The blend drives the coffee – a conversation with Martin Löfberg

Löfbergs was founded in 1906 by the brothers Anders, John and Josef Löfberg. They began roasting their own coffee in Karlstad in 1911. Today, the company is one of the Nordic region’s biggest family-owned coffee businesses, producing the equivalent of more than 10 million cups of coffee every day. Löfbergs is still fully owned by the Löfberg family, now in its third and fourth generations.

 I spoke with Martin Löfberg, one of that fourth generation and head of procurement for the company. I asked him what that role entailed.

I spend a lot of time in the coffee origin countries. Out of the twelve years I have spent with the company, I reckon I have travelled for one year of that. I have especially been focusing on the co-operative side, Fairtrade, organic and Rainforest Alliance certified cooperatives, mainly in Central and South America.

On a daily basis I do a lot of cupping: three times a day for a total of 300 cups. That’s an important part of my role. It allows me to be actively involved and not just manage the procurement process from a distance. It is important for me to be inside the flow. It allows me to keep an ear to the rail tracks, to listen to what’s going on, to understand the challenges in producing countries, and to stay on top of how our farmers and partners are doing. Although it may sound counterintuitive, being hands-on allows me to look at the business in a more strategic way.

Throughout my day, I also have to keep on top of the coffee price and follow the futures markets.

What percentage of your coffee do you buy against the futures and what percentage on a flat price?

We buy close to 99 percent of our coffee on a differential basis against the futures. We only buy our speciality coffees on a flat price.

About 15-20 percent of the coffee that we buy is Fairtrade. For a number of years now world prices have been low, and these purchases have been at the Fairtrade minimum price. These coffees are priced on a differential basis, but a minimum price applies. It is 140 cents per pound for washed arabicas, with a 30-cent premium for organic, plus a 20-cent social premium. That gives a minimum price of 190 cents, to which you may have to add a quality premium.

In the past three years the world price has been higher than that for only one day – in December 2019! Apart from that one day, the Fairtrade minimum price has applied.

When you buy coffee, do you buy with a particular blend in mind, or do you sometimes buy a coffee and work out where to put it later?

Some consumers like a consistent taste profile over the seasons and over the years. If a new-found coffee fits into our blends, we are happy to introduce it. However, we operate on a more strategic basis for the blends. The blend drives the coffee.

This is not as easy as it sounds; every new crop is a new page in a book. It’s never the same as the previous crop, and it takes a long time to get an understanding of that. It takes at least five years to become a rookie in this business. It’s always changing. So, for the blends we continually try to be proactive and to see how the crops are coming out, and what qualities are being produced. We have a very narrow tolerance in our blends.

Some consumers like to buy specific origins or regions, or single estates or even single lots, part of an estate. Sometimes, we come across something that is really unique. When we do, we buy it and then test it through our two coffee shops, which are a little bit our centres for innovation, to see if the consumers like it.

There’s a treasure chest of findings throughout my travels that I have been able to introduce.  We are able to use our big flows of coffees to put a few bags inside a container to make it easier for us to import.

Some people have complained that there’s too many certification agencies. Have you found this?

We don’t really see this as a problem, particularly with the merger that is now under way between UTZ and Rainforest Alliance. The merger should be completed by 2022, but from 1st July 2020 you can cross-use coffees from farms and estates under both.

We are in favour of the merger as it can be a challenge for farmers to handle too many standards. It’s costly for them to be part of a certification scheme, not just in money but also in time. It is also confusing from the consumer side. Having too many certification standards dilutes the picture.

However, having more than one certifying agency means having access to a wider market. UTZ and Rainforest Alliance were quite similar in their standards.

Fairtrade is different because of their focus on the premium and the minimum price. They are strong from a social perspective. Then you have the organic coffees which are very strong from an environmental perspective.

Rainforest Alliance and UTZ operate on the bigger farms where Fairtrade doesn’t operate. So, Fairtrade is small scale, while Rainforest Alliance / UTZ can be applied on a bigger scale.

We see certification as important, and one of many tools, but for us the Löfbergs brand is more important. Our brand is the guarantee and the trust from consumers and partners that we build into it. Certification symbols and so forth are sometimes important for consumers, but Löfbergs is the true seal.

What’s your favourite type of coffee? And how do you prepare it?

It depends on the day and the time of day! My most common technique is to self-grind and then use a filter. But I also use a French press and an Aeropress.

As for which coffee I prefer, it’s like choosing between your kids. It’s impossible! I do have my favourite espresso though. It’s a natural Brazilian one. If I don’t get it at least once a week I would die!

Many thanks Martin for your time and input!

© Commodity Conversations ® 2020

This is an extract of an interview that will be published later this year in my new book Merchants & Roasters – Conversations over Coffee

The Dream of Coffee – Andrea Illy

Andrea Illy is Chairman of illycaffè S.p.A., a family-owned coffee business founded in Trieste in 1933. I spoke to him by telephone from Trieste and asked him about his family heritage.

My grandfather was Hungarian, but at the time of Austro-Hungarian empire. He lived most of his youth in Vienna; this is where he fell in love with coffee and where he decided that coffee was what he wanted to do in his life. When he came to Trieste, the city was still part of the Austro-Hungarian Empire. He started his coffee business with a Viennese heritage.

Trieste and my family share the same heritage: both started as Austro-Hungarian, but both became over the decades very much Italian. We nurture both. Our Italian heritage is about coffee and particularly expresso coffee. Our Austrian heritage is more about coffee as a hot drink: filter or café latté. We respect them both!

Why does illycaffè produce blended rather than single-origin coffee?

For three reasons:

Blending gives you the richness and the complexity of the aroma spectrum. If you listen to a single violinist, you can discern specific notes. However, if you listen to a symphony orchestra you get the richness and the complexity of the composition – the full spectrum of sounds. Blending is to coffee what a symphony orchestra is to music.

Blending gives you balance in the coffee. It enables you to compensate the disparities of the different origins. For example, Brazil is famous for its chocolatey aroma whereas Central America is famous for its flowery or fruity aroma. You can also compensate acidity with the bitterness, say, of a sun-dried coffee.

Blending gives you consistency. We want a product which is always of exactly the same quality.

