees that come along with a new school year – dues, uniforms, and travel, while also needing to invest in their farm.
It’s hard to patiently work towards quality when the result of these efforts is unknown and pale in comparison to the actual needs your family faces today.
This highlights a hidden problem for the exporter – the uncertainty of outcome for farmers. Coffee is a volatile market; prices change on the farm every day. On top of this, the market does not reward or even recognize quality. That’s right, until the point of export, coffee is bought and sold based on one thing – weight!
This means that there is no natural system in place that pays for quality, and anything you invent will be mostly or entirely new to the area. Conditions like this make it tough to invest in one’s business.
And so, we are battling against poverty (timing), uncertainty (volatility) and a volume-driven (commodity) system. From a sourcing point of view, these three factors make it difficult to incentivize one farmer to produce quality, let alone an entire community!
The adage “one bad apple can ruin the barrel” holds true in coffee too. A farmer network must trust one another; even one poor participant can tank an entire container. Game theory tells us this is difficult – large anonymous groups have problems cooperating when it comes to matters such as this.
“Why should I put the extra effort in to produce better quality when I’m not being paid more for it? My work could be erased by the sour beans of my lazy neighbor?” the farmer reasons.
So how do you introduce ‘pay for performance’, the practice of rewarding farmers who produce quality coffee without totally disrupting a farmers group? How do you overcome barriers to financing so farmers can afford to invest in quality? How do we arrive at a reasoned understanding of what quality looks like at the farm and in the cup?
Paying Higher Price = Better Quality?
In our first article, we took a journey to the farm. In this instalment, we will chart the rather complicated path that lies between paying higher prices to get better quality coffee.
Consider this situation – you read ‘How to Buy Coffee 101’ and set out to become a coffee buyer. You can afford to pay a reasonable premium as long as the quality you get is good enough that you can build that premium into the price tag when it hits the shelf back at home.
As you step into this world…think about how would choose to source: directly, through an importer, through an exporter. There’s no wrong answer. It will be helpful for truly engaging in the scenario that follows:
You have anywhere from 20 bags to 2 containers to fill from a specific origin and wonder what you can do to be more proactive in sourcing this coffee. The first question you should ask yourself is “Why look past the importer?” Importers manage quality control, risk and hassle with great efficiency gained through their expertise, relationships, and economy of scale.
There are dozens of importers, and with some notable exceptions, coffee is a buyers’ market. If you can accomplish your sourcing goals in collaboration with your importer, this is usually your best path forward.
This is often as simple as cultivating your supplier network, stating your intent and asking the right questions. Of course, this could be a whole other blog post. But if you are frustrated with your importer, then that’s a problem you can fix. You should pick an importer that’s interested in calibrating to your palate preferences and purchasing process. When you find one that does, communicate more closely with them.
Whether you know where to go to find the farm or not, your search should begin by contacting the mill or exporter who would be responsible for getting your coffee to you.
Hey, it’s not as fun as riding in the back of a pick-up truck, but those who operate the mills (be they cooperatives or private exporting companies) are pretty knowledgeable about the area you want to travel to.
So knowledgeable, in fact, that you may find them better equipped to finance your farm-to-export purchasing and represent your needs while you are away. If so, the work doesn’t stop here. We’ll explore the impact of alignments and map out significant stakeholders in our next instalment, How to Buy Coffee 103: Relationships.
In the meantime, simply know that no matter how close you get to the farm, the exporter is your supplier, and therefore either an excellent ally, adversary or ‘frienenemy’.
Even the best export partner, when they talk about quality, means something slightly, to significantly different than what you mean when you talk about the quality you can pay for. For you, quality is in the cup – it’s both the sizzle and the steak. Quality is what builds your brand and makes your customers go ‘wow’. Yes, of course, this is a matter of preference. So it should be no surprise to learn that one of the chief challenges you’ll encounter while sourcing is calibrating with your suppliers, be they exporters or farmers.
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Identifying Cup Quality
Your average exporter can talk to you in terms of cup scores, but their core culture is to cup for defects. Specialty coffee companies have the luxury of cupping appreciatively to describe our preferences around coffee. However, on the supply side, we are looking at a volume business where one simply can’t afford to take such an appreciative approach when evaluating so much coffee.
