Traders and merchants

Coffee traders and merchants move coffee from areas where it grows well (and cheaply) to places where it grows less well, or not at all. They transport coffee from surplus areas to deficit areas.  If coffee is worth more money in the US than in Brazil – and if that difference is more than the cost of shipping it (plus a little profit margin to make it worthwhile), then the trader or merchant will make it happen.

Coffee traders do not only move coffee from surplus to deficit areas. They also store and process it. They hold coffee at times when it is not needed (after the harvest) until a time it is needed (throughout the year). Coffee millers process coffee from a form in which it is not wanted into a condition in which it is wanted, transforming cherries into green beans. Roasters transform the green beans into roasted or soluble coffee.

Millers and roasters are, by definition, traders. A miller buys cherries and sells green beans, while a roaster buys green beans and sells roasted beans. Just as a trader may depend for his livelihood on his skill in buying coffee in one country and selling it in another, a roaster depends on his skill in buying coffee in one form and selling it in another. Millers and roasters are traders, and they need trading skills to perform their tasks correctly.

When you think about that a little, it becomes clear that what a trader is most interested in is not the outright price of coffee but the difference in the prices of that coffee in its different geographies, times and forms.  It is the price differential that matters, not the outright price. Traders like to limit their exposure to the outright, or flat price, of a commodity. They usually hedge their outright price risk, preferring to make their money on the differentials – the difference between the cost of the futures and the price of their particular coffee.

All traders – and that includes roasters – will try to reduce their risk of future price movements by hedging what they buy, taking an offsetting position for the same quantity in the futures market. Having purchased the physicals, a trader will sell futures as a hedge. When he sells the coffee, the trader will buy back their futures hedge; they no longer need to be protected against a move in the outright price of coffee because they don’t own it anymore.

Everyone involved in the coffee supply chain is taking and managing price risk. The farmer is perhaps taking the most significant risk by growing coffee in the first place. He may try to offset some of that risk by selling in advance – selling something that he doesn’t (yet) have.

The trader is taking a risk on the quantity that he buys but offsets that risk by hedging in the futures market. The roaster is also taking a risk; he has invested in his roasting machinery and has the risk that coffee prices will be too high to allow him to make a profit when he sells his roasted beans.

When I began my trading career with Cargill in the late 1970s, my first business card gave my title as ‘Commodity Merchandiser’.  But what is the difference between a trader and a merchandiser? Traders take positions on the markets, betting whether prices – or the differentials between prices – will rise or fall. Merchandisers move commodities along the supply chain, taking a tiny margin at each stage of its journey.

Traditional commodity merchandising has become more challenging and less profitable over time. It has become tough to make a margin just moving coffee along the supply chain.

One of the significant difficulties that merchandisers now face is that information is widely and freely available. It also travels incredibly fast. Technological change has reduced the potential for traders to arbitrage prices between geographical regions.

The other significant change is that governments and government agencies have pretty much left the coffee business. In the past, governments were often responsible for selling their country’s production, and this led to opportunities for corruption. Low-paid government officials were easy targets for unscrupulous traders; selling tenders were often rigged in favour of the traders that gave the biggest bribes. The markets have now been privatised, and this no longer happens.

In a world of instant information, it is no longer possible for merchants to take advantage of price differentials in various countries; instead, they now have to anticipate them. It is the point where a merchant becomes a trader. A trader predicts where shortages and surpluses will occur, and he takes a position in the market in anticipation of future price moves. As a result, analysis has become the lifeblood of trading.

It is not unusual for a trading company to employ more analysts than traders. Nor is it uncommon for traders to spend most of their time not on trading, but analysis. It is impossible to succeed in the commodity markets without an experienced group of traders and analysts to interpret and understand the mass of information that needs to be absorbed.

But analysis is not the only thing that you need to succeed in the physical commodity markets: you also need clients. Traders, therefore, have to keep in regular contact with their client networks, and they have to move physical coffee along the supply chain. There is now such an overlap between trading and merchandising that they are pretty much the same thing.

Merchandising coffee allows you to see the trade flows, helps with your analysis, and enables you to anticipate trading opportunities in the coffee market. But the margins on straight merchandising are now so thin – and sometimes even negative — that it is pretty much impossible for a pure coffee merchandiser to survive. The profits from trading subsidise the lack of profits, or the losses, on merchandising. In that sense, merchandising enables trading, and trading facilitates merchandising. They are mutually dependent.

© Commodity Conversations ®

This is an extract from my latest book ‘Crop to Cup – Conversations over Coffee’, available now on Amazon

Commodity Conversations Weekly Press Summary

The Chinese government continues to push its “Operation empty plates” to reduce food waste amid growing concerns of possible food shortages. Officials denied any possibility of shortages, however, and the country’s consumer price index saw a 0.5% drop in November, the first annual drop in over a decade. An economist explained that the fall was led by declining pork prices, which dropped by 12.5% in November, following an increase in the domestic hog population. This could be short lived, however, as pork prices have been rising again in December due to seasonal demand for meat in preparation for the Lunar New Year. The crackdown on imports has also contributed to lower meat availability, with the government’s coronavirus testing measures slowing import clearance, while consumers prefer to buy domestic pork. 

