81. "Poverty Coffee" Is Not Attractive to Youth at Origin

April 5, 2018

Looking for a way out of poverty. Not planning to stay in it.

There is a lot of wringing hands about how to attract youth in the Coffeelands to want to grow coffee. Journalists, politicians, coffee roasters and buyers have become united in their alarm about the advanced age of the "average coffee farmer".

Rwanda = 51 years old (NAEB 2015 Census)
Kenya = 51 years old (Ngeywo, 2015)
Burundi = 47 - 67 years old is where 47% of the farmers fall (Recensement General Des Cafeiers, Edition 2006-2007)

The message is clear. The younger generation is not following their parents and grandparents into the coffee farming business. A recent report  from the International Coffee Organization on the sustainability of coffee in Africa states the problem plainly: "The average age of farmers is over 60 despite the continent being dominated by a huge number of young people. Indeed, the young and educated do not engage in coffee production due to the low returns."
(ICO, ICC-11-4-5, 2015).

In other words, "poverty coffee" (Artisan's choice of words) is not attractive to youth at origin. We can bring children and teenagers into the coffee fields and show them how coffee farming works. We can make it clear that new systems exist to test soils, accurately fertilize trees, rejuvenate trees, test coffee cherries and process coffee with more precision than was done in the past. But  the fact of the matter is, the industry cannot keep the attention of youth on coffee as long as they only see low returns to their investment compared to their other choices.

The coffee industry (of which Artisan is a part) needs to grow up and understand that some aspects of the Lewis "dual-sector" model of economic development are in evidence here. There is a labor transition happening between two sectors, the 'capitalist' sector (including services and manufacturing) and the 'subsistence' sector.  The fundamental assumption of the Lewis model describes what appears to be happening before our eyes: that surplus of unproductive labor (that would happily take a job as a coffee farmer in the past), is moving to 'capitalist' sectors in the capital cities. They are going to work in sectors with high enough productivity per person to be able to pay wages higher than the average a coffee farmer earns.
According to the Lewis model, attracting youth to coffee would mean improving the productivity (revenues earned) per employee in the coffee farming sector. The status quo seems to be to pay "sub $6.00" prices per KG green landed (or < $2.73/lb green landed), which probably means paying subsistence wages on the coffee farm. For example $1.00 per seven hour day. $1.00/day is not scandalous in terms of pure economics. It is an average, market-based wage today in many rural areas. But these rates are not accounting for the impending exit of laborers from the region. Rates today do not include the cost of replacing the ones who get up and grow coffee today. If prices do not increase, the outcome after  the "old guard" has retired, is unknown. According to the Lewis theory, the supply of labor will continue to be in surplus and available at low wages. But one already sees evidence that the surplus can disappear as countries develop. Rural wages have increased in some coffee-growing regions in Central America as labor, especially during  harvest, becomes scarce. The smallholder farmer income (working their own land, not someone else's) also needs to see increases, as opportunities for them and their children in the city become more and more accessible.

Quality coffee is grown with techniques that are more labor intensive, (e.g. pruning, mulching, hand-picking, etc.). So companies with supply chains dependent on high-quality, green Arabica coffee need to realize they are competing with vibrant digital, banking and manufacturing industries for the future. In those industries, youth are seeing young adults with attractive life-styles: phones, cars, a vacation once in awhile. And they're not believing they can get those things with what amounts to $1.00/day returns.

To attract youth who have these choices ahead of them, "coffee or computers?", it does not take a tremendous amount of analysis to figure out which project will help. Investing more in the price paid for green coffee will help. By paying above $6.00/KG for green landed coffee today, (and asking what of that amount is paid to the farmer), roasters can be more confident that they are contributing to a healthy future for the sector. There are similarities in education - paying for early childhood education avoids much higher costs later, and in medicine - paying for wellness visits avoids high-cost emergency treatments down the road.

