78. Perspectives on Recent Reports on Farm Profitability

Nov. 27, 2017

An undercurrent of discussions and meetings related to cost of production and farm investments has been on-going in the specialty industry for at least two years, maybe longer. It was 2015 when I first read Chad Trewick's elegant article about cost of production in Specialty Coffee magazine. By 2016 he had organized conference calls for the SCAA's Sustainability Council to learn about cost of production from a consultant, Christophe Montagnon, president of RD2 Vision. I felt fortunate to participate as a guest on one of those calls. Chad understood my curiosity as a grad student writing a masters thesis on this exact topic. Later in 2016 Montagnon's report was available, and just last month a revised and finalized version of the "Farm Profitability" report was introduced to the world by the SCA at the Avance conference in Guatemala. Now comments are reverberating such as the recent "Perspectives" blog post by Kraig Kraft, technical advisor for CRS, which was re-published in Daily Coffee News.

I would like to add to these comments. First, I'll share 3 key points to consider when reading the SCA/RD2 Vision report. Then I'll share 3 points as comments to Mr. Kraft's article review. For both sections, the following three equations are important to keep in mind:

1. Profit (or net income) = (KGs x Price) - Costs
2. Cost of Production = All Costs/Total KGs produced
3. Farm Investments = All Costs/Total productive asset (such as land, ha; or # of trees) 

Comments on Key Findings of the SCA/RD2 Vision "Farm Profitability Report"

• Key Finding 1 (of the SCA report): Yields increase with higher costs per hectare, especially in the short term, and hence may decrease a farm’s profitability. In other words, production yields are not necessarily correlated with farm profitability.
• Africa Great Lakes Coffee (AGLC) data also shows that increased investments per asset (measured in ha or tree) leads to increased productivity (or yield). (Note: “investment” is more accurate than “cost” in this case, because we are talking about an asset, namely hectares.)
• The SCA report seems to be saying that farms with the highest yields (most productivity per asset) are not the most profitable. AGLC data shows this correlation also, by stratifying the farms by size. Large farms have the lowest productivity (KG/tree) and the highest operating profit.
• When I think about it in terms of factories it makes total sense. “Land and trees” are assets, like machines are assets in a factory. Just because your machine is producing widgets 2x as fast as my machine, doesn’t mean you have a more profitable business.
• The SCA report is disappointing because it doesn't point out how the metric, cost of production, can be a very useful one, to manage investments and ensure they are increasing profitability.
• It is also disappointing that key findings like this one fail to mention the critical role of price in determining whether farmers have profits. I would suggest re-writing this "finding" this way: Farmers must be careful to increase investments only as long as those investments lead to lower cost of production per KG, which, assuming price is constant, will mean increased profit.

• Key Finding 2: Good Agricultural Practices (GAPs) are effective tools for increasing yields but do not automatically translate into more profit for the farming system.
• This is why it is important to understand cost of production (CoP). The objective of GAPs is to lower cost of production per KG. By lowering cost of production of a product, you are increasing its profitability for the farmer, as long as the price is constant. By definition this is true, no research needed. These are principles of Econ 101.
• Our research is looking for the “other factors”, that are enabling GAP to lower costs in ways that increase productivity, thus lowering CoP/KG and increasing profits. For example, we find that cooperative members:

• Adopt best practices at a higher rate than non-coop members
• Are 14% more productive per tree
• Receive 52% more income from coffee than non-coop members
• Have 22% lower cost of production than non-coop members

o    We’re not saying “every farmer will be more profitable in a cooperative”, but in Rwanda, something is happening in cooperatives that helps farmers. Because of the data that shows this, we can do a better job of discovering why.

• Key Finding 3: There is wide variability of situations in coffee production. When production costs and profitability figures are given as an average at a country, or even regional level, this high degree of variation is not being accounted for. 
• Couldn't agree more! The most important disaggregation to look for or insist on is farm size. What is cost of production on small, medium and large farms in the area of focus?
  

Kraig Kraft writes in "Perspectives on the New SCA Report on Farm Profitability."

• Key Finding 1: Calculate net income using: Net Income = (yield x price) - (cost of production)
• We prefer to use the term 'production' or 'KGs' instead of yield in this equation. So Net Income = (KGs x price) - Costs.
• Key Finding 2: Producing more coffee is expensive, costly and cuts into a farmer's margins....the law of diminishing returns.
• Kraft correctly describes the law of diminishing returns, but falls short of describing how cost of production/KG plays a critical role in helping farmers determine "how far to go" with their investments. Farmers are still optimizing their profits if they continue to invest up until the point where the next investment pushes the farmer into increased cost of production per KG instead of decreasing CoP.

