Podcast Transcript: 'Coffee &' - Episode 5 - Fair Trade vs. Direct Trade Coffee

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Episode 5 - Fair Trade vs. Direct Trade Coffee

Hey everyone and welcome to our podcast called Coffee & where Specialty coffee means so much more. We're on a quest to cultivate freedom for victims of human trafficking all while drinking wicked awesome coffee. I'm your host, Philip Klayman. I'm also the co-founder of Three Tree Coffee in Statesboro, Georgia. Today we're going to be talking about how coffee is purchased, what is the price for coffee, what determines the price for coffee? What is fair trade versus direct trade? We're going to be talking about all these things and more. So stay tuned and let's dive in.

So before I get started today, I actually wanted to take a quick moment and just share a little bit more about my coffee mug. This coffee mug comes from Prodigal Pottery and as we mentioned earlier on this podcast, we're passionate about ending human trafficking and this mug was actually made by an organization that employs victims of human trafficking. And so I encourage y'all to take a look. Prodigal Pottery, amazing company, doing awesome things. I just happen to have one that's branded for Three Tree. Love it. But let's continue on with our podcast today. Today we're going to be talking about the coffee market. What determines coffee prices at Three Tree Coffee, we have a passion to empower our farmers, but why do we even need to empower farmers? Well, let's start with how coffee's priced. Coffee is priced based off of the C market price of coffee.

This is the stock exchange coffee price that you could look up online right now and it fluctuates day in and day out, and it's always changing. This is what determines the value of Coffee per pound every day, and it kind of operates like what we remember from our economics class long ago, supply and demand. So if you recall from that class in college or maybe in high school, if you have more supply of an item than you have demand, then you are probably going to have prices go down. You have more product than what people really need. And so the people who are selling it are going to keep lowering the price and lowering the price to try and just get it off their hands. Well, oppositely, if you have more demand than supply, then the price is going to go up because it's rare or it's scarce, you can't get it as much.

So it's therefore more valuable and that is one thing that determines the price of coffee. Lemme give you an example of supply and demand. To put it in a very easy way to understand, I love Quaker oatmeal squares. They are amazing. If you've never had Quaker oatmeal square cereal, you got to give it a try. They're delicious. They got that wonderful brown sugar sweetness.  Way to go Quaker. So let's say that tonight Quaker announces that there's only one more box of Quaker oatmeal squares left in the whole world and that they're going to auction it off to the highest bidder. Well, I'd probably be willing to spend a little more than normal to see if I could get that last box because I like them so much, right? Well, in that scenario, the supply is super low. Demand has stayed high. Well, oppositely, let's say that they find out that overnight, that Quaker oatmeal squares causes some sort of illness or disease, well suddenly no one's going to want to buy Quaker oatmeal squares anymore.

You're going to see the demand drop significantly and you'd probably naturally see the price start to drop as well. That's how supply and demand works, and that is one of the primary drivers that determines the C market price for coffee. However, that's not the only thing that determines the price or the past few decades there's been a rise of people investing in agricultural commodity futures. They use these things as an investment tool and they'll try and buy low sell high and they don't have any intention of keeping the coffee or using the coffee. It's strictly an investment tool. Well, all these things has created a situation where coffee prices have just stayed very low as of the day of this filming. The price for coffee on the exchange, the sea market price exchange is $1.65 per pound. That is not very high, and it's worth mentioning that that is not what the farmer's going to get.

That is after milling, processing, bagging, exporting. There's lots of other fees and values that captures, and so what the farmer's actually getting is probably much, much less than that. These things are a problem and these are the things that we want to make sure that we're trying to find a solution for. I want to share a quick story with you. A few years back, I was in Indonesia and I was on the island of Papua and we heard of a situation where on this island there was someone who was buying coffee and they drove up the mountain to these coffee farmers and they said, we're going to buy all of your coffee for 20 cents per pound, 20 cents per pound. And the farmers said yes, because there was no other options, no one else would come to buy their coffee. They had no way of getting their coffee to anyone else. So that's it. They don't have any sort of power in this scenario. They just have to say yes because what else can they do? These are the sorts of things that we want to make sure we're trying to resolve and fix as we look for solutions.

