Change Accelerator: Session 3

Impact Hub Berkeley’sFrom the Ground Up” is a four part, year-long program that brings together multi-stakeholder organizations working in sustainable food and agriculture to collaborate on joint initiatives. The change accelerator combines dynamic innovation salons, public-facing education programs, and community building events to drive systemic change in the following areas: (1) Collaborative Trade, (2) Living Oceans, (3) Soil Health/Carbon Farming (4) Local Food Systems.

 

Collaborative Trade Change Accelerator

Session 3:  Bridging the Gap

 

Collaborative Trade is fundamentally about people, and providing opportunities for each person to help create systems that work better for everyone involved.  The accelerator series is a prototype of the process in action, providing a space for direction to emerge. The second topic for sessions 3 and 4 focused on “the risky business of logistics and supporting finance.”

 

Session 3 gathered 12 leaders from logistics and sustainable finance companies and businesses in sustainable cacao, coffee and food industry together 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.

 

Participant List

 

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, Blue Bottle Coffee

Tim West, True West Ventures

Kathryn Cavallin, ECOM Trading Company

 

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Session 3 Summary

 

The 3.5 hour session included introductions and a PPT overview, co-creative topic development, topic-led discussion and synopsis and action-step design.  Below is a summary of learning, followed by an detailed account of the topics discussed.

 

Financing needs and challenges for each player

 

The topic explored the needs and challenges for each player. A key voice missing in the room was the speciality cacao buyer.

 

Origins:  The most significant financing need of the supply chain is pre-harvest financing at origin. Processors and cooperatives often need pre-harvest financing to pay farmers and workers for their products and labor before the product is paid for at export or by the buyer at import.  There are also other loans offered to farmers for smaller projects that can improve production. Intermediaries working in country may offer these loans, about $500 on average.

 

For many of these farmers, there is no other financing option. It leads to increased productivity for cacao farmers or an opportunity to add value-added processing in country.

 

Buyers: There is a “missing middle” of buyers purchasing between 2 and 50 metric tonnes suggesting that product makers require financing or coordination support to purchase at levels that make shipping cost efficient. Orders of 1-2 MT are often shipped via airfreight.  Smaller buyers are also constrained by cash flow issues, making the risk of purchase or receiving a bad shipment of beans more severe due to lower volume of production. 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 often the responsibility of the importer to sell any excess cacao.  Knowing demand and a coordinated market would reduce this risk.

 

Intermediary plays a key role in market coordination

 

These intermediaries coordinate many functions 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 and support. Importers also offer additional services such as pre-harvest financing. These functions reduce risk and achieve quality and consistency the market demands.

 

Knowing market demand reduces risk for finance intermediaries

 

When asked what reduces risk for the intermediary in importing more speciality cacao or providing loans, the answer that ‘it is often demand driven.’ If there is market demand or a way to estimate demand, the importer will try to meet that market demand and likely take more risks. The greater the demand, the more resilient the market is and the higher level of diversification within a market can occur.

 

In general, demand for speciality is less in cacao 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. And without that demand, it’s hard to reward farmers who have invested in producing a quality product and who is promised a higher price.

 

Collaborative shipping for cost efficiency

 

Many smaller chocolate makers have begun to collaborate together on importing a container together shipping to reduce risks and save costs. In this way farmers can be rewarded for the work done to improve quality and typically earn over 100% the world market price.  “Kate from Ecom Trading company suggests, “You can be creative with the shipping.  It’s just having the demand be concrete and continuous.”

 

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.  

 

A shared language of flavor is key to communicating value of a speciality product and empowering farmers

 

Like wine, cacao tastes different from different sources. 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 also 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

 

Beyond flavor, there is Information needed on all sides to ease trade transactions and reduce risk. Specifically there was a lack of the following information:

 

(1) 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.

(2) 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.

(3) 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 story the support. With a direct connection, there is an opportunity to work together as partners in the supply chain.

