Session 3: Bridging the Gap
by Nancy Zamierowski
Collaborative Trade is fundamentally about people, and providing opportunities for each person to help create systems that work better for everyone involved. Yellow Seed and Impact Hub Berkeley’s “From the Ground Up” accelerator series on Collaborative Trade is a prototype of this process in action, providing a space for direction and partnerships to emerge. The second topic (encompassing sessions 3 and 4) of our series focused on “the risky business of logistics and supporting finance.”
Session 3, entitled “Bridging the Gap” and held on February 23rd, gathered 12 leaders working in the logistics, finance and business spheres of sustainable cacao, coffee and the food industry to share their voice and co-design ways to remove barriers to trade (see participant list below). The conversation focused on the challenges to finance and logistics that emerge during international trade transactions focussed on ethical sourcing. Information sharing and topic-led discussions resulted in key learning around our initial organizing questions as summarized below: For a more detailed summary of the discussion, see the Yellow Seed blog.
- What are the challenges to capital flow for buyers, intermediaries and farmers?
Farmer/Origin: The most significant financing need of the cacao supply chain is pre-harvest financing at origin as processors and cooperatives need money to pay farmers and workers for their products and labor well before the product is paid for by the exporter or importer. Farmers also need small loans for projects that improve productivity, quality, and potentially value-added processing in country. Financing may be provided through intermediaries working in country, micro-loan programs, development agencies, and other organizations (often working through field agents and/or associations).
Buyers: There is a “missing middle” of buyers purchasing between 2 and 50 metric tonnes of cacao, suggesting that product makers require financing or coordination support to purchase at levels that make shipping cost efficient (i.e. full container loads of 15 to 25 MTs rather than expensive airfreight of 1-2 MT). Smaller buyers are also constrained by cash flow issues and lower volume production, making the risk of a bad shipment of beans more severe. Smaller loans or coordinated shipping could have huge economic and social benefit for farmers as more people could access higher quality chocolate.
Intermediary: Importers bear the majority of the financial and logistical risk. They are responsible if anything goes wrong during sale and transport of the product or if the product is rejected. It is also often the responsibility of the importer to sell any excess cacao. Advance knowledge of market demands or efforts at coordination among smaller and medium sized chocolate companies will reduce this risk.
It is a larger commitment of time, resources and operational costs for traditional intermediaries to track and coordinate speciality cacao directly at origin, requiring constant communication, many one-on-one visits and the management of smaller orders with many details and unique preferences.
- How can risks and rewards be distributed more evenly across the supply chain?
Intermediary plays a key role in risk and market coordination:
Intermediaries include buyers, exporters, importers, service providers and a combination of these roles. The intermediaries often coordinate a number of activities from providing inputs of seedlings, financing, collection, fermentation, drying, sorting, bagging to coordinating shipping and logistics. They also offer a direct relationship with farmers and processors in order to provide consistent oversight, technical support, logistics and finance support key services such as pre-harvest financing, and
Direct relationship with farmers at origin and translating that across the supply chain is key for intermediaries to facilitate technical assistance, oversight and a high level of verification. This is done through partnerships with service providers, and “field agents” in frequent and direct communication with farmers.
Knowing market demand reduces risk:
If there is a way to accurately estimate market demand for specialty cacao products, the exporter/importer will try to meet that market demand and likely take more risks in coordination with farmers. The greater the demand, the more resilient the market is and the higher level of diversification and investment can occur. In general, demand for speciality cacao is much less developed than that of specialty than coffee. For speciality coffee, there’s a lot more mid-sized to establish grocers in the States who are buying a more significant volume. Without that demand, it’s difficult to reward farmers who invest in sustainable production and quality.
A shared language of flavor is key to communicating value and empowering farmers
Like wine, cacao tastes different from different locations. However, the cacao market has yet to form a standard sensory language to describe the unique characteristics found in the diversity and variety of beans from around the world. Currently buyers rely on testing samples but without a standard language of flavor, have little way to communicate feedback to farmers or align preferences for collaborative purchases. A sensory language can enable “farmers to understand how to be craftsman with the production side of cacao then they become businessmen the same way a craft chocolatier on this end becomes a businessman,” says Nick Spilger, from Bean Stock.
Information drives markets
Information is needed on all sides to ease trade transactions and reduce risk:
Farmers and intermediaries on the ground need preferences and feedback from buyers to understand how to create the quality to match preferences or meet standards required.
Financing intermediaries need buyers to specify terms and preferences for pricing and ordering of speciality products in order to bridge the gap. Transparency correlates to trust and verification needed to manage loan or verify quality
Specialty buyers often prefer to have a direct connection to the farmer or processing facility in order to achieve quality desired and verify the origin and support their story.
- What are ways parties can work together to more equitably exchange what they need?
Collaborative shipping for cost efficiency
Many smaller chocolate makers have begun to collaborate on importing container loads together, reducing risks and saving costs. In this way farmers can be rewarded for the work done to improve quality and typically earn over 100% the world market price. A menu that buyers could use to learn about the farm, state preferences and agree upon orders would support collaborative shipping. Awareness and visibility of these details is the first step towards market coordination.
An open platform for information sharing across farmers, buyers and intermediaries is needed.
It was proposed that creating an open platform for information sharing could create more efficient trade for all parties. For example, reducing the admin costs of one-on-one communication for farmers and intermediaries who often provide the same information to a lot of people. For example, one could see a menu, ‘Look if you like the strong coffees or if you like floral, fruity, nutty kind or perhaps the wild flavors’ might increase the conversation on what is possible to buy.”
The learning themes that emerged out of Session 3 provide key insight and understanding of the specific needs and effective mechanisms around the finance and logistics of collaborative trade. This greater understanding will lead to strengthened partnership and projects that benefit farmers, traders, chocolate makers and everyone within the supply chain.
Jon Bloom, Kiva
Gina Cooper, Prosperity Exchange
Daniel Goldman, Prosperity Exchange
Maya Granit, Uncommon Cacao
Chris Lai, Horizons Ventures
Lawrence Nussbaum, Collaborative Trade Fellow, From the Ground Up
Lindsay Smalling, SOCAP
Nick Spilger, Bean Stock
Tim West, True West Ventures
Kathryn Cavallin, ECOM Trading Company