Coffee’s Economics, Rewritten by Farmers; Some coffee farmers are taking control of more of the supply chain, roasting and marketing their own beans for greater profit

March 16, 2013

Coffee’s Economics, Rewritten by Farmers


IN 2005, Kenneth Lander, a lawyer in Monroe, Ga., moved with his wife, stepdaughter and the youngest three of his seven children to a coffee farm in San Rafael de Abangares, Costa Rica. He always “had a heart,” he said, for Latin America, and after a vacation to the lush cloud forests near Monteverde in 2004, he was determined to return on a more permanent basis.

He was also looking for more balance in his work-driven life. And so, after buying a coffee farm from a farmer he’d met on his earlier trip, he packed up his life and moved.

“It was like Swiss Family Robinson,” Mr. Lander jokes. “We just left.”

In Costa Rica, Mr. Lander, who is now 46, didn’t have to worry about making money. He had received a cash windfall from selling a portion of a residential subdivision he had helped develop in Georgia; the plan was to keep selling more lots and live off the proceeds. So he grew coffee for fun.

Then, in 2008, the financial crisis hit. The value of his subdivision plummeted. Suddenly, he had to support himself as a coffee farmer. Very quickly, he realized how difficult that was going to be. He had just 12 acres that produced 6,000 pounds of specialty-grade coffee beans a year.

He belonged to a “fair trade” co-op, which guarantees farmers a minimum price, but was making only $1.30 a pound on coffee that retailed in the United States for $12 a pound. His net profit was so low that at one point he was down to $120 that had to last two weeks.

“I was at the register debating whether or not to buy shampoo or a bag of rice,” Mr. Lander recalls.

Why wasn’t he seeing more of that final price?

That question has been asked by farmers throughout history, particularly in developing countries, where growers of commodity crops like coffee and cocoa often live in poverty. Over the last few decades, a worldwide movement under the broad banner of fair trade has tried to rectify that imbalance.

In exchange for receiving “fair” prices for their products, fair trade farmers must adhere to environmental and labor standards set by certification groups, the largest of which is Fairtrade International, a nonprofit organization based in Bonn, Germany. It represents 1.24 million farmers and workers in industries including coffee, bananas and honey.

But Mr. Lander started to think that he might improve on the idea. He began to experiment. Using a roaster he had bought in better times, he started roasting his beans and selling them on Facebook to friends in the United States. He also opened a coffee shop, called the Common Cup, in Monteverde, and sold his coffee to tourists.

When he ran out of beans, he teamed up with two other area coffee farmers, Jorge Fonseca and Alejandro Garcia — who also had a coffee shop, the Colibri — and began shipping greater volumes. Suddenly, he was making money.

This D.I.Y. enterprise led to the creation in 2011 of Thrive Farmers Coffee, which Mr. Lander started with Mr. Garcia and Michael Jones, an entrepreneur based in Atlanta. The company is still largely untested, but is built on the idea that farmers can “participate in the added value as coffee moves downstream to the consumer,” Mr. Lander said.

TYPICALLY, farmers sell their green, or unroasted, beans. At that stage, the beans generally fetch a price based on the commodity market price, which in February averaged $1.53 a pound for Arabica coffee, according to the International Coffee Organization.

The fair trade concept offers an improvement on that model. It will pay the market price for beans, but, importantly, it guarantees a minimum price — now $1.40 for Arabica coffee. In addition, the local co-op that collects and processes the beans keeps a premium, now 20 cents, which is used for social services like scholarships and health care for farmers and their families.

Theoretically, a fair trade farmer never loses, because when the commodity market price is higher than the fair trade price, the farmer receives the market price, and the co-op still receives the premium. But fair trade buyers purchase unroasted beans, and the processes that add to the price and value of the coffee come later.

In the system that Thrive is trying to develop, farmers are paid only after their coffee has been exported, packaged and sold — at a much higher price — to retailers. If coffee is sold for, say, $7.25 a pound, Thrive splits the proceeds 50-50 with the farmers, who end up, in that example, with about $3.60 a pound.

The farmers working with Thrive must pay the higher costs of processing and exporting, but Mr. Lander says they net about four times as much as they would through fair trade, once production costs and co-op fees are factored in. And Thrive helps farmers by establishing relationships for the farmers with local coffee processing mills and co-ops. Then, once the beans are shipped to the United States, Thrive takes over, handling packaging, roasting and sales. In some cases, Thrive sells green coffee beans to roasters, in which case the farmer receives 75 percent of the proceeds.

“We’re teaching a farmer that you don’t have to relinquish control of your coffee,” Mr. Lander said. “You can see it all the way through the value chain.”