You can only obtain these three fundamental attributes by blending. I don’t believe in pure origin. Pure origins are good as a kind of a tasting at a coffee experience, but if you are really seeking the best possible quality then it has to be a blend. Our blend is made of nine origins. Of course, the better the quality at origin the better the blend.

Could you tell me about your University of Coffee?

The University of Coffee is organized into three different departments: one for the growers;

one for the hospitality professionals; and one for coffee connoisseurs. For the last ten years we have run a master’s degree in coffee. We take twenty students from all over the world; they stay with us for six months.

We serve nearly 9 million cups of coffee per day. To make sure that each cup is as good as the last, we have to educate our farmers and we have to educate our baristas. But we also want to educate our consumers to appreciate coffee.

Coffee still has a long way to go to reach the same level of sophistication as exists in the wine industry. By that I mean sophistication in terms of product expertise: how you produce your wine and how you drink it.

I also mean sophistication in terms of narrative. A glass of wine in a restaurant will cost you a minimum of 6-8 euros, while a cup of coffee will cost you 2-3 euros. Coffee is as good as wine, and it should be as expensive as wine.

It is not good for your health to drink too much wine. But coffee makes you live better and longer. Coffee is a beverage of success: socially and professionally, and for your health.

My dream is to bring coffee culture to the same level of nobleness as premium wines. This means approaching coffee in a sophisticated way, and this is what we teach our students.

Is it your quality that enabled you to build the brand?

Yes, in order to build a successful brand, you need to have a narrative, an image, and a product. The question is, which comes first? Do you start with an incredible product that you narrate to the consumer, or do you start with a wonderful narrative that you then build the product around?  We were in the first case: we had this unique product; we started narrating the coffee culture, and we built our image, our point of difference and our credo around it.

illycaffè has been called the Armani of coffee. Is illycaffè a luxury brand?

It’s not a luxury brand. It is a high-end brand, what we call ‘altagamma’. ‘Luxury’ is more inaccessible and exclusive. Coffee is by its very nature inclusive. I’m proud to say that unwealthy people with a good palate can enjoy our coffee even though they pay a premium price for it.

Our coffee has all the paradigms of luxury – the superior quality and the savoir faire in both production and consumption. It has a wonderful image. It has everything that a luxury brand has except the exclusiveness. It is an inclusive product.

Your company motto is ‘Live Happily’. Could you please tell me a little about that?

Happiness has two philosophical definitions: one from Aristotle and one by Epicure. For Aristotle, happiness is living in a world of virtue, combining altruism, knowledge and wisdom – living for the greater good.

The Epicurean definition is about hedonism.  It is about the three pleasures in life: the natural necessary; the natural unnecessary; and the unnatural unnecessary. Epicure says that you should forget about the ‘unnatural unnecessary’; it will destroy you. You should be moderate with the ‘natural unnecessary’, but you should take full advantage of the natural necessary pleasure.

I consider coffee as a ‘natural unnecessary’ pleasure for the at least 1.5 billion coffee drinkers around the world – in terms of joy, in terms of energy, in terms of health, in terms of social life, in terms of mood.

And each cup that you drink helps the at least 25 million people in the coffee supply chains – people who depend on coffee for their human development and their quality of life. Most of these people live in poor countries and they have no alternative to coffee.  By taking your little treasure every day, several times a day, each time you know that you are helping a family in Ethiopia, or in Guatemala or wherever.

This is the dream of coffee.

Thank you, Andrea for your time and input!

© Commodity Conversations ® 2020

This is an extract of an interview that will be published in my upcoming book Merchants & Roasters – Conversations over Coffee

Continuous improvement – a conversation with Jan Lühmann

Jan Lühmann was until the end of May 2020 Global Head of Procurement for Jacobs Douwe Egberts. I spoke with him while he was on ‘gardening leave’ before becoming Co-CEO of Bernhard Rothfos, the Hamburg based mainstream trading arm of Neumann Kaffee Gruppe, in September 2020.

You’re one of the few people I’ve met who has moved from a merchandising role to a buying role, and then back to a merchandising role. What’s the main difference between merchants and roasters?

Technology, brand building and process are more important for a roaster than for a trader or merchant. Roasters focus a lot on technology, be it single serve, instant coffee or other proprietary USP’s. The roasting industry also has a strong emphasis on process, while the trading mindset is nimbler and more reactive as it needs to quickly adapt to market situations and shifting client needs.

In the past, I understand that some roasters set up trading departments but have since closed them. Is that correct?

There have been waves of this.  Both roasters and farmers are easily attracted to the idea of going direct, to cut out the middleman – the evil trader. And on the surface, many will agree that this makes sense. However, they quickly find out that the evil trader has many real and vital service functions. Roasters also found that trading is counter to their industrial DNA.

I don’t think it is possible to run a true trading functionality within an industrial company.

You are now moving to Neumann….

After 35 years in the coffee business, origin and trading, I spent the last 7 years with Jacobs Douwe Egberts. Two years ago, they promoted me to Global Head of Procurement, still in charge of the coffee and tea buying, but as well everything else such as packaging, machinery and even digital media. I found that I didn’t enjoy that. I really wanted to go back to what I love, which is coffee. I’m a coffee guy.

Neumann Kaffee Gruppe is the world’s largest green coffee house. They are a traditional and yet modern coffee firm with a focus on the product, on customers, the entire supply chain.  They value relationships and have a long-term commitment to coffee, and only to coffee.  So, when the opportunity came to become Co-CEO of Bernhard Rothfos, I jumped at it.

Is there a dichotomy, a divergence, between a roaster’s commercial department and its sustainability department? The sustainability people want to make sure that farmers stay in business, but the commercial people just want lowest price possible.

The people in both the sustainability and commercial departments of roasters have specific targets to achieve. Yes, there is the commercial drive to buy cheap, but it’s for management to pull those contradictions together and align them into a coherent brand strategy

Many roasters struggle with this, but that is what is so interesting about the coffee business in general. It is complex. It is changing. It has tensions. And those tensions will be resolved, sometimes with more of an emphasis on the commercial aspect, and sometimes with more of an emphasis on the sustainability aspect.

In the long run the consumer is the ultimate arbiter on those choices.

Many roasters only buy certified coffee. There seems to be a lot of certification systems: are there too many; and are they effective?

It’s very easy to be critical of certification.

