Cuppa Transparency

I first learned the term transparency in business practice in 1999, while working for the Specialty Coffee Association of America. A gentleman by the name David Griswold, President of Sustainable Harvest Specialty Coffee Importers, had created a business model within the industry called “Relationship Coffee”. This business model had many things in common with the supply chain management system used by Toyota for decades, which was built on relationships and building capacity among suppliers. While the traditional method of coffee importing was performed in an anonymous fashion, the Relationship Coffee model was built on the foundation of transparency of transactions between the farmer, the broker and the buyers. For many years people in the coffee industry had complained about the “fat brokers”, but when Mr. Griswold introduced the transparent business model, through an industry trade article, it caused quite a stir among the large players. Over the years Sustainable Harvest has continued to grow an equitable business around the framework of Relationship Coffee, including traceability, trade credit, quality control training and profit investments into the supply side in order to help growers build sustainable businesses in countries of origin. (2008. Sustainable Harvest).

In terms of volume, coffee is one of the five most traded commodities in the world and, except for Hawaii, is grown in third world countries around the globe. This means that businesses in consuming countries, like the United States, make varied profits on a product that poor and hungry people are laboring to harvest, process and bring to market. The farmers and laborers are not getting rich, however, and many are abandoning farms in order to find a livelihood in industries elsewhere. Unfortunately, some countries have no other options, but to continue to trudge forth in coffee because there are no other available opportunities. This gives businesses in consuming countries the upper hand in negotiation, meaning that the farmer is forced to take what is offered despite the intensive work needed for production, despite labor and maintenance costs and despite the value of the product itself.

In the years immediately following World War II, the United States had a substantial increase in demand for coffee and the supply chain was inadequate, causing coffee prices to rise. This in turn caused coffee growers to increase crops in order to fulfill future demands. Also, at that time, most American consumers cared little about quality, as was the emerging age of convenience. It was during this era that instant coffee became viable on the market, further increasing demand. Instant coffee is made from low quality, low maintenance-produced beans, which means less labor-intensity in production. The United States, in particular flourished in low-quality coffee. (Pendergrast, 1999, p. 241).

Even worse than bad tasting coffee, was the diminishing conditions of the coffee farms; natural shade trees and plants were cleared to make room for planting more coffee trees and new pesticides were used to prevent interruption of coffee growth. Eventually, the growers’ efforts to meet demand backfired in several ways: They had a gross over-supply of coffee which caused prices to fall, they were bringing low quality coffee to markets other than the United States, and they were on the verge of ruining the farms. This state of imbalance in the system within an industry already vulnerable to weather, wreaked havoc on those countries whose economies were dependent primarily on coffee exports; furthermore, the growers were suffering in the ups and downs of the price fluctuations – this would go on for approximately twenty years before governments of consuming countries and countries of origin would form an initiative in attempt to stabilize the market. The first official International Coffee Agreement in 1962 was negotiated in order to implement a quota system, which would help control the price of coffee, protecting especially from over-supply on the market. The Agreements also allowed opportunities for all coffee growing countries to participate in trading. This was a step in the right direction.

An important facet in the coffee price puzzle is the New York Board of Trade Coffee Exchange, the mysterious entity that puts a price on coffee futures. The Coffee Exchange was created after a disastrous market crash in the late 1800’s to ensure both buyers and sellers an agreed upon price to be paid on future coffee imports. It is a system of speculation that sets a foundation upon which contracts are made between producer and importer. They contract for a certain number of bags of coffee at a certain price to be delivered and paid for at a future date. The speculated market price gives them a basis on where to start; however, there are many things that can cause the rise and fall of price, as discussed previously. The main factor being weather, for instance, an importer and producer agree on a price, whether over, or under the market price. If there is a frost in Brazil and this drives the price of Brazilian coffee up, then the grower is bound to sell the agreed upon number of bags at the agreed upon price despite the current price. The scenario could be reversed as well; the price could drop considerably and the buyer would be bound to the agreed upon price. (2006. Coffee Research Institute). The problem with this system is that the people speculating on coffee futures are not coffee experts who are directly involved in the coffee industry, they do not travel to origin to inspect the farms, nor do they taste the coffee. Also, coffee quality varies from harvest to harvest, farm to farm, country to country and with processing methodologies. It is much like an interior designer directing a pancreatic surgery, it does not quite work; unfortunately, it is the system.

Many coffee buyers (usually roasters) do travel to countries of origin, in order to inspect farms and cup the coffee for purchase, then work with the importer to obtain the coffees selected. Pricing is traditionally negotiated privately between importer and producer, then privately again between importer and buyer. Many quality-driven roasters expect to pay a premium for specialty grade coffee; however this is the point where the deal usually goes hazy. Somehow, the premium does not trickle down to the grower, even though the buyer has paid well above the market price set by the New York Coffee Exchange. The roaster will still make a profit from the coffee; however the grower is left with nothing to show for the labor. The profit made by the importer is claimed to be high as the importer takes the greatest risks in coffee futures; however, there is no point in paying a premium for specialty grade coffee, if the grower does not reap the benefit. Also, the chances of maintaining a superior coffee are nearly impossible if growers cannot cover overhead, production and labor costs.