Thrive’s system is among a growing number of innovative business models in the coffee and cocoa industries that are allowing farmers to increase their ownership and profit margins. Divine Chocolate, based in London, is partly owned by cocoa farmers in Ghana, who get a percentage of company profits. Pachamama Coffee Cooperative, based in Davis, Calif., is owned by farmers in Latin America and Africa. After the coffee is roasted in the United States and sold, all profits go back to the farmers.

All of these initiatives have sprung out of fair trade and aim to send the movement in a more significant for-profit direction.

Fair trade “can be part of a fairer deal for farmers,” says Christopher Bacon, an environmental studies professor at Santa Clara University. “Small-scale farmers have historically used fair trade as one of several strategies, including grass-roots organizing, to build stronger cooperatives” that allow farmers “to become active players in the global coffee industry.”

But, he added, the fair trade idea “is more about making a living than rocketing coffee farmers out of poverty.”

Paul Rice, president and C.E.O. of Fair Trade USA, the nonprofit organization that certifies transactions between United States companies and their suppliers, said that the fair trade price “is a floor, not a cap,” and that co-ops with reputations for delivering high-quality coffee have commanded prices of more than $3 a pound. In 2011, a strong year for coffee, the average price for fair trade coffee was $2.84 a pound, according to the organization.

Mr. Rice applauded companies like Thrive, but asked: “Is that model really scalable? Is it going to reach millions of farmers?”

After all, fair trade’s partnerships with major coffee companies — like Starbucks and Green Mountain Coffee Roasters, which together imported 84.6 million pounds of fair trade certified coffee in 2011 — are central to keeping fair trade farmers in business. And he said those companies were accustomed to the quality and reliability that come with the fair trade label.

Moreover, exporting creates risks that farmers selling raw beans don’t face. “There are aspects around flavor and quality, and the changes in flavor that can happen during export,” says Dennis Macray, the former director of ethical sourcing and global responsibility at Starbucks, who is now an independent specialty coffee and cocoa consultant. “Most coffee producers don’t have the capacity to manage that risk.”

Mr. Lander acknowledges challenges in the Thrive model and says that there have been glitches as he and his partners figured out the business. Two groups of Thrive farmers who did not process their coffee up to standards set by the Specialty Coffee Association of America, for example, had to reprocess the coffee, leading to a delay in sales — and their payment.  “It’s the first time that farmers are being asked to think about quality,” Mr. Lander said. “Now they’re selling to the end user. So that’s something we have to teach them.”

Carlos Vargas, chief financial officer at CoopeTarrazú R.L., a coffee co-op in Costa Rica, said Thrive’s payment model, in which farmers have to wait until their coffee is sold in grocery stores before being paid, could be a hardship for small farmers.

“In the end, the farmer will get a good price, but the problem is there’s not the right balance between when the farmer needs the money and when the farmer receives the money,” Mr. Vargas said, explaining that farmers depend on money they receive from selling beans during the coffee season to cover their production costs. Waiting for the coffee to be processed and roasted and reach stores can take several months. He said that some farmers he knows, who have been working with Thrive, have had to wait 6 to 12 months to be paid.

“That’s a very long time, and they have to invest in the next crop. For a small farmer that’s very difficult.”

“Farmers do have to wait,” said Mr. Lander, who added that 6 to 12 months is a typical time frame for getting paid. For this reason, farmers are asked to put in only a small percentage of their crop the first year and to increase the portion over time.

Still, fair-trade-certified co-ops — which similarly rely on sales from beans early in the season — are free to work with Thrive.

According to Mr. Jones, who has invested more than $1 million in Thrive, it is committed to high-quality farming and environmental standards. Eventually, he said, he would “love to have a third-party agency to help us validate things,” but “we have to crawl before we walk, and walk before we run.”

Mr. Rice of Fair Trade USA agreed that “there are a lot of different doors into this sustainability space that consumers can take.” He added that “if a consumer discovers a great product that also makes the world a better place through Thrive, that’s great.”

IN 2012, Thrive sold 328,000 pounds of coffee over the Internet, to churches and through specialty stores like Golden Harvest Produce Market in Kittery, Me., and Earth Fare, a chain based in Fletcher, N.C. The coffee sells for $9.95 to $12.25 a pound. Mr. Lander said that of Thrive’s 625 farmers in Costa Rica, Honduras and Guatemala, 480 had received their share of coffee sales. The remainder consigned their coffee to Thrive later in the season, so their coffee has not yet hit the market.

As for his own well-being, he said that since Thrive brought on angel investors last fall, he is taking a “conservative salary.”

But, he added, “I’ve never been more happy or more fulfilled.” And he has no trouble buying shampoo.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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