#55 | Re:co Podcast - Peter Roberts on Empowering Specialty Coffee to Look Beyond the “C” (S5, E2)

Today, we’re very happy to present the second episode of the “The Role of Innovation and Technical Advancement,” a session recorded at Re:co Symposium this past April. This session explored and evaluated advances in innovation positioned to make an impact within our industry as we work to resolve the coffee price crisis.

We are pleased to welcome Peter Roberts, Professor of Organization and Management at Emory University and Academic Director of Social Enterprise at Goizueta. Producers of specialty coffees face serious questions about whether and how the market values their products. These questions are symptoms of long-term, structural problems rooted in inequality and information asymmetry. For the specialty coffee industry to survive, these questions need to be answered. In this episode, “Empowering Specialty to Look Beyond the ‘C’,” Peter introduces The Specialty Coffee Transaction Guide, which relies on an expanding group of roasters, importers, exporters, and others who donate contract data covering specialty coffee transactions from recent harvests.

Special Thanks to Toddy

This talk from Re:co Boston is supported by Toddy. For over 50 years, Toddy brand cold brew systems have delighted baristas, food critics, and regular folks alike. By extracting all the natural and delicious flavors of coffee and tea, Toddy Cold Brew Systems turn your favorite coffee beans and tea leaves into fresh cold brew concentrates, that are ready to serve and enjoy. Learn more about Toddy at http://www.toddycafe.com.

Related Links

3:10 The story behind how Peter came to realize Central American coffee producers were not earning sustainable prices for their coffees
8:25 Specialty coffee needs a pricing benchmark for paying coffee producers, but it can’t be the C price.
11:55 Why the American Blue Book for comparing used cars prices is a good model for comparing specialty coffee premiums paid to farmers
20:15 Future considerations once the specialty coffee industry has this pricing data

Full Episode Transcript

0:00 Introduction

Peter Giuliano: Hello everybody, I’m Peter Giuliano, SCA’s Chief Research Officer. You’re listening to an episode of the Re:co Podcast, a series of the SCA Podcast. The Re:co podcast is dedicated to new thinking, discussion, and leadership in Specialty Coffee, featuring talks, discussions, and interviews from Re:co Symposium, the SCA’s premier event dedicated to amplifying the voices of those who are driving specialty coffee forward. Check out the show notes for links to our YouTube channel where you can find videos of these talks.

This episode of the Re:co Podcast is supported by Toddy. For over 50 years, Toddy brand cold brew systems have delighted baristas, food critics, and regular folks alike. By extracting all the natural and delicious flavors of coffee and tea, Toddy Cold Brew Systems turn your favorite coffee beans and tea leaves into fresh cold brew concentrates that are ready to serve and enjoy. Learn more about Toddy at toddycafe.com. Toddy: Cold brewed, simply better.

Re:co Symposium and the Specialty Coffee Expo are coming to Portland in April 2020. Don’t miss the forthcoming early-bird ticket release – find us on social media or sign up for our monthly newsletter to keep up-to-date with all our announcements.

For those of you familiar with this year’s Re:co Program, you may notice that this episode – our second release of the Re:co 2019 Podcast series – comes from the session that closed this year’s event. This year’s event was all about coming together to learn, collaborate, and act to address the coffee price crisis that faces all of us in specialty coffee and, across two days together, some big projects working to tackle different facets of the crisis were announced.

Excitingly, these projects are just getting underway, so we wanted to kick off this year’s series with some clear and concrete calls-to-action!

If you haven’t listened to Episode #54, the first of this series, we strongly recommend going back to listen before you continue with this episode.

On this episode of the Re:co Podcast, we are pleased to welcome Peter Roberts, Professor of Organization and Management at Emory University and Academic Director of Social Enterprise at Goizueta. Producers of specialty coffees face serious questions about whether and how the market values their products. These questions are symptoms of long-term, structural problems rooted in inequality and information asymmetry. For the specialty coffee industry to survive, these questions need to be answered.

In this episode, “Empowering Specialty to Look Beyond the ‘C’,” Peter introduces The Specialty Coffee Transaction Guide, which relies on an expanding group of roasters, importers, exporters, and others who donate contract data covering specialty coffee transactions from recent harvests.

Also, to help you follow along in this podcast, I will chime in occasionally to help you visualize what you can’t see.

