How Can Producers Transition From Commodity to Specialty Coffee?

Today, Miguel Moreno and his family trust that coffee will pay their bills for the year to come, put food on their table, and enable their children to attend kindergarten. But it wasn’t always this way. In the past, poor commodity prices pushed Miguel to move to the US with his brothers. He didn’t see a future for himself on his farm.

So, what changed? He moved from commodity to specialty coffee production.

The differences between these two markets are stark. For producers, specialty production can offer rich rewards: greater profit margins, increased support from trade partners, and more.

However, every change comes with risks. And this is particularly true for the move to specialty. Not only does it require a large investment, but producers remain vulnerable to many factors outside their control: weather changes, pests, currency fluctuations, and more.

I spoke to Miguel and other producers to find out their advice for transitioning to a more profitable, rewarding, and sustainable coffee market – while also minimising the risk.

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The Moreno family with the Collaborative Coffee Source team and their clients in Santa Barbara, Honduras. Credit: Benjamin Paz

Commodity vs Specialty: What Are The Differences?

The commodity market revolves around the C price, an international market price for green coffee that is set in New York. However, this is set based on supply and demand – meaning that it doesn’t consider the cost of production and exportation, differences in quality, and so on.

For many producers, the C price is not enough to operate profitably. (In fact, in July 2017, a Fairtrade study found that even Fairtrade farmers often did not earn enough to live on through coffee production.)

The fluctuations of the C price also lead to instability, meaning that producers never truly know how much they will receive per pound of coffee until the day of the sale. Add to that currency variations – a producer is paid in US dollars but their costs are in the local currency – and it’s a complex and often messy calculation.

In specialty coffee, quality, rather than supply and demand, should determine coffee prices – but “should” is the key word here. Buyers, in theory, pay price premiums for better-quality coffee. With a trend towards shorter supply chains and direct trade, roasters and importers may choose to sign long-term contracts and invest in a producer’s infrastructure or training.

It’s worth noting that the prices paid for specialty coffee are often, but not always, still linked to the C price and so suffer the same fluctuations. Yet the argument is that the premium paid is sufficiently high enough that coffee production becomes not just economically viable but also an attractive and profitable business choice.

However, producing coffee of this quality also requires greater investment – and if quality slips one year, perhaps due to harvest-time rains or the appearance of coffee leaf rust, then the price premiums are not guaranteed.

Moreover, while specialty buyers typically pay price premiums, there is a lack of transparency over how much they actually pay. This can make it harder for producers to negotiate or companies to be held accountable.

Moving from the commodity to the specialty coffee market can open the door to sustainable prices – the kind of prices that will allow producers a decent standard of living, a way to reinvest in their farms and infrastructure, and ultimately continue to improve their coffee quality. However, the challenges of this shouldn’t be overlooked.

Discover more! Read What Are The Main Challenges Faced by Coffee Producers?

Jesus Moreno (right back) and Mabel Moreno (right forward) inspect drying washed coffee on Finca El Filo. Credit: Collaborative Coffee Source

What Do You Need to Transition to Specialty Coffee Production?

Let’s say that a producer has decided to make the transition. The next thing they need to consider is how to make this move. Bear in mind that this is a step-by-step process that requires investment, patience, and persistence.

Benjamin Paz is the business relationship representative of the producers of Beneficio San Vicente in the Santa Barbara region of Honduras. He helps organise the producers as they sell their specialty-grade coffee, a project that started back in 2008 when they first began partnering with Collaborative Coffee Source. He tells me that a lack of resources can be the most difficult part of making this transition.

Building raised beds for drying coffee, good washing tanks and mills, the labour required to selectively pick cherries and turn the drying coffee… there’s a lot for a producer to invest in.

And producers don’t just need to invest in new infrastructure: they also need to allot time for experimenting, learning new techniques, and slowly improving quality and consistency. It can take years, and require significant trial and error, to be able to consistently produce a coffee that specialty buyers want.

Constantly evaluating processes and tracking data so that results can be replicated is key to success. It’s also important to find the right business partners. Producers need to work with buyers who will support them in the transition, as they learn about their coffee’s potential and improve their processes.

But finding these partners isn’t easy, either. The importance of marketing cannot be overlooked. It can also take a long time for a producer to create a name for themselves among specialty buyers – and even longer to find the kind of partner that will invest in them.

So, what can producers do to ensure that the time-consuming, investment-demanding transition to specialty is financially possible? They need to go slow.