Rising food prices are also an issue in Russia, where the government announced measures to cap the price of several essential commodities, including a temporary quota for grain exports and a temporary export tax on wheat. Sugar and sunflower oil producers agreed to cap prices themselves, failing which the government threatened to lower the sugar import duty and tax sunflower oil exports.  

A big winner in all of this is Brazil, which expects to see USD 100 billion in agribusiness exports in 2020, up 3.5% from 2019 and the second highest after 2018. The projection made by Insper Agro Global notes that a third of exports are destined to China, Brazil’s biggest agricultural trade partner since 2013. Soybean exports by themselves should generate USD 36 billion, driven in large part by the recovery in China’s hog population. 

Within this context, it is little surprise that more and more Brazilian agribusinesses are choosing to go public on the domestic stock exchange. A mergers and acquisitions consultant said there was strong investor demand for these companies thanks to the weaker Real and interest rates at historically low levels. However, a banker involved in one of the IPOs said that sustainability and good environmental practices were key. 

In the UK, the Prime Minister said this week that a UK-EU trade deal looked unlikely, which prompted retailers to reiterate their warning that a no-deal Brexit would lead to higher food prices. The British Retail Consortium warned that 80% of the country’s food is currently imported from the EU duty-free and the absence of a trade deal would lead to average tariffs of 20%. Brexit could also lead to sub-standard food imports, the Future British Standards Coalition (FBSC) said, explaining that the government had refused to sign food safeguards into law. Despite agreeing to ban the import of chlorinated chicken and hormone-treated beef, the current system allows the government to make changes on food import rules without a vote in parliament, the FBSC said. 

Soybean from Brazil is facing a backlash in Europe amid the rapid rate of deforestation in the Cerrado which supplies two thirds of the country’s soybeans. Some 160 food groups and investors have asked the major trading houses to stop procuring soybean linked to deforestation in the Cerrado region by the end of the year. Nestle already stopped buying Brazilian soy from Cargill back in May 2019, and two European fish feed companies announced they would stop using Brazilian soybean in their feed, one of which said it would be using European grains instead. The Financial Times explained that part of the issue is because, by law, farmers in the Cerrado only have to protect 20-35% of the native forest, against 80% for farmers in the Amazon. 

Brazil overtook the US as the number one producer of genetically modified (GM) soybean in the world in 2019, according to a report by ISAAA. Overall, however, the area under GM crops dropped globally by 0.7%. The area dropped by 4.7% in the US, the country with the largest area under GMO crops, but increased by 3% in Brazil, the number two in the world. The report suggested that GM crop area seemed to have reached a peak, having remained stagnant for a few years now. 

In the US, the Food and Drug Administration (FDA) gave the green light to the first GM pig safe for people who are allergic to red meat. The Center for Food Safety complained that the FDA didn’t do enough tests and flagged the risks of a pig escape and contamination with wildlife. But the company that engineered the pig, United Therapeutics Corporation, isn’t working on meat for consumption. Rather its goal is to develop pig-based organs that can be transplanted into humans. “[This] is one step on our journey to address the shortage of transplantable organs in the US,” a company official said

Also in the US, some 12,000 peanut farmers filed a class action lawsuit against three shelling companies, including Olam and ADM, accusing them of depressing prices by close to 20% between 2014 and 2019. The three companies, dubbed Big Peanut by The Counter, have an 80% market share of the industry. Two of the Big Peanuts are reportedly about to settle with the farmers. 

Dear readers, we would like to wish you a Merry Christmas and Happy New Year. The Commodity ConversationsxECRUU report will resume on 7 January 2021. 

This summary was produced by ECRUU

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The History of Coffee

No matter what historians claimed, BC really stood for ‘Before Coffee’.― Cherise Sinclair

The first reference to coffee as we know it today was in the early 15th century when the Arab mystic al-Dhabhani saw Ethiopians drinking ‘qahwa’, now the Arab word for coffee. The Ethiopians, however, call coffee ‘buna’, which also means bean.

As coffee gained popularity throughout the Arab world, it began to be used less as a religious drink and more as a social stimulant. In 1511, Khair-Beg, the governor of Mecca, ruled that coffee was like wine and hence banned by the Koran. He ordered the city’s coffee houses to be closed, only to have the ban overturned by his boss, the Sultan of Cairo.

Despite its growing popularity, coffee production was slow to pick up; it was only after the Ottomans occupied Yemen in 1536 that they began to extensively cultivate the crop in the country. The Ottomans exported the coffee from the port of Mocha, and it became known as ‘mocha’.

When the first English sailor reached the port in 1606, he wrote that there were over thirty-five merchant ships, some from as far away as India, waiting to load the precious green beans.

Some of the coffee was shipped to Alexandria in Egypt and then on to Venice. Still, mostly it stayed within the Ottoman empire, reaching Damascus and Istanbul by the middle of the century. By then, coffee was no longer considered just a religious drink, but also a social one. By the end of the 16th century, there were over 600 coffee shops operating in Istanbul.