3:10 The story behind how Peter came to realize Central American coffee producers were not earning sustainable prices for their coffees

Peter Roberts: So, I guess I’m the last presenter. Thank you. Two things you need to know before we get going which I’ve put a lot of context. One will become obvious in a second. My first Re:co, you know, ever. So, you know closing a Re:co for your first Re:co seems like a bad idea and secondly, I think it’s probably even more important unlike most of you in the room I only became obsessed with specialty coffee about six or seven years ago. So, about 2012/2013. So, the double bad dude in first Re:co comes with very limited experience exposure, and I’m supposed to spend 18 minutes talking to you about you know, why you should listen to a new tool that we’re trying to develop for specialty coffee.

So, to set context is the only way that you can get value from the next 18 minutes is I’m a fairly normal business school professor in my day job, right. So, I’ve been doing this for about 20 years, doing research teaching and met a conclusion that I’m going to try to go over. There’s just something about the global specialty coffee market that just seems odd to somebody who’s been trying to understand markets. Odd is probably an understatement, but there’s just a weirdness in there that just can’t be allowed to persist, and I want to basically share a few interactions and anecdotes along the way that sort of produce this conclusion that the market is just a little bit too odd, you know, for its own good. I’m putting this up behind me.

Peter Giuliano: Peter has a graph showing the gradual collapse of the coffee commodity price, the ‘C’ market, over the last two years.

Peter Roberts: Most of you will recognize what it is. It may not be the elephant in every room, but if you listen closely to my first four stories that I want to tell the thing that I think becomes sensible in those stories is that this elephant is always in the room.

So, story number one way back in the day taking students, meeting small groups of cooperatives, and I’ve just been doing a lot of research on my own, just trying to look at where retail prices were for specialty coffee and again, very new to all this. I’ve got a conversation going and I just asked these folks because I thought it was just an obvious and innate question. What’s your aspiration, you know, when it comes to price per pound for your coffee? And holy smokes everyone looks at their shoes. We’re just don’t talk about this kind of stuff. A little bit more prodding was almost like we don’t really have the opportunity to form expectations about prices and finally, because man, persistent I got students who are looking at me, you know, I got one guy to say about $3 a pound. If I knew that I could get $3 a pound regularly this is a business that I would love to be in and love to hand off to my kids, $3 a pound. So, I start talking a little bit about what retail prices looked like in North America, sort of that notion that it’s not uncommon to see $20 a roasted pound for specialty coffee. Two of them piped up right away then said I think $3 is a little low then if other folks are getting 20. So, there’s that weird notion of going you all don’t seem to have a really good pricing context.

In fast forward about a year later, different guy. I just learned that this guy, a small grower in Nicaragua again, his coffee routinely 89, 91, 90 right across the board an awesome producer. So, I’m thinking okay this is going to be a happy story. So, you know, bring the students around, gather, start talking I say, “hey, what’s the best price you ever got for your coffee?” Of course, this was coming off the roller coaster because it was last year. Last year got almost $3 a pound you for my coffee and I say, “Oh this is awesome and just out of context, worst price?” He goes. “Oh, that will be this year.” I was like huh again expecting a happy story. Huh, and he goes. “Yeah, this year. I won’t cover my cost of production this year,” and it’s like oh. Again, students watching a business school Professor going I’ll make sense of this. Surely, what happened different buyer? Same buyer and I went whoa, that’s weird. So, the green prices in this thing and again, nothing you don’t know. So, it seems to be way, way, oversensitive to something that seems very not sensible to people in this market to go from like almost three to not covering cost of production with the same buyer when your coffee is still 90.

So, I’m now getting energized. I don’t pretend to know as much when I go to Origin now with my students, but I got a chance to sit on a panel in Guatemala. It was a flea conference and it was dedicated to coffee, this particular panel. And the other folks on the panel, don’t remember names, but the first thing was specially coffee has a big problem and they use the example of Starbucks’ forecast. It’s going to need a hundred million pounds more coffee itself per year to meet its own growth demands. Like, whoa. The second one said ‘yeah, but the problem is that all the young people in coffee they’re walking away from farms. They don’t want to take over their parents farms’, right and so, you know it comes to me and I’m just literally going, and I haven’t said a lot out loud, yeah, but I’m going, you know, there’s a variable that’s supposed to move. If somebody wants more of something but supply is going the other way, I said there’s this mechanism, it’s called price and I can’t imagine that if you had more reasonable and exciting prices that some of the kids wouldn’t stay and grow more coffee for the Starbucks and so, there’s that weird thing. I’m going what makes all those stories sensible. It’s this weird over obsession with this one big elephant in the room.