 

High costs of coordination, transparency, verification challenge intermediaries

 

The costs of knowing where products come from is expensive to track and coordinate. 1:1 communication and product diversity add an extra layer of burden to any intermediary trying to coordinate number of details for smaller orders with unique preferences.  “From my personal experience it’s a lot of back and forth emails, it’s a lot of interviews with farmers, it’s a lot of pictures, it’s a lot of video, it’s a lot of personal visits. It’s really a time commitment and a resource commitment,” says Kate from ECOM Trading Company. Kate also spoke to the importance of a direct relationship with origin that add a level of verification and technical assistance to support market connection. However, this also adds operational costs.

 

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 1:1 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.”

 

Who funds that information layer?

 

“The cost of the communication layer of the market infrastructure or like the platform you are trying essentially trying to build is like the tragedy of the commons, where it is not in anyone’s best interest to fund this ability to see into the buyers and suppliers to support the farmers.”

 

Thank you for your participation and the opportunity to pilot Collaborative Trade  with us.

 

Co-creative topic development

 

After introductions, we took a few minutes to co-design the session before jumping into the discussion.  We reviewed the original discussion prompts and asked “what’s alive for you” and “what attracted you to this session” to better shape the discussion around the desires and energy present in the room. Discussion interest coalesced around 4 major themes:

 

(1) What are the needs and challenges to capital flow for buyers, intermediaries and farmers? What are the levels of financing needed?

(2) How can risks and rewards be distributed evenly across the supply chain?

(3) What are current innovations and options within financing?

(4) Who else is critical to this conversation? What are ways parties can work together to more equitably exchange?

 

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Topic-led discussion

 

Yellow Seed engages community directly in the decision-making process. We believe individual voices coming together accelerates learning and allows the Collaborative Trade  movement to grow. Topic-led discussions allow for wisdom to emerge from what is current and relevant and allows equal opportunity for people to share as they feel called.  We documented the conversation here, highlighting stories and experience shared, so you can join the collective learning process throughout the series. 

 

The conversation kicked off organically after introductions with an exploration of needs and challenges to capital needs for each stakeholder.

Who else is critical to this conversation?” asks Lindsay Smalling, Vice President of the SOCAP, an annual conference that brings together social entrepreneurs with the impact investing and the social capital market.

“And what is the scale of money you are talking about?” Daniel Goldman, co-founder of Prosperity Exchange an organization focused on growing collaborative economies and collaborative business models chimes in. “Are you talking about millions of dollars, tens of millions, billion? Because that will change who you need to have at the table and the whole political side of it as well.”

Maya Granit from Uncommon Cacao offers, “Well it depends.” Uncommon Cacao operates two export companies, one in Belize and the other in Guatemala, partnering with smallholder farmers and farmer associations who produce cacao. “If you are talking about servicing one farmer who has a one-acre plot, $200 U.S. dollars goes a really long way. If you are talking about servicing a chocolate maker who is trying to buy one bag of beans, actually that same amount of money will probably go a long way. If you want to service a medium-sized chocolate marker, you are talking about tens-ish thousand dollars. If you want to finance a container, it’s different.”

Maya mentioned she has been working in Belize with Kiva for the last four years and adds “it has totally revolutionized the local economy of the entire southern part of the country.”

Daniel asks, “So, what was the total amount of the Kiva loan per year?”

Maya replies, “The credit line is about $100,000 U.S. I believe about 150 or 160 loans have been distributed with an average of like 500 dollars per loan. Belize is a tiny country. There are barely 350,000 people in the entire country. Seventy percent of the population is at or below the poverty line.  We are the biggest exporters out of Belize and we export about 60 metric tons this year. That is tiny compared to Ecuador. Kate, how much are you doing this year?”

