Alternative Trade or Better Trade?

Alternative Trade or Better Trade?

By Ed Canty

I don’t like the term “alternative trade.” This might seem odd, considering I work for an organization that is considered an alternative trader. However, I feel that calling this philosophy of trading by that moniker limits its potential.

For one, it implies that the issues facing coffee producers can be solved with only a minority of their crops sold at an equitable price. In truth, grower organizations require consistent prices across all of their yields to improve their livelihoods. From a producer’s perspective, alternative trade can only solve part of the problem.

Secondly, the term separates alternative traders from the industry we are very much a part of. The producer cooperatives I work with show up in many of your commercial, certified, and direct-trade supply chains whether you know it or not. The same is true for other importers and roasters who describe themselves as alternative, direct, relationship, and mission-driven organizations.

The term I would prefer to see used is “Better Trade.” Better Trade invites everyone in the value chain to participate in the conversation. It acknowledges that we are part of a larger solution. Ultimately, Better Trade is a challenge to secure quality coffee while addressing the issues facing the sustainability of producers and our industry.

I have spent the past 17 years working with fair-trade coffee cooperatives and negotiating contract terms. And while grower cooperatives do not represent the industry’s entire supply base, they are a powerful and efficient aggregate of producers for buyers to engage with. Estates and exporter-led groupings of smallholder producers have equal presence in our industry, and face many of the same issues. However, working with grower cooperatives is the experience and context I can speak from, and the foundation of my definition for Better Trade.

I use the term “buyer” to represent any exporter, importer, roaster, or wholesaler. It is not necessary for every roaster to be involved in every step I describe, however, they need to ensure that their interests are represented throughout the chain. Roasters hold enormous responsibility in pushing their supply participants to reach a higher standard.

What is Better Trade?

Better Trade is built on a foundation of holistic business practices. Rather than externalizing costs for perceived savings, Better Traders address counterparty risk, equitable pricing, long-term relationships, and sustainability at the negotiation table.

Counterparty Risk

In any industry a buyer will tell you their job is to find the right price, not the cheapest price. Overpaying makes you less competitive in your market. Underpaying puts your contracts and supply relationships at risk.

Better Traders understand that this is not so straightforward when negotiating with producer partners. Many grower organizations have decades of experience working with buyers whose behavior is to move to a cheaper supply source when regional price volatility increases their costs. These changes in buyer behavior can be sudden and devastating, causing producer organizations to approach negotiations as victims rather than partners. The question becomes “What price will they give me?” rather than “What price do I need?” This is never a successful start to a principled negotiation, forcing producer groups to cut services, speculate in the market, and operate at a loss to maintain their relationships.

Better Traders work to create trust with their supply chain, understand the true costs of producing coffee, and highlight risks associated with delivering on contracts. Clear policies regarding contract terms and the process of awarding new business help maintain this trust. Multi-year volume commitments, consistent face-to-face engagement, and adding a producer organization’s name to consumer-facing packaging can reinforce a buyer’s commitment to stay at the negotiation table and work through issues. Better Traders build tools to approach the negotiation table as equals.

Equitable Pricing

Better Traders understand pricing must meet the specifications of the contract, build the resiliency of their supply base, and support producer livelihood. In building trust with your suppliers, you must be open to what they tell you about their costs in order for production to be sustainable.

Discussing certifications is not a focus of this article. However, I do want to mention a few of them as excellent resources to help Better Traders to evaluate costs of sustainable production. Fair Trade certification conforms to a standard maintained by Fairtrade International (FLO), nearly half of whose board is comprised of producer organizations. Small Producer Symbol (SPP) certification works from standards set by a cooperative of producer cooperatives. Regardless of labeling, both these organizations provide producer-led guidance on pricing to the industry through their standards, and are utilized by Better Traders to support their purchasing decisions.

Equitable pricing always needs to include a minimum price that covers the cost of sustainable production. Producer groups signing contracts that could fall below their cost of production are a huge risk for both buyer and seller. Better Traders also realize most producers’ groups experience competition in collecting coffee in a higher C market. Therefore, contracts in higher markets must offer pricing above the minimum to secure coffee. This does not preclude Better Traders from using futures and options. On the contrary, using financial tools in conjunction with a minimum price creates unique opportunities to manage price volatility for both buyer and seller.

Relationships are an Investment

screen-shot-2016-12-06-at-10-08-54-amBetter Traders realize relationships are the cornerstone of their business, and approach contracting as an investment in a producer organization and their future coffee quality. Relationships are key to improving livelihoods, leading producers out of abject poverty, and improving opportunities for the next generation. Relationships are also important in developing scalable infrastructure that will deliver quality coffee over time, and assure buyers access when supply is scarce.

This does not mean all relationships should be maintained regardless of contract performance. Investing in producer infrastructure that does not successfully collect, process, and price the producer’s coffee is helping no one. However, not considering long-term investment in a relationship when making purchasing decisions is extremely shortsighted.

Sustainability

If there were more Better Traders in our industry, there would be less need for sustainability projects and corporate social responsibility funds. The bottom line is these programs reinvest profit margins back into the supply chain, and are commonly separate activities from purchasing. Considering all factors, it is more efficient for a buyer’s organization to address the complete relationship in the negotiation, and allow producer organizations to manage their own livelihoods with an equitable income.

While this is the goal, I do not suggest roasters and importers stop funding supply-chain projects outside of their trade relationship. Climate Change, geopolitical volatility, lack of rural infrastructure, and decades of lower-than-sustainable-production pricing have eroded many producer organizations’ abilities to solve their problems through trade. However, if pricing structures were to support soil, community, and infrastructure development, we could move away from the burden of running sustainability projects, and efficiently empower producer organizations to address issues themselves. Better Trade relationships support this vision and highlight that buyers are not merely part of the solution, they are the solution.

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By redefining this article around Better Trade instead of “alternative” trade, I hope to highlight best-in-class buying practices that support a sustainable vision of our future. While our industry is making huge advancements in our understanding of sustainable supply chains, too often these discussions are separate from procurement work. That needs to change. To start this conversation and summarize Better Trade down to one metric, I ask you this:

What percentage of your purchases are from producer-group relationships you have maintained for three years or longer?

A healthy, growing organization will never maintain 100 percent of their purchases from long-term partners; buyers are always developing new relationships. However, continually reviewing this metric will keep us all honest about staying engaged with producer organizations, either directly or through our supply partners.

ed-canty-fEd Canty is the general manager of Cooperative Coffees. His coffee career began two decades ago in a Portland, Maine coffee shop where he learned the craft of roasting and the pleasure of customer service. This led him to Green Mountain Coffee Roasters’ cupping lab in Waterbury, Vermont. His interest in coffee quality and growing communities started a 15-year career as Green Mountain’s Fair Trade and Organic coffee buyer. He values transparency, principled negotiations, intelligent system design, and innovative holistic agricultural practices that improve quality and producer livelihoods through trade. Ed is a licensed Q grader and lives in Vermont with his partner Christe and children Asher and Emma.