Direct Trade

Table of Contents

Direct Trade. A term that we have come to know exists but as consumers we may not understand it in its entirety. The purpose of direct trade is to provide support across the entire length of the supply chain. By purchasing directly from the producers who grow and cultivate coffee, roasters can share a better understanding of the product and promote transparency in the business.

But is this a sustainable trading model?

Project Origin believes the specialty coffee industry should be working towards building more sustainable direct trade models where the connectivity between the very start and the very end of the supply chain goes beyond the literal definition of the term. We should be investing in long term partnerships that share the risks of working with agricultural products before we can fairly share in the joys of it. You cannot achieve end to end quality without investing in the long term. This is where true value lies in operating a direct trade model, and we want everyone in our industry to raise the bar for standards in how we collaborate across the entire supply chain to build a more sustainable industry.

What is direct trade?

Direct trade is an operating model where companies sourcing goods or raw products have a direct relationship with the producer or farmer, with a focus on providing a mutually beneficial trade relationship. The term is used in agricultural and artisanal mining industries and there are many interpretations of how this model works. At its essence, direct trade is about the very start of the supply chain being connected to the very end of the supply chain.

By using a direct trade model, businesses can offer transparency in the origin of the product, the people responsible, and their stories. We can be directly responsible for ensuring a fair price was paid, which is something that should be demanded of any product from any industry in modern society. But where lines begin to blur, and what makes ‘direct trade’ difficult to understand is in how we decide what is ‘fair’. Does fair mean a dollar value? Does fair mean signing a contract? Does fair mean sharing the name of the producer and their farms’ altitude to the end consumer? Project Origin believes a direct trade model should not be linear, and means a lot more than dollar values paid for coffees and farm information. We believe fairness exists in sharing the risks to the producer and to the roaster across multiple harvests, and this is what makes it sustainable. 

“We can be directly responsible for ensuring a fair price was paid”

What does a fair and sustainable direct trade model look and not look like?

We believe that in order to pay a fair price for coffee and to genuinely and honestly go direct trade, we need to understand what it takes to produce the coffee, the production and financial limitations that can exist, and what risks are involved for the producer, their community and their environment. We need to be prepared to go into those risks together with them, and we need to do this across multiple harvests. 

Coffee being an agricultural product means it is susceptible to natural conditions and disasters, including changes to weather patterns, rainfall, temperature fluctuations, pest exposures, and sunlight accessibility. There needs to be some tolerance for the variability that comes with that. It certainly does not seem fair that the purchasing and consumption end of the supply chain holds all the negotiating and buying power, as this end of the chain is not concerned by the impacts of the local weather and how that can determine an annual salary. To a lot of producers, all they have is the cherries they grow on their trees – and that’s it. Roasters and consumers have the luxury of options to change their supply. This means that a direct trade relationship is not valuable to a producer if the buyer only buys when the coffee is good or at its best. We need to create balance so that the production and purchasing of coffee is a sustainable operation. This is what we should be expecting of ourselves as an industry.

Pepe Jijon from Finca Soledad, Ecuador

Modern technology means it is very easy for a roaster to say they have a direct trade relationship with a producer because they can communicate with them online, cup a coffee and buy it. That’s easy and it technically follows the literal definition of direct trade, however, it’s unfair and misleading to suggest you have a direct trade relationship for just 1 year. What is hard is starting a direct trade relationship and preparing for weather patterns to change, growing conditions to fluctuate and disease and pest infestations to occur.

Where a relationship becomes meaningful is with what happens next: do you still buy the product even though the quality is not the same as the previous season? Do you buy it at fair value? Do you change the price? Is the agreed price fair for the producer, or just fair for the roaster because of the quality that has now been created? Have you cancelled entirely? Answering these questions is not easy, and the risk should not be fully borne by the roaster. However, if we are really going to promote direct trade and discuss what we do to help make the industry sustainable, then we should openly acknowledge these occurrences and be prepared to work with them so we can protect everyone in the supply chain, not just ourselves.

As buyers, we have the responsibility to prepare for flexibility and renegotiations on purchasing agreements. At the bare minimum, when things go wrong, we should not be cancelling on an agreement with the producer. We should also not be agreeing to a price that is below their cost of production. There are always options when we build long term agreements and partnerships. Perhaps, we can agree to pay an average price across two years’ worth of harvest, so we pay slightly more for this harvest than what it is worth, but we balance that by paying slightly less next harvest for the quality we know is possible, building a long-term plan.

Being paid each harvest, and not just each good harvest, means they can live more comfortably.”

While this agreement to split average costs across two harvests may seem an insignificant, or potentially annoying and risky solution to the buyer, the upfront payment makes a huge difference to the producer. It can allow the producer to invest back into the farm for the next harvest, can enable them to afford upgraded equipment to raise their quality, and can allow them to educate their children. Being paid each harvest, and not just each good harvest, means they can live more comfortably. All we must do is not cancel our orders. Surely, at a minimum, that sounds fair.

The culmination of risks when working in a sustainable direct trade model can seem overwhelming, and it is reasonable for a buyer or roaster to not want to bear all the risks upfront. It is important to understand exactly what risks exist, but also know what benefits lie ahead when we can successfully create these long-term meaningful relationships.

