Disrupting the Coffee Industry
One Block at the Time
For each $5 cup of coffee, you take at Starbucks the farmer only gets $0.05
Coffee is a magical liquid that fuels our early mornings and keeps us strong in the long nights. Like many different commodities industries, the coffee one is full of corruption, lack of trust and unfairness but, in this case, the most affected actor is the most important, the coffee farmer.
Just a few disclaimers before I dig in, live in Honduras, a country which big part of its economy relies on coffee $1.1 billion (3.6% of total coffee exports). I’m Co-Founder at Affogato a company that builds decentralized tools and financial instruments for coffee farmers and have been researching the coffee industry for over a year, last month we got a small grant from ConsenSys Labs to further research the impact of DeFi on the coffee industry.
Coffee is Hard
Turning coffee beans into a cup of coffee takes an average of 10 steps (may vary) with quality and flavor changing on how the process was done. Each step increases the price of the beans and farmers can sell their coffee at any stage. Since processing the coffee requires money, most farmers sell it as soon as they pick it from the plant at lower market prices.
What’s the solution? Loans, right? educated farmers can request a loan with high rates to banks at a 15% annual interest rate using their sold coffee contract or farm as collateral. Since most farmers don’t have a credit score they have to request to informal lenders at 2% interest rate monthly.
This brings a new problem, lack of liquidity, first farmers only earn money at each crop, once sold they need to wait for the next harvest. Second, even if they manage to sell the coffee directly to a buyer it takes at least 7 months to get their payment. This makes a cycle every year that the farmers need to renew their loans and keep working to pay down the interest.
Two big problems that we need to tackle and notice that I’m not even bringing into conversation middlemen, corruption nor smuggling.
Enter the Blockchain
The first example of blockchain and any commodity space is traceability, but as you can see from the problem, a supply chain in the blockchain isn’t going to solve the problem to the farmers, yeah consumers will know the provenance of their coffee and they might be willing to pay more, yet the value won’t be captured by the farmer and even in some cases the farmers will need to pay for this traceability.
Immutability is incredible for supply chain but we can take another property of blockchains to help farmers, I’m talking about ✨🦄Internet Magical Money🦄✨. With programmable money, you can start developing solutions that have a real and direct impact on the lives of the farmers.
A lot of people tips their baristas in coffee shops, sharing that tip with a farmer would be almost impossible with current fees, with Ethereum is as simple as splitting the value in a smart contract and if you use an L2 solution like Instapay or sidechains like xDai, you can send it with less than $0.001, if a farmer only gets $0.05 from a cup of coffee imagine the impact of a $0.10 in the economy of the farmer.
Yet, tips won’t move the needle for most farmers. Disruption can only be achieved with Decentralized Finances (DeFi).
DeFi is something that can only happen in a public blockchain like Ethereum. It allows financial inclusion of actors that been relegated for years, transparency on prices that never existed before and most important than anything, real DeFi is Interoperable and Permissionless. Coffee farmers won’t need permission from the other corrupt actors and if one is behaving bad they can simply pick another service, in the end, I’m betting on DeFi for breaking the wheel☕⛓️.
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