• Key Finding 3: MACERCAFE... the key to their profitability is to maximize efficiency, not yield.
• I would clarify the term "efficiency" further and state that MACERCAFE is maximizing profit by investing in coffee only up until the point where their net income is protected, given the price. Looking at the equation above, if price is low, the farmer needs to keep the costs low, to protect his/her profit. We show in AGLC data from Rwanda that large farmers (perhaps similar to MACERCAFE in Nicaragua) reduce their investments in coffee when price goes down. They are protecting their gross margin, even if it means investing nearly nothing - i.e. neglecting the trees completely. Large farmers will do this until the price improves.
• Contrary to the comments of the supply chain manager for MACERCAFE, small farmers in Rwanda do not have the luxury of doing the same. Their coffee trees are sometimes their only source of cash the entire year, so they invest everything they can into them, no matter what the price is. Maybe "small" has a different meaning in Rwanda than Nicaragua? For Rwandan standards, a small farmer has less than 400 trees. 500 - 1000 trees is a medium sized farm, and 1000+ trees is large (1000 trees still being less than half a hectare).

The AGLC program produced a helpful typology for understanding the spectrum of small to large farmers. See figure below. This typology highlights an important aspect driving whether farms are profitable or not - farmer motivation.  The SCA's report doesn't mention it and neither does Mr. Kraft. Yet a farmer's motivation for growing coffee cannot be assumed to always be profit maximization. In Rwanda, at least, some farmers are growing coffee out of necessity - it is their only source of cash. The typology also highlights the other factor that greatly impacts profitability, that is capacity. Capacity includes things like whether the farmer has an education, other adults in the household, a large farm and access to credit.


[Typology diagram credit: Dan Clay, 2016]

The punchline of the typology is that large farmers in Rwanda own over half of Rwanda's trees. Seems like they are similar to MACERCAFE in Nicaragua. They have capacity and their motivation is commercial - profit maximization. So price is a key driver. If the price they receive for their cherry does not cover costs, with a margin that matches their opportunities elsewhere, you can train them and talk to them all day, but do not expect their coffee trees to be well-attended. Their focus will remain on the crops and businesses that are paying the highest return on their investment.

The fact is, it is helpful to be having these discussions so that the gaps in our knowledge are recognized, which allows researchers to focus and fill the gaps. There is a lot of new research since the time that the SCA's report was written in 2015, especially from the AGLC project. Click here for the project description and scroll down to see the list of publications and resources.

77. New Dry Mill and Rural Community Development in Rubengera, Rwanda

10. November, 2017

Nov. 9 - Inauguration celebration included drummers and dancing!

Yesterday was a very exciting day in the small rural community of Rubengera, Rwanda. Hundreds of people attended the inauguration ceremonies for the new dry mill which opened earlier this year. I had the honor of seeing the large, cavernous building on May 1, shortly after it was purchased from the previous owner and was only starting to be converted. Then I saw it again in June when a contractor from Braz-Afric was there supervising the installation of a dozen different new, large machines. In July and August, Artisan Coffee Imports was honored to be one of the first coffee importers to have the coffee we were buying (from KOPAKAMA's Ejo Heza group) processed on those new machines.

I was so honored to be invited to the inaugural ceremony, but unfortunately, I was not able to be there in person. So I was delighted to receive photos and even a video from the auspicious occasion. (Thanks to Frederic HAKIZIMANA, KOPAKAMA's CEO who is adept with Whatsapp!) I'm sure if I had been at the day-long event, listening to the speeches and enjoying the dances, the food and the tour, some of the points I would have reflected on would be:

• How beautifully different organizations have worked together to make this large project possible. My understanding is that KOPAKAMA, TWIN and a group called SIDI brought the financing for the project together. Seven different coffee washing stations have agreed to use the facility, agreeing on the fees they'll pay, schedules, labor arrangements, etc. All of this takes levels of trust, cooperation and goodwill which cannot be taken for granted.
•  How this large building, near a school and not far from the road will be another visible sign to all in the community of how important coffee is to the community. It will visibly reflect how coffee brings development opportunities -- machines, big buildings, jobs.
• How this new business is going to offer multiple opportunities for building the capacity of the residents of this rural village. The machines will need technicians and operators, the offices of the dry mill will need accountants and human resources managers. The dry mill will require operations managers who understand production scheduling and modern communication. The new facility has a cupping lab staffed by trained cuppers, who in turn, will offer training for others to learn this critical quality evaluation skill.

