#65 | Re:co Podcast - Andrea Olivar on The Coffee Barometer and Its Relevance to the Specialty Sector (S3, Ep. 1)

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Today, we’re very happy to present the first episode of “Value Chains: Transparency and Market Linkages,” a session recorded at Re:co Symposium this past April. Acknowledging that this isn’t the first coffee price crisis, this session brought leaders together to ask: How successful were the tools we employed previously? What new tools offer potential solutions?

Published every four years, the Coffee Barometer highlights emerging trends and provides a critical look at progress made by the coffee sector on sustainability. Researched and written by a consortium of organizations that specialize in sustainability, including Solidaridad, Hivos, Conservation International, Oxfam Belgium, and COSA, the 2018 report paints a startling picture of today’s coffee sector. Listen and learn as Andrea Olivar, International Programme Manager at Solidaridad, shares some of the highlights of the 2018 report.

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.

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.

Now published every four years, the Coffee Barometer, which is a publication, highlights the emerging trends and provides a critical look at the progress made by the coffee sector on sustainability. Researched and written by a consortium of organizations that specialize in sustainability, including Solidaridad, Hivos, Conservation International, Oxfam Belgium, and COSA. The 2018 report paints a startling picture of today’s coffee sector. Listen and learn as Andrea Olivar, International Programme Manager at Solidaridad, shares some of the highlights of the 2018 report.

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

2:30 The coffee market is consolidating, and this creates downward pressure on trading that affects producers. Also, many sustainability standards are either dropped or frozen as companies merge.

Andrea Olivar: Hello. I have to say I have this mighty cold. So, sorry about that. So if I cough and sneeze bear with me, I’m trying to battle through it. But apart from that, I would like to share with you the outcomes from the Coffee Barometer. It’s a publication that comes out every four years and is published by a group of organizations that try to be independent and when we published the report, we came to the conclusion that trouble is brewing in the coffee sector. The barometer comes up from market research. We also do some literature review and also we send some specific question as to the key roasters and the key traders, the top traders in the world and when this comes, what it gives you is a report that is very succinct and it shows what are the key trends that are happening in the market, and also it provides an update regarding sustainability. So, how is the sector doing regarding sustainability?

So, we believe that trouble is brewing in the coffee sector and at the moment many the farms are currently being spectators. I like to start with you sharing the first conclusion. One of the first trends that we have, market. Billions have been spent in mergers and acquisitions in the last four years. In the 2014 version of the barometer, we say that three corporations dominate the market, Nestle, Mondelēz, and the Master Blenders. Today, we have two giants, Nestle, still there, and JB Holding – and the latter is not a coffee company, it’s a German investment firm.

Peter Giuliano: Andrea is showing a diagram of all coffee companies owned by JAB Holdings and Nestle.

Andrea Olivar: I was speaking [on] the morning show this and I’m not going to try to explain this to you. It’s far too complicated even when the designer said to us he couldn’t understand the relationship. Sarah Lee, the master blender, Jack Dow Edwards. It’s too complicated, we don’t have the time. But what is clear is these big companies emerging.

Mainstream brands are buying specialty brands. Giants are making alliances. It’s what we saw less here with Nestle and Starbuck’s last October. Even standards emerging but the question here is, why does this matter to sustainability? Why do we care about this? It matters to sustainability first because this is creating downward pressure on trading that ultimately affects producers. It also matters because when a company, and it’s normal, start to go through a merger to an acquisition, all these companies have policies. They have programs, initiatives that are related to sustainability and when they go through these acquisitions and these mergers, these programs related to sustainability are either on hold, they are put on hold in the fridge or forgotten. Let’s try to sum in the linkages between trading and market consolidation. These bigger companies now have greater negotiation power and they are starting to ask traders to change some of the terms. So, for instance, changing the terms of payment.

So, traditionally or until a couple of years we have you buy a container of coffee, you wait 30 days as a trader and then you will get your payment. Now we’re moving from 30 to 180 days, so we move it from one month to six months and to be able to manage that, you have to be part, you have to have the financial muscle on being one of the stock traders because you can bear those financial risks, you can bear waiting for longer. But, if you’re a medium trader, a smaller trader, then that’s more difficult.

