How to make Coffee Green and Sustainable?

Coffee is the world’s second most tradable commodity after oil. The burgeoning coffee culture in the developed world has resulted in high profits for coffee retailers and franchises. However, a bleak picture remains veiled upstream, as third world coffee farmers receive a paltry 10 per cent of the eventual retail price on average. This begs the question as to whether profits from franchises and retailers are really trickling down to the people growing the beans. Are there also other sustainability issues with coffee that we are overlooking? With a plethora of options available today, we recognise that there are a growing number of ethically sourced coffee retailers in many parts of the world. This article aims to delve into the ecosystem behind the coffee industry and through the analysis of those organizations promoting coffee ethically, identify which aspects of the value chain ethical retailers and/or franchises are championing through their unique value propositions. Our goal is to educate coffee consumers to make informed and smarter decisions when they purchase coffee, challenge current practices and identify potential opportunities for businesses to champion sustainability causes in this industry.

 

Industry Analysis

Coffee production involves harvesting, processing, sorting, roasting and finally brewing. Between these processes exist producers, middlemen, exporters, importers, roasters, retailers and customers.

We can organise them largely into three groups: the growers, the roasters and the retailers. Growers exist in areas known as “The Bean Belt” shown below. Amongst these countries, based on a report by ICO (International Coffee Organisation), the top five producers are Brazil (36%), Vietnam (16%), Colombia (9%), Indonesia (6%) and Ethiopia (4%). In certain coffee growing countries, especially in Africa, there is an overwhelming reliance on the coffee industry as a percentage of total exports. Burundi, Uganda, Rwanda and Ethiopia derive more than half their export earnings from coffee alone. A heavy reliance on coffee as a cash crop results in many malpractices which go unaddressed. For example, coffee farmers in Kenya do not actually get paid for their coffee crop until after the crop has been sold at auction, which may be six months after they have first delivered their beans to a primary cooperative. As a result of this, farmers are heavily reliant on credit, charged at high rates of interest, and on the provision of education, health and input credits from their cooperative or local credit unions. And these farmers are part of Fair Trade certified supply chains.

Growers typically sell green coffee, or unroasted coffee beans to exporters who then sell them to importers or large plantation owners. Importers hold inventory of large container loads, which they sell gradually through numerous small orders. Importers possess capital resources to obtain quality coffee from around the world. Roasters’ heavy reliance on importers gives the importers strong influence over the types of coffee that are sold to consumers.

As we can see, the supply side of the coffee industry is highly fragmented and fragile through exposure to changing weather patterns globally. In contrast, the roasting industry is extremely concentrated. Due to this concentration, roasters obtain the market power in their interactions with the growers and have the highest profit margin in the commodity chain. Large roasters normally sell pre-packaged coffee to large retailers, such as Maxwell House, Folgers and Millstone. (McLaren, 1992). This type of market structure is a monopsony, which signifies that the roasters have purchasing power and therefore have control over the prices that they pay to the farmers for the coffee produced by the growers. The economic side effects of this type of market power, is that many of the coffee growers live in poverty and it is difficult to achieve sustainable development in these places that are dependent on the production of coffee. When the coffee farmers receive prices for their beans that are below the costs of production, they are forced into a cycle of poverty and debt.

The world coffee market is dominated by these multinational corporations: Nestle, Kraft General Foods, Proctor & Gamble, Sara Lee, JM Smucker and Starbucks. The largest importers are the United States (19.5%), Germany (11.4%), France (8%), Italy (5.7%) and Japan (4.8%). Based on ICO, there has been an overall increasing trend in global coffee consumption at a rate of 1.3% since 2012.

Key Issues

Along with greater coffee consumption has come greater awareness of the problems. Here, we outline some of the key concerns in the coffee industry.

Environmental impact

The increase in competition and a drive for increased output are impacting the environment in negative ways, with monocropping becoming the new norm alongside ‘sun cultivation’ methods. Traditionally, coffee beans were grown under a shaded canopy of trees, but modern methods of growing which require high outputs regardless of the weather are stripping away the sustainability of traditional growing methods. In many cases now the canopy which would once have provided a habitat for various animals, insects, flora and fauna has been replaced with intensive ‘sun cultivation’, where coffee is grown in plantations that rely on the use of chemical fertilisers and unsustainable agricultural farming methods. Large trees provide a habitat for native wildlife, support soil health, fight erosion and confer side benefits, like fruit and firewood, to farmers. WWF reports that because of this, 2.5 million acres of forest in Central America have been cleared to make way for coffee farming, and this deforestation is on the rise in coffee-growing countries. Incidentally, 37 of the 50 countries in the world with the highest deforestation rates are also major coffee producers.