8:25 Specialty coffee needs a pricing benchmark for paying coffee producers, but it can’t be the C price.

Peter Roberts: So, you fast forward, I’m getting a little bit more confident now. I’m actually in the Specialty Coffee Association meetings and it was last year when people were beginning to more vocally rail against pricing, you know, talking about pricing and commodity and a little bit of C bashing going on for sure. But one very courageous young man went up and he said something along the lines of “I know this is going to be contrarian, but I need the C price. I need to C price because I have to know that the prices I’m paying are appropriate. If I don’t have context I don’t know whether I’m over and underpricing”. And there’s a pause the room and I set myself as not being as concerned as others about what people think about me.

So, they sort of looked over at me at the table and I said, I guess I’ll take it. I said the first thing is you’re right. Markets need context, they need benchmarks and anything where we go in and we have a conversation about price, there’s no such thing as we naively knowing what something should be worth. We need to look around and sort of talk about benchmarks to know where to start and where to stop a conversation. So, I said, you’re absolutely right. You need a benchmark, you just don’t need that one and this kind of stuff and I said, I’m going to say it for the first time out loud. I said, I think a good metaphor for all of us is like Tarzan and the vines, you know, going through the jungle.

So, Tarzan basically will never let go of one vine until Tarzan has the next one to grab onto. Now, there’s a bit of an Act of Faith in there in between because you know, you’re not holding on to both lines at the same time. It’s not how it works. But if you don’t see the next vine then what happens is Tarzan will just sort of swing backwards and then swing backwards and we’ve been swinging back and forth on the same vine. I was like, yeah, I made that up and then I’m going that make sense to me. It’s the Tarzan metaphor. So, somebody said, and a reasonable question, “so, what’s the next vine look like?” And I think I made some comment which is a little glib. I said “anything, almost anything will be better than that.” And I went one step further and this reveals a little about myself.

I said my weight is a better benchmark here for specialty coffee than the ‘C’ and your weight, I said has never gone below 225 as an adult man. So, it’s never gone below 225. It has actually on rare occasion gone above 300 and it has that appropriate day-to-day and week-to-week wiggle in it that keeps all the hedge fund people happy too. You could do a lot of forecasting models and so, I went like this. So, my weight would be better and then we pushed a little bit. I go actually that graph there, if you sort of flipped it, that’s actually been my weight since 2016. It’s sort of this whole thing but it’s been it’s been going up and if we were sitting here, a good 45 pounds more than we were in 2016 we wouldn’t have the same conversation. But then somebody comes up and then goes you get off the glibness and then you sort of go, well, the one thing you have to go, well Peter your weight has nothing to do with specialty coffee. I’m going well, there’s where we bring the two stories together. Neither does the ‘C’.

Now I know that the ‘C’ is implicated in all conversations, but it just doesn’t seem to have any correspondence. When you think about that idea, I’m going through, we’re talking about your coffee. I’m cupping it. I’m making sure I get mine. That’s the world of specialty and there’s a couple of bars indicating what specialties been doing on the demand side and actually go back and you sort of say. “Hey that graph of your weight would once again be a little bit better surrogate than the ‘C’ price”. All right.

11:55 Why the American Blue Book for comparing used cars prices is a good model for comparing specialty coffee premiums paid to farmers

Peter Roberts: So, then so you go back and go that’s where the conversation starts and that’s roughly around the time I met Chad and he said don’t ever tell the weight story again and so, I promised him I wouldn’t but he said we’re going to need a slightly better idea and I said, so the better idea that we sort of come up with again simple comparison, nothing big or new.

When people buy cars or when people buy houses, they have these two things that they can go to. They have this thing called the Kelly Blue Book and the other thing are services like Zillow and all those things do is when you’re about to embark on deciding I want to 2017 BMW, you can go onto the Kelley Blue Book and it can say recently, this is what these things sold for, low-end, medium, high end. Doesn’t tell you what you’re going to get. Doesn’t mean there’s not a deal to be had but that’s the reasonable range. Real estate the same thing, you walk out there and go I’m interested in this house. The realtor will always go what’s the comparables? What have similar houses sold for in your neighborhood and you go that is really sensible in a context which could do the following. So, you want to buy a used car, forget all the particulars. The global supply and demand conditions for cars are such and you go what are you talking about. That has nothing to do with the 2017 BMW or I’m looking to buy a house in an affluent neighborhood, and someone goes the global supply and demand conditions for housing are, and you would go and again, it makes no sense. and it goes it makes no sense. So, what we need is we need something like the Blue Book and then the problem is with the Blue Book. You say wow, that’s really simple but what does it need?