This list of development and capacity building benefits could on and on.  The vision, foresight and planning of the individuals who supported the creation of the KOPAKAMA dry mill are truly to be appreciated for this momentous gift they are giving the people of Rubengera and indeed, all of Rwanda. It is concrete evidence of the benefits that coffee can bring to rural communities.

May 1 - building renovation in-process

May 1 - main entrance, lower floor

May 1 - First floor

May 1 - second floor

June - machinery being installed

June 16th - Braz-Afric Supervisor from Nairobi supervised machinery installation.

June 16th - Jean Bosco- the de-pulper operator at the washing station - looks happy to be working on bigger machines!

June 16th

June 16th

Nov. 9th

Guests of honor - Nov. 9th

Nov. 9th - Frederic HAKIZIMANA, KOPAKAMA CEO

Nov. 9th, Mattia Guglielmi of TWIN

Nov. 9th, food and drink enjoyed inside the new dry mill

76. Tale of Two Coops: Insights on Determinants of Farmgate Price in Rwanda

Oct. 17, 2017

Rwanda is unique in many ways. Sometimes so unique, that even Rwandans are unable to clearly articulate how "their world" is different from other places in the coffee industry. The farm-gate price in Rwanda is called the "cherry price". Elsewhere in the world, coffee farmers understand that their price is largely determined by the New York "C", the price set daily at a commodity exchange in New York which has little to do with coffee farmers and a lot to do with speculators. In general, a good thing. Commodity trading provides transparency and easily referenced pricing. But a bad thing because, unfortunately, this market does not reflect true costs, especially for "specialty coffee". But let's not go there today. The point here is that this all-pervasive NY "C" price does NOT pervade directly to the farm level in Rwanda!

In Rwanda, the cherry price is determined by another price, the National Agricultural Export and Development Board (NAEB) floor price. It would be fair to say the NAEB floor price is influenced by the NY "C", but it is influenced by many other people, too.  Which people? People who have influence in coffee and politics in Kigali. Notice that definition does not sound like a definition of a "coffee farmer". And therein lies the controversy and challenging transition that is currently underway in Rwanda. The Rwandan cherry floor price determines the fate of 350,000 coffee farmers, and ultimately, the country's foreign exchange earnings, yet up until 2017, the "voice" of the farmer has been absent in its determination.

In the past year I was able to talk to two leaders of cooperatives in two different coffee production regions in Rwanda. The differences in their comments about what determines cherry price illustrates how and why a transition to including farmer "voice" in the politics that determine the NAEB floor price is so important to Rwanda's future. 

Cooperative A:“So many things influence coffee cherry price,” commented Jean Luc TWAKIRE (name changed), managing director of a well-established coffee cooperative in Rwanda. “Factors include whether a farmer is a cooperative member or not, the competitiveness of the region and the strategy of the cooperative itself. I’m willing to pay a high price, because I only buy high quality cherry. I need a high quality output.” Mr. TWAKIRE goes on to share specifics about the type of relationship he has with his buyers. He calls them “permanent” and willing to “reduce their profitability in order to help the cooperative in their sustainability.” In other words, one notices that the type of relationship the cooperative has with the coffee buyers is one critical variable in determining cherry price, on top of the others TWAKIRE mentioned. 

Bringing the coffee to get weighed at a collection site.

 

Where it counts: farmer record shows she has been paid exactly the NAEB floor price - 270 RWF/KG cherry until the floor price was adjusted down to 240 RWF.

Cooperative B: In a different area of Rwanda, the managing director of a different cooperative washing station, also well-established, we’ll call it “Cooperative B” has less “permanent” customers. The director, we’ll call him Theogene HABONIMANA, explains their pricing strategy this way, “we pay the floor price set by NAEB, keeping that first price low, and checking what the other washing stations will pay. Our price should be the same, not different.”  Then, at the end of the season they give the farmers a second payment based on the actual profits the cooperative received. “The second payment is an obligation.”

