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The coffee supply chain is failing farmers, says Solidaridad

The coffee industry’s economic model means its profits do not reach farmers, despite there being enough value to be shared all along the supply chain, according to a new report by Solidaridad Network and IDH.

The publication, commissioned by non-profit Solidaridad Network and IDH, argues that farmer prices are disconnected from consumer prices, with farm labour often unpaid and unaccounted for. Both IDH and Solidaridad work to make agri-food supply chains more sustainable and equitable for workers.

The report’s authors make a case for how value concentrates away from farmers further down the value chain between importer and retailer, with a lack of mechanisms to distribute value.

“The long term impact of underpaying smallholder and family farmers ultimately affects the whole industry, and it will take an economic perspective to systemically and sustainably address this issue,” the report concludes.

“The coffee industry is so diverse and complex that there is no quick fix. Trading conditions need to account for this complexity, and stakeholders in coffee supply chains need to implement mechanisms to distribute value and promote economic viability of farming.”

Germany is the world’s third largest consumer after the US and Brazil

The report: ‘The Grounds for Sharing: A study of value distribution in the coffee industry’ focused on Germany as the largest consumer of coffee in Europe, and the world’s third largest consumer after the USA and Brazil. The country is also the largest importer of green coffee in Europe, with a major coffee roasting industry.

Here, the average price of coffee products sold in German retail stores was €9.71 per kilogram (kg). For this aggregated coffee product, once costs and taxes were deducted, cumulated net profit margins amounted to €1.09/kg - 11% of total retail value.

Further findings revealed that the retail, roasting and coffee cultivation stages along with the German coffee tax each amounted to between 21% and 23% of the total value of the coffee products.

Coffee formats include ground, whole beans, soft pods, and capsules

Key to a coffee product’s profit margin was its format, where brands such as Tchibo, Jacobs Douwe Egberts (JDE) Peet's, and Dallmayr accounted for 20%, 18%, and 16% respectively of all ground coffee sales in Germany in 2021.

Similarly, the share of sales in whole beans in the same year, was led by Tchibo (24%), Lavazza (19%), and Dallmayr (9%).

The 2021 primary share of sales in soft pods went to JDE Peet's (28%) followed by Tchibo (12%), and Dallmayr (3%), while the year’s share of sales in capsules overwhelmingly went to JDE Peet's (38%), Nestlé (19%), and Tchibo (13%).

“…consumers’ willingness to pay increases when moving from ground coffee and whole bean to soft pods, and most prominently to capsules,” the report reads. <“…Pods and capsules offer precision consumption and a convenient method of preparation that also preserves the quality of the coffee…hence a higher willingness to pay. In the meantime, the costs associated with these different product formats grow at a lower rate than the willingness to pay, thereby increasing profitability.”

Farmers in a disadvantaged bargaining position due to limited insight

The report goes on to highlight that in contrast with these strong variations at retail and roasting stages, price paid at the coffee cultivation stage did not change according to product type (format).

Delving deeper into the findings, the authors also suggested that it was this large difference of product formats along with cost of production at coffee cultivation stage that made it difficult for farmers to draw uniform conclusions on value creation in certified supply chains.

“…an important number of coffee farmers have limited insights, opportunities and control over the final form and destination of the coffee they produce/export,” they wrote. “This puts most farmers in a disadvantaged bargaining position when it comes to getting value for their coffee. The disconnect between end-product and farm production leaves farmers with limited, if any, points of leverage to capture a share of the end-product.”

Joint sourcing practices and mechanisms the recommendations for value redistribution

In a series of recommendations, IDH and Solidaridad said they would look to enhance farmer prosperity through joint sourcing practices and mechanisms for value redistribution. This included the sector engagement to develop sourcing principles that enable value redistribution in the supply chain and enhance farmer prosperity. They commented that the ultimate goal of this cooperation was to convene a sector commitment around industry preferred mechanisms to distribute value.

“Sourcing principles for value redistribution can include a broad set of procurement and portfolio management practices. The consortium therefore invites the coffee community to jointly define what value redistribution would mean for the sector. A group of companies and other stakeholders will be invited to co-develop this ambition.”

A key finding of the study was that the added value in the coffee sector concentrated in the downward part of the chain and did not make its way to farmers. As yet, there are no established mechanisms that enable re-distribution of value at scale.

Together with partners, IDH and Solidaridad said they would develop and pilot mechanisms for “adding, creating, and transferring value in the supply chain.”

“These mechanisms can be linked to existing initiatives, need to be scalable and account for the diversity of farmers in origin,” they concluded. “Learnings from these pilots and mechanisms will be integrated in the collective work with the sector on sourcing practices.”