My view is not that there are too many certifiers, or that they do a bad job. I strongly believe that the people in the certification business are good people who mean well and who do make a positive difference.

However, it is imperfect. And whatever positive impact one has in coffee producing countries the situation will remain imperfect. We are thus certifying imperfection.

There is a risk that you’re over promising. Even though the legal wording in the documents is smart enough so that the occasional unacceptable incident will not compromise a roaster’s legal position, consumers will nevertheless expect perfection.

Also, the desire by roasters to portray perfection can lead to a misallocation of resources. How much of the global sustainability spend reaches farmers and makes a real difference, and how much serves to “prove” perfection in a roaster’s supply chain? As a coffee industry, I believe we should be moving towards a mindset of transparency. Acknowledge the imperfections and then focus on mitigation and continuous improvement.

One of the things I’m most proud of at JDE was to be part of the effort to start a different thinking – to move from a mindset focused on certification to one where you acknowledge the imperfections in the supply chains, and then be a part of remedying them, ideally in a pre-competitive way.

So, you are saying that certification is part of the solution, but it’s not sufficient?

Yes. Also, let’s not forget that the traders are doing what the roasters are asking of them. The trade is a service provider to the industry. The buck stops with the roaster.

So, what is the solution?

People are very fast with quick answers, quick conclusions and one-liners, but coffee is complex.  There are a lot of tensions around development and sustainability, but you can’t limit the discussion to agriculture when many of the challenges are social.

The economic challenges in coffee producing countries aren’t always rooted in the price and productivity of coffee alone; they are often driven by societal issues. Many of the good NGOs are working on that.

The realities of coffee are just as varied and diverse as the different tastes of coffee: complex, contradictory, fascinating and not easy to resolve. But many very positive and engaging discussions are on-going.

Are you a coffee addict?

Yes, I love this business. You can touch it, feel it, smell it. It’s tangible.  I like the physicality of coffee: the beans and the beverage. I like the social aspect of coffee: it’s a people’s business.

Thank you, Jan for your time and input.

This is a short extract of an interview that will appear in my forthcoming book Merchants & Roasters – Conversations over Coffee.

© Commodity Conversations ® 2020

A conversation with Jim Sutter

Jim Sutter (pictured bottom right) is CEO of the U.S. Soybean Export Council

Good morning, Jim. Could you please tell me about the U.S. Soybean Export Council (USSEC) and what it does?

We differentiate and build a preference for U.S. soy, and we ensure market access for U.S. soy in markets all around the world. We have a global network of about 140 people that work for our organization, most of them are outside the U.S.

How do you differentiate U.S. soy?

We demonstrate to our customers the U.S. Soy Advantage. It is anchored by four key elements. The first is its exceptional composition and intrinsic quality such as its amino acid profile and energy level. The second is consistent supply and reliability of our farmers and the whole export supply chain. The third is sustainability and our farmers commitment to protect the environment and conserve our natural resources. The final element is innovation beyond the bushel and the U.S. soy industry’s promise to continually adapt, evolve and improve.

How environmentally sustainable is U.S. soy?

Sustainability is in the DNA of our farmers; 97 percent of our farms are family-owned and nearly all are multi-generational. The farmers I talk with are always proud to tell me that they are 4th, 5th or 6th generation.

For me, one of the ultimate measures of sustainability is if farmers are passing on their farms to the next generation. Not only that, but farmers will all also tell you that they want to leave their farm – particularly the soil – in better condition than when they started.

The U.S. Soil Conservation Service was founded in 1935, now called the Natural Resources Conservation Service, and it has really helped educate and guide farmers on how to minimize soil erosion, as well as to limit the runoff of water and reduce the amount of energy they use.

When I think about what consumers around the world are concerned about – what they want to know when they’re asking about sustainability – is that the farmland will be there to feed their children and grandchildren. I think this multi-generational aspect is a great example of the sustainable way that we farm.

In addition, we have a program called the U.S. Soy Sustainability Assurance Protocol; it was developed by a multi-stakeholder group of global consumers, NGOs and the U.S. soybean industry as a means of verifying or showing the sustainability of our commodity. The European Feed Manufacturers’ Federation (FEFAC), which has developed soy-sourcing guidelines that allows buyers to verify the sustainability of the soy that they’re sourcing, has approved and recognised the verification.

How are the trade wars affecting you?

The U.S. soybean industry started investing in China 40 years ago. We’re very pleased with the relationship that we have built up over that time.

China is the largest import market in the world for soy. The trade war was detrimental for U.S. farmers, and we lost market share in this valuable destination for U.S. soy, but I anticipate this for only an ephemeral period. In the meantime, we shifted some exports to other regions, but you don’t want to be hindered from a market that makes up 60 percent of total world import demand.

We’re pleased that the Phase One agreement has been put in place, and we are optimistic that it will be implemented. The volume is significant as China pledged to buy $32 billion worth of U.S. agriculture products over two years. I know that there’s a lot of talking back and forth between the two countries, but I think at the end of the day China, and its many importers of U.S. Soy with whom we’ve built strong relationships, wants to see the agreement implemented as much as we do.

If you’re a sizable importer, you want multiple origins to choose from, so China has identified suppliers from both northern hemisphere origin (primarily from the United States) and southern hemisphere origin (primarily from Brazil). That’s how world trade works: importers want to have multiple origins to buy from, and exporters want to have multiple destinations to sell to.

How has African Swine Fever affected exports?

It did lower total global demand for soy, but it didn’t impact the U.S. too much. It was happening in China at a time when exports were down. We hear that the ASF situation is improving pretty rapidly there, and we’re glad to hear that.

With regard to ASF in other markets, we’re certainly concerned because it is a serious disease for the swine industries in those respective countries. So, we want to do all we can to help prevent the spread of ASF, and of course, stop it from reaching the U.S. We hope that science can help eradicate ASF, or at least keep it under control.

Are you actively trying to develop overseas markets outside of China?

As I mentioned, China is the largest import market for soy, but we do a lot of work in other markets as well. We diversify our marketing efforts, and we have stepped up our work in countries with large populations, low protein consumption and growing economies – for example Pakistan, Bangladesh, Nigeria and Egypt.

We work to teach people in these countries, to bring them skills on how to better use soy to improve livestock nutrition – the kind of things we did in China years ago. We are trying to take that same educational model to other markets around the world.