Now let's talk about fair trade and what is fair trade? Quite simply, Fairtrade is a global movement. It is made up of multiple organizations and it's a movement to ensure that we are paying fair prices for our agricultural crops. Alright? And so if we want to put our economics hat back on, fair Trade actually introduces a price floor of $1.80 per pound to the farm owner. If you remember just a moment ago, we said $1.65 is the trading price for coffee, but that's not what the farmer's going to get. They're going to get something lower than that. Fair Trade certifies that if we buy Fair Trade Coffee or if some organization buys Fair Trade Coffee, that the farmer is getting a minimum price of $1.80 per pound. This actually all started the Fair Trade Movement back in 1946 by a woman named Edna Ruth Byler.

So Edna was down in Puerto Rico and she actually saw women making textiles and linens with their own hands and it was really high quality products, and yet these women lived in poverty and they weren't making almost any money off of this really quality good product. And Edna decided, you know what? I'm going to buy this for what it's worth. I'm going to spend more money and I'm going to go back to the States and I'm going to sell it for more and share their story. That was all the way back in 1946 and she didn't start Fair Trade U S A, she did start an organization that eventually became a part of the Fair Trade Organization, but you had lots of these organizations popping up throughout the fifties and the sixties, and it was in 1997 that they all came together under the Fair Trade International branding umbrella to say, Hey, let's work together and certify this together.

Now let's talk about maybe what are some of the pros and cons of Fair Trade? So some of the cons of this system is it doesn't really incentivize quality. It's sort of a one size fits all approach. Lemme give you an example. Let's say I'm a coffee farmer and I have one half of my harvest turn out really spectacular and taste phenomenal. I could probably go fetch a really good price because of the quality if I sell it as a direct trade partnership. More on that in a moment, but let's say because it's higher quality, I could get a better price than the market. Let's say the other half of my harvest turned out pretty bad. Maybe I got some bore beetles that got inside the beans and ruined the crop. Maybe there was some sort of defect on a lot of the crop because of a fungus that got on the plant.

Well, I know I could maybe sell that coffee under the Fair Trade Certification as long as I'm a fair trade certified farm and I'm going to get a price minimum, that's good. That's better than the market price. So Fair Trade maybe doesn't incentivize quality as much as we would want it to. It's kind of a one size fits all approach. Another issue with Fair Trade is there's not much transparency all the way to the farm level. We had a podcast that we posted not too long ago about specialty coffee and what is specialty coffee? Well, in that, one of the tenets that's so important is transparency to the farm level that we know where is this coffee coming from? What altitude was it grown at? What varietal of Coffee plant was used? You don't usually get any of that information when you're dealing with Fair Trade Coffees All is what cooperative does it come from?

And a cooperative is just a collection of coffee farmers. They represent a collection of farmers. You know what co-op it comes from, and you know that the farm owner is going to make at least $1 80 cents per pound. That's better than the market price we mentioned earlier in the episode, but still not amazing. With that said, let's talk about some of the benefits of Fair Trade. The first and the easiest benefit is it's easy to find and buy. It's easy to find and buy. I was just at the grocery store the other day and I found Fair Trade Grapes and I decided to buy them because I know they're ethically sourced, whereas all the other grapes, I don't know that, I'm not sure how they were sourced. I don't know everything about all these different companies. And same with coffee. It's very easy for coffee roasters to go find Fair Trade coffees and they can get them pretty quick. And so it's an easy product to buy and sell. And on top of that, it's nice to have a third party sort of vetting this, right? You don't have to necessarily trust the company. You can trust Fair Trade U S A, and as long as you see that fair trade symbol, you know that to some degree it is more ethical than normal standards.

I'm very grateful for Fair Trade. I do think there are some better ways to seek empowerment of farmers. However, fair Trade has had an incredibly, incredibly profound effect on making ethically sourced goods common, making it common in the marketplace. They really set the stage for direct trade and some of these other ethical situations to come about. And for that, I'm really grateful that they made buying ethical, popular. I actually got to go visit a Fair Trade farm in GIAs, Mexico. I got to visit a few Coffee Farms back in, I think it was 2016 or so, and I was curious on this trip to see how connected is Fair Trade with their farmers, right? It sounds kind of like this big organization with a bunch of policies and maybe it's impersonal, maybe they don't have very good relationships or maybe they're not connected with their co-ops and with their farms.