Human impact

On average, coffee farmers in developing countries receive only 10 per cent of the retail price of the product. Beyond this, stronger competition among growers has led to price reductions and undercutting, which leaves growers with no safety margin when the supply drops or adverse weather hits. As with sweatshop labor, growers are not always treated well and often work in poor conditions, all for a fraction of the cost that the final product – the coffee we consume – is sold for.

Several movements have sprung up to address many of these inequities by raising awareness and offering a more equitable alternative. Fair trade certification provides economic stability for farmers by providing them a base price for their coffee, requiring unionization or cooperative business structures and encouraging them to adopt more sustainable farming practices. A newer movement, direct trade, has buyers send representatives directly to coffee farms to observe their practices and develop long-term trading relationships. Fair trade certification and direct trade tend to return more money to producers and provide them incentives to help lessen their coffee’s impact. Yet both depend on consumer demand and center around the willingness (and ability) of affluent Westerners to pay higher prices for their coffee. This demand can dry up quickly, leaving producers with lots of high-quality, expensive coffee that no one wants.

Another certification available to consumers is Rainforest Alliance-certified coffee (RA). RA focuses more on environmental standards rather than wages for growers. The argument here is that by investing in sustainable lifestyles and encouraging eco-friendly land use practices, RA contributes to the wellbeing of growers in its own way.

The Fairtrade Foundation and Rainforest Alliance do not claim to be solutions to all the problems involved with coffee manufacturing, but they are small, pertinent steps in the right direction – towards fairness and sustainability. As in most cases of consumer goods, the big brands are generally the least ethical and their coffee is likely leaving a trail of devastation in its wake. You can choose to change this by voting with your wallet and saying no to uncertified coffee brands.

 

Sustainability goals

To improve the issues we address as above, we cultivate three social and environmental sustainability goals and develop our business model against them.

Strengthen Fairness: This is our fundamental credo to build up innovative business model. We see the imbalance negotiation power between farmers and roasters as growers take major risks of exposure to changing weather and in average live in under developed condition, while we believe  the rise of conscious consumer will contribute to the way companies do business, and further fertile the foundation for fairness trading. Rather than creating dependency on aid, we believe the key changer will be fairness trading—equipping growers to get fair price for their harvest, fundamentally improving their income status so that they can initiatively enhance their living condition.

Improve Livelihoods: By conducting fairness trading to improve growers income status, we also aim to improve their livelihoods, including upgrading working environment (safety and efficiency), increasing access to education and medical services, and empowering minorities in the value chain and community.

Protect Nature: the industry can only continuously foster with the nature, the resource has been over overused hence under fragile condition. The goal is to ease this issue by equipping growers with sustainable growing knowledge, advancing professionalism among growers and related organization, and increasing adoption of climate smart agricultural practices, etc.

 

Business Model Innovation

We suggest a business model innovation for coffee shop chains to integrate sustainability across the whole business.

Supply: working with smallholder farmers directly

If companies really want to make a difference in the developing world, it’s time to go beyond fair trade and get involved with farmers directly to create a network of small farmers to supply coffee, tea and cocoa from them. This cuts out the middlemen, the brokers, which ensures more of the price paid goes back to the farmer. Buying directly also means that the coffee shop know exactly where its coffee comes from, providing full traceability.

Direct trade is an approach taken to build mutually beneficial and respectful relationships between businesses and producers, by fairly distributing benefits and involving producers in decision making processes.

Farmers might even own the shares in the business. Producers are not anymore third party suppliers but active members of the team, ensuring the best quality of the product and contributing to the decisions that govern business.

To ensure the standards of the taste and quality are the same across all small farmers, regular meetings with company representatives for sharing the knowledge and best practices together should be organized.