The way of brewing coffee changed as it travelled. Arabic coffee (qahwa) is a light-coloured liquid made by lightly toasting the beans, crushing them with various spices such as cardamom, and then boiling them in water. Turkish coffee (kahve) is made with more darkly roasted beans and brought to the boil at least twice but without spices.

For a time, the Ottomans successfully prevented coffee cultivation from spreading outside the area of Mocha; they refused to let berries leave the country unless they were first boiled in water to prevent their germination. However, exports had grown to such a level that it was impossible to stop some un-boiled beans from getting through. As Muslim pilgrims returned to their homes, they took coffee beans with them.

One such pilgrim, Buba Budan, is credited in 1600 with smuggling out some beans by taping seven of them to his stomach. He took them back to India and planted the beans next to his hut at Chickmaglur in the mountains of Mysore. Buba Budan is now (rightly) revered as a saint, but it was not until 1840 that the English began the commercial cultivation of coffee in India; the plantations extend now from the extreme north of Mysore down to Tuticorin.

In 1614, Dutch traders brought a coffee plant from Mocha to Amsterdam, and by mid-century, they had taken plants to Ceylon (now Sri Lanka) and Dutch Malaba (now Cochin), where they started small plantations. From there, in 1696, the Dutch took cuttings from the plants to their colonial island of Java. A flood washed away the early seedlings, but the Dutch tried again three years later, this time successfully. In 1706, the first Java coffee had reached Amsterdam; some coffee plants were grown successfully in Amsterdam’s botanical gardens.

During the 17th century, ‘Mocha’ and ‘Java’ became synonyms for coffee; they are still so today.

© Commodity Conversations ®

This is a short extract from my book Crop to Cup – Conversations over Coffee now available on Amazon.

Commodity Conversations Weekly Press Summary

In order to meet its goal of reaching net-zero emissions by 2050, Nestle announced that it will invest USD 3.6 billion over the next five years, focusing on regenerative agriculture, renewable energy and plant-based products. More countries and companies have joined the 2050 net-zero pledge in recent weeks, including Glencore. The group, however, argued that fossil fuels still had a role to play and mentioned that it was not planning to sell its coal mines in Australia. Glencore also announced that the CEO will retire next year and that Glencore Agriculture will be rebranded as Viterra

Carbon offset programs will be essential to meet these goals, as Mondelez explained that any “product that has to be produced and transported will have some carbon footprint”. Mondelez is testing the concept with a product launched in France, the carbon-neutral NoCOé cracker. Beyond using local and organic products, Mondelez is planting trees in partnership with Rainforest Action. The product will also help verify whether consumers are willing to sacrifice price and convenience in order to help the environment. 

Singapore made headlines when it approved the sale of the first cultured meat, produced by the US-based Eat Just. The chicken bites are produced in a bioreactor without the slaughter of an animal. Nonetheless, the company was the first to admit that a lot of progress still needed to be made, as the meat is still expensive and energy-intensive. It also relied on foetal bovine serum extracted from foetal blood, although this could eventually be replaced by a plant-based alternative. For these reasons, an observer argued that the launch was “good news, but not great news.” In the long-term, another observer expressed optimism that cruelty-free cultured meat could replace cuts of traditional meat while plant-based products will replace processed meat like burgers and sausages. 

As investment in the plant-based meat sector continues to soar, Canadian researchers highlight the need to properly evaluate the true environmental impact of switching to plant alternatives. Supply chain logistics behind the production and distribution of proteins also play an essential role, along with the choice of base ingredients. Experts also highlighted that working conditions and food safety should be factors when assessing the sustainability of plant-based meat. Separately, a study by Tufts University suggested that the only way for US cities to focus on locally produced foods was by reducing the consumption of meat. The land needed for grazing livestock would make it difficult to supply enough meat locally for more than 20 percent of meals.

The world of machine learning and food development collided when Google’s parent company announced that the DeepMind AI was able to crack a longstanding problem: protein folding. Protein folding contains a number of variations that approach infinity but DeepMind’s DeepFold AI can predict the structure within days. Beyond the huge implications for the biomedical sector, food researchers also pointed out that this could be a fundamental change in the search for new proteins, along with the possibility of replacing rare ingredients like saffron and vanilla. 

Google announced other food-related ventures as two prototypes developed by the X factory will now be scaled and commercialised. The first is the “dana-bot”, a food distribution network designed to track food waste to help food banks and redirect waste from grocery stores. The second prototype leverages computer vision to analyse the food thrown out in kitchens. Going even further in the realm of science fiction, Finland-based Solar Foods raised USD 30 million to test the production of “air protein”. Called Solein, the protein is made using carbon dioxide captured from the air and mixing it with bacteria. 

When the US prohibited the consumption of alcohol, apple producers started designing sweeter varieties more suited for direct consumption instead of fermentation to make cider, according to Civil Eats. Some cider producers are now scavenging in the wild to rediscover old apple varieties much more suited for cider. South Hill Cider, in the US, is grafting and planting these varieties in its own orchard. Meanwhile, a jogger in Wiltshire, UK, was puzzled when he found a solitary apple on a wooden trackway. With the help of the Royal Horticultural Society, he discovered that the apple was a new variety which means he gets to name it. The choice is tricky and he explained: “My seven-year-old son wants me to call it Cristiano Ronaldo but that’s not happening. My wife, Hannah, is the apple of my eye, so she’s in contention.”