Which are the top three export markets for U.S. soy?

As individual countries, China, Mexico and Egypt are our top three markets, but when you take the EU as a whole it slips in there at number two after China.

Does USSEC also work to increase domestic U.S. soy demand?

The United Soybean Board (USB) is one of our founding members; they do the domestic marketing work for soy inside the U.S.

USB manages the checkoff program. Each U.S. farmer contributes a small portion of the selling price of soybeans into the checkoff program, and that provides resources that USB invests in the domestic market; they also invest in the work that the USSEC does internationally.

U.S. soy farmers have been going through a rough time recently. What message would you like to send to them?

It’s fortunate that you are in the food production business. The products that farmers produce serve as the foundation for food, feed and fuel and are grown in a sustainable and high-quality manner that meet what the people of the world need to survive and thrive.

I tell our farmers to ‘stick with it’, and that the future looks bright. We have a growing world population out there. You’re going to be an important part of feeding those people in the future.

Thank you, Jim for your time and comments!

Jim Sutter presented at the IGC Virtual Conference in London on June 10th. To see his and other presentations, please register here.

© Commodity Conversations ® 2020

A conversation with Pedro Amaral from Proforest

Pedro Amaral is Deputy Director of Proforest. I talked to him by telephone from Sao Paulo.

Good morning, Pedro. Could you tell me a little about Proforest?

Proforest is a not-for-profit group that works with governments, producers and other private sector partners, as well as civil society organisations and NGOs throughout agricultural and forest product supply chains.

Founded in 2000, we now have around a hundred people in our group. Our headquarters are in Oxford UK, and we also have offices in Colombia, Brazil, Ghana, Malaysia and Indonesia. We are currently opening offices in Mexico and the Netherlands.

Our mission is to help people produce and source natural resources sustainably. We have a focus on agricultural commodities, and we partner with companies in the supply chain – producers, traders, manufacturers, brands, and retailers – to help them come up with commitments around how they produce and source commodities; we then help them to implement these commitments.

We have a charity and we have a consulting arm. Part of our resources come from the companies that we partner with. These are some of the largest brands on the planet: Nestlé, Mars, McDonald’s, PepsiCo, Unilever, etc. Part of our resources come from funding agencies such as the UK’s DFID. Whenever we work with grants, we work on specific programmes.

In terms of deforestation, soy and palm must be the biggest culprits…

Cattle raising is by a long way the commodity associated with the largest deforestation areas, and soy comes second. Brazil is where most of the commodity-related deforestation is happening. Some researchers estimate twice as much native forest is associated to cattle raising in Brazil than is to palm production in Indonesia and Malaysia,.

Of course, a lot of the soy and cattle produced is not associated with recent deforestation – we could assume most of it is not. The deforestation cycle is complex and includes drivers such as land speculation, land grabbing or illegal lodging, on top of commodity production – which might end up happening on land cleared initially due to other drivers. Deforestation not only happens for commodity production, but there is a clear link with it, sometimes directly and other times indirectly.

Tell me about the Soy Toolkit.

The Soy Toolkit is part of a broader program called the Good Growth Partnership that addresses beef, palm oil and soy. It is funded by the Global Environment Facility and is developed in partnership with World Wildlife Fund (WWF). It is a demand side toolkit that shows supply chain companies the resources that already exist to address deforestation, native vegetation conversion and human rights issues in the supply chain. Overall, it aims at helping increase the capacity that companies have to implement their commitments, building on existing initiatives.

The Soy Toolkit can help companies understand, for instance, tools that will allow them to show their different stakeholders (customers, for instance) that the soy being traded is deforestation-free. On the other hand, it will also allow them to flag whenever there is a problem, which in turn provides them with the opportunity to take action to resolve it.

What are the resources and initiatives that already exist?

The Amazon Soy Moratorium, as one example, is an agreement signed in 2006 to ensure that soy production in the Amazon region only occurs on existing agricultural land and not through deforestation of native vegetation. It has been successful in helping reduce soy-related deforestation in the Amazon.

Anyone who buys soy from Brazil should check that they are buying from a company that is a signatory to the moratorium: If they are, the buyer should ask for the audit reports to see if they are 100 percent compliant, and if they’re not, to take action on it. If they’re not a signatory, then the buyer should ask them to become a signatory. The moratorium provides a credible and successful framework to demonstrate that, whenever you are trading soy from the Amazon, it is deforestation-free.

The Forest Code obliges a landowner to protect from at least 20 to 80 percent of their land as native vegetation, depending where the property is. Under the farm registry system the government provides on-line access to every single farm boundary, as well as information on protected areas. This provides people with an unprecedented level of transparency with over 5 million properties enrolled – more than 90 percent of all the properties in the country.

If you are a trader, you can ask your supplier for the registry number. You can then use this number on the system to see, for instance, if their registry is active, pending or cancelled. If it’s cancelled, it could be because the farm overlays with protected areas like an indigenous territory.

The Federal Environmental Agency maintains a list of environmental embargoes, some of which are because of illegal deforestation. IBAMA puts in the public domain areas that that have been found to be breaching our environmental laws. If you buy soybeans directly from the farmer, you can cross-check your supplier name with this list.

Another example is the Public Prosecutor’s Office website, which includes lawsuits related to environmental and social issues like land conflicts. It will show you if you’re buying from someone who has a lawsuit outstanding.

There are many other initiatives and resources we feature in the Soy Toolkit. We mapped over 100 of them, including tools that can help you with traceability, continuous improvement programs for farmers, or information on Key Performance Indicators (KPIs) related to policy implementation being reported by supply chain companies.

Are you optimistic or pessimistic for the Amazon jungle in terms of soy and agriculture?

The past two decades have proven that deforestation can be drastically reduced while crop (and meat) production can keep on increasing. Looking back, the combination of market mechanisms, geospatial monitoring, improved law enforcement, partnerships between the private sector and the civil society managed to accomplish great results in the Amazon. I am, therefore, optimistic that there is a successful track record of initiatives that, together, can achieve such great results.

On the other hand, we have seen deforestation rising again in recent years. A recent report shows that in 2019, Brazil accounted for a third of the world’s tropical primary forest loss on the planet. There has been a troubling increase in forest loss in Brazil and some of the hot spots of loss are happening within indigenous territories.  Recent research shows that most of the deforestation was not authorized and could be then deemed illegal.