As an industry, we need to do more than just cover rising labor costs in the coffeelands, begrudgingly and belatedly. We need to  get coffee into the forefront of the crowded "job fair" that young people are looking at today. When youth see that there are returns to investments in high quality coffee, they will be attracted. When the older adults around them see that there are profits to be earned with coffee, they will encourage their offspring to gain knowledge about coffee, not abandon it.

Sources include: Feed the Future Africa Great Lakes Coffee (AGLC) support program. Baseline survey was conducted 2015 - 2016 with 1024 farmer households, randomly selected from 4 coffee-production districts.

80. What a 240 Cherry Floor Price Means in Rwanda

Feb.27, 2018

Coffee cherry in Rwanda

What does a 240 cherry floor price mean in Rwanda? More poverty for coffee farmers. NAEB has announced a 240 RWF/KG cherry floor price (farmgate price) for coffee cherry for the 2018 season despite research showing that around 25%, one fourth, of Rwanda's coffee farmers will be losing money on every coffee cherry they sell. (See  Figure 1 below.)  When viewing this figure, keep in mind that the threshold used for "profit" here is any amount above 0. The data is credible, as it is based on a 1024 sample survey (AGLCa, 2016), which included estimating cost of production for coffee at 177 RWF/KG cherry (AGLCb, 2016). Most businesses, including the exporters who are pressuring NAEB to keep the cherry price low, would go out of business if profit levels fall below 20%. The red bars in the Figure below would be much higher if we assumed farmers had the right to have 20-30% margins. Then Figure 1 would show that nearly half of Rwanda's farmers are "in the red" at a floor price of 240.

Figure 1: Percent of Coffee Farmers Making Above 0 Profit at Various Cherry Prices

So the 2018 season begins with these "barely getting by" prices for farmers, forced to be this low by exporters who will gorge themselves on 50% margins. Meanwhile, the exporters will publicize their exciting 'investments' in water projects to improve waste water treatment at one coffee washing station, and 'investments' in a training project that brings cows to smallholders. These 'investments' will be so exciting they will end up in articles on the covers of glossy coffee trade press magazines and even in Harvard Business Review case studies about "social enterprises" doing the right thing for poor coffee farmers in Rwanda.

Please don't be fooled. The powerful in Rwanda are hungry enough to eat every coffee farmers' lunch. They would rather invest in projects on the fringe, than work to improve their marketing and sell more specialty coffee at higher prices. They cannot see their way to paying a few cents more, just $.19/lb. green coffee, to ensure that farmers are motivated to plant seedlings, prune trees, conserve their water and buy a cow if they would like to.

Please don't be fooled by projects and trainings. 57% of Rwanda's coffee trees are owned by commercially oriented farmers with .5 hectares or more planted with coffee. Many of them could increase their yields by two or three times this season -- if it is commercially viable to do so.  They know how. But they choose not to because with cost of production at 177/KG cherry, 240 RWF/KG cherry means 64 RWF/KG cherry net income, or a 26% gross margin and they have better options in banana, livestock and other farming businesses. Many will use low-input strategies or neglect the coffee trees completely because they can afford to transition to other business opportunities.

The smallest farmers, with an average of 180 - 200 trees, will not be so lucky. They will suffer yet another year of losses for all their effort on their coffee trees. For them, a training may minimize their costs per unit of cherry produced and therefore minimize their losses. But leaving the coffee and using the same amount of time to pick potatoes as a day-laborer would probably bring more cash into the household.

You might ask "why?" Why do companies implement projects and trainings, but refuse to pay $.07/KG cherry more, (equal to +$.42/KG green coffee, or +$.19/lb green coffee) for a supply of quality, fully-washed coffee? For some it is greed to make a few pennies more this year that drives such decisions. For other exporters it is short-sightedness. Despite the research (AGLCc, 2016) they do not understand that their insistence on cheap cherry means death of a vibrant option for increases in yields and supplies of high-quality cherry, plus rural development in Rwanda. Meanwhile, they keep their options open to move over to Ethiopia or Tanzania once Rwanda's commercially viable coffee farmers have all pulled out their trees.

Pennies -- they are unwilling to pay pennies of investment in the coffee farmers via the coffee cherry price, (i.e. the farmgate price).