It needs the people who had last year’s prices to give them up and make them available and that’s why I’m really excited about what we’re here on today. I’m going to tell you in a second all the things that this project is not. I just think it’s an important movement. In the direction of the sense and sensibility. We get better sense making when it comes to used cars right than we do for coffee. But what did you need? You needed people to give up their data and this is where cynical business school Professor guy goes no one’s going to do that. Why does no one know anything about private equity? It’s because private equity guys don’t give up their data and this is where Chad, thank you, goes there are people in this sector that think similarly enough that we can do this and with I would say very little effort on my part. Thank you Chad, we actually managed to gather together 21 folks who basically allowed us to start moving in the direction of a Blue Book.

Now all the pluses and minuses as you walk down says that certainly doesn’t represent the entire market. It does not yet, but it could. But if you go down don’t dismiss it because it’s a non-trivial part of the market that has been demonstrating a certain sensibility in it and wouldn’t that be better guidance moving forward. It’s like rely on that sliver, non-representative sliver of the market because it seems more sensible than always going back to that one ‘C’ vine that we keep swinging back and forth on and the final thing that’s very important down here, look at the three bucks. The dude in Northern Nicaragua in 2012 was remarkably prescient about what prices look like. The center of gravity in this sample in terms of medians is like three bucks.

Now you pause right there, and you should go, and you’re going to go surely there has to be more Peter because this is what we’re talking about. You mentioned the 2017 BMW versus the 1998 Kia right? So, I’m going to basically go that one price doesn’t help us. Yes, but if you go back and say things like one, we recognize in specialty that we have different scenarios. Sometimes we buy a lot of ordinary. Sometimes we buy small amounts of exquisite and you just know for a fact that both of those different contexts they need different benchmarks.

Peter Giuliano: Peter’s graph shows different FOB prices for different qualities of coffee. The 80 point coffee fetches the lowest price and the 88+ coffee fetches the highest price. Also, these prices are categorized according to how much is being bought. The more a roaster buys, the less they pay per pound.

Peter Roberts: and so, if you do feel motivated to look at where we are and where we’re going. this is the most exciting accessible graphic and it does nothing else. It sort of says that seems sensible. So, as you basically go from one side to the other you’re basically talking about large to small as you go in each of these slopes you’re going to lower quality to high quality. I’ve heard it over and over again, hearing people have to price quality. Yes, they do.

Surely you’re not saying buying 800 pounds of a micro lot is the same as no I’m not and so you look at this and you should get excited. You should get excited for a couple different reasons not because it’s complicated. In fact, if you walked away through all this thing, I’m a business school Professor. I have a PhD. All I do in this project is I calculate medians and I’ve been doing that for 20 years. I can calculate medians. This is not hard. It’s not complicated, sorry, it is hard. It is hard because people got to go buy and they have that risk moment of going to I want to participate, what does that mean? But as more people get over that part, it’s just as easy to calculate a median from a larger sample rather than is from a smaller sample. So, I’m excited about this. Second critique we get this is not the silver bullet. This is not the one thing and listen, this problem has been around references to colonialism, references to slavery. Forget the content a good long time. What one thing do we need to do to fix this. There is not one thing but the way that I like to think about this if I. was going to rebuild a house I’d probably want to have a good hammer and someone’s going to come up and say you can’t build a house with just a hammer and go no, no, no, you need a lot of other kind of stuff too but you need a hammer.

So, that idea, don’t walk away from this because oh smug man on stage thinks he’s solved specialty and this guy because that’s not what we think at all. Go down one further, all you’re doing is lauding those people. Every moment in specialty coffee is for people to pat themselves on the back and say I’m a better person than you because I pay more and we get this all this commentary back and forth and going, to be honest, we are relying on people feeling like this is the right thing to do and that’s the motivation for our data donors but it’s anonymous donation. There’s no chest thumping and what the market wants to do, it doesn’t want to give everybody an obscenely high price. It wants to help people find out you’re growing there at that quantity, at that quality what are a reasonable set of expectations.