So exporters may score coffee by industry standards (SCA), and they may even have a Q-certified cupper on staff who sample roasts and who has travelled enough to know what hazelnuts taste like. It is this person, or whoever holds this position, that cups collections throughout the harvest and blends to meet quality specifications (defect counts, price goals and general cup characteristics).
Meeting this person, picking their brain, and starting to calibrate with them is a best-case scenario. Still, however, you must keep in mind that this person likely spends most of their day discussing quality in terms of output instead of cup score.
Important Aside: Output refers to the percentage of export-grade beans (sc 15+) that result from milling a sample of dried cherry or parchment. Floaters, defects, chips and undergrades are pulled out during milling, reducing a lot’s overall output. By the same measure, the output is a term that can refer to the distribution of bean grade size from a particular lot, with higher yields of larger grades being more desirable.
Since calibration is a two-way street, we’ll start our conversation here. Can the output be a measure of quality? The answer is – it can be, yes. Healthier crops from the most fertile areas produce bigger beans. Flotation and proper post-harvest processing remove many undergrades.
About Representative Samples
When coffee is dried alongside foreign matter or in the same pile as defects, this influences the end quality of that coffee. However, if these are picked out before drying (with the aid of willowing or flotation, for example), much of the quality concern is avoided. And so, whether output relates to quality depends on whether the sample was picked before milling.
If there was no picking at all, then you can get a baseline for the farm based on their coffee’s output. Combine this with a green bean analysis, and you’ll find that a representative sample of green beans can tell you quite a lot about the farm before you even visit.
If the sample was cleaned up, then it is important to know whether this happened before, during, or after drying the coffee. Picking is a positive practice and one you should not discourage, but if you are to use the term as a stepping stone to calibrating with your suppliers, you should arrive at a common definition of what goes into a representative sample.
Now you know when you hear a supplier talking about getting 85-90 quality coffee, they are likely talking about output, not cup score. Still, this is a good place to start your conversation. This, and debriefing on the known causes of the defects that everyone can see and understand. In short, define what goes into a representative sample and use the output ratio as a proxy for cup quality.
The obvious next step here is to cup with your suppliers so that you can both draw a relationship between output and cup scores. Calibrating with suppliers is a long, multi-year process, and I’ve found it helpful to set expectations.
The first step is to create an awareness of how their coffees are evaluated by your customers. Once they are ‘aware’ of the process and what a cup score means, the next step is ‘deeper understanding’. This is where they begin cupping with you and the start of you calibrating the way you score coffees. The final stage is ‘ownership’, which is where you see suppliers cupping coffees on their own accord and teaching others how to cup as well.
Okay, so we have overcome a few significant barriers – the coffee will make it through the mill and out of the country, as ordered. We have gathered an ally or two to help us in our work. Lastly, we have arrived at a common term, ‘output’, to start talking about quality until you can cup and calibrate more closely with your suppliers.
The road between higher prices and higher quality now looks free and clear. Simply offer higher prices and you should get coffees with a higher output, which can be a rough indicator of cup quality. You may think that better prices encourage better effort is put into picking, separation, pulping, fermenting, washing and drying. However, it’s still not that easy.
The market works towards consensus. Every morning traders wake up, check the international price for coffee, and then announce what price they are paying at the farm that day. Throughout the season, this leads to a more or less uniform ‘farm-gate price on average.
Commodity supply chains buy broad and wide to get their volume. More direct specialty supply chains go deep into a specific community to get their quality. These are two different ethics. Commodity markets are fair to everyone because they offer the same price to everyone. Specialty markets are fair to specific farmers who benefit from them because the prices are more aligned to value in the end market.
When you walk in with a premium pricing scheme, you break ranks and create a pricing bubble within a specific location on the mountain.
Impact of the Price Dynamic
Farmers are likely to pick too quickly to take advantage of higher prices. Since they don’t know how long the prices will stay high, they collect poor coffee from other places over the mountain to sell into the higher price schema. As such, when you offer higher prices you actually encourage a decrease in quality.
It’s an odd market dynamic that keeps some coffee communities in poverty as producers of mediocre coffees. Anytime a specific region gets too much momentum, the free market comes in with increased prices and decreased quality standards to encourage volume. It’s an open market; farmers can sell to whoever they want. The company that led the price increase does not hold any loyalty.