“In Ecuador, we have about 3500 of metric tons of certificated or small farmer purchasing. Then about 20,000 in total,” responds Kathryn (Kate) Cavallin. She works with ECOM Trading, one of the largest global purchasers of cacao and cocoa products. Kate was originally introduced to cacao as a Peace Corp volunteer in the Dominican Republic and has been working closely with many of the small chocolate makers over this last eight years that have a large social mission to better serve farmers at origin. At ECOM she has had an interest and opportunity to grow this speciality market and create a positive impact. Kate offers the group some framing of the goal in working with farmers, “ECOM aims to support the small farmer to improve trade and earn fair price. Then in terms of the chocolate maker side, from my experience, it goes back all the way to 2008 when Taza chocolate air freighted shipments of one or two tons of cocoa because they are just starting out.” (Now Taza Chocolate imports over 200MT annually, according to their latest impact report.) “The difference between moving to those small one or two tons is about $10,000 dollars versus an entire container rate of $60,000 or $70,000,” which holds about 25 MT.  She mentioned that it is not cost effective for makers to be shipping small amounts by air, nor do [small speciality purchases] provide income consistency for the farmer.

Maya adds a key challenge, “I think we also missed a very critical role, which is the exporter who often needs pre-harvest financing. ECOM provides support through pre-harvest financing and is probably the most significant part of the whole financing operation.”

I chime in, “Yes, Yellow Seed has noticed about 90% of makers we interviewed produce below 2MT and the remaining 10% produce at a capacity above 25 or 50 MT.  So, there is a large gap between sourcing 2MT and 25MT likely due to economic pressures and efficiency of scale that shipping requires.”

Daniel asks, “Do you have a dollar amount associated with that?”

I add, “So a container of Fair Trade Certified cacao is about a $200 premium of the market price of cacao, so about $2800/MT or so.  On the high end, I’ve heard some specialty cacao can sell for as much as $8,000 per metric tonne or $200,000 a container to craft makers who are looking for beans that are special and unique.”

Michael adds, “There is a missing middle. Big companies come in where smaller buyers are not willing to go.”

I agree, “Right, what we have noticed is there may be demand for higher quality cacao by specialty markets but it is uncoordinated. Without coordination there is a lack of market power and demand. This leaves smaller buyers relatively invisible to the current trade system. Similarly, smaller product companies that use chocolate in different forms such as paste or chips face similar challenges of finding smaller amounts of cacao that is sustainable and from sources they trust.  Processing companies generally process in very large batches, so generally there is not enough scale to process specialty orders for one product maker. I am curious if there are ways to surface and aggregate demand and preferences from these buyers. For example, what if efficiencies of scale can be met via collaboration and the power of a coordinated network? Collaboration on shipping containers has begun to happen in the cacao industry led by a few pioneers.” Then thinking back to how to finance that container I added, “I’m curious to hear from the finance folks in the room, what is helpful to know in order to loan to farmers and buyers?”

“In the last three years, we have opened up our platform and started working with companies like Uncommon Cacao,” replies Jon Bloom, Portfolio Manager, South America at Kiva.org. “We see our money as somewhat special because it is interest free. We take risks and finance things that others often won’t. Our lenders allow us to do that because they are risk tolerant. So my question today is ‘how can Kiva be most helpful?’ Where are the other financing needs at Origin or on the side of the farmer? And how can we best mitigate the risks as responsible fiduciaries of our lenders money, but at the same time take on more risks that would normally be taken on by financing?”

Maya chimes in, “Yeah, exactly. So currently we are working on an exciting cross supply chain lending solution in partnership with Kiva. Like I mentioned, working in Belize directly with smallholder farmers, the credit line is $150 K with average loan size of $500 to smallholder farmers. Then the next size up we work with in Guatemala is the Associations.  Associations have between 20 and 80 farmers that all process their cacao at a centralized fermentation and drying facility together to achieve a higher quality product. Those associations often need cash. Working with Kiva, Uncommon cacao has been able to finance associations to support the construction of fermentation and drying facilities or seedling projects for example.”

We are also beginning offering financing for chocolate makers, with 90 day terms, which enables them to create a product and sell it to ease some of their cash flow issues. Chocolate makers can then buy cacao in larger volumes – maybe three metric tons at a time,” Maya says.

Daniels asks, “What loan sizes are you talking about for them?”

Maya responds, “This program is still in development, but the minimum loan would be about $1,000 or $2000 dollars up to say $20,000. The short-term lending would be for partners who are well established. Uncommon Cacao will require loan criteria and vet in both directions because we have these sort of long standing partnerships with organizations across the chain.”

