ECW: What’s risk got to do with it?

Once a year, we convene all our Direct Trade partners from around the world — more than 50 growers and representatives of farmer associations, washing stations and exporters from 15 countries on four continents — for a week of farm visits, cupping sessions, presentations, meetings, shared meals (and sometimes spontaneous dance parties) that we call the Extraordinary Coffee Workshop.  

The ECW program is carefully designed to deliver actionable insights to participants through a variety of formats on a broad array of issues, including agronomy, post-harvest processing, innovations in coffee science and technology, market trends and more. The event is held in a different country every year, celebrating the coffee culture of the host country and exploring unique local practices that might be effectively applied in other countries and contexts.  

Perhaps as valuable as the formal program of the event is the unstructured interaction between the diverse and award-winning participants. Participants in the 2017 ECW event had collectively won honors at the Cup of Excellence, the world’s most rigorous and prestigious coffee quality competition, an astounding 63 times. It is like the All-Star game of coffee, and participants learn from each other as much as they do from us. All of this adds up to a source of real value for our Direct Trade partners.  It also represents another important hedge against market and price risk.

A week of exhaustive joint exploration of quality from seed to cup with your entire supply chain amplifies market signals like nothing else you might imagine.  And the entire affair is designed to ensure our partners have the knowledge and skills they need to execute on their strategy of quality-based differentiation and succeed in the marketplace.

The first issue of our Ad Lucem magazine is an account of the most recent edition of ECW, held in San Francisco.  

ECW 10 is planned for Bolivia in September 2018.

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This post is the sixth in a series of seven posts summarizing our participation in the Sustainable Food Lab 2018 Leadership Summit and exploring the ways our Direct Trade model helps to reduce the risks faced by coffee growers.

Busting the microlot myth

The idea that Direct Trade is all about microlots is pervasive.  And persistent. And, at least in our case, dead wrong.

Michaele Weissman wrote the book on Direct Trade nearly 10 years ago. God in a Cup tells the story of Direct Trade through the work of three of the model’s principal intellectual and material authors: my Intelligentsia colleague Geoff Watts, Peter Giuliano, then of Counter Culture Coffee, and Stumptown’s Duane Sorensen.  But in the sprawling retrospective on Direct Trade she wrote last year for Sprudge, she perpetuates the microlot myth, defining Direct Trade like this:

Direct Trade is a sales practice related to the growing, selling, and buying of microlots — small amounts of coffee grown with an unusual attention to detail on pinpricks of land.

To her credit, she goes on to suggest that Direct Trade isn’t all about microlots.  It includes single-origin lots, too, she says.

The Direct Trade label can also apply to single-origin coffees. Single-origin refers to disaggregated beans grown in somewhat larger areas of a single farm or possibly several farms. A single-origin may produce as much as 50 or even 100 bags of unusually high-quality coffee.

Even this broader definition of Direct Trade is fatally narrow, however.  And if this is the definition offered by someone who has had years of exposure to the chief architects of the model, then there is little hope that casual observers of specialty will understand what Direct Trade is really about.

We believe coffee has a natural pyramidal distribution, with the lowest-quality coffees being most common and occupying the base and the highest-quality lots being rarest and occupying the peak.  This vision is intuitive. Extraordinary quality is hard, after all, and producing low-grade specialty coffees easy by comparison. But the vision is also empirical.

While we draw a higher baseline than most other specialty companies, with purchases beginning closer to 84 points rather than 80 points, our purchases neatly reflect this pyramidal construct.  In other words, our Direct Trade model isn’t just concerned with the small lots of coffee at the peak of the pyramid.  It is the whole pyramid. For us, Direct Trade isn’t a “sales practice” at all.  It’s a sourcing model.  The way we buy coffee.  Period.

To be fair, we contribute to the popular tendency to equate Direct Trade with microlots and single-origin lots.  Call it the Pareto principle of coffee quality: it seems we spend roughly 80 percent of our time and energy breathlessly promoting 20 percent of our coffees.  But who could blame us? Our Special Selection microlots push the frontiers of flavor: their superlative sweetness, crystalline clarity, cultivated complexity and sheer delight, they are unimpeachable evidence for our our conviction that coffee is culinary.  And our single-origin I-marks represent what is best about the countries and regions where they are grown. We can’t blame observers of specialty coffee, even careful, veteran observers like Michaele, if they share our enthusiasm. But in failing to look beyond our headliner coffees, we miss something important, and not just the extraordinary quality of our everyday blends.