Looking forward, there is a need to further strengthen law enforcement in Brazil. The market has to step up. Supply chain companies might need to play an even more important role now, by monitoring their supply chains and implementing their responsible sourcing policies.

Companies should work to shed light on what is being produced according to the law, respecting the zero conversion commitments and human rights — and I would expect many, if not most of producers, to be compliant. By scrutinizing their supply chains, they will also shed light on where wrongdoing is happening and will therefore be able to work as a catalyst to promote positive changes on the ground whilst further strengthening their commercial relationships.

Is there anything you would like to add?

I think that the more everyone knows about what’s already available, and what’s been successful already, the more capable they will be to implement their sourcing policies.

Up until April, 2021, we can offer free webinars, workshops and training funded by the Global Environment Facility through WWF to help companies understand what traceability and deforestation analysis tools exist, and how they can benefit from them. It’s all available in English, Portuguese and Mandarin.  People can contact us via the e-mail soytoolkit@proforest.net

We’ve just secured funding to extend our soy toolkit to beef and palm oil – which will allow us to shed light on resources companies can build on to implement their responsible commitments related to these commodities too. It will build on the work we did for the Soy Toolkit and lessons learned from that programme.

Our ultimate goal is to help supply chain companies to implement their commitments. We are not telling companies what to do, but we are rather showing them the tools and resources that they can use in implementing their commitments.

Thank you, Pedro for your time and input!

Pedro will be presenting at the International Grains Council virtual conference on 10th June 2020.

© Commodity Conversations ® 2020

A conversation with Alejandra Danielson Castillo

Alejandra Danielson Castillo is based in Singapore where she serves as the regional director for South Asia for the U.S. Grains Council.

Good afternoon, Alejandra. How did you end up in Singapore?

I was born in Nicaragua and I came up to the United States for university. I did both my undergraduate and my graduate degrees in management in Minnesota.

I worked for Cargill for about seven years across three different states within the grain, oilseeds and cotton business units and focused on trade execution before moving to the U.S. Grains Council, first as a manager for global trade, providing trade and market updates to our international offices and customers, and later joining their newly formed division for South Asia. I moved to Singapore in July 2019. The Council sees great opportunities for growth and market access for feed grains and biofuels in the South Asia region and especially India. As part of the Council’s commitment to the region, it is working to open a liaison office in Delhi, India to continue our engagements.

What does the U.S. Grains Council do?

The U.S. Grains Council is a non-profit organization that develops export markets for U.S. barley, corn, sorghum and related products including distiller’s dried grains with solubles (DDGS) and ethanol. With full-time presence in 28 locations, the Council operates programs in more than 50 countries and the European Union. The Council believes exports are vital to global economic development and to U.S. agriculture’s profitability.

In a sense, we are the marketing branch for U.S. grain farmers, tasked with creating market opportunities, identifying markets where U.S agricultural commodities are both needed and competitive, and helping to address market issues that inhibit trade. Many U.S. farmers contribute to different commodities checkoff programs based on what they grow – some that are state-based and some that are national – that attempt to improve the market position of the covered commodity by expanding markets, increasing demand, and developing new uses and markets.

We work to promote knowledge and understanding of the U.S. system for production and exports. For example, we bring trade teams from different parts of the world to the United States to visit our farmers, our operations and our marketing system, our ports etc. We also bring U.S. farmers and other stakeholders to the markets we’re trying to service. This cross collaboration serves to increase awareness of the impact of trade in the daily lives of the farmers in the U.S. and across the globe.

Is your job getting harder now that the pendulum is swinging away from free trade in agriculture?

We do have headwinds on the trade side. We are seeing more tariffs and more trade disputes; they certainly create challenges for us when we are trying to bring U.S. agricultural products into certain markets.

The U.S. Grains Council has always been very vocal in its support for free trade. We believe free trade in agriculture is beneficial to U.S. farmers and to consumers in importing countries. We often say, “when trade works, the world wins.”

During these turbulent times we continue to promote free trade, and to create an understanding of the benefits free trade brings.

The silver lining is that it’s pushing us to more actively develop new markets.

Could you give an example?

We’re starting to see there’s a need and a market for U.S. commodities in Bangladesh, as well as a renewed interest among the importers in the country. I’ve gotten to know the top five importers in the country and have been working with them in improving their supply chain. Bangladesh is currently importing a good amount of DDGS.

Of course, these markets are not anywhere near the volumes we can see in, say, India or China, but they present a very strong value proposition for U.S. agriculture.

Are you optimistic about the prospects of U.S. exports to India?

I am very optimistic. India presents some challenges from a trade policy perspective as we currently don’t have access for DDGS or ethanol, but there’s been an increase in conversations between our two governments around a bilateral trade deal, especially after U.S. President Trump visited India in February 2019, and we remain hopeful a final resolution will be reached before the end of the year.

From a market perspective, we see an annual potential import demand within India for as much as 700,000 metric tonnes of DDGS. India is the third largest market for U.S. ethanol, with over 202 million gallons imported last year. The Council is working on developing a market for fuel ethanol in the country.

We’ve had many Indian trade teams come to the United States and visit farms and look at how our farmers work. It’s certainly been a very positive experience for me. It absolutely solidifies my feeling we’re doing something that is going to create a win-win scenario for everyone.

But it must be tough all the same…

Certainly, not every day is a great day, but there’s a lot of positivity around understanding a new market and opening it up for U.S. agriculture. I am personally very excited about South Asia. I am confident we can create value both for our farmers in the U.S. and for importing countries.

Thank you, Alejandra for your time and input!

Alejandra will be one of the speakers at the  International Grains Council virtual conference on Wednesday 10th June.

© Commodity Conversations ® 2020

Agri-risk management during Covid19

Deven Chitaliya is Senior Vice President & Global Head Credit at Olam in Singapore, where he is responsible for Credit and Counterparty Risk management across 12 agri-business platforms spread across more than 70 countries. He is also responsible for development and roll-out of company-wide Enterprise Risk Management Framework.

Could you please tell me a little about the Enterprise Risk Management, or ERM, that I believe that you helped introduce at Olam?

