For a company that wants to deal in agri-commodities, one decision stands out among many: where to position itself in the supply chain. Being more “upstream” means you are closer to the actual growth and cultivation of the crop. Upstream implies control and more opportunity for profit, but those benefits come with increased risk and operational complexity. Positioning a company further “downstream,” closer to the end-users of the products, is less risky and requires less working capital, but these companies are usually constrained to making a small margin on all of their sales. They are price-takers, in a market where the buyers and suppliers jostle for pricing power.
The most downstream position a company can be in is to simply speculate in agri-commodity futures markets. This sort of company (or fund) avoids at all costs ever taking physical possession of a commodity. In addition, many agri-commodities, such as tree nuts, would be out of reach for this sort of company because there are no exchange traded futures for these products. Beyond speculating, the next step up the value chain is to sit near buyers in destination markets, book sales, and then have third-parties in the agri-commodities’ countries of origin fulfill the contracts. This is really just acting like a broker. One step further upstream is having a presence in the origin’s port city and taking and exporting big bulk deliveries of the agri-commodity. Each step further upstream affords you a larger share of the total value chain profit, but it also increases operational costs and risk. For instance, if you take bulk deliveries in the port city you need a warehousing operation, but if you are only a broker you only need shipping relationships. On the risk side, the more inventory you have and the longer you hold it, the more the prevailing price of the commodity can move against you before you offload the inventory.
Crashing the farmgate
If you want more control over procurement you can install yourself “upcountry” (as in, not in the port city) and deal directly with the farm or community level brokers. This is my company’s main mode of operations for cocoa in Nigeria. There are alternative procurement schemes as well, such as dealing with cooperatives or farmer groups, or purchasing via auction. Beyond the brokers, you can buy at the “farmgate” from the farmers themselves or their community level brokers. For many crops, there are too many farms over too wide an area, so the operational complexity of farmgate is too costly to justify the margins it commands. If you want even more control beyond farmgate you can work directly with farmers and provide them with inputs like seeds and fertilizer. This is known as outgrowing. There are even instances where the crop is owned by the company itself, and the farmer is contracted to simply manage the crop cycle from planting through harvesting. This is often referred to as contract farming.
The last level of control, which is the riskiest and most intensive with regards to operations and costs, but necessarily commands the highest profits, is to become a farmer yourself. For a few products, my company has gone down this path and acquired land across the world and begun the capital-intensive process of preparing the land, planting crop, and waiting for harvests of sufficient quality and quantity to sell on the international market. We’ve gone down this route with coffee in southwest Tanzania. I was sent to this plantation near the Mozambique border and Lake Malawi for the last two weeks to learn about the business of growing coffee.
Being more embedded in the supply chain implies that an agri-company has more control over the environmental and social aspects of the agri-commodity. If a company is a broker they can try to find in-country agents that purport to offer environmentally and socially responsible products, but the broker has little true control over the situation. The same goes for in-country bulk buyers who are relying on upcountry buying agents that aggregate product from multiple growing regions. Only when you directly embed yourself in the regions can you begin to exert your sustainability expectations on your buying agents and the farmers themselves. This is what my company is doing with cocoa in Nigeria. We have created farmer groups that includes the buying agents and community-level brokers. They are receiving training and some inputs, and once they demonstrate they are adhering to sustainable farming practices, we bring in third-party auditors that certify them as Rainforest Alliance or UTZ Certified. About one seventh of our Nigerian cocoa is now Rainforest Alliance or UTZ Certified, and we have a goal for 100% sustainable cocoa from Nigeria by 2020. Despite this, on-the-ground operations often differ significantly from the expectations certification bodies and my company have for the farmers. This was starkly revealed in September when a Brazilian coffee farm with Starbuck’s C.A.F.E. Practices certification was found to have laborers in slave-like conditions (EcoWatch).
Being the farmer yourself implies maximum control over the environment and social factors, and that’s what we are doing at our coffee plantation in the southern highlands of Tanzania. We established the plantation to prove that we could sustainably grow quality coffee and sell it for a premium on the international market. By owning the plantation ourselves we also have the added benefit of being able to trace the coffee right back to the farm. Our plantation is the largest single-tract coffee farm in Tanzania and sells high quality Arabica and Robusta beans to roasters around the world. In addition to being Rainforest Alliance and UTZ Certified coffee, the plantation is the first Alliance for Water Stewardship certified project in all of Africa. However, continuously operating a profitable and sustainable plantation takes a lot more than just adhering to the standards of certification bodies. The company took a careful and deliberate approach from the pre-planning stage of farm development. The alternative is having to change processes and remediate problems, which is difficult and expensive now that the plantation is operational.