If Direct Trade were, in fact, just about microlots and single-origin lots, it would merit the crass derision and casual dismissal of its many critics.  But Direct Trade, at least as we practice it at Intelligentsia, isn’t as easy to dismiss.

We work intentionally to fill the containers we buy from our Direct Trade partners with as many as four or five different quality grades, from single-A all the way to microlots, with graduated premiums.  Our purchase of A-grade and AA-grade coffees along with the single-origin AAA lots and microlots represents an extraordinary source of value for our partners, who struggle to find reliable markets and meaningful premiums for their larger volumes of lower-grade coffees.  There is enormous opportunity cost for growers in the hustle to find buyers for those coffees, and invariably, real financial losses when they are sold through conventional trading channels.

I suppose there is one way in which Direct Trade is all about microlots: in most cases, it was the pursuit of microlots that helped our partners begin separating their coffees in the first place, making our multi-grade purchases and our entire Direct Trade model possible.

As much as any other single thing we do as part of the Intelligentsia Direct Trade program, this practice of multi-grade contracting creates value and efficiency for growers, and significantly reduces their market risk.  But because the microlot myth has such a firm hold on our collective coffee imagination, it is rarely identified as one of the benefits of the model.

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This post is the fifth in a series of seven summarizing our contribution to the Sustainable Food Lab 2018 Leadership Summit, focused on resilience, and is part of a series exploring the ways our Direct Trade model helps to reduce the risks faced by coffee growers.

Escaping the commodity trap

From the day we opened the doors at our original location on Broadway in Chicago’s Lakeview neighborhood back in 1995, our business has been built on quality-based differentiation: we have always worked to deliver the best coffee and the most elevated experience in the marketplace.  When we started traveling to origin and building our Direct Trade model a few years later, the same principle applied: we sought out estates, farmer associations and washing stations that shared our obsession with coffee quality and saw it as the most reliable and lasting source of value.  As it turns out, the promise of quality that resonated so clearly to us in the marketplace also resonated at the other end of the coffee chain with growers of all sizes.  Our Direct Trade partner network is filled with them: more than 50 farms, farmer associations and washing stations whose commitment to quality has earned them awards and a privileged place in our supply chain.

Their eager embrace of a quality-first strategy is due in part to the fact that it represents an important hedge: their ability to earn quality premiums insulates them from low prices in the market.

As of this writing, May futures contracts are closing at less than $1.14 per pound, less than production costs in just about every coffee-growing country with the possible exception of Brazil.  Few farmers earning these kinds of prices can turn a profit or continue to grow coffee for long, least of all the smallholder farmers who grow the majority of the world’s coffee.  This is the commodity trap: competition on the basis of price alone in a market that rewards size, scale and efficiency and is agnostic on the issue of quality.

Quality premiums offer an escape from the commodity trap, helping to mitigate the risk of low prices.  But premiums alone do little to protect growers from the extreme price volatility that characterizes coffee futures markets.

The free-hand scribble above roughly tracks coffee futures market prices over the better part of the past half-century.  With so much uncertainty about what coffee prices will be like tomorrow, it is hard for coffee growers to reinvest in their farms with confidence today.  That’s where our fixed-price contracts come in.

Unless we are explicitly asked to do so by our partners, we never contract coffee based on differential pricing.  Our preference for fixed-price contracts is related to our central commitment to quality.  We believe each of the first three tiers of quality in our model — A, AA and AAA, where A is the lowest and AAA is the highest — have an intrinsic value as defined in part by what the market will bear.  We have settled into narrow graduated price bands for each of these tiers that remains stable year-over-year independent of what may be happening in the futures market.

Combined with the price premiums we pay for quality, our fixed-price contracts help to deliver prices that are high enough to ensure growers earn a profit on every pound of coffee they sell us and stable enough for them to be able to accurately predict their coffee earnings over multiple seasons and make business decisions accordingly.