So, get off this idea that we’re sort of sitting here where we have our bunch of our cool friends that pay a lot of money and we’re going over there trying to certify as being 100% transparent. That’s not what this is about. This is about using that input so the market can be more sensible and then the final thing I look at is going but Peter it doesn’t tell you what the price should be and that’s the whole thing about the house and the car and about everything special. There is no one price. There are prices and everybody who looks at these medians and gets excited. The university researcher loves the 5th percentile to 95th percentile spread more than the median because it tells folks in specialty there’s more than you, a roadside and a quality score that determines the future success of you as a businessperson. In specialty story matters, relationship-building matters, access matters and then if you could start building some sort of re-orienting like global value streams, love that. If we could start thinking about this is a foundation so you could more reliably plan your future. I think we’d be talking about something that’d be a lot more awesome than the vine that we’re currently swinging on.

So, at the end we think we got a really good start here on the basis of goodwill from 21 folks a slight correction moving forward that 21 has become 25. It will probably hit north of 30 in terms of people that go I actually want to win in the game of specialty coffee, and this is me projecting and so I apologize. I actually want to walk away from a negotiation where I got a really good price, but I don’t feel like a jerk. That whole idea at the end of the day sort of says that I’m in that negotiation where we’re sort of equally informed and then we’ll hammer it out. That’s the world that I think we want to live in and to be honest I think there’s an awful lot of younger people that says “man, you paint a vision of coffee that had that in it, I’d be more excited about being in coffee.”

20:15 Future considerations once the specialty coffee industry has this pricing data

Peter Roberts: So, the things that we’d like to think. For those that think it’s a little bit too special right now. It is too special, 21 is not enough. To be honest, there’s a very large political part of me that says I think I like the prices as they are let’s just stick with those but I’m very sympathetic to the notion that we have to get a better picture.

So, if you’re in here and know somebody that might be cajoled into “doing the right thing,” the only lauding you will get is joining those folks and an invitation to come to the transparency colloquium at Emory University in June and drinks later on today, but only if you’re a data donor ha, ha. A couple things that we have to do in this, again thanks to Chad, you can put those tables up and everyone who reads them will know who got screwed but it is actually much better to make sure that the folks on both sides of the transactions are fully aware of the emerging information and I’ve learned recently for two reasons. One is that if we don’t go out of our way to inform the sell-side like we’re informing the buy side I get shut down by antitrust, you know people because this could be a wonderful vehicle for collusion if the 21 folks just went like this and says, what are we paying this year? So, my University attorneys are going you better, so we’re excited about that part.

Published data briefs. What’s going on in specialty coffee? The ancillary thing that the university guy just loves. There’s a lot of questions again bandied around that are never answered by data, but they’re illuminated by them and so we can actually start producing and disseminating insights on the basis of what does and does not get priced. Why our prices seem to be different in different regions. Great questions that an expanding database can answer.

And the final thing that I think is the most important from a human perspective. I teach in a business school. I always say the thing about business schools is nobody comes to business school to learn how to make minimum wage. Nobody comes to business school to learn how to be a subsistence producer. They’re like I got some kind of stuff going on here. Teach me how to basically, I can turn my $60,000 into a new career stream that would get me my 150. That’s what we’ve become good at and what do we focus on. We focus on things like what’s your identity, what’s your story, relationship management, effective negotiation. What if you basically got to a point where we can talk to these amazing specialty coffee producers and say you are more than the quality of your beans?

You are a story, a set of relationships etc. and we can start having MBA-esque education as part of capacity building at Origin. And the reason I’m most excited about the prospects is because we did one of those recently as a pilot. The women were massively generous to an awkward professor and group of students, some amazing mentors, but we all agreed this is the thing that we need so you can build some of this, correlate assets so as someone gets excited about what price point they want to hit we actually have some broader guidance to set aside. The entrepreneurs among you will be leading the next wave of specialty coffee from Origin.

So, I’m a minute 18 over which by the way is good for me so I want to apologize. Thanks very much, appreciate it.

23:10 Outro

Peter Giuliano: That was Peter Roberts at Re:co Symposium this past April.

Remember to check out our show notes to find a link to the YouTube video of this talk, a full episode transcript, and a link to speaker bios on the Re:co website.

This has been an episode of the Re:co Podcast, brought to you by the members of the Specialty Coffee Association, and supported by Toddy.

Listen, Re:co PodcastSCA StaffJune 10, 2019Re:co Symposium, Re:co 2019

#55 | Re:co Podcast - Peter Roberts on Empowering Specialty Coffee to Look Beyond the “C” (S5, E2)

Special Thanks to Toddy

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