There are two ways to solve to this problem. Both relate to knowing your coffee by knowing your farmer. Begin by registering how many trees each farmer has and matching any bonus payments to reinforce that system of accounting. This helps you to know who is delivering coffee to you. When you know how much a farmer produces, you can also determine if they are delivering more than they should be able to grow on their own farm, thereby weeding out any out-of-zone coffees coming in to profit from the premiums you are offering.
By visiting their farm and registering, you can outline some steps the farmer can take to improve from wherever they are starting – called a farm improvement plan. By doing so, you have a point of conversation to pick up on each subsequent visit.
During these visits, they also get to know you. When it comes time to sell their coffee, they are more likely to deliver to you than the many other buyers on the mountain (in their village, in their family).
Buyers who purchase from directly registered farmers expect to get about 80% of that farmers’ annual harvest. The other 20% would be sold to other middlemen or suppliers or used as a type of barter (for loans or other goods – coffee parchment is like cash).
To recap, we’ve now translated the road signs to know how to talk about the path towards quality. We’ve engaged some local guides and have gotten to know the farmers from whom we are hoping to buy. We have even registered our supplier network to cordon off the impact of our price increase and as a check against non-premium coffees being bought at premium prices. So things are looking good, but we have yet to address the gorilla in the room.
And that is the fact that you don’t buy coffee in a vacuum.
External Factors
When a buyer rewards specific farmers or farmers associations with higher prices, this creates disparity within the community. Why do some farmers get paid more than others? On the one hand, we want to reward extra effort, encourage quality, and help lead farmers to pull their neighbors into specialty coffee production through their example. However, this dynamic can create stress within a farmers group and between them and their neighbors.
Simply paying more to individual farmers is going to create some problems. So how do we move forward while first doing no harm?
The first is to recognize that specialty coffee depends on commodity coffee. Farmers need a buyer for all of their coffees. Then they can look to premium buyers for their premium coffees. In other words, you are not the only buyer in a farmer’s life.
So even if you aim to purchase their ‘Whole Crop’, something that greatly increases your credibility at the farm, you are purchasing in the context of an open, competitive, volume-oriented market.
This simply means that farmers are oriented towards quantity. To get quality, you need to take away volume-based collection goals. You can do all the right things to engage your suppliers, only to have them smile and show off five containers of mediocre coffee. To institute higher quality standards for production and collection, you need to take all volume-based goals off the table. Addressing the non-specialty portion of the farmers’ harvests is the responsible way to do this.
Your options are to commit to purchasing their ‘Whole Crop’, work alongside another buyer interested in more competitive coffees, or encourage farmers to sell what they don’t sell to you into the open market at lower prices.
What you decide to do will depend a lot on the coalition you’ve built (more on this in our next instalment), but in general, it’s your purchase volume that will decide this for you. You should be looking to purchase as much coffee as you can sell. But if you are a specialty buyer and don’t have outlets for commodity coffees, you are at a disadvantage.
Separating Out Quality
You’ll need some mechanism for separating coffee based on output or quality if you do this. This will allow you to keep the products separate so that you can pay differentially (in the case of Whole Crop purchasing) or cherry-pick what you want (if you aren’t buying their commodity coffees).
Lot separation is a relatively new concept in many communities. And there are thousands of ways to go about it. This can be a whole course on its own.
For now, know that the goal is to get a system in place where your suppliers can produce samples of coffees for you along a few different axis:
- By grade (screen-size), lots with larger bean sizes contain fewer defects. Separating a lot by grade size is a way to screen out different quality levels.
Note 1: This does NOT mean that larger beans correlate to higher quality coffees. In fact, bean density is more likely a better generic measure of cup quality.
Note 2: Separating by screen size happens at the mill prior to export. This can be done instead of OR in addition to any of the methods listed below for separating coffees at the farm BEFORE they get to the export mill. Since lot separation is not common, grading by size is the default in most communities.
- By altitude. Altitude can impact cup characteristics, so separating lots by altitude can lead to different qualities of coffee.
- By region. Micro-climates all carry unique characteristics, so separating by producer organization, community, zone, or region is a way to identify geographic flavor profiles.
- By collection period. The season can impact quality quite a bit, and so separating lots by the day or week they were collected can help a buyer to understand how the harvest progresses in the cup.
