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I recently chatted with Dave Behrends, the Founder and President of Farmer Connect. I asked him how it all started.

In 2017 I attended a coffee conference in Medellin Colombia. Professor Jeffrey Sachs, an economist from Columbia University, got up on stage and told the audience,

“Every day I go to a famous coffee shop and pay $1.95 for my medium sized black coffee, but how much of that $1.95 actually goes to farmers? The answer is five cents.”

The conference descended into chaos, with everyone arguing as to whether the coffee chain makes too much money, and why the farmers don’t make enough. But what was lost – and it was this that personally inspired me – was the second statement that Jeffrey Sachs made. He said,

“If as a consumer I was given the option to pay $2 for my coffee instead of $1.95, but I was sure that that the extra five cents would go back to the farmer, or back to the farmers’ community to either double their income or really significantly improve his livelihood, I would gladly pay that extra five cents.”

That was a light bulb moment for me. I realised that he was right. Consumers would be willing to pay a little bit more as long as they could trace that money flow back to farmers and their communities.

And has that vision now come to fruition?

Yes, it has. Farmer Connect currently offers three main components, or solutions: the first is Farmer ID, the second is an Enterprise Blockchain Solution; and the third is Thank My Farmer.

Farmer ID gives each farmer a self-sovereign digital identity that stores two types of credentials: one transactional and the other behavioural (in terms of sustainability). Having the transaction and the behaviour on the platform creates a trust score and a credit score that micro-finance institutions can use to determine the farmer’s credit worthiness.

In addition to the transactional and behavioural credentials, Farmer ID also has a link to digital wallets, bank accounts or other means of payment.

The Enterprise Blockchain Solution is the second component of the scheme. It records two types of data: prices paid at every stage along the supply chain, as well as what we call ‘the journey of the product’.

Thank My Farmer is the third component. It will allow a consumer to scan a QR code on his cup, or bag, of coffee and immediately see the journey that product has taken.

It will allow consumers to contribute to social projects in the farmer’s geography or to make a donation directly to the farmer who grew the coffee.

Do you think that consumers will use the Thank My Farmer app to tip a farmer in the same way that they would tip a barista?

I think there are consumers who will engage. The millennial and post-millennial generations may be a little bit more inclined to do so compared to older generations. Also, some countries have more of a tipping culture than others, so it could vary by geographies.

But we don’t want to limit it just to that. We’re speaking with brands who are saying that they want to give money to sustainability projects, and they want to allow their consumers to choose which project to support.

How will Farmer Connect increase farmer revenues?

Farmer Connect will enable consumers to engage in a new way with the supply chain and allow them to know that every cup they’re drinking is positively impacting the lives of the farmers who produce it. Once that happens, we believe that consumers will be willing to pay more for their coffee, and probably drink more.

This changes the game for everyone. Instead of fighting over whether the brand owner or the retailer make too much and the farmer make too little, we’re going to grow the whole pie. And as we grow that pie we will make sure that the farmers are getting a more than equitable share of it.

I believe that you are currently raising money.

Yes, we are going through a series A fundraising, looking to raise US $10 to 20 million, and we envision bringing in three to seven investors.

We’ve purposely gone out of our way to turn down Venture Capital and Private Equity money. Even if it means that we have a lower valuation we’ve put most of our focus on finding industry partners. We really believe that this should be done by the industry for the industry.

Dave, thank you for your time and explanations, and I wish you every success with the venture.

To see Dave’s latest blog on child labour click here.

© Commodity Conversations ® 2020

I met recently with Nicolas A. Tamari, the CEO of Sucafina. I asked him about the geographical spread of his business.

We are in the top five of global coffee traders. One out of every 20 cups of coffee drunk in the world comes from Sucafina. That is a big number, but we look more at profitability than at volume. We say that ‘volume is vanity, profit is sanity and cash flow is reality’. We look to be profitable, not to fight for market share.

We source about one third of our coffee from Africa, one third from the Americas, and one third from Asia. Historically we were more of a robusta based company, but in the last decade we’re now doing more arabica. The majority of our business is now arabica.

Our strategy in the next five years is to build in Asia in terms of both origination and destination. A couple of months back we acquired a specialty coffee merchant operating in Hong Kong, Australia and New Zealand. It used to be called MTC, which stood for Mountain Top Coffee, but has been rebranded as Sucafina Specialty.

Who owns Sucafina today?

The company today is owned by the family and by the management. We believe that commodity trading companies should be owned by the management. It’s a people business. We are about one thousand employees in total in the company.

We encourage key people to become shareholders. To become a shareholder, you have to have worked for the company for a minimum number of years, to share our values, and to contribute to the bottom line financially.

Why are coffee prices so low and do you see any relief for growers in the near future?

Prices are currently low because the Brazilian Real is low against the US dollar. Brazil is the largest producer and exporter of coffee, and the low Real gives producers there a reasonable return.

As you know in coffee, we have two exchanges: one in New York that trades arabica and one in London that trades robusta. They are two different qualities. To make an analogy, they are like red wine and white wine.

The contract specification for the New York contract is washed arabica. Brazil mainly produces natural Arabica, which means that the vast majority of Brazilian coffee cannot be tendered on the Exchange – even if it still trades on that Exchange.

It’s a little bit like the cotton anomaly of a decade or so ago. You remember how most of the cotton in the world cannot be tendered against the futures market. It has to be US origin.

We have a similar phenomenon in coffee now where most of the physical coffee trades against a market where it cannot be delivered. I believe that this technical situation in itself will lead to a rally in prices.

In addition, even with the Coronavirus I am confident that coffee consumption will keep growing in the decade to come.

So yes, I believe we will soon have a rally, and that the New York market will reflect the fundamental tightness in washed arabica coffee.

