STiR coffee and tea magazine

28 STiR coffee and tea / Issue 4, 2018 (August / September) D By Dan Bolton "Direct" Defined ealing direct describes a business rela- tionship in which roasters meet individual growers face to face, exchange cash and bypass brokers and import/export agents. That is rare for any transaction involving more than three kilos of coffee. Direct sourcing involves jointly determin- ing the quality of the coffee with growers and then negotiating a price. Importers do the rest. In some coffee regions the relationship may be with a cooperative, or a processor operating a washing station. Transparency is a key element. Purchasing direct from a cooperative that does not have the ability to segment its coffee cannot be considered direct trade. The intent is to enhance green coffee qual- ity through regular and constructive exchange that includes travel to origin. Ideally coffee that is directly sourced is responsibly grown and ethically traded. Growers are encouraged to manage waste, protect water quality, conserve energy, reduce agrochemical use, and preserve biodiversity. Direct sourcing may circumvent third-party certifiers but that is not the goal. In many instances, alternates such as the coffee and farmer equity (C.A.F.E) practices estab- lished by Starbucks rely on third-party verifiers to determine compliance with regulations such as minimum-wage, child-labor (and forced labor) and discrimination. Nespresso's AAA sustainable quality pro- gram, founded in 2003 and serving 70,000 farm- ers in 12 countries, is another example. The program is administered in cooperation with the Rainforest Alliance to address systematic risks within the coffee supply chain. Here is a summary of key aspects of direct trade gleaned from Wikipedia and other sources: • Paying higher premiums to farmers than those mandated by fair trade; • Tying these premiums to specific quality standards that create a sustainable economic rationale for higher prices; • Allowing participation by individual farmers and processors, regardless of size or member- ship in a cooperative; • Generating additional supply chain trust and transparency through personal relation- ships, price negotiation, and information sharing. Done well sourcing direct empowers pro- ducers and delivers roasters consistently high- quality coffee. Green coffee contract Traders rely on industry protocols established in the 1920s to resolve disputes whenever the coffee ordered differs significantly from the coffee that arrives in port. Standards and simple solutions like discounting for observable defects and subtracting the weight of stones and debris from the price paid resolve most disputes. The focus is on visuals. Arbitration panels meet periodically to consider more thorny questions and insurance settlements resolve the rest. Disputes involving specialty coffee are more challenging. When a trader accepts responsibility for transporting coffee from origin to roaster, the most important consideration is taste. The first cup quality test dates to the early 1900s when green coffee broker Clarence E. Bickford at Hills Bros. insisted on blind tastings. The company was an early adopter, reasoning that when it paid a premium it should be based on characteristics evident to consumers. The most recent considerations include sustainability, which brings into the assessment of quality attributes such as environmental and labor practices. While the Green Coffee Association (GCA) conventional contract terms are used as a basis for transactions in mainstream physicals and futures mar- kets, they differ from several "alternative" contracts that exist to promote specific sustainability systems. These certifications are devised by non-gov- ernmental organizations and third-party certifiers including UTZ | Rainforest Alliance, Fair Trade (FLO), and by private companies like Starbucks' (coffee and farmer equity preferred supplier program) C.A.F.E.practices. During her many years as a trader, Trindle Mersch advocated for a multi- party contract designed to protect merchants like Atlantic and Zephyr. "It is the importer that usually pays the producer or exporter for the cof- fee. Importers may pay out $100,000 or more per container, including high priced green coffee and service fees," she explains. "If the roaster doesn't like the quality, precisely who is accountable?" she asks. "Even if the roaster is ethical and the two sides work it out, at a mini- mum the importer is on the hook for the entire time it takes to settle the dis- pute," she said. The worst case is when the buyer refuses to accept the shipment. The trader is then stuck in the middle and must find a buyer. "I've seen that occur and it is very dangerous business," she said. Multi-party transactions involving direct sourcing are not covered in the green coffee contract, said Trindle Mersch. To address that concern the Specialty Coffee Association in 2012 formed a committee that worked with its attorney Marshall Fuss to draft model amendments to the green coffee contract. The following year the committee was expanded to include representatives of the National Coffee Association and GCA. The goal was to create an alternative contract with standard clauses ad- dressing terms and conditions unique to multi-party transactions, said Trindle Mersch. The committee exchanged drafts and met through 2015 "before it fizzled out," she said. The work remains important, she says. "Honestly, I'm still quite passionate about it. If anyone is ready to pick up the baton I'm still at the ready to run," said Trindle Mersch. "Offering direct trade services is an opportunity to stay relevant with a new generation of roasters," said Lutz. "Zephyr has publicly committed with Conservation International to grow our direct trade business to 10% of our total volume," he said. "Contract language that enables all parties to better understand the ob- ligations will facilitate direct trade. In this ever-changing environment it is crucial to ensure that we "future proof" any standardized agreement to help entrepreneurs and innovators apply new technologies to our industry. Self- fulfilling contacts as well as e-commerce trading platforms come to mind, but also social/impact financiers like Root Capital will benefit," said Lutz.

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