Producers sort red Catuai cherries on Finca Chely, El Cielito, Santa Barbara, Honduras. Credit: Henry Wilson

A Slow Transition Is an Economically Viable One

Finding other income channels while moving to specialty coffee production is key to supporting the transition. This might mean continuing to sell part of the crop to the commodity market. At the same time, producers can work on improving the quality of select lots and marketing them.

This business strategy is used particularly often on larger farms, such as those in Brazil. Producers determine how much they can invest in each individual lot based on its potential, minimising risk and helping to ensure a good profit margin.

What’s more, selling lower-potential lots to the commodity market can help create a smooth cash flow – which, in turn, can support the transition to specialty.

Natividad, a producer in the Santa Barbara region of Honduras, uses raised beds to dry his Pacas and Ocotillo coffee. Credit: Benjamin Paz

The Power of Marketing & Branding

During this transition period, it’s also important to market the coffee. Benjamin tells me that, for many years, the Santa Barbara region was unknown among specialty buyers. However, this all changed when Cup of Excellence came to Honduras and two of the producers he works with took the first prize.

This transformed the destiny of not just the producers but also Beneficio San Vicente. The mill became a point of contact for both producers and buyers working with specialty coffee. Before that, Benjamin and his family mainly dealt with parchment coffee.

Events like Cup of Excellence raise a region’s and producer’s profile, and connect producers and buyers.

But it’s not the only way to market a coffee. Producers need to consider a range of ways to promote themselves, including social media and event attendance. And this is often easier when done together.

Miguel Moreno with his raised beds in Santa Barbara, Honduras. Credit: Benjamin Paz

Collaborate to Improve Marketing & Bargaining Power

One of the most difficult aspects of marketing coffee and negotiating contracts with buyers is the power imbalance. Producers have limited ways to reach buyers and often less knowledge about industry norms, such as the going rate for specialty coffee, than buyers do.

Discover more! Read Green Coffee Pricing Transparency Is Critical (And Complicated)

But if we look behind the industry’s well-known coffee region, we’ll often find a whole community working together. Collaborating with other producers to achieve common goals can be a step on the path towards improved visibility, resources, and negotiating power.

Benjamin tells me that the producers in Santa Barbara work as closely together as a family, and this makes them stronger and better supported. It’s through cooperating that they have managed to achieve a stable income for a constantly growing community.

Back in 2008, there were just 14 producers (including Miguel) selling to Collaborative Coffee Source; today, they number 270. In turn, they reap the benefits of knowing that Collaborative Coffee Source, which remains their biggest trading partner, will return year after year and support them in the ever-continuing journey towards even better coffee.

In countries like Colombia, where the average size of a coffee farm is four to five hectares, being part of a cooperative has become a common way to improve quality and facilitate access to specialty buyers.

And in other places, such as Ethiopia, cooperatives are the traditional model for producers. They bear witness to how collaboration benefits communities, from encouraging environmentally friendly production techniques to using earnings to invest in community projects such as health care facilities, roads, power lines, and schools.

Bjørnar Hafslund of Collaborative Coffee Source with the Moreno family. Credit: Benjamin Paz

Re-Investing Greater Profits Into The Community

It’s been more than a decade since Benjamin, Beneficio San Vicente, and the nearby producers started the transition to specialty coffee production. A decade in which their community has grown, new projects have been undertaken, and more producers are seeing a positive impact.

Miguel says that he has been able to improve his quality of life and bring economic stability to his family. And he and Benjamin tell me about the social projects that have been undertaken: building a kindergarten, for example, and starting a recycling project within the community.

A stable, profitable business allows a producer to reinvest in their farm and their community – knowing both that they can afford to do so and that everyone will experience the benefits.

A coffee producer works in the washing station on Finca Chely, El Cielito, Santa Barbara. Credit: Henry Wilson

Selling to the specialty market can bring great benefits: long-term relationships with buyers that will invest back into the producer; opportunities to innovate and improve coffee quality; stronger market positioning; a more stable income and reduced risk; and, most importantly of all, a better quality of life for the entire community.

The transition can be challenging. It needs careful planning. It also needs supportive partners, both within the producing community and outside of it, in the form of buyers.

But when managed well, the transition can offer great rewards.

Enjoyed this? Check out: Why Do Some Farmers Struggle to Produce Specialty Coffee?

Written by Angie Molina.

Please note: This article has been sponsored by Collaborative Coffee Source.

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