Kate asks a clarifying question, “Is this because a lot of small chocolate makers are putting it on their credit cards? Is that the part of what you are solving for?”

Maya adds, “I think it is just a cash flow issue for chocolate makers. A lot of small chocolate makers don’t have the option of putting their bean purchases on credit cards right now. Even some of the bigger makers, or relatively bigger, say 25-30 MT a year are still small businesses.”

 

Maya adds, “I think it is just a cash flow issue for chocolate makers. A lot of small chocolate makers don’t have the option of putting their bean purchases on credit cards right now. Even some of the bigger makers, or relatively bigger, say 25-30 MT a year are still small businesses.”

 

Michael suggests, “This is like a harvest loan for chocolate makers.”

Lawrence adds, “Or like lending credit basically for the beans.”

Maya agrees, “Yes, Exactly.”

Michael asks, “Are your all loans short term? Is it all under 90 days?”

Maya responds, “For chocolate makers, yes it’s 90 days. For associations, it would be like six months. Then for smallholder farmers, it is two years.”

Michael Anzalone,  Project and Community Manager  for OSC2 (a coalition of CEO’s and founders  in the natural products food industry, which includes brands such as Mary’s Gone Crackers, Numi Tea, 18 Rabbits, Alter Eco, and Guayaki) adds,  “One of the financing projects we were working on was coming up with financing solutions or low cost loans for capital and infrastructure improvements, for international farmers. A lot of our participating companies sourced their materials from developing countries, and they were self-financing the capital improvements to help their farmers scale. He mentioned that RSF Social Finance is piloting a fund that emerged from an initial conversation about that. “The problem certainly hasn’t been resolved. The need is still there and I think there is a ripe opportunity here for us to be applying and looking for solutions in other places that might be relevant.”

 

Mike shares,“One of the financing projects we were working on was coming up with financing solutions or low cost loans for capital and infrastructure improvements, for international farmers. A lot of our participating companies sourced their materials from developing countries, and they were self-financing the capital improvements to help their farmers scale.  “The need is still there and I think there is a ripe opportunity here for us to be applying and looking for solutions in other places that might be relevant.”

 

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Lindsay empathizes, “Financing a centralized processing facility for example might create more efficiency and would be an easy investment for someone who is looking to do an investment at that scale with impact. But, it just not really right for a newbie or small enterprise to do it.”

Michael agrees, “Yeah, the challenge has been initiating those projects. It is essentially long-term debt.”

Daniel asks, “What happens to the cacao farmers if they can’t repay the debt? Do they lose the farm?”

Maya shakes her head, “No, no definitely not.”

 

Jon adds, “The biggest consequence is generally you don’t get another loan right? It’s your future credit.”

Daniel clarifies, “Your credit rating?”

Maya, “Yes.”

Jon says, “We trust our field partners to make those kind of decisions on a case-by-case basis.  One of our biggest advantages is we absorb the risk if the client or farmer doesn’t pay [our field partners] back. We want to take that risk. If you can justify that loss with social impact, than we are good.”

Daniel asks, “How does the money lead to increased productivity for the cacao farmers or does it? Is it just a better finance than they would otherwise get?”

Maya replies, “Well, there is no other financing option. They can’t easily walk into a big bank and ask for financing.”

Daniel ponders, “So if you have to take out the loans and you are not growing or your productivity is not going up, than you are kind of on the edge a lot of the time, right?”

Maya speaks to the opportunity, “Yeah, it really varies from farmer to farmer. We have seen farmers who have used their loans to invest in new tools for pruning for example. Then with the help of our field officers, they cleaned up their farm where just with their pruning they doubled production by the next year. We have had other farmers who have sat on their loans and did not have success. I think we learned a lot in the first year in terms of how to vet farmers through kind of community interviews. The biggest thing we learned, was to have a cosigner who is responsible to pay. Usually that is the wife.”

Jon asks Maya about the responsibility of managing the loans, “Do you want to be the financing option? If you had the option, would you rather have someone else manage the operational constraint of running the lending program? Has it been tough for you guys to do the financing?”

