Securing the Future of Quality Coffee: Risk Management and New Opportunities to Strengthen Coffee Supply

market

by Ben Corey-Moran, Fair Trade USA

Growing great coffee is no easy task. Period. Now, try producing the finest beans on the market while battling the pounding hand of climate change, the spread of diseases like coffee leaf rust, and wildly volatile markets with an oftentimes distant relationship to the generally accepted terms of supply and demand; the odds are largely stacked against the modern coffee farmer. This high-risk, low-return scenario leads us to a very basic yet critically important “aha”—the ability to not only survive in coffee, but to thrive, lies in the capacity to manage risk at all levels of production. The future of exceptional coffee depends on it.

Market Volatility and the
Small-Scale Farmer

It is a fact that the vast majority of the world’s coffee farmers are small-scale producers. For many of them, their collective success, and the scale of their production, requires aggregation—the organization of multiple (sometimes hundreds or thousands) of farmers working together to produce, process, sort, and export coffee. These formal organizations, largely cooperatives, play a critical role in linking farmers with the market, helping them become not just producers, but also traders. For better or for worse, with this role comes exposure to market volatility, and the risks it creates for all.

The peaks and valleys of the New York “C” are a real-life roller coaster; its dramatic movement has implications for individual farmers and their organizations alike. Without a firm understanding of the market, the dynamics that shape it, and the tools available to manage risk, it becomes nearly impossible for producers to plan for and make meaningful investments in the future.

Take the historic coffee market spike of 2011, for example, as compared to the dramatic plummet of late 2013. This type of volatility translates into high degrees of uncertainty for cooperatives and individual farmers. Consequently, it limits farmers’ ability to fund improvements in quality, productivity, environmental sustainability, and overall business capacity. Great coffee requires ongoing investment, and only great coffee really earns the price premium farmers need to make those investments.

Simply put, unmanaged market volatility is a true roadblock on the path to long-term profitability, and the ability to improve and maintain quality for generations to come.

Market Risk and Access to Finance

Back to the idea of investment, it’s important to reiterate that farmers’ ability to access capital to renovate their farms, improve their processing, and manage their harvest for quality is key to the sustainability of coffee. There are numerous financial organizations who have entered our industry, and who have done heroic work to fill “the missing middle” by providing finance to farmers and their organizations. Still, these lenders have many challenges funding cooperatives, because of the risk associated with the business. Simply put, it’s difficult to know if farmers and their cooperatives will break even, let alone turn a profit, and be able to repay their loans.

Producers across the board need access to pre-harvest and long-term financing. The challenges associated with becoming a good loan candidate, combined with overall price instability and unpredictable crises like leaf rust, can make it very difficult to access that vital capital.

Understanding the Market

The vast majority of farmers, even those in successful co-ops, have not historically had access to the tools and resources needed to manage market risk, especially in times of extreme volatility.

This presents us with an important question—is there a way for the coffee industry to come together to create a future where every supply chain partner is positioned to manage their exposure to price risk? Through collaborative effort, can we develop a stronger coffee industry, one more capable of delivering value to everyone within the context of an ever-evolving and complex market?

Producers in the Driver’s Seat

With a network of more than 300 small-farmer cooperatives in Africa, Asia and Latin America, Fair Trade USA sees price risk management (PRM) as the only way forward to shared prosperity. We’re now working in partnership with producers and importers to develop new collaborative approaches to price risk management through pilot programs in Nicaragua, Peru, and Costa Rica. Our partners are inspired to share knowledge and skills, because when it comes to managing risk, our supply chains are only as strong as their weakest link.

This is why we’re developing a new program to support farmer trainings on PRM tools. It focuses on:

  • Individual leadership development
  • Organizational development at the co-op level (inclusive of management capacity building as well as management systems implementation)
  • Technical PRM training
  • Development of a simulator to help cooperative commercialization managers practice and learn PRM strategies.

We recognize that in order to be successful, PRM cannot be seen as a technical skill alone. Certainly, there is a skill set that needs to be developed, but to be effective this effort needs to be embedded within the long-term development of cooperatives as social businesses. This means taking into consideration the need to align management with farmers, and to support the cooperative’s organizational capacity in building a strong foundation. And it’s not enough to simply begin this work—we need to look for strategies to jumpstart its integration. That’s why we’re developing a simulator to ramp up the learning curve, helping co-ops learn lessons in a matter of hours that before may have required multiple seasons of practice and experience.

Managing Risk, Opening Doors

The ability to understand and manage risk is directly related to the struggle for long-term viability of coffee growing communities.

Through education on price risk management, coupled with stable, long-term contracts and access to lending collateral, cooperatives will be better positioned for profitability. They’ll also be prepared to manage longer-term debt, extend finance to their members, and enable the investments necessary for the future of specialty coffee.

At the end of the day there’s a toolbox required for every job. When roasters travelled to origin 15 years ago, they didn’t taste coffee with producers. Producers didn’t taste coffee themselves. The development of cupping labs, and the sharing of knowledge about coffee quality, has helped transform our industry. The collaborative effort taken to share the tools of cupping put producers in the driver’s seat, and has created win-win scenarios up and down the supply chain. It also reconfirmed the notion that we’re all in this together. It is this same spirit that is required to transform the volatility of the market from threat to opportunity. Sharing the tools of the trade is a strategy with a proud history in coffee, and price risk management is one of the next frontiers we must explore, map out, and navigate together.

benBen Corey-Moran is the director of coffee supply at Fair Trade USA, where he works with hundreds of coffee cooperatives, estates, and associations of independent family farmers to strengthen coffee supply chains.

Leave a Reply

Please use your real name instead of you company name or keyword spam.