This summary was produced by ECRUU

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A Conversation with Andrey Sizov

 

Good morning, Andrey. Could you tell me a little bit about yourself and your company?

After leaving university, I worked for ExportKleb, which at one time was the largest importer of grain into the Soviet Union. My father, Andrey Sizov Sr, founded Sovecon in 1991, and I joined in 1998.

Sovecon is the oldest established firm in the Black Sea analysing and closely following agricultural markets – mainly wheat, corn, some barley and oilseeds. In addition to our regular reports included in sizov.report service, we also do multi-client studies. We are a small company – about five people in total.

What is the biggest issue in the Black Sea grain markets today?

Officials in both Russia and Ukraine have little faith in free markets. They don’t believe that price can balance supply and demand. They want to take administrative control of their domestic grain markets, primarily by limiting exports.

A few weeks ago, the Russian Ministry of Agriculture published a proposal that, if accepted, would limit total grain exports, including wheat, corn and barley, to 15 million mt for the current season. That tonnage was in line with expectations, and the market did not react.

Russian domestic grain consumers – flour millers, farmers and animal feed manufacturers – argue that export quotas won’t be enough to stop an increase in domestic prices.  They have written to the Prime Minister to ask instead for a tax on grain exports. They have requested the government set a threshold price in roubles, with a 50 per cent tax on anything above that threshold price.

I believe that both proposals are bad, but the second one will be tough to manage because of the currency risk between the threshold price in roubles and the export price in dollars.

How likely is it that the government will impose one or other of these restrictions?

There is a third possibility – that the government doesn’t do anything. I would rate the probability of export quotas at 60 per cent, export taxes at 30 per cent, and of the government doing neither, and perhaps proving some subsidies to local grain consumers, at 10 per cent.

The market is expecting export quotas; they are already in the price.  The market is not expecting export taxes; they are not on the radar. If the government introduced them, it would catch the market on the wrong foot; we could see a market reaction.

What about Ukraine?

Local consumers are also not happy with domestic grain prices and have written to the government to ask them to limit corn exports. The government has already imposed soft limits on wheat exports, but there are no set penalties if you over-export. If the Ukrainian government imposed rigid limits on corn exports, it would come as a shock to the market.

Exports have been the primary driver of the growth in the Russian and Ukrainian grain sector over the past 20 years, and I am afraid that restrictions on exports would be detrimental to further expansion. They could be harmful in the long term for everyone in the supply chain, farmers, traders and firms investing in sea terminals.

Going back to Russia, couldn’t traders get around the proposed system by declaring lower prices on their export contracts?

I believe that would be impossible given the transparency of prices all along the supply chain. However, it may mean that traders make sales basis FAS (Free Alongside Ship) rather than FOB (Free on Board), or that they ship more from the lower-draught ports in the Sea of Azov, which trade at a discount due to higher shipping costs.

When do you think any changes might come into effect?

The government may try to publish the necessary decrees by the end of this year for validity in 2021.

Isn’t this all part of the Russian government looking to take control of every aspect of grain exports? The state-owned bank VTB is already a significant terminal and port operator.

You shouldn’t confuse the two issues. VTB is majority state-owned, but it is in their interest is to maximise export flows through their infrastructure. The government may want, for domestic political reasons, to reduce exports. The two forces are opposing, not complementary.

Do you see Black Sea exports continuing to grow in the medium to long term?

Ukraine does not have much land on which to expand its grain area, but the country does have plenty of room to improve yields. Average wheat yields are around 4 mt/ha; this compares with 6-7 mt/ha in the EU. Wheat yields in Ukraine could improve to 5-6 mt/ha. As for corn, average yields are currently around 6-7 mt/ha; this compares to 10-11 mt/ha in North America.

Russia also has considerable room to increase yields. Global warming has been beneficial to Russian agriculture. Milder winters have meant that farmers could plant more area under winter, as opposed to spring, wheat. Average winter wheat yields are around 4 mt/ha compared to 2 mt/ha for spring wheat.

Russia also has a lot of area that they could bring back into production. Potentially, farmers could bring in an additional 300,000 to one million hectares into production every year. It will mostly be in the Volga Valley region, which has relatively easy access to the Caspian Sea. It will facilitate Russia’s exports to Iran, a significant wheat and corn importer.

There is also some potential for Russia to expand corn and soybean areas in the Far East of the country; Russia could become a significant competitor in Asia for Northern and Southern American farmers.

How much do you expect Russia and Ukraine to export in ten years?

We estimate that Russia, including Crimea, will produce 85.5 million mt of wheat this season. Our figure for Ukraine is 25 million mt. Aggregated production is 110 million mt. We could see that increasing to 150 million mt in ten years.

We estimate the total corn crop in 2020 at around 45 million mt (31 million mt in Ukraine and 14 million mt in Russia). In ten years, this number could increase to 60 million mt.

That additional production is likely to result in a substantial increase in exports. We expect local consumption to grow at a slower pace, something around 0.5-0.7 per cent annually.