Peter Giuliano: Andrea is showing a piechart of the coffee trading sector, where six companies – NKG, ECOM, Olam, Volcafe, LDC and Sucafina – account for roughly a third of the market.

Andrea Olivar: And what happens is that these medium traders and smaller traders, then they have to again say to the producers we are changing the terms as well and this is exactly what we don’t want to see. We don’t want to see the pressure going down within producers, but this is happening. But the question that many people have is okay what is the link between these new terms of payment and market consolidation and the answer is actually quite interesting because many believe that by changing the terms of payment, moving from one month to six months, the sector, the industry is able to free some capital that then is invested in mergers and acquisitions. So, we’re seeing all these linkages between these two trends.

8:15 Coffee production is also being consolidated into fewer and fewer countries.

Andrea Olivar: Now, I like to focus a little bit on production. As we saw this morning productivity, we have had the highest records on volumes. Last year we have 168,000,000 bags, fantastic news. If you look up robusta only in the last 10 years they have had a 40% increase in volumes. This is huge on and this is great news and again we see here consolidation which is the keyword of the majority of the trends that we have seen.

Peter Giuliano: Andrea has a chart showing arabica and robusta production in different countries. Brazil dominates Arabica production, followed by Colombia and Honduras. Vietnam dominates Robusta production, followed by Brazil and Indonesia.

Andrea Olivar: This morning Ric talked about five countries. Four countries produce the majority of the volumes in the world yet not Brazil and Vietnam. Columbia and Indonesia at a different level, Honduras there, five countries. But what we found as well at the same time is that the Food and Agricultural Organization, because we review this data every four years in the barometer, is that they were reporting exactly the same total area producing coffee in the world that it was producing country four years ago. So we had an increase in production, 168,000,000 bags, but the total production area remained exactly the same, 10,000,000 hectares.

And then if we look at climate change and everyone knows that this is already affecting. If we look at the issues of prices, then producers should be either moving to all the places to continue to produce Arabica, for instance, or they should stop being coffee producers, that David was saying, because the prices are too low.

So, who wants to produce coffee? But no, the numbers remain exactly the same. So, some hectares had the same number of farmers, and we just stuck on that. So, they made us believe that we saw two options here. First either there has been a steady increasing production in the same area which is the case, for instance, for Brazil that has invested in technology heavily. Equally. Columbia partly Los Andes because of Columbia but with the renovation and all producers, in fact, are opening their agricultural border, and sometimes this is within their own farms so don’t think about a producer going to a national park and doing deforestation. No, this is within their own farms. So, this is the next trend. So, the big question here is what is the link between coffee and deforestation? And today, 60% of the land, suitable to produce coffee is forest and only 20% of this land is protected. So, it is very likely that the majority of coffee producers in the world are contributing to national deforestation levels, possibly with the exception of Brazil that has invested in technology a lot and this is something we have to think about because the amount is increasing and for a sector that claims to be working towards sustainability we have to be very careful where those volumes are coming from.

12:15 Less than 1% of the total value generated annually in the coffee industry is invested in sustainability.

Andrea Olivar: This is a second very important part of the report. Let’s zoom in on sustainability. The Coffee Barometer also reviews what is the data available regarding verification and certification standards and, as we saw and was mentioned this morning about different speakers. At the moment, 55% of global production is either verified or certified and 20% of those volumes are sourced by the market as such. So we have Merlin saying I have Fair Trade coffee, but not all the coffee is sold as such. That’s the reality.

Peter Giuliano: Andrea’s graph shows the total amount of coffee produced that meets various sustainability standards, such as 4C, CAFE, AAA, Fairtrade, Organic, Rainforest Alliance and UTZ. It also shows how much coffee was sold under these standards, which is often less much less.

Andrea Olivar: And if you look at this graph and you look at the top. So, this is a total volume produced, 55% of total production. But if you look at with exception of CAFE Practices, which is the code for Starbucks and AAA, the code for Nespresso, the majority of standards are struggling to put their volumes in the market, and I don’t think this is news. We all know this. But, this is where the sector is at the moment.

But when we talk about sustainability and this is one of the areas of the report that has generated more interest. It comes to the issue of value distribution. Not much about price but value distribution and why this is, is because we believe that within in the coffee sector there is a systemic underinvestment in both production and sustainability.