Our approach to pricing and contracting gives coffee growers something that is invaluable in a marketplace characterized by uncertainty: the ability to plan confidently for the future.

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This post is the fourth in a series of seven summarizing our participation in the Sustainable Food Lab 2018 Leadership Summit and exploring the ways our Direct Trade model helps to reduce the risks faced by coffee growers.


The signal and the noise

Arguably the most important principle of our Direct Trade model is the one implied in the name: a commitment to direct engagement with the farmers who grow our coffees.

Collectively, the buyers on our sourcing team routinely log a quarter-million miles a year traveling to visit with more than 50 Direct Trade partners in 14 countries.   This commitment to tireless travel grew out one of the company’s early insights: that our influence over quality would always be limited if we were only controlling variables related to the roasting and extraction processes.  We came to understand that the quality frontier of a coffee is determined primarily by the ingredient, the raw agricultural product that we purchase. This insight set us on a collision course with coffee’s origins and direct collaboration with growers as part of our commitment to source, roast and serve the very best coffees in the world.

It is a commitment that amplifies the market signals transmitted to growers and reduces the noise.  With no intermediation of the conversation between growers and buyers, there is no distortion of the complex messages we send growers on issues of quality, volume, price, communications, innovation and more.  

Think of the common salon game Telephone: a simple message is whispered from one person to the next around a dinner table, and the distortions, sometimes radical, are the source of some entertainment.  Now consider that we generally play this game with friends who share the frame of cultural reference and same language, and often a similar social class and education level.  Imagine what happens when that game is stretched across continents, time zones, cultures, languages and social class, and rarely played in real-time.  And now consider what happens when the messages being conveyed are nuanced.  Clearly, the potential for distortion is higher when coffee-related communication is conducted through a network of supply-chain intermediaries, and the likelihood of crisp execution of innovation projects is lower.

In my previous work in the international development space, I felt like this basic commitment to being there, which seems so simple, was everything.  Anything seemed possible when communication was direct and unfiltered. I used to liken it to a professor telling you what questions would be on an exam before it was administered: it was still possible you could fail, but that failure would be a direct result of your preparation and execution, not one of understanding what was expected of you.

Direct engagement is not necessarily sufficient on its own to build a lasting relationship.  A roaster still needs to deliver a compelling value proposition to growers. But it sure helps to build the trust and mutual understanding on which the best and most enduring relationships are based.

As a development professional, I found myself consistently privileging collaboration with roasters, like Intelligentsia, that made this commitment to direct engagement precisely because it delivered so much value to the growers with whom I worked.  That perspective was validated during my first year as Intelligentsia’s Director of Sourcing when I sent a survey to our Direct Trade partners: they identified the regular visits of our buyers as one of the most significant sources of value created by our Direct Trade model.

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This post is the third in a series of seven summarizing our participation in the Sustainable Food Lab 2018 Leadership Summit and exploring the ways our Direct Trade model helps to reduce the risks faced by coffee growers.  Image courtesy wikicommons media.

The Four Horsemen

Beginning about a decade ago, the term resilience began a steady climb to ascendancy in the field of international development.  In that domain, resilience refers to the ability of disadvantaged people to draw on different forms of capital — financial, natural, physical and social — to limit their vulnerability to specific threats in a context fraught with risk.  

Resilience in coffee was an appropriate topic for the Sustainable Food Lab 2018 Leadership Summit agenda because coffee growing is a risky business.  The list of risks facing coffee growers is seemingly endless. The four primary ones as we seem them at Intelligentsia — the Four Horsemen of the Apocalypse, perhaps — are the following:

Market risk | Risk associated with the failure of growers to respond to market trends or requirements, or to deliver coffee that meets market standards.  This category also includes the inefficiency and opportunity costs associated with failure of growers to find ready buyers for some or all of their coffee.

Price risk | Distinct from market risk, price risk is associated with price-discovery mechanisms and secular market conditions that keep coffee prices low, volatile, or both, as well as the implication of market uncertainty on a farmer’s willingness to invest in coffee.

Production risk | Risk associated with environmental shocks, significantly amplified in a period of accelerated climate change, that can include drought, frost, extreme weather events, pests and diseases, etc.