Maya admits, “Yeah, definitely. The person who is in charge of all of our finances in Belize is also managing loans for 100 farmers at a time, who come in for various issues.” She adds, “It’s a lot of overhead, but on the other hand, it is great that we are the ones that are the face of this friendly money to farmers.”

I asked, “Help me understand the process for vetting the farmers for the loan and then the managing of the loans? Is there an entry process? And then what is the work involved with maintaining the loans?”

Jon speaks to the challenges and strengths of a crowd-sourced lender model, “For Kiva, we are not a regulated financial institution. We have delicately been working with the IRS to keep our 501(c)(3) status, but also to be able to lend directly to organizations instead of what our mission statement says which is just microfinance. We know that we are a heavy operational burden for our partners. At the same time, one of the things that people really like about Kiva is that they are tiny little loans and they can be part of them. Uncommon Cacao could probably benefit much more from a 200,000 direct line of credit, or a use it when you need it type thing from Kiva. However, that doesn’t function the same way on our website.”

Daniel clarifies, “You provide extension services basically in farming. I’ve seen models that split between the loan and the extension services in order to support the adoption of the practices. Say a loan is $300. They loan the initial $100 then they go out and they audit, which adds costs before loaning the rest. There is often more compliance with these programs and [the recipients] don’t end up as much in debt. Then all of the insurance, reinsurance is done mainly around disaster. They use satellite imagery often for that just if there isn’t enough rain basically. They try to minimize the kind of overhead that they have associated with it.”

Lawrence adds, “The strength in what you are doing is you are providing the support and technical assistance, in addition to loans.”

Daniel adds, “Yeah, you do that before the loan, before you have the meeting.”

Maya also agrees. “Yeah.” And she asks Nick, “Do you do any creative lending?”

 

Nick Spilger of Bean Stock, a technology being designed to help importers move spot coffees faster so they can free up capital and to share stories that share the value of coffees that are differentiated and higher quality replies, “No, not yet. We are still just in the initial phases and have been interviewing importers and roasters to understand their pain points. One thing we noticed is many importers have [financial] challenges when they import spot coffee because you can’t always wait until someone contracts that coffee before importing it into the country. So importers do these unique marketing things to try and get their products out there once in the the country.  For example, they will create email blasts, yet they have no measurement around its effectiveness. They also sent out tons and tons of samples that often end up getting wasted. So Bean Stock is really focusing on that process [of matching] and a platform where roasters can basically input preferences and improve recommendations for spot coffees to various importers. As more samples are cupped and rated, the more the preferences of those roasters [are aggregated] to create better recommendations to the spot coffees from the importers. I think the storytelling aspect of it is key so that roasters are able to sell more coffee to their consumers.”

Nick continues, “So I’m not sure how it is for cacao, but for coffee, it seems like most of the importers bare a lot of the financial burden and risk because they are the ones who essentially front the roasters the coffee that they need.”

 

Nick continues, “So I’m not sure how it is for cacao, but for coffee, it seems like most of the importers bare a lot of the financial burden and risk because they are the ones who essentially front the roasters the coffee that they need.”

 

Lindsay reflects,While the [cacao] market has not reached scale, it seems like we can figure out the finance piece.  For the most part it is sort of a known quantity that if you were able to get these smaller loans to the [smaller buyers] who have been vetted properly that they could have huge economic and social benefit.”

 

She continues, “And I’m curious, who is taking on the financing risk, the importers or exporters? And how is the chocolate maker able to go from 2-5 metric tons to a container? Do they need an equity investment because they are growing or could this be like slower debt financing? I feel like if we answer some of these questions there will be more people making craft chocolate and there’s more people in importing and exporting that eventually trickles down to more financing for small local farmers. And I am curious to learn a bit more from you, what does it look like now versus how you want growth to look like as the exporter, importer and chocolate maker?”

 

Lindsay inquires “And I’m curious, who is taking on the financing risk, the importers or exporters? And how is the chocolate maker able to go from 2-5 metric tons to a container? I feel like if we answer some of these questions there will be more people making craft chocolate and there’s more people in importing and exporting that eventually trickles down to more financing for small local farmers.”