All organisations must manage risks effectively to endure and thrive. Traditionally, most organisations assign risk management to business unit leaders within their areas of responsibility. We call this “silo” or “stove-pipe” risk management. For example, the Chief Technology Officer is responsible for managing risks related to information technology operations; the Treasurer is responsible for managing risks related to financing and cash flow, and so on.

However, risk does not respect organisation charts; it can be anywhere and take any form. Some risks “fall between siloes”, unnoticed by individual leaders. Others can affect different units differently – managers may not know that a decision taken for one silo can cause or escalate risk in another. The upshot is that risk can go unnoticed or not be effectively tackled until a catastrophic event is triggered.

Another challenge with traditional risk management is that it is often internally focused and granular – looking within the four walls of the organisation, with minimal focus on risks that may emerge from outside the business.

At Olam we have mapped 51 risks (including 19 quantifiable risks) across 11 risk categories that Risk Office monitor, measure and report at regular interval along with each department.

We have 13 people in the Risk Office team in Singapore and 2 in London.

What are the most important considerations when implementing a Risk Management Framework for a company?

The most important is a strong governance structure and an independence of risk management team. You also need what I call a “holistic risk capture’” that is both outward as well as inward looking, and which covers the entire company, not just individual business platforms within the company. Risk must be consolidated and assessed both at business as well as corporate level.

Obviously, you need to measure risk wherever you can, and keep on stress testing and analysing different scenarios. You need proactive operational risk controls in the areas of credit, counterparty, stock, quality. At a platform level, you also need strict ‘drawdown’ and ‘stop loss’ policies.

But perhaps most importantly you need to assess your company’s risk appetite. That may sound obvious, but many companies go into trading without first assessing their risk-taking capabilities.

Could you tell me which are the biggest risks that Olam currently faces?

The biggest and most important risk that we face is the health and safety of our employees; we spend a lot of time making sure that we minimize those risks. This is especially the case now with COVID-19, where we must make sure that social distancing, sanitary measures and all requisite PPEs are always made available for factories, warehouses and our plantations.

I would say that cyber-security risk is our second biggest risk. The innovative ways in which your systems and people information can be hacked and misused sometimes even surprises experts. With wide-spread operations across product platforms and geographies, standardization of IT controls and effective implementation of latest security controls across the company becomes key to counter and reduce losses in case of actual cyber-attack or cyber fraud.

Supply disruption is currently our third biggest risk. Labour shortages and transport / logistics bottlenecks can also be an issue. We do see some slowdown in select countries. However, most of the Agri products fall under the list of essential commodities and therefore the trade is still immune from complete shutdown.

There have been some relatively short-lived food export bans from certain countries, but they have not really had much impact on the supply of food. Ports have remained open, and the food supply chain has shown itself to be robust and flexible in dealing with the current crisis.

I would put demand destruction as our fourth biggest risk. This risk is less with food products, as demand more or less remains constant. People have to eat. However, things can be more complex with what we consider as industrial products like cotton where purchases by end-users can be deferred for fairly longer periods.

For example, we have to ask ourselves how the collapse in retail clothing demand in Europe and the US might lead to the cancellation of their orders, say, with Bangladeshi clothing manufacturing factories, which in turn might affect cotton sales contracts.

In-depth regular risk reviews with business team with focus on operational checks and controls plus assessment of high-risk areas and bottlenecks helps us take proactive actions as “One Olam” team.

Has Covid19 increased counterparty risks?

Olam is quite unique among the major agricultural trade houses in that we are very involved at origin. Our vertically integrated supply chain for our Upstream businesses means that we have very limited and well-managed counterparty risk on our supply side.

Our counterparty risks tend to be downstream where we are dependent on timely contract performance and payments from our Customers. Market volatility plays an important role. Higher the volatility, higher the ‘mark to market’ exposures, and therefore higher the risks.

Not only do we have to assess the risks to our businesses, we also have to constantly monitor the risks to our clients’ businesses: are they facing supply issues; has a major buyer defaulted on them; how is their cash flow with regard to their stock levels; how is their payment performance with us, what are the inputs from our market network, etc? Any of these things can show us an early warning sign / red flag for timely and corrective action.

It goes a long way to ensure long-term relationship building and trust when we try to offer innovative solutions where possible to support their businesses. e.g. short-term cash-flow issues, bank assisted structures to support payments, credit insurance / collaterals / deposits / parent guarantee backed exposures, etc

What keeps you awake at night?

That there is something out there that we don’t know about. I am not worried about the things we know about: any event that may occur once in a while in normal course of business; we have robust systems in place to monitor and manage these known risks.

I am spending a lot of time now, for example, wondering whether there will be a second wave of COVID-19, and making sure that if there is one, we will be ready for it.

Another unknown, of course, is technological development and innovation: will something be invented that might negatively affect one of our businesses? There is no easy way of knowing that except to remain up-to-date on what are the major initiatives, experiments and actions being undertaken across industry!

Many thanks, Deven for your time and input!

Deven will be participating as a panellist in Commodity Trading Week online

© Commodity Conversations ® 2020

Coffee: from value to values

Ric Rhinehart was until recently Executive Director and CEO of the SCA, the Specialty Coffee Association. I asked him if he was worried about current coffee demand with cafés closed and a sharp increase in unemployed.

The price elasticity of coffee is low. If you are a coffee drinker, coffee is a relatively high priority at a relatively low-price basis, so you’re willing to defer other expenses in order to continue to drink coffee. Conversely, if coffee was suddenly free you wouldn’t increase your consumption to say nine or ten cups a day. You’d still maintain your three or four cups.

Coffee has also been very resilient in economic downturns. That was true in the global recession in 2008 when coffee consumption stayed relatively strong. What shifts is the venue of consumption. When you’re in an economic downturn people tend to return to drinking more coffee at home and drinking less coffee out of home.

In the current scenario it’s quite different in that the cafés were literally forced to close because of social distancing. I suspect that a lot of marginal operations will disappear.

It seems to be the specialty sector that’s been driving the demand growth in the US. Is that correct?

Absolutely. In mature markets, particularly in the US, coffee consumption had peaked in the early to mid 1960’s and was in decline until the mid-90s when the speciality coffee movement began, and people started returning to coffee.

With the growth of coffee bars and shops there was also a new venue of consumption. People began drinking coffee outside of their home and their workplace. That really changed the market.

And is that demand growth continuing in the US?