The first step is finding suitable land. Climate and altitude are very important for coffee cultivation, but land use rights are of equal, if not superior importance. I’ve written about land use before, but I’ve become even more conscious of how contentious it is, even in my own country, when reading about the Bundy family’s various sieges and standoffs, as well as the controversy concerning Bears Ears and Grand Staircase-Escalante National Monuments. In Nigeria, there is a lot of media attention on the Boko Haram terrorist insurgency in the north, but three times as many people have been killed in central Nigeria over disputes regarding land for cattle herding vs. row crop farming. My company goes through a painstaking process of identifying potential parcels of land and conducting due diligence with the government to make sure we are not displacing anyone without their prior free and informed consent.
Involving the government, at all levels, from the national institutions to local leaders, also engenders trust, mutual respect between people and for the project, and more equitable dispute resolution in the future.
Southwest Tanzania is remote by any standards. It is over 1,000 km from the port city. Grid electricity has only reached the plantation’s nearest town in the last year. There are two flights on a 12-seater per week. We basically had to build a small village to support the plantation. During the picking season there are 4,000 – 6,000 workers buzzing about on a daily basis. We constructed some limited housing, cooking and eating facilities, water treatment, sanitation, electric generation, and more. From any given point on the plantation there is a toilet within 500 meters. There is a large workshop for fleet maintenance, and we are also responsible for recycling 100% of our waste, or incinerating it. We employ a third-party security firm to secure the plantation, and they have a few of their own small buildings, including a lock-up. We have fire prevention and response plans, and the local fire department inspects our property and facilities, advises on best practices, and certifies our plans.
Beyond land use, and closely tied to it, the most contentious and important aspect of sustainable farm design is water use. The plantation does not receive enough rainfall to naturally support the coffee plants, so it needs to be supplemented by drip irrigation. The plantation borders the Ruvuma River, which flows south to form the border between Tanzania and Mozambique, and then drains into the Indian Ocean. We directly draw from the river for irrigation, but we strictly adhere to limits which allow for downstream use and sufficient flow into the lake. Because of these restrictions, during the dry season there is not enough water in the river for us and everyone else who relies on the river. We have built a reservoir that we fill with water during the rainy season and deplete during the dry season so that we can adequately feed our coffee plants without any adverse downstream effects. These efforts have garnered us the first Alliance for Water Stewardship certification in Africa.
The pump is on a barge that floats up and down with fluctuations the water level
Beyond river dynamics, we painstakingly calculate watering needs so that we do not over-water and lose too much water to evaporation or soil drainage. We have soil erosion protocols in place, and approximately one half of our land is left as a conservation area and is not planted. This helps maximize natural drainage and flow from the hills into the river. Parts of the plantation were rich in indigenous trees prior to us acquiring the land, and those trees have been left in their original place. We have planted coffee around them. All of the water we use for processing is either filtered and re-used or is left in evaporation pools to prevent polluting the river or groundwater.
World Health Organization Class 1 and Class 2 chemicals are banned at the plantation due to their toxicity levels. All employees and laborers that handle chemicals are trained in their storage, handling, and application, and they are provided with all necessary protective equipment. To make sure they are using the protective equipment properly they receive periodic blood tests for certain toxic chemicals. We ship these tests up to a lab in Dar es Salaam, and if their levels are high then the worker is removed from chemicals spraying. The farm avoids using agro-chemicals that are explosive, and all laws, regulations, and company policies are followed with respect to chemical storage and transportation. Even more so, the plantation manager heavily emphasizes good crop husbandry to minimize the need for pesticides, fungicides, and herbicides in the first place. If the plants, soil, and land can be appropriately maintained then pests will not proliferate, diseases will be naturally repelled by the plants, and chemicals will only be needed in small quantities.
The Saturday I spent at the plantation happened to be payday. At the peak of the picking season there are more than 4,000 laborers at the plantation, and everyone gets paid on the same day. The process takes between four and six hours. Everyone is paid in cash, but 10% is withheld for social security, and my company contributes an additional 10% out of its pocket for social security. Due to the complicated payroll process the plantation is beginning to pilot mobile payroll to automate the arduous payday process. On the day I observed payroll the local police commissioner showed up for his periodic chats with plantation management. They tell me that he often chooses payday for his visits. In his precinct, this is the largest congregation of people on a regular basis (1,500 in the low season, and 4,000+ in the busy season).