Specialty buyers of Rwandan coffee should be outraged at the downward spiral the 240 price can precipitate: lower prices, leading to lower yields, leading to lower motivation from commercially motivated Rwandans living in rural areas. Rwanda was poised to reverse this vicious spiral in the 2017 season. At this time last year NAEB pegged the floor price first at 270, a promising start.  But then they let it decline to 240 later in the season. The weighted average for 2017 was 249. Starting this 2018 season at 240 starts to look like we are headed back to the bad 'ol days of 2015 and 2016. In those years the floor price was 170 and 150 respectively.

If you buy Rwandan coffee, you know the FOB price, (called the export price in our scenario illustrated below, $4.30/KG green). Please, demand to know the farm-gate price from your supplier. Farmers want 300 RWF/ KG cherry. Research (AGLCa, 2016) shows 300 RWF provides sufficient motivation for farmers to invest in best practices, which results in high-yielding plants and more specialty grade coffee. A win-win for all. Any exporter paying less than 300 RWF for coffee bound for the specialty market should explain to you why coffee farmers deserve margins only half the size of exporters (Chart 1 vs. Chart 2 below).

 Chart 1: 240 RWF/KG Cherry

 

Chart 2: 300 RWF/KG Cherry

79. Long term impacts of Lean - Resilience of the Toyota Way

Feb. 20, 2018
Great blog today, "The Toyota Way or Entropy?" by David McKenzie, an economist at the World Bank, on the World Bank Development Impact blog. McKenzie takes the most typical criticism of any training, which is that it won't stick, and tests it. Specifically, McKenzie and co-authors Nicholas Bloom, Benn Eifert, Aprajit Mahajan, and John Roberts test whether an intensive management intervention in Indian textile weaving plants can be shown to have staying power. The simplified, contrasting possible outcomes are the“Toyota way” , with systems in place for measuring and monitoring operations and a continuous cycle of improvement vs. the alternative of entropy, or a gradual decline back into disorder. "One estimate by prominent consulting firm Boston Consulting Group, is that two-thirds of transformation initiatives ultimately fail." Fortunately, McKenzie et. al. find different results.

The study results shared in their new paper are somewhere in between the two outcomes described above. There is some entropy, but some improvements are "sticky", and even 8 years later are still in practice. In short, there was more persistence in management practices than the researchers anticipated. We (at Artisan) were most interested to see which practices were the ones that had staying power. They relate very closely to improvements in quality and inventory levels:

1. recording quality defects in a systematic manner (defect-wise); 
2. having a system for monitoring and disposing old stock; and 
3. carrying out preventative maintenance.

We're excited to see this list, as #1 and #3 have been key success areas in the Lean at Origin two-year pilot project carried out at washing stations in Rwanda and Burundi.
#1 - recording quality defects in a systematic manner: In a washing station in Rwanda, the first "big KAIZEN" a work team addressed was to devise a way to measure the defects coming out of the depulping machine. At the very least, monitoring the level of defects alerts the machinist as to when he needs to adjust the discs. In an advanced scenario, the level of defects after the depulper can be an indicator of the overall quality of the cherry the washing station is receiving. This has important implications for farmer education and washing station profits to the extent that revenue is dependent on quality.

#3 preventative maintenance: At a dry mill in Burundi, the operations manager recognized right away how impactful a program of regular maintenance could be for the depulping machines at the 30-some washing station delivering parchment to their mill. No doubt, he also recognized how the quality of the parchment from these 30 washing stations would be improved if machine down-time became less of an issue.

#1 - photos of recording quality defects in a systematic manner at KOPAKAMA:

Devising the "3 cup metric" for depulper defects.

Basin of A3 beans - machinist wants to know when the % of cut beans spikes.

Devising the "3 cup" metric for depulper defects.

Three samples taken each night - beginning, middle and end of shift.

#3: HOROMAMA dry mill plans to implement preventative maintenance at washing stations like Dusangirijambo and 29 others.

Giving Dusangirijambo a new digital scale.