There are two significant obstacles to this. The first one is the governments’ actions – we hope to see more freedom and less export control in both countries. Our industry doesn’t need subsidies, nor does it require state investment. All we need is the freedom to grow and remain competitive.

The second one is global warming – so far it has been beneficial for the region, but medium-long term things could start to change. It could put the southern areas of Ukraine and Russia in a risk zone with a higher probability of drought and crop failure.

We are possibly already seeing this. The 2020 crop was a disaster for many farmers in Odesa (southern Ukraine) and Kuban (south Russia) because of a lack of precipitation. The outlook for 2021 is rather grim again for Russian South after another dry autumn. This issue could be addressed by the rapid introduction of new drought-resistance varieties. Still, these new varieties are being developed with gene-editing methods which are officially forbidden in both countries.

Thank you, Andrey, for your time and inputs.

© Commodity Conversations ®

Jonathan’s book, ‘Out of the Shadows – The New Merchants of Grain’ is available on Amazon.

 

Commodity Conversations Weekly Press Summary

The Ivory Coast and Ghana – responsible for two-thirds of the global cocoa supply – implemented a USD 400/mt premium called the living income differential (LID) last year in order to avoid environmental and human rights abuse. However, they have been struggling with low sales since amid a drop in demand caused by the coronavirus. Moreover, the countries accused Hershey of bypassing the premium by buying unusually large amounts on the ICE exchange. In response, all of Hershey’s cocoa sustainability schemes in the countries were cancelled. The latest Cocoa Barometer report suggested that voluntary efforts so far have mostly failed at addressing issues in the cocoa industry. They call on governments to make food buyers liable for abuse in their supply chain. 

Voters in Switzerland were presented with a law that would accomplish just that last week. In what became the country’s most expensive voting campaign ever, the initiative proposed to make Swiss firms like Nestle and Glencore liable for abuse committed by suppliers overseas. The proposal won the popular vote, getting a 50.7% approval, but failed on regional grounds as a majority was not reached in most cantons – an unusual occurrence in Switzerland. Activists warned that Switzerland could fall behind the global trend, as France, Britain and Canada already have such laws in place while the EU is working on its own plan. 

In the US, lawyers are still debating whether a 1789 statute used to charge Nestle and Cargill over a forced labour case can be applied to corporations instead of only individuals. The Supreme Court heard arguments this week concerning the 15-year old case brought by former forced labourers in the Ivory Coast. The plaintiffs argued that the companies were complicit because they failed to properly monitor their supply chain and refused to pay a high enough price for cocoa. The court seemed to suggest that Cargill and Nestle could indeed be liable for breaking international law, although the evidence in this particular case was not enough to directly link the corporations with the practice of forced labour. Bloomberg predicted that Cargill and Nestle might get a “narrow victory” in the case.

In India, the government’s attempt to reform the farm sector was met by a wave of protest since three laws were passed in September. The government is looking to remove regulated wholesale markets and the need for middlemen by allowing private corporations to purchase food directly. Farmers, however, fear this will mark the end of the purchase of food crops at guaranteed prices. In addition, middlemen provide an essential service to farmers, often acting as the main source of financing. Officials are due to meet with farmers again this week but protesters threatened to maintain their blockade until the government guarantees to maintain the minimum price scheme. 

Food waste surged in Australia because of the coronavirus, according to the Rabobank 2020 Food Waste Report. Households were less concerned about food waste during lockdowns, while people stockpiled and ordered food through delivery services which led to nearly 13% of all groceries being wasted. 

Oysters producers on the East Coast of the US are left with massive supplies of unsold oysters because restaurants had to close with the pandemic. Household purchases of oysters are much smaller and many producers lack the licenses to sell directly to consumers. Nonetheless, the Nature Conservancy and the Pew Charitable Trusts stepped in and promised to spend USD 2 million to purchase unsold oysters. The organisations then plan to use the oysters to repopulate depleted reefs that have been suffering from overharvesting. 

The WWF has been busy trying to reduce the amount of waste in Singapore’s fish farm sector, where around 30% of the fish is wasted between producer and consumer. This involves improving processing methods and access to cold storage. Other groups noticed that 60% of the fish is often wasted when it is filleted. Activists created the Soup Spoon which uses fish offcuts to make soups, broth or chowder.

Foodstuffs, the owner of several supermarket chains in New Zealand, would call the process “upcycling food”. The group noted that just 17% of the food wasted in its stores was currently redistributed. By partnering with other food firms, Foodstuffs is now working to make its waste into more attractive offerings, such as beer made from old bread. Amazingly, the leftover yeast from the beer can then be used again to make more bread. In San Francisco, a pizzeria hopes to go even further and offer what it calls “trash pies”, pizzas made entirely from food waste. 