Risks to the roaster:

  • You have an agreement to purchase coffee from the producer at a set price, but;
    • The quality drops
      • You should still be ethically required to commit to purchasing this coffee, and at a price that is not below the producer’s cost of production. Options can include averaging a price across multiple harvests or even agreeing to purchase more coffee than agreed, but at a bulk price that is still fair for the producer.
    • The quality is higher than predicted
      • You should discuss options with the producer, who could turn around and sell it for its higher value to someone else. This is where benefits exist in long term relationships where you can still negotiate with producers for their supply.
    • The market value for the coffee changes and increases
      • You should discuss options with the producer, who could turn around and sell it for its higher value to someone else. This is where benefits exist in long term relationships, where you can still negotiate with producers for their supply .
    • The process changes
      • The processing method may change due to weather conditions or infrastructure availability.
  • You have an agreement to purchase an entire lot from the producer, but;
    • The quantity produced is less than predicted
      • Be prepared for this and to not cancel on the producer.
    • The quantity produced is greater than predicted
      • If you agree to a whole farm’s worth of product, or agree to work with the producer exclusively, you need to be prepared to purchase what they create, including additional kilos. The volume of product should be agreed upon with an allowance in mind. By agreeing to a whole farm’s worth of product but not taking it all, you leave the producer in a tough position where they often either can’t sell their remaining stock, or they sell it locally at an unfair cost.
  • Shipping and transporting green beans
    • The buyer needs to know how to move coffee from the farm to the warehouse to the dry mill before getting it export ready – shipping instructions, packing labels, bag markings, ICO codes, following country exporting laws – then getting it in a food grade shipping container that will deliver to a port you can access and finally having it delivered to the roastery.
      This process can be expensive and time consuming, especially if you don’t know what you are doing, and the result may be a drop in bean quality through poor transportation or excessive transportation time, which is a particularly relevant issue through the Covid-19 pandemic. This drop in quality is not the fault of the producer nor is it the fault of the roaster, but the risks should be known.

Risks to the producer:

  • You have an agreement to sell the coffee at a set price, but;
    • The quality drops
      • How the buyers deals with this is a great risk
      • Is the quality drop a result of the dry mill influencing the harvested product? If so, this is out of the producer’s hands.
    • The quality is higher than predicted
      • It might be worth a lot. Does the producer assume the loss to honour the agreement, or can the buyer pay more for the quality produced?
    • The process changes
      • The processing method may need to change due to weather conditions or infrastructure availability that is out of the producer’s control.
  • You have an agreement to sell a set quantity produced, but;
    • The quantity produced is less than predicted
      • Does your buyer honour the agreement and purchase what you have?
    • The quantity produced is greater than predicted
      • Does your buyer agree to take it all, or do you need to find another last-minute buyer to take the additional stock?
  • The buyer no longer agrees to purchase the coffee at all if there is an issue, regardless of contracts in place
    • Very often, producers do not feel in a position to battle a breach of contract, and so assume the loss while the buyer walks away unscathed
  • You send samples to a buyer that is approved, but then the main shipment arrives with a different quality. Does the producer take responsibility?
    • How do we determine where the issue occurred and how or whether to compensate for it? Beneficial long term relationships should be addressing these issues and looking to avoid them happening again in the future.
Pedro Erazo, Honduras

Benefits to the roaster:

  • They understand the product: its origin, its creation, its environment, the community that exists around it. They can share with clients that they have paid fair value for it and the production side has not been exploited in the creation of this product.
  • With longer term relationships comes trust. This trust can lead to creating new things and new products that are special and exclusive to you.
  • You have consistency of product by dealing with the same farms and producers.

Benefits to the producer:

  • Security in knowing that after a product is made, they have somewhere to sell it.
  • Price assurance.
  • While this doesn’t have to be fixed, they at least have a price range or guide so they know they will not lose money on the production of this harvest.
  • Promotion and marketing of their work
    • A lot of producers may not have direct access to the market to promote their work and their reputation lies in the roaster’s hands. As farms and producers become marketed and more well-known, they move out of a poor negotiating position and now have some reputation that allows them to talk to their buyer, or buyers, and start to request a price more based on quality, popularity, and demand. If the farm and producer is not known, they do not have the power to do this and so they will be a price taker. As a farm establishes marketing, they can be a price maker.

The specialty coffee industry often talks about the values of quality, sustainability, transparency, and fairness, but in order to achieve these values, we need to both understand and own the risks before we should enjoy the rewards. We need to create support and protection across the entire supply chain to ensure not just a sustainable production, but a thriving one. We already know to expect that if a coffee is labelled as ‘specialty’ we should know where it comes from and basic production information. Where we can improve is relating quality with fairness and understanding from the consumption end that a quality coffee comes from years of community work, growth, and education, and not just months of harvesting.

We believe that a sustainable specialty coffee industry needs to be underpinned by ethical direct trade partnerships that view the seasonal risks, long term crop management, environmental influences and thriving communities as an integral part of each cup, and so the value paid by the consumer can incorporate the real and true long-term costs of supply. Our Project Origin company values of Quality, Community, Sustainability guide us to achieve our vision statement: to empower people so together we can change the world we see. As a direct trade green bean exporting and importing company for specialty green beans across the world, we encourage everyone in the specialty business to look ahead and consider how you can contribute to bettering the world of specialty coffee.

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