Yes, coffee consumers in the US now drink on average three cups per day, and that’s back up to practically to where it was at its peak. Consumption continues to be on the rise, and it continues to be driven largely by the specialty sector.

Coffee consumption in kilos is still just a little less than 70 percent in home, but in dollar value it’s probably 55 percent outside the home now. A lot of that has to do with the price point of a cup versus a price point of a kilo.

I have heard talk of a price crisis in coffee. Is there a crisis?

Coffee farmers, small holders in particular around the world, frequently produce and sell coffee at below their cost of production. They don’t have a lot of other options. For many smallholders, coffee is a cash crop that augments subsistence farming at the same time.

The board of the SCA asked me to spend my terminal year focusing on that price crisis. We launched a price crisis response within the organization to try to understand what drives the cyclical low prices in coffee and what we might do about it.

What’s the solution?

Unfortunately, I know more about the drivers of the problem than I know about the solutions.

I believe that the problem’s biggest driver has been the shift in the approach to economic activity from pre-Friedman capitalism to a post-Friedman capitalism. Instead of Ten Commandments there were two: first, that the market shall be unrestrained; second, that shareholder value should be paramount. That became the religion of economics worldwide.

It seems that the pendulum is swinging back towards stakeholder rather than shareholder capitalism.

That’s very good news for the coffee industry and for all of the farmers around the world. It’s a belief that you’ve got to look after your stakeholders.

And in economic terms that suggests that you have to price in all the externalities. You can’t let the market force out the externalities.

The most important is to reassess how we form our values as a separate issue from how we assign value.

What is your favorite coffee and your favorite way of preparing it?

That’s like asking me which out of my four children is my favorite. I don’t have a favorite, but I love Ethiopian coffees. Ethiopia is the birthplace of coffee. There’s more diversity in flavor and style in coffee in Ethiopia than anywhere else on Earth.

It is generally true that the way you’ve come to coffee is the way you stay with coffee. I grew up as a drip coffee drinker, and I am a drip coffee drinker today.

© Commodity Conversations ® 2020

This is a brief extract of an interview that will be published in my upcoming book “Merchants & Roasters – Conversations over Coffee”

Coffee is a necessity

Good morning Steve, and thanks for agreeing to talk with us. First, could you please tell me a little about yourself?

After studying Economics at the London School of Oriental and African Studies, I joined Rowntree’s as an economist in their cocoa buying office. In 1988 I moved to ED&F Man to become head of cocoa research. Three years later they merged their cocoa and coffee divisions and I took over as head of research of both. When ED&F Man bought Volcafé in 2004 I also became head of coffee research for Volcafé.

In 2006 I moved to the US to join the Ospraie hedge fund. I worked for them for four years before coming back to the UK to co-found Tropical Research Services. We provide research and data on the coffee, sugar and cocoa markets, including extensive field research.

What does the current S&D look like for coffee?

Arabica is interesting at the moment; there are a lot of similarities with 2009/10. That year there was a shortage of mild arabica and a surplus of Brazil naturals. Differentials for mild arabicas from Central America and Colombia widened significantly, certified arabica stocks declined and eventually the market rallied to 300 cents per pound to ration mild arabica usage. There wasn’t an overall shortage of coffee in the world, just a shortage of mild arabica. The New York C contract is a mild arabica contract.

We are in a similar situation now where the differentials for Colombia and Central America mild arabicas are increasing, certified stocks are falling, and we have a record Brazil crop of natural arabicas, rather than the semi-washed arabicas which could substitute for mild arabicas.

The big unknown is what impact Covid19 will have on demand. We are seeing the collapse of out of home consumption as restaurants and coffee bars close, and a big increase in at home consumption. This may lead to a shift away from mild arabica consumption towards naturals and robustas.

We are also heading for a major recession. In 2008 after the Great Recession, coffee consumption held up, the rate of growth slowed but people carried on drinking coffee. But in hard times, consumers tend to buy cheaper coffee, so again, Covid19 could lead to lower mild arabica consumption and higher naturals and robusta consumption, so we probably won’t see a price spike as high as in 2009/10, but if Covid19 does not resolve the mild arabica conundrum, prices will.

There is also a risk to the semi-washed harvest in Brazil from Covid19 measures on labour supply. The Brazilian government is trying to stop people moving across state borders and this may lead to a labour shortage. This could slow the harvest. You won’t lose any coffee as the harvest will just go on for longer, but you could see a fall in quality.

This is something we will be monitoring as the harvest progresses, and we have people in the field looking at how the harvest is progressing.

Any drop in semi-washed production could further tighten the mild arabica balance sheet, so there are a lot of moving parts at the moment.

Where does Vietnam fit into this?

The robusta market in London used to represent Vietnamese coffee, Vietnam being the world’s largest robusta producer. As most of the Brazilian robusta crop was consumed internally little was exported. Over the past few years Brazil has created a surplus of robusta – conilons – that was exported and is now sitting in Europe. There is very little demand for this in Europe.

Roasters don’t like them, and consumers don’t particularly like them either. What should happen is that the price differentials between Brazil conilons and Vietnam’s become so large that roasters would start blending in conilons.

There is however a problem in that the EU has just tightened up their rules on pesticide and herbicide residues, particularly glyphosate, in food. Brazilian growers use more glyphosate nearer the harvest than in other producing countries.

A lot of the conilons already in Europe no longer meet the tightened EU restrictions, and as a result no one in Europe wants the conilons. No one wants to take delivery of London. The calendar spreads are weak and the coffee continues to get carried forward. Meanwhile, the funds stay short, picking up the roll yield each time they roll forward.

Basically, the London robusta coffee futures contract is broken.

What’s going to happen to those conilons? Are they going to be burnt or dumped in the ocean?

Maybe they will be shipped to Russia, the US or Mexico. Robusta certified stocks have been coming down, so the market is slowly finding a solution.

Please tell me a little more about what is happening on the demand side?

The ICO did a study recently that showed a 95 percent correlation between GDP growth and coffee consumption growth. Because GDP going to take a big hit with Covid19, some people expect coffee consumption will collapse.  I am not so convinced. There is also a very high correlation between coffee consumption and population growth, and population will continue to grow despite coronavirus.