This summary was produced by ECRUU

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The Art of Growing Coffee

Coffee should be black as hell, strong as death and sweet as love. – Turkish Proverb

Coffee grows in tropical regions between the tropics of Cancer and Capricorn in what is known as the ‘bean belt’. Arabica generally likes higher altitudes of 550 to 1,950 metres (1,800 to 6,300 feet); anything above 1200 metres is ideal. Coffee grown below about 1,000 metres may be of inferior quality, although Hawaii is an exception. Robusta varieties prefer a lower elevation of 180 to 750 metres (600 to 2,400 feet) with warmer temperatures. Within those ranges, the altitude profoundly impacts the coffee. High elevation coffee will produce more acidic, aromatic and flavourful coffee; lower elevation coffee tends to have less acidity and a more muted character.

Coffee plants are evergreen shrubs that can grow up to 4-6 metres tall with broad, glossy leaves and white flowers. Older varietals take 3 to 4 years to bear fruit while recent varietals will bear their first crop two years after being planted out.

The fruit, the coffee cherry, ripens around eight months after the emergence of the flower. The cherries are harvested once they have changed colour from green to deep red. In most coffee-growing countries, there is one major harvest a year. A few countries, including Colombia, have a primary and secondary crop: the main harvest is from April to June and the smaller one from November to December.

Just as there are two main kinds of coffee, arabica and robusta, there are two main methods of coffee cultivation: sun-grown and shade-grown. Shade-grown coffee is the more traditional approach that mimics the natural way coffee trees grow in the wild, underneath a forest canopy. Farmers, particularly in Brazil, began growing coffee in full sun in the 1970s to increase yields and production.

Coffee trees growing in the shade of a forest maintain the forest’s biodiversity, particularly its wildlife, and shade-grown coffee often trades at a premium to full-sun coffee. However, the thick forest cover – combined with the steep mountain slopes where coffee grows – makes harvesting more difficult and costlier. It is much cheaper to produce coffee on open flat land, especially if it is mechanically harvested.

There are different degrees of shade-grown coffee production. Rustic shade-grown coffee is where the trees are planted in an existing forest with only the lowest levels of the original forest removed. Once planted, the coffee trees require little care and often no pesticides or herbicides. It is the least capital-intensive method of coffee production. It suffers from a low yield and is quite rare except in India and some of the western coffee areas of Ethiopia.

Traditional polyculture involves planting other (usually food-bearing) trees alongside the coffee trees under a natural forest’s canopy. Commercial polyculture consists of removing or pruning much of the native forest trees to allow sunlight to pass and to give space for the coffee and other crops to grow. The shaded monoculture system is where farmers plant and then prune a single species of tree to provide shade for the coffee trees, allowing them to be grown more densely.

Over the past half-century, growers have developed new sun-tolerant coffee trees and shrubs to combat disease (particularly rust-leaf disease) and provide higher yields. As a result, the percentage of coffee that is shade-grown has been steadily falling. The increase in global production over the past twenty years has almost all been full-sun coffee.  Shade-grown coffee fell from 43 per cent of the total cultivated area in 1996 to 24 per cent in 2014. It has almost certainly continued to fall since then.

Coffee is picked by hand in most countries. In Brazil, where the landscape is relatively flat and the coffee fields immense, the process has been mechanised. Mechanical harvesters strip-pick all the cherries from the trees in one go, whether they are unripe (green), ripe (red) or overripe (purple/black). Mechanical harvesting can stress and damage the trees, reducing the yield the following year.

Coffee is sometimes also strip-picked by hand, particularly the lower quality arabica or robusta varieties. Better quality coffees tend to be selectively picked by hand. The pickers rotate among the trees every eight to ten days, choosing only the cherries which are at the peak of ripeness.

Selective hand picking is more labour intensive and more costly; it is used primarily to harvest the higher quality arabica beans. Red berries, with their higher aromatic oil and lower organic acid content, are more fragrant, smooth and mellow. As such, coffee picking is one of the most critical stages of coffee production.

© Commodity Conversations ®

This is an extract from my book Crop to Cup – Conversations over Coffee now available on Amazon.

Commodity Conversations Weekly Press Summary

Cargill lost its number one spot on Forbes’ largest private companies list, the first time in 12 years. The group’s revenues rose about 1% last year, falling behind Koch Industries. Cargill’s CEO said that 2020 was a difficult year but that the company was well-equipped to handle the crisis, as shown by the steady revenues. Danone, on the other hand, announced it would have to cut its staff by 2% globally, which should help meet a target to save EUR 1 billion (USD 1.2 billion) by 2023 in response to the coronavirus pandemic. The company will also slash its product range by close to a third. The CEO of Olam forecast that it would take until the end of 2022 for the world economic growth to return to the levels seen before the pandemic. “We’ve come down an escalator, but we’re going to go back up the stairs,” he said. 

In the US, a new report argued that the food supply system had proven to be particularly vulnerable to coronavirus disruptions because of the high level of consolidation. Looking at the meat processing industry, it pointed out that the major groups were not only unable to supply enough food but also caused high levels of waste with thousands of animals that had to be put down. 

The pandemic is also exacerbating land inequality, according to a report by the International Land Coalition and Oxfam. It found that 1% of farming companies manage 70% of the world’s farmland and that the world’s poorest rural population only controls 3% of the world’s farmland. Similarly, the pandemic is having a disproportionate effect on minority-owned businesses. In the US, the National Bureau of Economic Research found that close to half of Black-owned businesses closed down as of May due to the coronavirus. In an attempt to counteract this trend, the Coca-Cola Company announced that it would be doubling its spending on Black-owned businesses to reach USD 500 million within the next five years. 