The plantation adheres to an equal opportunity and equal pay policy with regards to gender and religion. Men and women are both given the opportunity to work, as are Christians and Muslims. The only requirement is that the person is 18 or older, and they must present a national ID card or a letter from a local priest or imam to confirm their age. The daily wage is 148% of the agricultural minimum wage. Pickers can earn up to 250% during the peak season if they are efficient pickers. Every worker receives one meal a day at the plantation, which usually consists of ugali (a maize mash that looks like mashed potatoes), beans, and vegetables. We buy our maize, beans, and vegetables from local farmers and our stoves, while wood burning, are low-burn models.
In each of the four villages closest to the plantation we have a social impact program which falls under the title corporate social responsibility (CRS). Each village has a population of about 500 people. Tanzania has had well organized village-level politics since the times of Nyerere, and each village has a liaison committee with the plantation. Every year the plantation and each village agree on a modest development project, and the plantation provides most of the capital for the project. Over the years we have built housing for teachers, replaced school furniture, and built a science lab for a school. Our largest project was a medical clinic for one of the villages. Before the clinic, villagers had to travel more than 20 km for any medical care. Now there is care available in their village, including for low-risk pregnancies and malaria. The clinic is seeing about 300 patients per week. A small bit of the price you pay, as a consumer of coffee, goes into these CRS projects, and in turn the goodwill we enjoy with the communities allows us to continue to operate and provide the coffee to customers around the world.
All of our coffee varieties are non-GMO. After a seed germinates, it takes up to five years for a tree to reach its fruit bearing potential. Coffee beans are the seeds inside of small berries that grow on the branches of the coffee tree. Coffee is a perennial crop that bears fruit once a year. The berries take about four to five months to mature, and once red they are known as cherries and ripe for picking. Up to this point, if the tree and soil have been properly cared for and fertilized then the cherries have the potential to produce high quality coffee. However, post-picking processing has a large impact on the quality of the final coffee bean.
Developing beans
The first goal is to have the coffee bean ferment under the proper conditions. Fermentation develops chemical properties inside of the coffee bean that are palatable. If the ripe cherry is left un-processed for too long it will begin to decompose, ferment, and dry inside of its skin (known as the “pulp”). This is undesirable, so we have a wet-mill processing facility right on the plantation property. The day’s pick is brought to the wet mill every afternoon and the pulp and mucilage (sweet under-pulp) are mechanically removed to leave only the seed, covered by a hard-inner shell known as the “parchment.” The beans-in-parchment are then fermented either aerobically or anaerobically overnight under the watchful eyes of the processing staff. If the fermentation process produces too much heat it can degrade the quality of the coffee.
The Wet Mill
After approximately 16 hours we drain the fermentation water (if fermented anaerobically) and give all of the beans a last water wash before they go to the drying beds. Drying is a slow and labor-intensive process. By reducing the beans’ moisture content from around 50% to 11% we arrest mold development and lock the coffee flavor into the bean, protected by the parchment inner-shell. The beans are laid out on the ground, on drying racks, or in a greenhouse and regularly raked and turned so no one side of the bean receives too much or too little sun exposure. It takes about seven days to sufficiently dry the coffee, and then it is bagged and sent to the dry-mill.
Empty drying beds
Coffee cannot be roasted and consumed until after the parchment is removed. At the dry-mill (a four-hour drive from the plantation), the parchment coffee is stored until it is assigned to a customer order. Coffee-in-parchment can retain its quality for up to two years. However, once the parchment is removed, the coffee will begin to lose some of its favorable qualities after about four weeks. Basically, it goes stale. The same goes for roasted coffee. Freshly roasted coffee is much more desirable than packaged coffee beans and especially ground coffee. Once a lot of coffee is assigned to a customer order the dry-mill machinery removes the parchment and other excess matter and sends it off to Dar es Salaam for containerization and exportation.