- By inferred quality (letter-grade). Farmers carry generations of informal knowledge about what constitutes a quality lot, so asking them to mark bags as a school-teacher would (A, A-, B+, etc.) is a way separate by quality based on this knowledge.
- By processing method. Coffee can get fermented, washed and dried in a variety of ways. Separating coffees based on common processing methods can be a way to get a variety of differentiated products from the same suppliers.
Any of the above methods require some brick-and-mortar storage at the farm plus a clear plan that’s easy to implement and enforce. Whatever method you choose to pursue, the separation of lots is a powerful tool.
It’s what you need to determine premiums and to decide what coffees to buy. It’s what you need to give farmers better feedback as well. “Hey, Zone 1 is over-drying, Zone 2 has a few underripe, Zone 3 is our model zone, etc.”
Lastly, having lots separated at the farm allows you to use your knowledge of the market to help this community create the best coffees possible. You need to pick a manageable method – you won’t have the time or logistics necessary to cup daily lots from individual farmers, and keep these separate. However, once you have an idea of the potential within the different lots, you can decide how you want to recombine those lots into a final product
If you find some lots have a certain type of acidity, for example, you may want to create one product around that flavor profile.
Or you may even blend them all back together and bring the coffee in as a single lot. Even if you do this, the effort associated with lot separation was worth it. The simple knowledge that their name is on a bag of coffee and that it will be compared against their neighbor’s can have a powerful impact on the right farmers.
And, again, without lot separation, how are you going to structure your premium payments? Are you just going to offer a premium to everyone saying ‘thanks for the extra effort, here’s a tip’? You can do this, but it’s simply confusing to many farmers and creates stress between neighbors who aren’t part of the program.
The approach we’ve found to work best is to reframe yourself–from a buyer of their coffee to their salesman and advocate.
“The feedback I’m giving you is not from me – it’s from my customers, who are ultimately your customers, too. Here is what they want to see. Here is how we, working together, can deliver.
“You know I’m not your buyer, because a buyer would be negotiating with you to get better prices. I’m encouraging you to produce more valuable coffee so that I can pay higher prices. When I can sell a coffee at a higher price, I can pay you a higher price for it. Makes sense, right?”
Amongst other advantages, this approach allows you to present premiums based on performance. For example, in the community of Bulaago in Uganda there is a farmers organization that receives three payments:
The first payment is the prevailing farm-gate price on that day. This gets around the quality concerns of buying within a pricing bubble and avoids putting such stress on a community.
They get a second payment based on our final contract price for that coffee. This is a small premium that’s an event for everyone in the group and goes directly into the farmer’s pockets.
Lastly, farmers receive a third payment, which is something not done in the area. This third payment is based purely on cup quality. However, since it is not common practice in the area and we don’t want to create a pricing bubble, we need to be careful about presenting this premium.
The solution was to have the farmer’s organization vote on how to use this third payment in the context of community and capacity development. In Bulaago, lots are separated by zone; bags are marked with a farmers’ name and a letter grade.
This allows us to know who the leading farmers are within each zone. When we cup coffees by zone, we determine which zones are ahead of others. The third payment goes into a pool that is then rewarded back to farmers by zone.
For example, at the end of 2014/2015 harvest, Bulaago purchased cows to give to the lead farmers in each zone as a prize. Once this cow gives birth, it is given to the next farmer on their list. The quality of their coffee will determine the size of the prize, but at around $450 per cow, each zone should be seeing multiple calves.
Other options on the table were ‘electric saws’ to make pruning easier or a pre-crop fund for agricultural inputs – both of which would increase farmers incomes indirectly. Other ideas included using the funds to purchase furniture for their school and creating a medical emergency fund to act like health insurance for members.
The point is that the third payment is being used to provide value to the farmers so that it doesn’t go directly into their pockets. This encourages the extra effort while avoiding some of the negative dynamics we’ve discussed caused by offering higher prices.
And that’s all for today, folks. Tune back in for our next instalment on ‘building coalitions’ where we walk through the key stakeholders along the line from the crop to your door. We’ll take a look at measuring impact and how to develop farmers are your business partners.
Jacob Elster is a sourcing representative for Crop to Cup. You can find out more about them at www.croptocup.com