Looking forward, Cargill announced it was investing in and getting involved with Seventure Partners’ Health for Life Capital II fund. The fund, whose other investors include the likes of Danone, targets investments in microbiome innovations. Cargill says this will help it develop ingredient solutions with health and nutrition benefits. In the same vein, Singapore’s Temasek is setting up a new platform to fast-track investments in agriculture and food, with a focus on helping startups scale up production. 

An estimated USD 8.37 billion have been invested in the food technology space in 2020 so far, up from USD 7 billion in the whole of 2019, according to Finistere Ventures. Alternative proteins and ingredient refinement are some of the areas seeing an increase in investments, in part because the pandemic caused a surge in demand for premium products and plant-based meat. 

Beyond Meat launched plant-based pork in China this week, a mince meat designed to be used in Asian dishes. The company is also building two production plants in the country. A Bloomberg analyst warned that the plant-based pork market was already quite crowded in China, however. Besides, he argued that the country’s vegetarianism didn’t seem to be rising and that vegetarians were more likely to stick to their current options, such as tofu, rather than the more expensive plant-based meat imitations.

KFC is applying innovation elsewhere and has started delivering meals in China using self-driving vehicles. The company hasn’t made any statements but analysts guess this is the result of a partnership between KFC’s parent company Yum Brands and Neolix. In the US, ADM and InnovaFeed have tied up to build what will be the world’s biggest insect protein processing plant. The factory will be supplied with feedstock and waste by the adjacent ADM corn facilities. They expect the market for insect protein in animal feed will be close to 1 million mt by 2027. 

The US FDA announced that food manufacturers will now have to disclose the presence of sesame on labels with a cautionary warning. The House of Representatives passed a bill that would add the seed to the list of major food allergens. The 1.5 million Americans allergic to sesame will welcome the news, according to The Counter which reports that sesame derivatives can be found in all sorts of unexpected places, including a peach-flavored yogurt. There’s another good news for those who are big on spicy food. New research found that people who eat chilis are likely to live longer, even though they’re not sure why.

This summary was produced by ECRUU

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A Conversation with Michelle Deugd

 

Good morning Michelle, could you please tell us a little about yourself and how you ended up in coffee with the Rainforest Alliance?

I joined the Rainforest Alliance in 2008 and, throughout the years, I have managed a range of coffee projects in Latin America, Asia and Africa, focusing on the development of the Rainforest Alliance Certified coffee supply at the origin.  I am now the organisation’s sector lead for coffee.

Rainforest Alliance has merged with UTZ. Why?

Having a single certification programme will simplify certification for farmers and help companies to build more responsible supply chains and drive innovation more efficiently. Creating a single auditing process and streaming the certification process will not only help the more than 400,000 coffee farmers currently certified under both standards, but it will also help new farmers to certify.

It will also help to expand our advocacy efforts.

I understand you have a new strategy called ‘Reimagining Certification’.

‘Reimagining Certification’ is our long-term vision for the future of certification. It is part of our broader strategy at the Rainforest Alliance to drive change.

Certification has had a significant impact, but it must continue to evolve to drive further improvement for people and nature and provide more value for farmers and companies.

We are moving away from the idea that certification is a series of pass/fail requirements. Instead, we are adopting a continuous improvement approach that drives change from a set of core criteria.

What does this mean in practice? It means first ensuring that all workers receive a minimum wage – but continuing to drive improvements towards a living wage. It means working to stop deforestation–and then going beyond that, towards reforestation or regenerative agriculture.

Could you please explain the economic elements in the new criteria?

Our 2020 Sustainable Agriculture Standard outlines two financial requirements for the buyers of Rainforest Alliance Certified commodities: The Sustainability Differential (SD) and Sustainability Investments (SI).

The Sustainability Differential is a mandatory additional cash payment made to certified producers over and above the market price of the commodity. We don’t set the Sustainability Differential in the coffee sector; the grower and the first buyer will negotiate it between them.

The Sustainability Investments are mandatory cash or in-kind investments from buyers of Rainforest Alliance certified products to certified producers for the specific purpose of helping them meet the farm requirements of our Sustainable Agriculture Standard. The investments must go towards the needs identified by producers in their investment plans, and buyers must report the investments they make.

Besides these new criteria related to shared responsibility, our 2020 Sustainable Agriculture Standard also enhances practices which promote improved efficiency and farm-based profitability as the basis for an improved farm income.

How has the Rainforest Alliance changed its approach to child and forced labour?

Child labour, forced labour, discrimination, and workplace violence and harassment have never been – and will never be – tolerated by the Rainforest Alliance. However, what we have learned through many years of experience is that merely prohibiting these human rights violations in our standard is insufficient. Automatic decertification as the response to any incident of child labour is more likely to drive the problem underground, making it harder to detect and address. That’s why our new certification programme promotes an ‘Assess-and-Address’ approach to tackling these human rights issues.