If the New York contract is washed arabica while Brazil produces only natural arabica, why doesn’t Brazil just wash the coffee and make it deliverable?

Less than 10 percent of Brazil’s arabica coffee can be washed in Brazil. That 10 percent can be delivered on the exchange. Traditionally – for the last hundred years or so – the Brazilians rarely washed their coffee. The majority do not currently have the infrastructure to wash it, and it would need substantial capex to build it.

Do the futures markets in London and New York work well?

Both are liquid. Both set prices correctly.

But as I mentioned, most of the coffee traded against the New York Exchange is not tenderable. This results in a de-correlation between physical and futures prices in terms of the basis, which we call the ‘differential’.

Historically differentials were not particularly volatile, except for Colombia in 2009 when we had a weather problem. Recently differentials have become more volatile leading to a total de-correlation between physical and futures.

Right now, we’re currently living with a scenario where washed arabica coffee is trading at the massive premium to the underlying futures. There is a shortage of washed arabica coffee, but an excess of natural arabica coffee.

So, what would stop someone taking delivery of New York and getting the washed coffee?

That’s what’s happening as we speak and that’s why I believe the market will rally.

Thank you, Nicolas, for your time and your insights.

© Commodity Conversations ®

This is a short extract of an interview that I plan to publish in full in my new book Merchants and Roasters – Conversations over Coffee – hopefully out at the end of this year.

While the rest of the world is stockpiling toilet paper, California is buying marijuana. Sales from licensed retailers have spiked in the last week as users worry about future shortages and a lockdown. 

Unfortunately the spike in marijuana demand is having no effect on the price of hemp; it has fallen by 90 percent or so in the last few months.

Although the same plant, hemp is different from cannabis in the amount of the psychoactive substance THC (tetrahydrocannabinol) that it contains. Hemp plants contain no more than 0.3 percent of THC, while marijuana typically contains 5 to 20 percent THC. This means that cannabis plants with 0.3 percent or less of THC are hemp, while those with more than 0.3 percent THC are marijuana.

I talked with Charlie Stephens, the only hemp trader I know. Having started his career with Gavillon, Charlie, together with his brother Watt and fellow partner Jack, now runs Halcyon Thruput, a hemp drying and processing operation in Hopkinsville, Kentucky, that was recently acquired by Generation Hemp.

The hemp harvest kicks off mid-October and goes through to early December. Charlie told me that once harvested, hemp has to be processed and dried within a couple of hours; if not it starts to combust. His facility works 24 hours a day during the two months of the harvest, with farmers allocated two hour slots in which to deliver the crop.

“The primary product that we are left with after drying,” he continued, “is the biomass from which the CBD oil is extracted. The co-product of that process is bast fibre, the stock and stem material that can be used for fibre for clothes.”

The number of US acres under hemp has increased 100 fold (to 146,000 according to the USDA) since the crop was first partially legalised in 2014. (It was finally fully legalised in the 2018 Farm Bill.) That acreage increase has been driven by two factors: first, the US farmer’s need to diversify away from traditional crops that weren’t paying the bills; second, the expectation of a sharp increase in hemp demand for the production of Cannabidiol (CBD) oil.

Although CBD oil made from hemp contains virtually no THC, it is still believed to have a number of health benefits such as anxiety and pain relief.

“All the soft drinks and food companies had been expecting FDA approval for their products,” Charlie told me, “but the FDA came out and said they weren’t going to do anything, that they were sceptical of the health benefits of CBD, and that they wanted to do their own testing. That really threw a wrench in the market.

“Prices were $60-70 per pound last year, and have now fallen to around $6 per pound. The expected demand spike for CBD oil has not happened, and farmers are left with no choice but to sell their hemp for fibre and seeds.

“I believe that CBD demand is still growing,” Charlie told me, “but there is a lot of noise in the market and we all struggle to keep track of it. The big health companies are doing some serious testing as to health benefits, so we could have some progress there.

“I really believe that hemp will eventually develop into a mainstream commodity. It is an easy crop for farmers to grow. It is pretty much organic. It requires less water than cotton. It acts a sponge in the soil, sucking up all the heavy metal content, and for the lack of a better term it cleans the soil, which means it is nice plant to add into your rotation.”

“So you are bullish for the future?” I asked him.

“On the demand side the clothing companies want to trial it, to blend it with cotton. The clothing brand Patagonia recently announced that they will be making hemp blue jeans.

Meanwhile, Hempcrete is really taking off and there is a lot of potential for it as a building material. The cement industry is the second biggest GHG emitter in the world, and hempcrete is an alternative.

“One problem is that there is little infrastructure in the middle of the supply chain, and no one wants to build capacity without greater certainty on both ends. Another problem is that hemp has to be cheaper to compete. Production will need to be mechanised, industrialised and done at scale.

“I have just got back from Colombia where the government is encouraging farmers to switch from coca to hemp. Because of its climate, Colombia can grow hemp year round, which means that the industrial infrastructure can be used year round. This obviously reduces costs enormously. So I am particularly bullish on production in Colombia.

“As for the US market, it is difficult to find liquidity. Panxchange are doing a good job both as a trading platform and as a PRA (Price Reporting Agency), but a lot of the time no one has any idea as to what the price should be. And when you do find transparency the bid / offer spreads are massive.

“I believe that there is a huge opportunity for some of the bigger trade houses to get involved, but so far they are hesitant. Maybe they need more transparency and liquidity to get involved. It is a chicken and egg problem. They are waiting until the market takes off, but it will be hard for it to take off without them.”

PS If you would like to talk to Charlie directly, please contact me using the feedback or comments buttons, and I will put you in touch.

© Commodity Conversations ®