The Global Coffee Value Chain
Like in many commodities, the coffee value chain too starts with a large number of growers that produce widely different quantities and qualities of coffee. In the case of coffee, there are around 25 million farmers globally, of which around 500’000 in Colombia alone, mostly smallholders. The beans reach global markets through a series of activities and processes that make them suitable for incorporation into industrial operations, including processing at the mill, packaging into coffee bags suitable for export, and transportation.
The Coffee Value Chain
The coffee value chain is extremely complex, opaque and it involves a lot of hands. The figure below shows a view of the value chain, depicting all the main actors involved between the production and the consumption of coffee. One additional step that is not shown in the figure is the potential storage and warehousing of beans, which may occur at almost any stage of the chain, and may either involve third parties or may be taken care of by the same players shown in the chain.
1) Producers. Grow and process coffee, often with the use of third parties that do the fieldwork and help them with all matters in the farm. Growers have the possibility to sell their crops in cherries, wet coffee, or in parchment. Producers can sell coffee directly, to local traders, to exporters at farm gate, to (or through) cooperatives.
2) Mill. The processing mill is where the parchment is removed from the bean. A coffee bean has 5 layers of skins of different thickness and parchment is the last one. The process of removing the parchment skin from the beans is called coffee hulling and the resulting crop is called green (or raw) coffee, which is packaged into bags ready to be roasted, sold or shipped.
3) Brokers/Commodity Traders. Buy and sell coffee at different stages of the value chain. They also trade coffee through a variety of financial instruments, mostly futures, impacting the price of the crop on international markets. Up to 40% of all coffee trades proceed from financial transactions.
4) Transporters/Shippers. Deal with the transportation of the crops; physically move the beans on the road, by plane, or by sea.
5) Exporters. Buy coffee directly from farmers, from cooperatives or from local traders. If necessary, exporters may also take care of the hulling coffee process according to the specifications provided by the importers. They also take care of the domestic logistics, financing, and can sell it Freight On Board (FOB) at the port of origin.
6) Importers. Trade green coffee beans and bring them to the market for blends or single-origin, depending on the requirements of roasters. Importers may also deal with the financing of the crops, logistics and procurement at origin.
7) Roasters. Buy green (i.e. unroasted) coffee beans and roast them according to the tasting profile that appeals end consumers. The type of roasting applied to the coffee (e.g. light, medium, dark) strongly depends on the local market where the coffee is to be sold.
8) Packagers/Distributors/Retailers. Buy roasted beans or grinded coffee from roasters, store it and have it ready for selling, normally in national markets.
Challenges in coffee production
Coffee is one of the most widely consumed beverages in the world, and not only plays an important part in the daily routines of a significant share of the world population, but it also has a significant social and economic impact for the families that produce it, who are mostly smallholder farmers running plantations of less than 5 ha.
Currently, coffee is primarily bought and sold as a commodity crop –meaning its sale value is tied to international futures markets. Low and volatile prices of green beans are not the only challenges that small growers face. Other economical issues include limited market access for producers, lack of product and market information, and exchange rate volatility.
Additionally, apart from the unequal income distribution, coffee growers are bearing most of the industry risks. In addition to the price volatility and exchange rate risk, producers must also shoulder the risk of losing their crops due to bad weather and to fluctuating costs of production. Hence, producers are often the weakest link in the coffee value chain. While they shoulder most of the industry risks, within the value chain they extract the least value from their economic activity.
Towards a new model
Coffee is a business for anyone involved in its value chain; it is a business for farmers as it is for roasters, importers and exporters. The goal of farmers is a reasonable profit, not the aid, not the charity, not to be at the center of social programs. In the end, farmers are just another value-chain business partner and should be treated and rewarded accordingly.
The entire coffee value chain needs to be reinvented to become more efficient and able to generate win-win economic transactions even for the weakest players in the chain, the producers.
We believe that the first step towards doing so is to bring transparency into a complex, opaque and closed value chain.
Blockchain & Coffee
The application of blockchain technology to the coffee industry can overcome some of the challenges described previously and provide a way to tackle the imbalance in the coffee value chain highlighting a path that leads to creating a more balanced and sustainable industry while simultaneously creating additional value in both producing and consuming countries as well as at the consumer end.
The first step towards making the coffee value chain more sustainable and inclusive is to bring transparency into a complex, opaque and closed value chain.
Read more about it in our blog.