ric rhinehart
In December Ric Rhinehart announced he is stepping down from his role as executive director of the Specialty Coffee Association (SCA) to devote his full attention to the Coffee Price Crisis Response Initiative, which aims to understand and address how the price crisis is affecting coffee farmers.
Coffee producers are simply not getting enough for their coffee to remain profitable. Following a brief incline in its monthly composite price indicator, as a disastrous year drew to a close, the International Coffee Organization (ICO) once again saw prices retreat to $1 per pound, a price less than half the cost of production in most origins.
STiR: The Coffee Price Crisis Response Initiative itself is a meaningful investment in resolving the crisis, leading you to step down as the long-time SCA executive director. Who came up with the idea and what led you to commit to the task? How is it financed?
Rhinehart: The idea for the initiative arose from a discussion at an SCA Board of Directors meeting around the issue of low prices as exemplified by slipping below the $1 price point last August. The Board sought to find a meaningful response to the issue as an organization that is committed to a healthy, vibrant, and growing specialty coffee sector. I had already made the decision to step down as executive director at the end of my contract (December 2019) and when the Board asked how we could respond we included the idea of me focusing my attention entirely on the problem for my final year.
From here we worked with a group of highly engaged stakeholders to propose a method for assessing the landscape of the coffee economy, identifying critical points, and developing a series of responses. The Board agreed to fund this work by committing significant human resources from the existing staff as well as a cash commitment to support the work. The initial funding comes from the operating budget of the SCA and we will be actively seeking appropriate ways to augment that funding from other sources.
STiR: Researchers I speak with find it difficult to get hard numbers from within the supply chain on expenses, margins, and how much of the retail dollar overall is available to compensate origin. In your announcement, you discuss the need for research “on producers and the entire value chain.” Everyone agrees we need real numbers. Will you elaborate?
Rhinehart: Over the years we have focused on understanding the economics of the specialty coffee sector, and have had some success in identifying the operating ratios of roasters and retailers in this space. In recent years the lines between specialty and commercial products have blurred considerably, making accurate assessments of market structures challenging.
This is further complicated by a tendency on the part of roasters to focus more resources on the marketing and positioning of their coffee products, and fewer resources on the actual quality and sustainability of those products. Consumer willingness to accept unverified claims of “sustainably sourced” and “highest quality” products has been leveraged to push prices down and margins up.
As part of this initiative, we aim to gain a better understanding of farm profitability and to support projects and platforms focused on greater value chain transparency and that include economic sustainability as a fundamental factor in assessing sustainability claims, and we will look for creative ways to link sustainability and quality with specialty in the consumers mind.
STiR: Price discovery, sans speculators who never take possession of coffee, is surely welcome. Will you discuss your ideas on how to minimize the often-harsh consequences of pricing volatility in the commodity coffee sector as it impacts specialty?
Rhinehart: I am increasingly convinced that the solution lies in basic transparency in the specialty coffee value chain. That is, specialty coffee roasters must be committed to knowing, at a minimum, the basic cost of production for coffee in the geographies where they purchase coffee, and the price paid at the farm gate for all coffees that they purchase.
The first part, cost of production figures, is being taken up by a variety of explorations, most notably by the International Coffee Organization, but also in myriad cases by NGOs and private sector actors. The second part, price transparency to the farm gate, is more elusive, but I believe that responsible specialty roasters can and must insist on access to this information when they work with intermediaries to acquire specialty coffee. Efforts such as the Data Backed Transaction Guide are well underway and will be useful in providing insight into how price discovery for specialty coffee might be undertaken. I also believe that this transparency is inevitable given advances in technology.
Finally, I believe that long term, fixed price contracts will be a key component of a thriving coffee producer economy, to reduce the volatility of the coffee market and to create opportunities for financing the sector in a viable fashion.
STiR: Coffee traded today is benchmarked to the wrong processing method in our view (washed vs natural). How significant is this institutionalized view of assessing value on the current crisis? Does it contribute to the pricing problem? Should it be changed?
Rhinehart: I think that there are two fundamental issues to consider here. First is the strongly held desire to have a highly liquid futures market that provided ample opportunity for price risk management for sophisticated market players. The current market satisfies this desire, but often at the expense of less-resourced market participants. Any change to the current system would have to satisfy the desire for price risk management tools and strategies.
Second, we must consider that the actors in the current market are not necessarily involved in the physical market for coffee at all and are using the futures market as a tool for currency hedging, complex derivatives, and other investment strategies. No fundamental or physical market arguments are compelling for these actors. Change will only be possible if there is a substantial shift in market participation.
STiR: Comment on alternate economic models for specialty coffee.
Rhinehart: There are many other ways for the coffee economy to proceed, and the specialty sector could both commit to driving towards economic sustainability for producers and manage risk with the current market tools. Unfortunately, there are too few incentives for specialty buyers to act in their own long-term self-interest.
The commercial actors are increasingly certain that there is no limit to substitution where consumers will react, and specialty roasters lack the resources or fortitude to message accurately to consumers. I suspect that any alternative market mechanism will include a push towards radical transparency that will have many detractors, but that will ultimately be adopted on the basis of inevitability due to technological shifts. That is, the key to sustainable purchasing in specialty is rooted in transparency, and advances in payment systems (block chain, et al) will ultimately result in fully transparent value chains.
With this initiative, our purpose is to help the industry discover these alternative economic models and find out how we can apply them across the sector. This is long-term work, but we have to start somewhere, and the time is now.