Foreign exchange risk | Risk associated with the appreciation of local currency against the U.S. dollar, in which contracts are generally denominated, which reduces the purchasing power of local currency.

The last of these issues is almost entirely beyond the control of coffee growers, depending in large measure on the monetary policy decisions of central banks that are supposed to be independent,  beyond the influence of domestic politics or the interests of specific sectors of the economy.

And while a grower’s practices, from the cultivars she chooses to plant to the way she manages them on her farm, can mitigate production risks, climate change creates a dynamic threat environment in which yesterday’s best practices may not be sufficient to combat today’s threats or anticipate tomorrow’s.  We participate proudly in the WCR Checkoff Program as an investment in the tools and technologies coffee growers need to adapt to climate change, but given the stickiness of our fossil fuel habit as a species and the collective neglect of research as an industry, we are all playing catch-up.  

If there is any good news here for growers, it is that each of the overarching principles on which our Direct Trade model is built — and some of the specific ways it is implemented at Intelligentsia — go a long way to helping mitigate the first two categories of risk.  I start exploring those principles tomorrow.

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This post is the second of seven in a series summarizing our participation in the Sustainable Food Lab 2018 Leadership Summit and exploring the ways our Direct Trade model helps to reduce the risks faced by coffee growers.

Risk, resilience and Direct Trade

Last month, I was invited by old friends at the Sustainable Food Lab to join its annual Leadership Summit in Mexico.  SFL is an extraordinary Vermont-based non-profit that is so unique it is hard to characterize. For my part, I would call it a membership organization devoted to fostering pre-competitive multi-stakeholder engagement and cross-sector collaboration to make global food systems more sustainable.  The SFL platform supports organizational learning and innovation and convenes “safe spaces” for exploration of key sustainability challenges and opportunities among leaders in food and beverage sector. Its members and collaborators include leading multinationals (think Mars, Pepsico and Unilever), leading global coffee brands (Nespresso, Keurig and Starbucks), research institutions in the Consultative Group for International Agricultural Research like CIAT and CIMMYT, non-profits and ministries of agriculture.

Every year, SFL convenes its members and special guests to explore a salient topic through a combination field visits and two days to work.  The theme of the 2018 Leadership Summit was Leadership for Resilient Agriculture, with a clear focus on production risk in a period of accelerated climate change.  It emphasized coffee as a sector that is both uniquely vulnerable in Mexico and a priority in the agriculture ministry’s new long-term agriculture development strategy.  The Summit included a field visit to coffee farms and projects in Chiapas and two plenary sessions focused on coffee. I was invited to join one of those plenary sessions devoted to an exploration of business models and the role of private-sector actors in contributing to greater resilience in the coffee sector.

Over the coming days, I will summarize my contribution to the SFL Summit in a series of posts here examining the way our Direct Trade model helps to make coffee growers in our supply chain more resilient by helping mitigate certain risks that most growers face, beginning tomorrow with a taxonomy of what we consider to be the primary sources of risk in coffee farming.

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This post is the first of seven in a series summarizing our participation in the Sustainable Food Lab 2018 Leadership Summit and exploring the ways our Direct Trade model helps to reduce the risks faced by coffee growers.  Follow the links below to the remaining posts in the series.

2 | The Four Horsemen | Introducing the four principal sources of farmer risk, as we see them at Intelligentsia: market risk, price risk, production risk and foreign exchange risk.

3 | The signal and the noise | How the direct part of Direct Trade creates value and mitigates risk by amplifying the signal and reducing the noise the market sends to origin.

4 | Escaping the commodity trap | How the mutual commitment to quality on which our Direct Trade relationships are based, and our commitment to quality incentives and fixed prices, hedge market risk and seize market opportunity.

5 | Busting the microlot myth | Taking on the most pervasive, persistent and pernicious myth about Direct Trade — that it is all about microlots.

6 | ECW: What’s risk got to do with it? | Our annual supply chain gathering is more than an exploration of the sources of extraordinary coffee — it actively hedges market risk for growers.

7 | Being there | Direct engagement, annual visits, quality premiums, fixed prices, multi-grade contracts, ECW — each one of these practices mitigates risk for growers. Together, they represent a source of significant value and contribute to farmer resilience. But they are most powerful in the context of stable, long-term relationships.