In recent years, many programs have been established within coffee growing countries in order to help migratory workers with health services, provide schools for children, and assistance to help growers in obtaining small business loans. There are also sustainability programs, which are designed to replenish coffee farms, land and soil. These include bird-friendly/ shade-grown coffees and organic certified coffees. The fair-trade certification program has been hugely successful in exposing the deep pockets of the importers and has certainly built a successful marketing campaign within several consuming countries, promoting awareness and sparking interest in social responsibility among coffee buyers large and small. Unfortunately, the Fair Trade movement in coffee fell short in execution, at least in the beginning. The movement brought the issues to light, but failed to present any long term solutions that were good for everyone involved; roasters wanted a mechanism in place to ensure quality in exchange for premium prices.

Transparency is a business practice which provides disclosure of information to all stakeholders. While there are challenges to transparency in business, it promotes a more proactive environment for stakeholders. In the case of Sustainable Harvest Coffee Importers, David Griswold built a successful business around transparency with buyers and growers and has furthermore developed long lasting relationships within both branches of business. When information between buyers, growers and importer was opened up, the focus became quality of coffee. This communication led to growing needs and costs of production and labor. It became obvious that if the buyers and importers wanted to continue to purchase a certain coffee, then those needs would have to be met. The importers and buyers became investors in the farms, not just financial investors, but they invested in educating the farmers and laborers in order for the growers to build sustainable, healthy businesses. The buyers, Green Mountain Coffee Roasters, the roasters of Newman’s Own coffee brand, along with Sustainable Harvest Coffee Importers, put together a team of trainers and began teaching the growers about the coffee that they grew and harvested. Sustainable Harvest called the program “Let’s Talk Coffee” and added it to his services as an importer. This guarantees Green Mountain high quality coffee at a price that is fair and they know where the money is going, so a paid premium over the Coffee Exchange market price is truly that and Green Mountain can rest assured that money is well spent.

Another coffee roaster, who works with Sustainable Harvest for import, made an interesting exchange for fine, specialty coffee; when the team from Dillanos Coffee Roasters was introduced to a coffee cooperative in Rio Azul, Guatemala, they fell in love with the coffee, and because they were dealing directly with the growers, they soon found out what the immediate needs of the workers are, healthcare costs. In return for high quality coffee, Dillanos was able to pay the growers directly and pay $10,000 in healthcare costs, which they consider a direct business investment. (Sustainable Harvest, 2008).

Some guidelines in achieving transparency in business for long term success come directly from the above examples of three successful companies within the coffee industry (more if you include the growers): First, make a commitment to integrity. Second, involve all stakeholders and encourage participation in the decision-making process. Third, be open about company performance and finances. Fourth, provide traceability for all transactions. Fifth, learn everything possible stakeholders positions in order to better understands common goals. Sixth, work for a common good with stakeholders.

According to David Lapin of Carlson School of Management “Employees who experience their company's purpose as making a valued contribution (with profits as the outcome) rather than merely generating shareholder wealth, commit to their work with greater passion. This leads to a partnership between employees and corporate leadership that boosts innovation and uplifts performance. Ethics play a vital role in the preservation of this priceless partnership, which can thrive only in an atmosphere of trust and integrity.” (Lapin, 2003). This can also be true for business owners, as well; meaningful work is a very important part of life and gives a business an added advantage for success.

Understanding common goals of stakeholders provides the opportunity to benefit everyone involved. Transparency in business, along with organic certifications and Fair Trade certification programs are imperative to sustainability in the coffee industry. Organic programs to take care of the farms, land and soil, Fair Trade programs to provide a realistic basis on which to start negotiation and transparency in practice to ensure that everyone involved is fairly compensated, creating long term, successful business relationships and high quality products for consumers. Also, there is an added benefit of marketing socially responsible products and practices. Even though this is sometimes frowned upon as an exploitive act, it actually provides the opportunity to raise awareness in consuming countries world-wide.

References:
Coffee Research Institute. (2006). Coffee Trade: New York Coffee Exchange: http://www.coffeeresearch.org/market/coffeemarket.htm
International Coffee Organization (2007). History – International Coffee Agreements: http://www.ico.org/history.asp
Lapin, D. (2003). More Imagination Ethics Conference. Strategic Business Ethics, Inc.: http://www.sbe.us/paper6.htm
Pendergrast, M. (1999). Uncommon grounds – The history of coffee and how it transformed our world.New York: Basic Books.
Sustainable Harvest (2008). Relationship Coffee Model: http://www.sustainableharvest.com/
(Also mentioned in this article were Dillanos Coffee Roasters: http://www.dillanos.com and Green Mountain Coffee Roasters: http://www.greenmountaincoffee.com )