2013

There Are Not So Many Bad Guys in the Supply Chain

8/11 3 A

There are not so many bad guys in the supply chain; just a bad process.How many times have you heard someone, well intentioned, look at a retail coffee drink and accuse the café owner of exploiting the farm worker by charging so much and not sharing the profits? Frankly, it is saddening to see the shallowness of thought that some are capable of achieving before pointing a finger and calling someone “not fair.” A thoughtful response for the café owner might be to offer their accuser $10,000 if they can track down the farmer and deliver the money. It is a safe bet because 9.9 times out of 10 it simply can’t happen due to lot mixing and the labyrinth of transactions it takes to get coffee from the farm to the roaster. One step deeper into the pool of thought would show that the supply chain is dysfunctional and needs an overhaul.

One company has discovered a way to change everything and reward the farmer up front. It is a system that will make us in the industry rethink the way we do business. It also puts the consumer in contact with the farmer of the coffee they are drinking. They will be able to hold us accountable. The shift has begun…

Logistics Latin America has looked at the supply chain model and turned it on its head. In order to see the brilliance of their solution we must clearly define the problem to solve and the current system.

Problem: Exploitation and worker conditions of the average coffee farmer create an unsustainable situation. They need to make more for their crop. Every transaction in the supply chain needs a profit component when in some cases the value is not that high.

Current System: The farmer is paid for his coffee based off of the C market pricing. Here is a hypothetical trace of a pound of coffee from farm to cup:

Table 1

1)    It costs a farmer about $1.65 in Colombia to produce the coffee. Farmer is going out of business

2)    Intermediaries perform an essential role, but raise the price of the coffee 63 percent over costs in this example

3)    Roasters in the US wholesale roasted coffee to others who will brew it. A well run roaster will operate at about 15-20 percent margin

4)    If the retailer can sell the pound of coffee for $2 a cup it seems like a great deal, but a well-run store will operate at about 10-15 percent Margin

THESE ARE NOT BAD PEOPLE! THEY OPERATE IN A BAD SYSTEM!

Logistics Latin America (LLA) is thinking outside the supply chain and has developed a new model with another funding component. It pays the farmer right up front and then tells the consumer about it so they can share in the success. The solution has two parts: A) Change the system  and B) Reward quality even more.

Solution Part A: Change the system
Buy the farm and save it from foreclosure or at the very least a slow death. Hire back the resident farmer and pay them a nice salary with health benefits.

Partition the farm into ½ acre, deed-able lots. Sell these lots to foreign investors looking for agricultural land outside of the U.S.

If the owner ‘Opts in’ then the property will be managed by a professional team that will increase the production of the farm by investing in the planting of non-producing areas with high value varietals. Hire agronomists and production staff, and build needed infrastructure such as pulping stations, fermentation tanks and drying patios. All of this investment  will be in an effort to improve both yield and quality of the coffee.

Create and own the intermediaries such as dry miller, exporter, and importer.

Add technology to the mix which can bond the consumer to the farm directly with a system known as Virtual Direct Trade TM.

A logical extension of this process would be to own a roaster and retail shops, but that is not currently the model.

Using our example from above the supply chain will now look like this:

Table 2

At $2/lb the dynamics shift a lot. The import company will pay a ‘price point that matters’ no less than $2 and then just tack on the actual costs of business to the price.

Anything the import company can sell the coffee for above the $2 + Costs gets split in a profit sharing between the investors and the resident farm staff.

Solution Part B: Reward quality even more
By making smart decisions on the farm, the quality of the coffee could raise as much as 10 points or more on the CQI scale. Roasters will be asked to pay more for higher scoring coffees and history proves they will do it.

In addition, LLA is adding technology to the supply chain so consumers can reach out directly and in a meaningful way to the farmer. The can see a live streaming video as well as participate in farmer chat texting. They can even take a virtual tour of the farm while they are enjoying a cup of coffee from that farm. A roaster and or retailer would pay more for a coffee that comes with this technology and a fantastic story to tell.

Disclosure
I was skeptical if LLA and their independent companies: Cima Land Sales, Tierra Cafetera Farm Management, and Coffee LatinAmerica could pull this off. Not only have they bought three farms, they have sold out two of them. The money has been invested in quality improvements and their entire 2013 crop has been sold to a roaster at a premium. Plans are to have 10,000 acres under management in 13 countries throughout Latin America and other significant growing parts of the world within five years. I am so excited about the difference they will make in our industry that I joined the company as CEO of the US based entity Coffee LatinAmerica. If you know me, you will confirm that I would not do this for just any company. I believe in what these guys are doing. The model is changing!

Rocky can be reached at rocky@INTLcoffeeConsulting.com as well as
RockR@CoffeeLatinAmerica.com

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