The world of coffee trading at times seems like an international cult, similar to wine. I’m sure that the members would be quick to point out a number of inaccuracies in this post, but I hope it serves the purpose of informing my friends and family about what I’ve been doing in Tanzania. Coffee “cuppers,” as they are known, have a tasting ritual in which they discern aromas like potatoes, garden pees, cocoa, caramel, and dry leaves from cups of hot water poured over fresh coffee grounds. They assess the cups based on their uniformity, clean cup-ness, body, acidity, mouth feel, and many more characteristics. These factors magically coalesce into a score, which can be used to compare coffee beans against each other and decide which should command the highest premium. However, the quality of the completely de-hulled bean is not the ultimate determinant of the quality of a cuppa joe. My company sells de-hulled coffee, known as green coffee, to coffee roasters. Roasting, as I understand it, has a huge impact on the quality of coffee (so that’s to say, blame Starbucks, not me, if you’re disappointed in their coffee).
Despite all of our best efforts, not all of our coffee can be high quality coffee. The coffee trees are extremely sensitive to environmental factors, including the weather, and our operations are not always working perfectly. We strive for more of a bell curve in our beans (under-ripe, ripe, over-ripe) with as tight of a distribution as possible around the good ripe beans. We asked the head cupper in Tanzania what countries buy the best coffee, and which buy the crummiest beans. He immediately pointed out Spain as a big importer of low-quality beans and the United States as our largest high-quality buyer. The next time you have an espresso or cappuccino on La Rambla you may be overpaying. However, $5 at a great café in New York may be the right price for a high-quality cup grown sustainably in southwest Tanzania. Arabica beans were trading at $0.99 per pound the last time I checked. That’s per pound. What happens between our overseas shipment and the cup you buy is up to the roaster and you. $3, $4, or even $5 may be justified by excellent and speedy handling of the green coffee, expert roasting, and superior service at the café. It’s all about marketing, in the end. The consumer decides what to pay, or what price is prohibitive, so it’s up to the roaster (or their purveyor) to convince the consumer that the beans are worth the money.
Coffee bean defects
To augment our sustainability practices, the company I work for is also offering traceability to our customers. Our traceability platform is called AtSource and was launched just this year. It is only available for some of our products originating from certain countries right now, but the CEO’s goal is to have 100% of our offerings on AtSource by 2025. AtSource will allow customers to trace their orders all the way back to its origin (whether that is a farmer group or an actual farm depends on the product). Along with the chain of custody information comes all sustainability metrics, including greenhouse gas emissions, water use, and social factors. Importantly, we are working towards verifying all of these data by third parties. All information on the products’ certifications (such as Rainforest Alliance/UTZ or Fair Trade for our Fair Trade products) is also housed in AtSource so a customer can easily access it. I see AtSource potentially evolving to supplant certifications like Rainforest Alliance. With all relevant information transparent and accurate, our customers can evaluate our offerings against their own standards and the expectations of consumers. The burdens of the certification middle man can be cut out.
At the coffee plantation, the goal is to have a carbon neutral operation, from seed to shipment. Since the first crop three or four years ago (it’s a relatively young farm) we have been able to cut out two tons of carbon for every ton of coffee. We were able to make this progress by extending the national power grid to the plantation and reducing our reliance on diesel generators. In addition, the farm managers emphasize preventative measures for weeds, diseases, and pests. This has reduced our need for spraying, which is often done mechanically with tractors. We have an ambitious reforestation plan, which is carbon net-negative, but with the amount of land we have we will never be able to reach carbon neutrality through tree planting. Our emission reduction efforts are continuous and sometimes subject to trial and error. For instance, minimizing the use of fertilizer needs to be carefully measured against plant and foliage growth and health. The plantation manager even uses regression analysis to ascertain the effects of various fertilizer regimes on cherry yields. Once our emission reduction efforts plateau, the company will have to purchase carbon offset credits to reach carbon neutrality. This is an expensive proposition, which is why I think it is important to have a platform like AtSource. The realities of growing carbon neutral coffee will be transparent to buyers, and we will be able to ask them to share in the costs to produce truly sustainable coffee. My company calls this AtSource Infinity, and to date we do not have any products at the Infinity tier of AtSource.
I doubt that I will personally be assigned to work on a company plantation after completing the Future Leaders Program. A large amount of the work at our plantations is agronomic, and I am not a trained or even an amateur farmer. However, the exposure to plantation work was definitely worthwhile to gain a better understanding of farm economics and the operational requirements for sustainably sourced agriculture. My next stop after Tanzania is Ghana, where I will be working in our processed foods business. We will go through all aspects of selling cookies in Africa, from manufacturing through to distribution and sales.
Baby coffee