January 13, 2021

Direct Trade In Specialty Coffee: Is It An Effective Model?

Direct trade is a coffee trading model that offers the promise of a stronger value chain achieved by minimising the number of intermediaries. It is a concept that is heavily linked with the ideals of third wave coffee culture, often described as a tool used to enable “relationship coffee”, which is where the producer and buyer are directly connected to improve transparency, traceability and quality. 

Cutting out the traditional “middleman” buyers and sellers to improve direct communication and maximise profit at both ends makes sense, and sounds great in theory. However, in practice, direct trade isn’t always that straightforward and more often than not, producers bear the brunt of its shortfalls if it fails.

To get a better sense of how direct trade operates today, I spoke to Ricardo Oteros from Supracafé, Connie Kolosvary from Café Femenino, and Blanca Castro from the International Women’s Coffee Alliance. Read on to find out what they said.

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What Is Direct Trade?

Direct trade started as a term used by coffee roasters to describe the practice of buying straight from producers, which is intended to eliminate the traditional role of the exporter and importer. 

It is a way of trading coffee that focuses on a direct relationship between producer and buyer to improve communication, quality, transparency, and sustainability.

Direct trade first came about in response to the traditionally segmented coffee supply chain, which has historically been criticised for low transparency and traceability. While things are changing, in the traditional model, coffee producers have less negotiation power, less profit, and find it more difficult to engage with quality control or sustainable production systems. 

This disconnected supply chain also widens the rift between producer and consumer, which can lower the chance that coffee is sourced ethically.

According to Ethical Coffee, proponents of direct trade claim the model builds mutually beneficial and respectful relationships between buyers and individual producers or co-operatives. Some roasters may also choose to do so because they want to have more control over any one of a number of variables; this ranges from the quality of the coffee to social issues and environmental concerns at origin.

It’s important to remember that direct trade is an approach, and not a certification. This means that when you see “product of direct trade” labels on coffee packaging, it doesn’t necessarily mean that no intermediary was involved; just that the buyer or roaster has direct communication in some capacity with the producer. Some roasters avoid using the label completely to avoid confusion, while others interpret and apply it more freely. 

Ricardo Oteros is the President and Director General of Supracafé, a large Spanish roaster. He says it’s quite rare to come across a “true” direct trade model. “There are always people in between,” he says.

“[Through direct trade models], the producer and the consumer discuss price and quality, but no one [I know] can say they are buying ‘straight’ from the producer. 

“I don’t know any small producers [handling] the export process by themselves. They always need someone to help.” 

A High-Maintenance & Often High-Risk Business 

Direct trade requires both producers and buyers to have access to certain skills and resources in order to function effectively. Without these, the transaction can easily go haywire and both sides will be left exposed and vulnerable. 

Additionally, because the direct trade model is far from the status quo of coffee trading, it subsequently lacks pre-existing regulations and frameworks to protect the parties involved.

The Risks

Many issues can arise when two small businesses take part in unregulated trade. Some of the key risks associated with direct trade include:

Contract & Payment Issues

With less regulation and a lack of standardised contracts, the risk of default on both sides is high. This means the producer can end up unpaid, and the buyer can end up without a product.

Unreliable Delivery Or Quality

The coffee itself may fall short of expectations and without regulations, there is no safety net. This means both producer and buyer can be put at financial risk. 

Unmanageable Bureaucracy & Logistics

With fewer parties involved, the responsibility of managing demanding paperwork and complicated logistics is left to be covered by each of the two actors. It is often the case that one or both will lack the skills or resources to handle this extra workload.

Less Formality

The focus on relationships can sometimes lead to informal practices and a lack of rules, organisation, and accountability. It also means that if management changes, handover becomes more difficult. 

Reduced Flexibility

Generally, the smaller scale of direct trade usually means that the size of operations (and therefore the resources and financial liquidity) are more restricted. This means that both producer and buyer have less capacity to absorb risk if something should go wrong.

The Gaps

Direct trade requires time and effort. However, for many, the skills, resources, and information required mean the return on investment is sometimes not worth it.

Connie Kolosvary is the director of Café Femenino with Organic Products Trading Company. She identifies the following “gaps” that both producers and buyers can suffer from.

Size Of Operation 

In direct trade models, if the production capacity is low, there may be low product diversity, as is the case with many small producer groups. This increases risk dramatically for the producer and the roaster.

“It can be a fragile position,” Connie says. “More production venues and more buyers make both sides of the equation stronger if either the roaster or the producer cannot fulfil their commitment.”

Activities are also rarely scalable, and low buying or selling capacity may simply end up not being worthwhile for either side. Furthermore, buying small quantities from origin is generally more expensive and shipping costs alone can eat into the profits.

Financial Literacy

“Small producer groups are made up of many individual farmers who may or may not have the resources to advocate for themselves,” Connie says. “A lack of knowledge about the coffee market, for instance, can be a serious obstacle for negotiations unless the organisation has someone in place with those skill sets.”

An understanding of other topics, such as supply chain operations, financing, pre-financing, risk, and liquidity (all crucial to trading any commodity) are even less accessible to many producers and roasters who operate at a smaller scale.

Communication

Producers are often at the mercy of a “digital divide”. Unreliable internet access and bad mobile phone reception can make communication very difficult. 

Language and cultural barriers are also common obstacles for both sides and can be a major source of problems.