And why is this? The total value of the global coffee category annually is 200 billion. The value of the green coffee is 20 that is exported and investment in sustainability annually is $350 million. 200 billion, 20 billion, 350 million. This means that 10% of the value generated by the industry globally is currently directly reaching producing countries and the annual investment in sustainability is less than 1%. It is in fact, not 0.25 but just less than 1% and I want to give you a breakdown of this. Half of this less than 1% is invested through premium sustainability verification and certification premium it’s all been paid by through the standards. 10% is various unknown, too complicated to follow up and 20% is invested by public donors and investment done by the private sector directly on issues affecting production and sustainability is only 20%. So, these are tailor-made solutions to specific issues, less than 20%.

16:00 The coffee sector is collaborating more to address issues of sustainability

Andrea Olivar: I would like to share with you the last trend that we have seen in the last four years with the review and we published the Coffee Barometer which is collaboration in the sector, and this is great news because this is something that other sectors are doing, coco for instance. but coffee is doing quite well, and this is great. In the last four years, we have been an explosion of what we call multi-stakeholder initiatives that are pretty competitive. This is a lot of jargon, but basically what it means is that everyone is getting together to try to work related to sustainability issues.

Peter Giuliano: Andrea’s chart shows different multi-stakeholder initiatives.

Andrea Olivar: These are some of the initiatives that are better known in the sector or perhaps a bit more established. CGCP, SAFE, Sustainable Coffee Challenge, The National Platforms, and the great news I think here is the people are getting together because they are starting to understand that the issues that they are trying to resolve a too big for them to find a solution, that the contribution is limited and if they team up with others, perhaps they can have a greater impact. They also are aware that actually there’s a lot of duplication, we’re visiting the same producers, we go to the same places. So, perhaps by teaming up with others, you’re avoiding duplication and you stop working in isolation and this is a fantastic trend that we’ve seen in the sector.

The next challenge for these initiatives is to move from consensus to action, meaning moving from consensus, yes, I’m happy to work with you even if you are a competitor in the market, even if you are my competitor, to action. How do we do this practically in the field? Am I happy to send my agronomists with your agronomists to the field? Am I happy to share information? We have to move from talking in lovely meetings in Boston, in Zurich where we all meet always, to action in the field.

But what I like a lot about the barometer is that every time we publish it creates a reaction. Some people are positive, negative, complaints; we receive everything and we like it and some as well, they give us ideas and some people dare to say let’s do this and some of the ideas I would like to share with you because a lot of people have said to us, look, if the production is focused on four countries, on five countries, why don’t we just focus on that, let’s forget about the rest.

So, Brazil, Vietnam, Colombia, Indonesia, Honduras, let’s just work on that, and the other ones will try to sort up themselves. But my question to you is that as the specialty industry, what will be the impact on a specialty if we only focus on those top producing countries? Can we do this? How does it affect your industry? Equally, we have seen, and we mentioned today, people are drinking more coffee, great news, millennials, they care about sustainability as Ric mentioned this morning. We need more coffee to feed demand. But what I would like to discuss with you tomorrow in our session is: can the industry generate more volumes?

Or can we bear the risk of generating more volumes that are linked to deforestation? Is the industry ready to support the production of deforestation-free coffee? Can we do that? I don’t have to answer it today, but it’s something that we have to start to discuss and then finally, the whole morning, we talk about prices about what do we do? There is a lot of frustration and there’s a lot of frustration because the industry is lucrative, and everyone is asking this question. If we are making more money, if people are drinking more coffee, why isn’t everyone winning? And to answer this question, I believe that starting talking about prices is good with putting the issue on the table, but I think we need to start to think about value distribution too. How do we do that structurally? So, trouble is brewing in the coffee sector and we need to decide today if we are agents of change or if we are spectators.

I thank you for your time.

21:00 Outro

Peter Giuliano: That was Andrea Olivar 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 StaffAugust 19, 2019Re:co Symposium, Re:co 2019

#65 | Re:co Podcast - Andrea Olivar on The Coffee Barometer and Its Relevance to the Specialty Sector (S3, Ep. 1)

Special Thanks to Toddy

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