The ‘Assess-and-Address’ approach puts the interest of children and workers at its centre. Without solving the root causes of child labour, forced labour, discrimination, and workplace violence or harassment, the problems will not go away. That’s why the Rainforest Alliance promotes collaboration between certified farms, governments, civil society and supply chain partners to solve these issues together.

How can you increase the demand for certified coffee?

Our market team works with brands, roasters and retailers to develop demand, and they have been successful in their work in the sense that both of our certification programmes have continued to grow since the merger. It has even been the case in 2020 in the context of the COVID-19 pandemic.

Besides that, you need to look beyond the data of one single certification system to get to the full understanding of supply-demand data. Many farms are double- or sometimes triple-certified. If they sell their coffee through one certification system, it is not available to sell through another certification system.

Last question: what is your favourite coffee, and how do you prepare it?

My favourite coffee comes from a sustainably managed small farm in the Tarrazú mountains of Costa Rica, at 1,700 meters above sea level. A young family manage the whole process from cherry to roasted bean, selling the coffee at the local market of the village where I live. I prepare it with a Chemex coffee maker to obtain the full flavour!

Thank you, Michelle, for your time and input!

You are welcome. Thank you for your interest in the Rainforest Alliance!

© Commodity Conversations ® 2020

This is an extract from my new book ‘Crop to Cup – Conversations over Coffee’ to be published shortly.

Commodity Conversations Weekly Press Summary

Eight years after negotiations first started, 15 Asian nations signed the world’s biggest trade agreement with the Regional Comprehensive Economic Partnership (RCEP). The treaty is considered by some as somewhat symbolic and excludes most agricultural products, although it does highlight a tilt in Chinese trade towards more regional partners. At the same time, however, China’s western trade partners have expressed frustrations at the claim that China detected coronavirus samples on the packaging of food imports. In response, New Zealand doubted claims that its frozen beef had signs of the virus. And the WHO and FAO repeated their findings that the virus does not appear to spread through food trade. 

The EU is hoping that a new US President would ease the trade tensions built up by the previous administration. Negotiations over the Transatlantic Trade and Investment Partnership (TTIP) have stalled but EU lawmakers said they hoped to resume talks soon. As a sign of goodwill, perhaps, a committee backed a proposal to remove EU duties on US lobsters. US lobster producers have been struggling to compete because of duties from China and the EU’s free trade deal with Canada. 

The situation concerning a potential trade deal between the EU and the UK does not look as promising, however. Tate & Lyle and Associated British Foods suggested that Northern Ireland could face supply issues in January 2021 because of the uncertainty surrounding Brexit negotiations. The current proposal does not outline how British goods will have access to Northern Ireland, as the region is due to remain in the EU’s single customs market. 

Fish and the protection of British fisheries remain one of the main issues blocking an agreement. An expert noted that the issue was relatively unimportant when measured in terms of economic impact as it only represents 0.08% of the UK’s GDP. The UK Prime Minister is not willing to make any concessions, however, because it is highly symbolic as it represents the UK’s ability to regain its territorial sovereignty. France, meanwhile, has a large fishing fleet and the French President promised to block a deal unless its fishermen are granted access to British waters. 

Speaking of fish, new research identified issues concerning the practice of focusing only on abundant species. Focusing on abundant species can sometimes have a significant impact on other species in what researchers called “indirect extinction cascades”. The fishing world is also unimpressed by China’s campaign to crack down on illegal fishing in the Yangtze River. China’s massive fishing fleet is currently doing a lot more damage to distant fish stocks as far West Africa and the Galapagos. Vessels have to keep going further as the once-abundant Yangtze River, Yellow Sea, Bohai Sea and East China Sea are all effectively considered depleted.

Aquaculture and fish farms have long been promoted as a more sustainable method to produce seafood but a series of dramatic farming disasters has made the practice unpopular with many activists. They point to issues like fish escapes, disease, antibiotic use, and waste as a way to argue that fish farms should be kept out of our oceans. Nevertheless, innovation has made the industry a lot more sustainable over the past few years. The FAO argued that wild fish populations cannot meet the growing demand for seafood and that sustainable aquaculture will have to step in. As of 2018, 46% of the fish eaten globally came from a farm. 

Some aquaculture innovations, like developing a more efficient feed based on microalgae, have been cheerfully accepted, while others remain controversial. In the US, for example, the FDA approved the first genetically modified salmon breeds in 2015 but the product is still not on the market because of legal challenges. The GMO salmon grows twice as fast and has been eaten by Canadians for years. A US court, however, ruled last week that the FDA failed to properly consider the long-term risk of GMO salmon before giving its approval. 

The rush to invest in the plant-based meat sector, meanwhile, continues. Unilever announced a plan to increase sales of meat alternatives five-fold to USD 1.2 billion in 5-7 years, while McDonald’s announced the launch of its own plant-based burger, uninspiringly called the McPlant. At the same time, however, the sale of traditional butter has been steadily rising over the past few years although consumption is not expected to recover to the levels seen before it had to compete with margarine. Nonetheless, butter’s comeback reflects the realisation that plant-based margarine is not necessarily healthier, while an increase in disposable income makes butter a viable option despite its higher price. 

This summary was produced by ECRUU

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