HABONIMANA and TWAKIRE’s descriptions illuminate how for many farmers, the factor most commonly cited globally as affecting coffee pricing, the NY “C” price, becomes almost irrelevant. Researchers on the Africa Great Lakes Coffee (AGLC) Support Program team have validated that for Rwanda’s 350,000 coffee farmers[1], the determinants of cherry price rest on four key factors:

• Being a member of a cooperative (or not)
• The level of competition in the farmer’s region
• Cooperative (or private washing station’s) quality strategy, which is directly related to buyer/customer relationships acquired. 
• The “cherry floor price” set annually by NAEB, via a negotiation process with many "influential" people, and more recently, with data representing cost of production and research related to productivity and quality.

The interesting point in TWAKIRE's comments (cooperative A), is the fact that for him, the NAEB floor price matters less than his relationships with his customers and the competition with other washing stations. Indeed, the AGLC research team found that while the NAEB floor price is the cherry price in regions where competition is weak (e.g. cooperative B's region), in regions where competition is strong and cooperatives have long-standing relationships with specialty coffee buyers, farmers receive prices around 33% above the floor price every year. "We're used to paying above the NAEB floor price," says TWAKIRE. "That happens every year."

What this means is that NAEB has an especially vital role to play. It is imperative that they continue to use data and evidence to inform decision-making about the floor price.  The data gathered by the AGLC team from a survey of 1024 coffee farmer households, represents, in many respects, "the farmer voice" that is missing at the negotiation table.  That data is time-limited, though. Therefore, NAEB must continue to find ways to keep the negotiations objective and fairly representing the farmers' interests, which in the end, are the interests of the country.

---

[1] NAEB, 2015 Coffee Census

75. JDE Assessing the Power of Lean

Oct. 5, 2017

In the September 2017 Issue of Global Coffee Report, an exciting article appeared about a six year initiative Jacobs Douwe Egberts (JDE) created in Honduras. Click here for the article.  SIX years is a long commitment. Many USAID projects only last three to five years. Six years is enough to see the impact of Lean efforts across a large geographical region. Looking for clues as to whether the JDE - Cohonducafé Foundation project is a Lean project, a few can be found. The key one was this:

“We conducted value-chain analysis to identify what our priorities should be,” Project Manager Edgar Joel Castro explained, detailing how the team at Cohonducafé Foundation worked with staff at JDE to evaluate key indicators in the market and narrow down the project’s objectives.  A "value-chain analysis" that is well-done at a high level of the supply chain is an excellent tool to help link many "value stream analyses" once you start drilling down.

The rationale for the strategic analysis couldn't be clearer. "The industry that their grandfathers once knew and operated in has changed drastically in line with increasing global demand for the commodity, climate change, greater instance of pests and diseases and other economic factors," (GCR).

The key impact metric may sound small, "overall productivity has increased 25 percent" but if we assume this is across all 15,000 farms in the project, that is actually a very impressive bump to Honduras' 2016 production of 5.93 million 60 kg bags, (USDA’s FAS annual GAIN Report), which comes from 97,000 producers (Instituto Hondureño del Café report 2015/2016).

Another helpful illustration in the Honduras story is how the project united many players along the value-chain. One alone could not have achieved the same result -- even the "largest one with the most money." Here's how they describe the collaborative group:

Through the foundation’s connection with Cohonducafé, the largest exporter of coffee in Honduras, and partnership with JDE, the project gained access to the coffee companies’ extensive networks and superior logistics. “We had direct business relationships with more than 40,000 producers,” says Castro. “We believe that if they weren’t part of this, it would have been much more complicated.”
The foundation also has strategic alliances with 30 different organisations, from universities and municipalities to local and international NGOs.

This example of a large project, combined with examples from the small projects Artisan has lead in Rwanda and Burundi, should encourage other industry players to take Lean training seriously for their strategic supply chain efforts. Invest in the sustainability of quality coffee supply, start your value chain analysis now with help from Artisan Coffee Imports.

74. IWCA Invited to Present at Cote D'Ivoire ICO Statistics Meeting

Sep. 25, 2017
In his opening speech at the 2017 IWCA Convention, Jose Sette, the new Executive Director of the International Coffee Organization (ICO) communicated that ICO members should not only improve their capacity to provide employment data on men and women, but also recognize the strong contributions of women.

The ICO is considering new rules for the member countries' submissions of data. Currently, countries submit data focused solely on production: kilograms, bags and beans. On September 25, IWCA was invited to present at a special meeting of the ICO Statistics Committee in Cote d'Ivoire.  The narration of IWCA's presentation to ICO members is available on the IWCA You Tube Channel, or click on the link below.