Fiduciary Duty: Our Undoing
How do we guarantee the survival of our supply chain?
By Chad Trewick
To grow or expand significantly, most companies rely on outside investments accompanied by expectations for returns on those investments. Publicly listed companies have even greater obligations to maximise shareholder returns. This fiduciary duty imposes limits on our exploration of tough but critical changes that are at least a generation overdue. Because we are only looking deeply enough at our challenges now that we are feeling their impacts, we are left to learn — very quickly — how to salvage a declining supply chain to support our businesses. Earlier, comprehensive analyses of company supply chains, which are increasingly required by coffee companies today, may have illuminated our supply vulnerabilities sooner.
Conversations about our challenges should become more mainstream and less marginalised as hippy or leftist at industry events.
Learning what we are today about our supply vulnerabilities, one might even suggest that it is an irresponsible investment on the part of venture capitalists, financial funds, and organisations to even invest in more coffee brands. Certainly, consolidating coffee brands under one roof, they are organising themselves to increase dependence on green coffee as a key raw material with each additional pound required. These supply chains need to be strong and resilient to give a return on that investment. But they are increasing their dependence on a flawed and inequitable value chain that is under scrutiny to ensure its preservation.
While it was a long time coming, we have arrived at a self-preservation era as an industry. Companies are examining complex factors in their supply chains to increase chances of future supply. Impressive efforts underway in the coffee industry are clarifying the challenges faced by our supply chain. Openly examining the weakened state of producing partners that supply our industry can unlock innovative ways of thinking about the priorities and principles we must work towards to support our collective future in coffee. Being honest about what we are learning and inviting consumers to learn with us should be a consideration, as we need to save face just a bit. And they will have to help pay the bill.
Coffee companies have engaged in supply strengthening interventions (read projects) for a long time, but few have been able to overcome the pricing and value obstacle. It is not, we can assume, because companies lack understanding of the need to improve the value of green coffee to producers. They seem to get stuck on and then fumble over self-inflicted and narrowly defined fiduciary duties and related needs to keep the cost of goods low to ensure highest possible returns to investors. Intervention efforts, as a result of this, are rife with helpful improvements in efficiencies and productivity which lower production costs to produce and can eventually result in more earning opportunity for farmers when the right balance of investment is made. Yet, what these efforts usually fail to address is the fundamental value coffee represents to those who produce it. And, importantly, how that value has not changed in more than forty years for the majority of coffee farmers globally. So these efforts to improve efficiency and increase productivity on coffee farms to return higher earning opportunities to the farmers themselves are limited in effectiveness by the woefully un-evolved value that green coffee represents to a farmer on a per pound basis.
Earning from Green Coffee is Stagnant
The chart above illustrates how significantly the cost of basic daily bread basket needs to support a family or household have increased, while the value of green coffee has remained relatively flat. The chart excludes the cost of a home, hired labour wages, fertilisers, an education, an automobile or farm truck, clothing, or other items that have also continued to increase in cost. Meanwhile, if one looks at the roast and ground coffee metric (think institutional grocery brands for this category, not specialty coffee) from the USDA, it is easy to see how roasters increase pricing to keep up with commodity market pricing, inflation, and overall pricing trends in the market. Producers of green coffee, however, have not been so lucky even while prices for specialty coffee at retail have arguably seen even more increase than is reflected in this chart.
Talk of High Coffee Prices — Profits Do Not Reach Growers
How has this increased earning opportunity for specialty coffee been distributed? The chart below, produced by The Coffee Paradox (Daviron & Ponte, 2006) illustrates that despite climbing prices at retail, the percentage of earnings that flow back to producers of coffee has actually shrunk over a similar period of time, while prices for specialty coffee have been increasing and causing a consumer spending shift towards higher end. And if you engage in a conversation with a coffee producer, this topic of earning opportunity disparity should definitely activate your compassion and empathy for the predicament they face. The world has become more connected and informed with every communications innovation; producers in the ‘Third World’ easily have access to see and understand the increased revenue from coffee on this side of the value chain as compared to their own.
It took me more than a decade as a buyer to recognise for myself that the prices I was paying were not evolving in sync with increasing costs to live and produce. My airline tickets, hotel rooms, and certainly my salary increased over the years. And when I juxtaposed that with the average prices I was paying, it was no surprise to see, repeatedly, how living conditions had stagnated and, in many cases, worsened at origin. While awareness is increasing, not much has changed at origin during more than 25 years of personal experience. We are starting, yes, but we have some hard work and change ahead of us if we are to survive and, ultimately, thrive as an industry.
Coffee companies are generally hyper-focused on stories about where coffee comes from — the exotic and harrowing origin sourcing adventures that are rich with imagery and make a good story. But our over-subscribing to this representation of what we do as special and differentiated has shielded us and our consumers from important and challenging conversations about where coffee comes from and the inelegant and unsavoury conditions that sometimes produce it. Repeatedly turning away from difficult disclosure of the challenges we all see on a trip to a coffee producing country, has only made for a more deeply buried (and smouldering under-the-surface) secret of the actual life experiences of those making their living where coffee is produced. Soon, whether our industry becomes more transparent and discloses these stories or they learn otherwise, more consumers will know of our challenges and expect much more from the coffee brands they support.
These supply chains need to be strong and resilient to give a return on that investment.
Leverage what Today’s Efforts Teach Us
With each passing day, coffee companies increase their efforts to understand by gathering empirical data about the vulnerabilities of our supply chain. As the understandings grow, so does the ability to articulate the risks associated with securing our industry’s raw material. Because we are in fact increasing our collective understanding, it follows that conversations about our challenges should become more mainstream and less marginalised as hippy or leftist at industry events. This is key to self-preservation.
One organization that leads critical efforts, The Committee on Sustainable Assessment (The COSA) is often engaged by companies to guide and assist efforts to measure and empirically describe what is encountered in their supply chains. The data and facts from these assessments, then, are used to identify and prioritise intervention strategies to accomplish the goals of the organisation that is driving them. Finally, The COSA’s robust measurement methodology is used to ascertain impacts of the intervention. This is a means of ensuring efficient intervention and investment in the supply chain and also to monitor the effective implementation of changes meant to strengthen farmers and, subsequently, supply to those companies and organizations. As a result, identifying cost effective interventions that get results is becoming more efficient, as well. This empirical information about the state of our supply chain will be increasingly leveraged to influence and guide our future behaviours and help us to set goals for what our future looks like as a value chain.
The full version of this article was originally published in Standart Issue 7. Want more caffeinated goodness in beautiful print?
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