In 2008 – the last time we had a decline in global GDP growth – the rate of coffee consumption growth slowed, but consumption still grew. This is in stark contrast to cocoa consumption, for instance, which showed a substantial decline. The difference is that cocoa is a luxury while coffee is – in many respects – a necessity.

During the last two years, prices have been low in dollar terms and consumption has grown by 3.5 percent per year. We expect that consumption growth this year will drop to 1-1.5 percent. If GDP growth takes a really big hit, the growth rate in global coffee consumption may fall to zero, but I don’t expect it to fall to below zero.

People who buy a cup of coffee on their way to work will now make it at home. The question is what sort of coffee they will buy from the supermarket. Will it be mild arabica or a blend of naturals and robustas? Possibly the latter.

How big will the shift be from mild arabicas? If there is no shift, then you have a potentially explosive situation for the arabica market. If the shift is big enough then we could just about get by.

We’re factoring all this in and we will review it as the year progresses, along with crop developments in the major producing countries.

For more information on Tropical Research services please visit www.tropicalresearchservices.com or contact Steve directly at

steve@tropical-research.com

From the ground up

Shirin Moayyad has been in the coffee trade all her working life and has recently opened her own roasterie in Switzerland. I asked her to tell us a little bit about herself and how she got into coffee.

I studied anthropology as an undergraduate and then began a master’s programme in development studies. For that I needed to do a practicum and I somehow found a position in the highlands of Papua New Guinea, working with an anthropologist. I quickly realized it wasn’t for me, so I took a job with a local trading company that owned coffee plantations, along with their other businesses.

As I spoke the local language, they put me in charge of the 100-acre coffee plantation that I lived on. So, I literally learned coffee from the ground up – from the farm angle.

At the time there were only two tiny coffee roasteries in Papua New Guinea.  My company purchased one of them and tasked me with its management. I was instructed to modernise it and develop an export market. Our coffee ended up in supermarkets all over the South Pacific, including Australia and New Zealand. It was quite a success as a model for value-adding in-country, and a wonderful project to be involved in.

After 11 years in Papua New Guinea I moved to Singapore, where I was hired to set up the roasting plant for a chain of coffee shops. I commissioned the roastery and was both the roaster and green coffee buyer for them.

My next move was to Peet’s, as their green coffee buyer and often storyteller. Based in Oakland, I travelled the world looking for specialty coffees for them. It was a magic job, working with some of the most amazing people in the industry, who have remained friends to this day.

From Peet’s you were recruited to Nespresso in Switzerland?

I moved here in January 2013. I landed in a snowstorm and it carried on snowing for the next 10 days. I had never seen anything so beautiful. If Disneyland did Switzerland, I thought, this is what it would look like.

At Nespresso, alongside my job as Coffee Expertise Leverage Manager, I was on the small panel of cuppers who were qualified to taste and evaluate the coffees they bought. I loved that, but we were in a large, rather industrial setting where we didn’t have our hands on coffee the way I did in previous jobs. I missed that. Then, in August 2018 personal losses and home stresses caused me to resign from Nespresso. A year later, in August of 2019, I finally decided to take the plunge and start my own little roasting company: Sweet Bean Coffee.

Going into roasting has been an opportunity for me to get my hands back onto the primary material that I love. I love coffee, I absolutely adore coffee, and I realized I need to be around the raw stuff.

Where do you buy your green coffee?

I buy from different origins. From the Americas we have Brazil, Colombia and Guatemala. My absolute favourite is Guatemala. From Africa, Kenya and Ethiopia. From Indonesia, Sumatra and Sulawesi, and then of course Papua New Guinea. I couldn’t imagine having a coffee business without Papua New Guinea!

Is it a gift to be able to taste coffee or is it something you can learn?

For me, it’s about discipline and training. I’m half German and grew up with a huge amount of discipline in the household. I attack any work project with this same discipline and concentration. If you’ve cupped coffees as many thousands of times as I have, your palate becomes trained, disciplined and discerning.

I’m not a super taster (people with more taste buds than on average), but I am what’s called a Q grader, qualified for both arabica and robusta. The robusta certification is rare, new and extremely difficult to pass. But then both qualifications are insanely difficult with 22 exams based on tasting, smelling and coffee knowledge.

I’m also on the Board of Trustees for the Coffee Quality Institute that created the certification. I didn’t pass the exams because of that though; I became a trustee after I passed!

What qualities do you need as a roaster?

To roast you need the ability to concentrate intensively for short periods of time. You have to be able to concentrate to the exclusion of everything else because you’re roasting with your senses: your eyes, your nose and your ears. You’re looking for colour. You’re looking for expansion on the beans, you listen to the sounds that the beans make, you feel the beans. Mr. Peet famously said: “the beans tell me how they want to be roasted” and I adhere to that school of craft.

What qualities do you look for in a green coffee?

It depends on the way the coffee will be prepared. Having said that, when I am offered coffees and something exceptional comes along, I buy it anyway, because I’ll figure out later what to do with it.

So, in a Papua New Guinea, I’m looking for a particular flavour profile that has something almost akin to a ripe mango, breadfruit, or jackfruit – tropical fruit notes at their very ripest level. That’s what you can find in a washed arabica from Papua New Guinea.

In a Sumatra by contrast, I look for huge body and cured tobacco leaf aromatics that are particular to the terroir and processing method of Sumatra.

Which are better: blends or single origin?

Blends can bring complexity, but a pure origin can really give you the spirit of the country.

Smell is a powerful memory stimulant. When I roast coffee from Papua New Guinea, it takes me back to walking the streams of the Southern Highlands Province, going trout fishing in the remote bush a day’s walk away from the nearest roads. I am smelling my memories in the bush, going through the coffee rows, the fresh milled crop being bagged for export and so many other memories. That’s the beauty of a single origin; it really transports you to that place.

Which is your favourite coffee and how do you brew it?

PNG is my favourite coffee and I brew it in a French press.

Lastly, where can I buy your coffee?

Normally we are on the market in Carouge in Geneva every Saturday, but since the coronavirus lockdown our website is our main outlet, as well as the VitaVerDura local food home delivery service.  You’ll find a few smaller outlets listed on the website as well. We mainly roast to order, and we deliver.

Thank you, Shirin for your time and input.

© Commodity Conversations ® 2020

This is a short extract of a full interview that will be published in my upcoming book Merchants & Roasters – Conversations over Coffee