And I got to be honest, that was a big misconception. I was so impressed with how well Fairtrade knew the people they were working with, the farmers they were working with, the co-ops they were working with specifically. We got to visit the Satch Cooperative in GIAs, Mexico. We got to go to Juan's farm and look around his farm and just seeing him thriving in a context through Fairtrade was really impressive to me. And so I want to go and share with you, I really believe in Fairtrade. I think it's a powerful way and an easy way to make sure that we're sourcing things ethically.

Now, with that said, let's move on to direct trade because I do think direct trade has more opportunity for empowerment. Direct trade is quite simply just partnerships. It's more direct partnerships. Now that's a very loose term and it is very loose. This can look a lot of different ways in a lot of different contexts. Even within Three Tree Coffee, we have two direct trade coffees that look very different. One of them is we talk with Mike obr, who's the son of the farm owner in Ethiopia, and for another one we talk with Chad Robbins in Brunswick, Georgia because he knows Abel, the farm owner in Honduras. Two very different partnerships and yet both are doing more to empower the farmer. Now let's talk a little bit about maybe some of the pros and cons of direct trade. Well, definitely one of the cons is it's just such a loose title. Lots of people can just throw that out and say, yeah, that's direct trade. And yet there can be different levels of partnerships, and so there's not great vetting for this. You have to really trust the organization that is claiming to be operating in direct trade.

You're also usually dealing with middlemen still when it comes to direct trade. And that's not a bad thing necessarily. It seems like the middleman is always kind of getting the bad rap in supply chain economics. Oh, eliminate the middleman, eliminate the middleman. They're just taking value. Well, sometimes they're adding value. And one of the cons of direct trade or one of the challenges of direct trade is you have a lot of barriers. There's language barriers, there's culture barriers, and so you kind of need some of those middle people to help facilitate these things. As an example, we used to get a coffee from Guatemala. It came from a farm called Carmona Estate in Antigua, and the farm owner, her name was Maria. I actually got to go visit the farm. I was supposed to visit Maria, and she totally stood me up. She had more important things to do and honestly, I'm really glad.

I think she does have more important things to do than to meet with me, but I still got to see her farm, got to see how the operation runs, and Maria is thriving. It was an incredibly efficient and just an amazing operation. Well, I didn't just meet Maria because I happened to be walking the mountains of Guatemala. No, I got connected to Julio who lives in Guatemala City and he knew Maria and he also knows quality coffee, and he also has a passion for people. So the middleman is not always bad. Bad middlemen are bad, good middlemen are good. And the emphasis here on direct trade is make sure that these partnerships are good partnerships and empowering people. Now, we mentioned a couple of the challenges of direct trade. Well, what are the benefits of direct trade? Easily, it has the highest potential for empowerment of farmers and quality of product, and it's not even close. All of our direct trade coffees and all of the direct trade coffees I get from other coffee roasters, they're usually really high quality coffees with lots of transparency where it comes from and it's usually paying much, much higher prices to the farmers. We mentioned earlier, dollar 65 is the market trading price. Farmers getting less than that. Fair trade is $1 80 to the farm owner. Direct trade coffees is four, five plus 6, 7, 8. A lot more money is going to the farmers and it incentivizes high quality products.

So in conclusion, is fairtrade bad? No, I don't think it's bad. I think a lot of people easily use it as a scapegoat to just kind of judge it and say, oh, it's bad. And what I do is better. Fairtrade has done an amazing job of setting the stage for our world to care more about ethically sourced products, and I'm grateful for the role that they have played and will continue to play. But is there a better way to empower farmers? Is there a better way to buy our coffee? Yes, I think there is, and I think it's that direct trade partnership model. These are the sorts of partnerships we need to continue to pursue. And if there's any step in specialty coffee, that'd be really helpful. It would be to somehow certify or regulate what is direct trade, because once again, anyone can say it and claim it. How do you vet that? How do you know that that is an authentic direct trade relationship that is actually empowering the farmer? I appreciate you joining us today and learning more about coffee prices and how coffee is priced, how it's purchased, how it's sold, and what fairtrade and direct trade is. I hope this was helpful for you and I hope you enjoy your coffee. Thanks.

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