Note: Language constantly evolves, and currently I prefer the term 'value chain' over 'supply chain'. The language in this post has been updated to reflect this, and I expect my language to continbue to evolve.
This is the second installment in a Q&A series with Laura Perry. (Link to the first installment is at the end!)
We did the q&a over Instagram DM in Sept 2018, and shared the convo via screenshots.
Laura has happily spent more than a decade of her life in specialty coffee in Canada. Before starting LÜNA, she was the green coffee buyer for 49th Parallel in Vancouver, BC.
Links in the Chain
Umeko: Thank you so much for doing this q&a Laura! I know you are super busy so I really appreciate you taking the time :)
Laura: So happy to be chatting with you again :)
UM: After we did our first q&a, on the c-market price for coffee, we got a lot of questions about how to gain transparency into the supply (or value) chain. so we wanted to do some follow up!
We also realized that the terms “supply chain” or "value chains" are fairly nebulous for a lot of folks, so we wanted to do a foundational q&a to really define it.
LP: Yeah it can be pretty confusing and, well, you could get a whole degree on it if you felt inclined!
UM: Totally! I super appreciate you walking us thru the basics, it is so helpful! So in coffee, we talk about the “value chain” a lot. And the term implies multiple links or transaction points.
Generally speaking, what are those links, and how are they sequenced?
LP: The links in a typical coffee supply chain may be shorter, especially if the business doing the export/import is vertically integrated (doing both the exporting and importing) but normally it goes like this (keep in mind this a SUPER general rundown there’s a bit more nuance depending on what country you’re growing coffee in, and what scale of farm you have)
UM: Whoah is that your graphic ?? That’s so rad!
LP: Yeah, Canva ftw
Specialty vs. Commodity
UM: And this graphic depicts (generally) a specialty coffee chain, specifically, is that right?
LP: It covers (generally) both commodity and specialty.
It can certainly differ, especially when you get into purchasing parchment, it’s possible that there are in country buyers who will resell to an exporter or even another buyer. This is where things can get a little confusing.
With specialty coffee, typically these links I shared in the info graphic are still very much present, perhaps shortened a bit. The difference is in how open all the players are in any given supply chain. The idea is to have access to who is getting paid what, and when.
UM: I didn’t realize that! So typically the structure itself of the specialty coffee value chain is v similar to that of commodity coffee - With the difference being how much access is given to pricing info?
LP: Yeah there’s a quality aspect for sure, but at its foundation, specialty coffee has a grower, an in country buyer (which in specialty is often the exporter as well). The coffee still has to be dry milled and still has to be imported before it reaches a roaster.
The real differentiator is certainly access to know who got paid what, how exactly the coffee changed hands on its way to us, paired with the quality of the coffee itself.
UM: Right, that makes sense. Thank you so much for that clarification!
How direct is direct?
UM: So when I first became a barista, I heard terms like "direct trade" and "working directly with producers" -
And I thought it meant the roasters were making payment directly to coffee producers.
But I eventually learned i was mistaken!
How does money actually move through the chain? Who does the roaster make payment to? And who does the producer receive payment from?
LP: Yeah it can get very confusing, especially how roasters have typically expressed what it is they’re doing. The idea of direct trade is neat, but really what is happening is a commitment to a more open and transparent supply chain - Which is great!
There are rare occasions where payment is made to a coffee producer upfront by the roaster, but that is not the case 99% of the time.
Make Money Move: An Example
LP: Normally, importers will rely on their very extensive access to credit from the banks to float financing of the purchases that the roaster would like to contract.
Let’s run through an example.
I’m thinking Colombia for this one: Let’s say a roaster has evaluated a coffee, which hasn’t been milled yet and is still at the country of origin, and they would like to buy it.
They would tell the exporter they are working with their intention to buy, and price negotiation would happen at that time.
Next, the coffee would be reserved and organized to be milled and consolidated into a container. Typically you’d let the exporter know and the Importer as well, so they have a heads up. Next, the importer would open a Letter of Credit and pay the exporter with that. Once the exporter knows that payment is coming from the importer, the exporter can arrange to pay the producer for the parchment.
UM: Ok, I think I’m following so far. This is already so complex!
LP: It’s up to the exporter to determine how they want to work. Who we work with, they base their final pricing with price to the grower as the base. And they have a spreadsheet to factor in their costs to mill it, sort it, get it ready for export, and have a margin for themselves too.
UM: That’s really cool!
LP: It is! It’s still pretty rare but I’d love to see more supply chains be that clear and easy to understand - I think if we want it and ask for it loud enough, the market might be pressured to eventually change :)
Give Me Some Credit
UM: I wanted to double-click on how payment is timed, since credit is such a big factor. When does a roaster make payment, when does a producer receive payment, and how do credit lines and net terms impact each player?
LP: Ok, so let’s continue with this previous example. The roaster wouldn’t pay for anything until the coffee arrives to them (unless they wanted to pay upfront themselves for the coffee to the exporter and pay the importing fees separately). It’s possible they might have terms with the importer, so they would have NET30 or something like that.
NET terms for the other players vary, but for this example, once a Letter of credit is opened the exporter is paid, and it means the producer can get paid. It typically happens relatively quickly.
The only time I’ve seen where this doesn’t happen in a timely manner is sometimes in East Africa, cooperatives don’t receive their second payment (members will receive a 1st payment upon delivery of cherry, and the second when they know what premiums they should expect depending on who the final buyer is). Having an open dialogue and accountability with certain unions and cooperatives can sometimes be difficult, but it’s something we can’t shy away from.
UM: Right, that makes sense. I’m glad to hear that timely payment is usually the norm!
LP: In specialty coffee buying, where you vet and know the supply chain, you can get the information you need to know the details - the trick is you just need to ask! With more growers on social media it helps keep accountability too :)
To FOB or not to FOB
UM: Last question -
In our first q&a, we touched on the term “FOB price”. It’s the price a roaster pays to the exporter, and it excludes importing costs (shipping, etc)
Although transparency reports often list a coffee's FOB price, the number still seems kind of opaque - in that it doesn’t reveal the price paid to the producer.
Given the importance our industry places on equitable payment to coffee producers -
why do we so frequently use FOB price as the standard for discussing payment? Omg that was the longest question lol.
LP: ❤️ That’s a really good question and something I hope more people will ask. I think as an industry we’ve clung onto the FOB price because its a contract in our hands that we can prove.
The issue I see with it though, it it’s an arbitrary number to most of us. You saw how long the chain can be before the coffee gets into an importer or roaster’s hands.
LP: This means I think it’s time we dig a bit deeper, and talk with as many people as possible about things like cost of production in certain countries dependent on amount of land in active cultivation, and seek to work with people who aren’t afraid to help us access this information.
And I’m going to be real with you, sometimes it’s going to be like pulling teeth to get the accountability you need for the supply chains you participate in, but it’s 100% what we need to be doing right now imo. Not just Roasters - but also baristas and people who love coffee too.
UM: And we’re exploring how to do that in our next q&a, which I am so excited for!
LP: I’m excited for that one 👆🏼💫
UM: Thank you so much for your time and for sharing this actual goldmine of information.
I wish I had known u when I was first starting in coffee! I spent a really long time with exactly zero understanding of any of this. So thank you so, so much!!
LP: That’s so nice to hear, seriously! I hope this is helpful for everyone.
The third installment is here.
The fourth installment is here.