The Value Chain Is Broken: How Do We Fix It?

How did you start your day today? Was it with a comforting cup of hot, tasty, soothing coffee? If it was, then you were part of the 3.3 billion cups of coffee drunk worldwide each day. Coffee is one of the highest traded commodities on global markets and is estimated to have a $200+ billion supply chain. Yet this staggering supply chain value is not distributed equitably, with the farmer that grew the essential ingredient of the coffee bean, receiving only 7cents out of the $2.80 paid for a cup(2).

Source: World Economic Forum

You also have an 80% chance that the coffee you drank was grown by a small holder farmer in a developing nation in Asia, South America or sub-Saharan Africa(1). This value distribution inequality leaves farmers struggling to earn a living wage and precariously subject to the risks of climate change induced crop degradation and international coffee price volatility.

The Coffee value chain is often complex with a number of actors between the grower of the coffee bean and the eventual consumer. Visual Capitalist has compiled an info-graphic (Visualizing the Economics of Coffee)(3) with data from Specialty Coffee Association that breaks down the costs of the $2.80 cup of coffee against the 5 stages of the value chain:

  • Growing and Harvesting $0.07;
  • Exporting — Beans are processed, milled and packaged for export — $0.16;
  • Roasting — Beans are mixed, blinded and roasted giving their particular taste — $0.35;
  • Distribution — To consumers or coffee shops $0.04;
  • Retail — coffee shops $2.17.

But before you head to the retailers for explanation, the biggest profit margins are found at the Exporters and Roasters with, at times, 87% of the value concentrated in a small number of multinational corporations(1).

Risks to farmers

While every stage in the coffee supply chain bears its own risks, it is the farmer, at the start of the chain that is most precarious. Small holder coffee farming employs mainly manual processes. Hand held tools, a lack of safety equipment and the use of pesticides translates to dangerous working conditions to both the farmer and their children, who are often kept out of school to provide labor into the family farm out of necessity. Women experience gender discrimination through lower wages than their male counterparts. Small holder farmers lack income diversity and are overly dependent on their coffee crop. This single income stream is vulnerable to drought, floods, pests, disease and changing climate which all negatively affect crop yields and therefore the farmer incomes. Fluctuating international, agricultural commodity prices also have a dramatic impact. Coffee price falls of 65% in May 2011 and December 2013(1) had devastating effects on farmer incomes while the retail price of coffee in supermarkets and coffee shops remained consistent. Isolation from markets due to distance and poor infrastructure, poor societal protections in producer countries and a lack of advocacy leave small holder farmers in precarious positions and economically vulnerable. As the developed world experiences marked economic growth through digital technologies, the gap to the undeserved farmer becomes ever wider.

Like all business, small holder farmers need access to credit to progress and grow their farms. Credit can be used to increase yields and quality of the produce through improved fertilizers, higher seed quality and use of farming machinery. However, small holder access to microfinance is often perceived as high risk by financial institutions and priced with high interest rates. A lack of formal property titles and farming transaction records create difficulty in demonstrating collateral which further restricts credit levels(4). A lack of credit stagnates the farming community development and further widens the inequality gap.

The COVID-19 induced economic downturn of 2020–21 has affected all sectors of the global economy. Consumption has been diminished by the lock down of communities and the closure of many retail outlets in developed nations. Coffee shops have been hard hit by these factors and an overall decrease in coffee consumption has impacted farmer incomes. Farmers have faced delayed or cancelled sales, closed local markets and disrupted transportation channels which results in crops that can’t be sold. When supply chain shocks hit, it is usually the poor, small holder farmer that bears the greatest impacts. Coupled with an overall lack of resilience, this translates to potentially devastating outcomes.

How do we fix this situation?

Considering the significant environmental, social and economic risk factors that small holder coffee farmers face and the fact that 80% of global coffee supply is from small holder farms, the entire coffee supply chain, from farmer to consumer, faces the possibility of catastrophic threats derailing global coffee supply permanently. A restructuring of the coffee value chain is urgently needed to protect the farmer and the production of the raw ingredients of coffee, the bean. The farmers need social and economic security for themselves and their communities if they are to continue producing coffee at the scale and quality demanded by consumers. They need the capital and financial services necessary to cultivate their farm’s potential and build in resilience to withstand environmental and market shocks.

Structural change can take time and in market based economies, it is dependent on market forces to drive that change. Consumers have a significant role to play in those market forces and the choices they make at the supermarket or barista will dictate the value chain shifts necessary for farmers to address the systemic risks to their coffee supply. The move towards ethical consumption of food products is already underway with ethical choice coffee on supermarket shelves. The Fair Trade movement certifies that coffee producers follow ethical standards based on good environmental and labor practices and allows coffee brands to market that certification to their customers. This movement is growing and while it has resulted in improved prices to farmers, only a fraction of the 25 million small holder coffee farmers are participating in fair trade practices and it has not directly addressed the value distribution inequalities sufficiently.

An untapped potential exists for consumers to participate directly in the redistribution of value in the coffee supply chain. The rapidly expanding field of blockchain has the potential to quickly include farmers into new financial markets, to streamline existing supply chains, to add transparency into food provenance questions and to directly connect consumers to coffee farming producers in a system that skips the middlemen and directly rewards farmers with an equitable portion of the value chain. The decentralized and trustworthy characteristics of blockchain can disrupt the incumbent centralized supply chain and dilute bottlenecks where value is concentrated. Whoever can unlock this potential will tackle the inequality problem at its heart. While systemic transformation of the coffee value chain moves at its own pace to address long term sustainability, we look to blockchain to provide a here-and-now solution that allows us all to enjoy our morning cups of coffee and know that we are helping small holding farmers in developing nations build resilience into the coffee supply chain.

Article by: Mark Tsang, Project Lead at AgriUT

References

  1. Fairtrade UK (May 2012) “Fair trade and Coffee: Commodity briefing. Available from: https://www.fairtrade.net/library/fairtrade-and-coffee-2012
  2. Speciality Coffee Association, Benchmarking Report, Coffee Price Report
  3. The Economics of Coffee in One Chart (2020), Visual Capitalist. Available from: https://www.visualcapitalist.com/the-economics-of-coffee-in-one-chart/
  4. FAO (2015) Challanges and opportunities to improve the livelihood of small holder farmers in the Pacific Islands countries. [Online]. Available at http://www.fao.org/fileadmin/user_upload/sap/docs/Challenges%20and%20opportunities%20to%20improve%20the%20livelihoods%20of%20Smallholder%20farmers%20in%20Pacific%20Island%20Countries.pdf

AgriUT is a digital utility token system that engages consumers through direct interactions and a means to reward and thank farmers that grow our food.