Market Network

“It is very difficult for a single small-scale coffee farmer in a remote community in Peru to reach out and find business directly with a small-scale roaster in say, Seattle, without some assistance,” Connie explains.

Smallholder farmers often lack a network in the coffee market and the tools to improve it, which often include the use of social media and the internet more widely.

There are similar difficulties for roasters, too. Building a global network of producers that are trustworthy and offer quality, certifications, and prices in line with their expectations is no easy feat. 

For Direct Trade To Work, What Do You Need?

For it to work, the gaps outlined above need to be addressed. However, beyond that, Connie says there are a few “non-negotiables” that need to be present if the direct trade model is to operate effectively.

Firstly, she says: “For [good] business, you need great communication.” She recalls that Café Femenino previously worked with a group of Bolivian producers. However, she says: “Suddenly, the cooperative leadership changed and [many of the skill sets they had] left with them, so the coffee sale was lost and it hurt the producers.”

Skills like how to send an email, organise pre-financing, and review a contract had to be relearned by the new leadership. “It took a couple of years to get back on track,” Connie explains.

Beyond these key skills, the ability to communicate about the product being traded is also essential. However, this generally requires a deep understanding of coffee quality, production, processing methods, and certification schemes, which are not always a given for many smaller roasters and producers. 

For the buyer, there are a further range of similarly important skills which need to be in place. Systems for importing logistics, certifications, and a group on the ground for export logistics like trucking, milling, and storing are also a must. There also needs to be at least one single person allocated to handling logistics, quality control, pre-financing, invoicing, insurance, and communication, according to Connie.

“It takes a dedicated crew,” she says. “What roaster wouldn’t want to get on a plane and fly to East Africa and walk through a coffee farm? It’s a great experience for those who have the network and resources to make it work, but to get the coffee from the farm to the roaster is something quite different.”

The “Middleman”: Obsolete Or Indispensable?

Over the years, coffee traders have come under criticism for their role in the supply chain, which some have come to view as unnecessary. Direct trade came about as a response to that: an idea that the middleman could be removed to improve profit and relationships for everyone else.

But perceptions – and roles – are changing. Blanca Castro is a Chapter Manager at the International Women’s Coffee Alliance (IWCA). She says: “Exporters and importers understood that with better quality comes a better price, and now so do the producers.” 

In theory, direct trade allows a dialogue that enables producers to understand and improve the quality of their product – and ultimately get a better price. However, buyers and producers both need the knowledge and communication skills required to have a highly technical conversation about coffee. That’s where the traders come in.

Intermediaries also have the skills, network, and capacity for risk which may not be available to producers or buyers. Blanca asks: “Without the middleman, who will take cherries from a producer in Huehuetenango in the highlands of Western Guatemala?”

Connie says that during Covid-19, this became especially pertinent. “When coffee shops shut down in March here in the US, it was right as the new crop was getting ready to come in.

“The shutdown caused a month-long pause in the US supply chain, and the coffee had nowhere to go. Thankfully, because we are diversified, we could shift it to other places where shops were still open, and our roaster clients also adjusted by selling more online, but there was still lag time.

“We were able to shift things around and keep everything moving because of the diverse range of roasters we sell to… however, if a single roaster were to experience that situation, the impact of the delay [on the producer] might have been much deeper.”

Ricardo says that transparency and good relationships are the truly transformative elements of the direct trade model, rather than eliminating intermediaries.

“The middlemen are necessary,” he says. “To the buyer, they offer local information about the producers, the qualities available, market prices, harvest times…. for the producer, they offer trade and financial knowledge, warehousing, packaging, logistics, and a buyer network.”

Each supply chain actor has its own strengths and weaknesses. Producers know the land and the process of growing coffee. Roasters excel at adding value and unlocking the quality within green coffee. Traders are experts at managing risk, planning logistics, communication, and bringing a network of buyers. Ultimately, each actor brings a unique set of skills to the table.

Could A Hybrid Model Work For Everyone?

Both Connie and Blanca insist that the relationship and dialogue that characterise direct trade are crucial to trading coffee. They offer a valuable education at both ends of the supply chain that enables better trade and better coffee.

If traders are necessary, then they need to target the same level of traceability and transparency in negotiation – pointing to the potential for a hybrid model.

Blanca says that today, modern roasters prefer to meet the producers, monitor their situation, and understand the origin. Even though they still need intermediaries to handle the logistics of it all, she says for her, it is still a form of direct trade.

“To me, an important part of Cafe Femenino’s sourcing model is relationship and transparency,” Connie adds. “That’s why many people like the idea of direct trade, but we have always offered that level of participation with producers for our roaster clients.” She explains that a hybrid direct trade relationship connects roasters to farms without asking roasters to take on the risk of importing themselves.

While the idea behind direct trade started with eliminating intermediaries, today, the focus is starting to shift towards a focus on good dialogue and high transparency. Education is an incredibly important topic in the coffee sector, and by focusing more on the way coffee is traded and less on how long or short the chain is, everyone can benefit.

Blanca finally says that today, direct trade isn’t about cutting out the middleman, but instead, putting supply chain actors in the spotlight and putting the right value on that service, without exploitation. She says it’s about aligning mentalities and increasing transparency to improve sustainability. If we can do that, surely everyone can benefit – producer, trader, roaster, and consumer.

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Photo credits: Sarah Charles, SupraCafe, Oscar Jimenez

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