Giving farmers access to the market and the opportunity to expand and meet new buyers improves labour conditions (wages, rights, health and safety) and increases access to education and medical services.

Incentivising environmental sustainability

In the work with smallholder growers, the companies should encourage environmentally sustainable production, support the positive impact they have on the environment, and strengthen their ability to adapt to climate change by incentivising sustainable farms.

A sustainable farm gives back as much to the land and people as it receives.  It seeks independence from non-renewable resources, using renewable resources when possible. Sustainable farming also minimizes pollution, takes steps to care for the environment, and cares for its employees.

A sustainable farm will reuse coffee husks as heating fuel rather than cutting down eucalyptus trees.  It will plant new trees for those used during heating, or it will implement pollution free coffee dryers such as the solar coffee dryer developed by Coffee Kids.

Sustainable farming implements practices to minimize water consumption and to clean the water used.  Water from the fermentation tanks should never be returned to rivers or lakes, but rather filtered naturally through the earth and then used for coffee irrigation.

Unfortunately smallholder farmers are barely aware about the available techniques for sustainable coffee farming. As part of the sustainability plan we suggest the coffee companies to take the lead in training the farmers in achieving sustainable farming.

Sustainable farms increase adoption of water conservation practices, soil conservation practices and conservation of primary forest and other high conservation value areas.

Full supply chain approach

While our main focus is on sustainable supply, our target is to integrate sustainability in all aspects of the supply chain, including processors and consumers, as well as key partners such as the Waste & Resources Action Plan (WRAP), eco3 and Forum for the Future.

The companies should use their influence to incentivise the highest environmental performance with their processing partners and to inspire innovation.

Potential costs and risks

Any sustainable coffees do not have strong brand recognition and the different certifications or labels can be confusing especially to a potential new consumer. Even many roasters and some coffee buyers are unfamiliar with the characteristics or reliability of such coffees leading some to reject them. Further education about the scope and the diverse benefits of sustainable coffees could pay substantial dividends if it is directed toward both consumers and the mainstream coffee industry.

New sustainability initiatives emerging from corporations, or with strong corporate backing, are likely to become increasingly prominent. While many of these are sound proposals that can help farmers emerge from endless cycles of poverty, others are not much more than risk management efforts to ensure that companies are not exposed to attack for cutthroat purchasing practices. The latter merely offer a conscience soothing draught of ‘‘Sustainability Life’’ while actually imposing new burdens on producers in exchange for only minimal new benefits.

Finally, the primary drivers for most sustainable coffees are premiums, but these may well be ephemeral. Clearly, sustainability cannot be built on these alone. It is important that both farmers and businesses understand the greater long-term value of sustainable practices and facilitate their adoption, not just as part of a competitive market strategy, but also as part of a sound rural strategy to reduce risks and improve livelihoods for both farmers and laborers.

Our model requires substantial resources for training and quality control working with smallholder farmers leading to extra costs.

 

Cafedirect and sustainable coffee

Cafedirect is the UK’s first 100% Fairtrade brand providing products sourced directly from smallholder growers in the finest coffee growing regions. It cuts out the middleman, giving farmers’ cooperatives the chance to deal directly with the retailers and ensure that coffee is bought at a price commensurate with the cost of production. Cafedirect already works directly with 40 producer organisations in 14 countries across Latin America, Asia and Africa. The extra proceeds received by farmers then go towards investment in social and business development projects such as scholarship programmes, healthcare services and quality improvement training.

However Cafedirect still uses Fairtrade organisation for direct contact with farmers, and the modest benefits generated from Fairtrade are concentrated among the most skilled coffee growers. They find no positive impact on coffee laborers, no positive impact on children’s education, and negative impacts on the education of unskilled coffee workers’ children. This means the poorest farmers still don’t get any benefit as they are not skilled to provide coffee of sufficient quality.

Above all, buyer and producer work together long-term, to produce a high quality coffee. Just as no business would brag it pays minimum wage – so should any industry reliant on commodities be striving to pay their producers in the developing world above minimum requirements, to incentivise innovation, and improvements in quality. It can only result in a better wage for the farmer and a better coffee for consumers at home.

(Written by Tejinder CHAHAL, Tatyana IVANOVA, Anna WANG, and Elcio YANAGA)