 

Daniel asks a clarifying question, “What does the exporter do? What is their role in the ecosystem?”

Maya chimes in first with an example, “Smallholder farmers produce too small an amount of cacao on their own to create a product that achieves a consistent fermentation and drying level if they are to ferment on their own farm. So as exporters in Belize and Guatemala, we aggregate cacao from a lot of different farmers. That includes literally driving to their farms in many cases. The bread and butter of these exporter businesses is collecting, fermenting and drying cacao. We also often sort the cacao and then bag and ship it. In addition, we also run seedling programs and we’re acting as a bank essentially through Kiva. We are building a demonstration farm working with smallholders in the area to kind of teach best practices in farming or newest practices, trainings and crafting, tool lending programs and things like that.”

Maya continues, “So Kate and I have very similar operations hers is just like 100 times as big.  And Atlantic or ECOM is a partner who supports us with financing and logistics. And the work ECOM is doing is essentially enabled the craft market to grow, a market that otherwise has very little power.”

Dan asks,  “Who is ECOM?”

Maya: “Yes, ECOM is one of the biggest commodity trade houses in the world.”

Kate chimes in,  “The operation that I report to is an ECOM company. It’s a supply chain manager of cocoa, coffee, cotton and it’s a very decentralized operation so we have origin based operations, we have processing-based operations and we have trade offices. In terms of sort of filling the gap, we understand that the proximity to the farmer, especially for the chocolate maker, is most important thing. We are more comfortable in providing services to the small chocolate maker industry as well as the small farmer.”

Daniel asks Maya, “Is the financing you receive manageable for you?”

Maya replies, “Yes, ECOM has financed up to 75% pre-harvest financing of almost every container we’ve shipped out of Belize. This money can then go directly to farmers to buy their cacao and then process it during harvest. It is very reasonable. And once the container is shipped, the risk is turned over to ECOM and that’s when the exporter is paid.”

Dan asks about the risk of repayment, “What if there’s a crazy cacao blight?”

Kate answers, “I think for any lender this is a business; this has obviously happened to us before. The ideal would be to recuperate the loss as quickly as possible and then we understand that the loan would probably restructured the following year. And Belize is one of the highest advances that we offer because we are really trying to grow the business that Maya is running.”

I ask about the process for assessing a lending relationship, “What do you look for when you begin a relationship with a borrower? What steps do go through to develop if that’s a good lending situation or not?”

Kate replies, From my perspective, much of [vetting a lending relationship] is demand driven. For example, if Maya and her team have done an excellent job marketing, which means there are 150 chocolate makers who are interested in buying the 12 tons that you’re shipping, then we’re going to try and meet that market demand and we’re more likely to take risks to import it.”

 

Kate replies, “From my perspective, much of [vetting a lending relationship] is demand driven. For example, if Maya and her team have done an excellent job marketing, which means there are 150 chocolate makers who are interested in buying the 12 tons that you’re shipping, then we’re going to try and meet that market demand and we’re more likely to take risks to import it.”

 

I confirm, “So it simplifies things for you, if there is something that’s connected to market where you can see that there’s a potential for for those beans to get sold.”

Kate replies, “Right.”

Daniel asks,  “And what’s the mark up through the export phase and how much the farmers get paid and import?”

Kate speaks to how terms get decided, “From the ECOM perspective we hear, ‘this chocolate maker would like to have a direct relationship with this cooperative or this export business.’ Then the chocolate maker and the exporter or the association have a conversation about what price they want to pay and ECOM provides them with the transparent list pricing for shipping, warehousing, and services.”

Daniel clarifies,  “Is it about twice as much when it goes out the exporter?” For example, if you pay the farmer, say $300.00, does it go out the door from the exporter at $600.00?”

Maya replies, “Farmers in Belize are getting over 100% of the world market price in their pockets. We sell at about $3,200 per MT and ECOM’s recent FOB price is about $5,600. And so the revenue that Maya Mountain Cacao is getting is 65% of that is going directly to farmers, which is not an [economically] sustainable model especially given all of the other services that I mentioned.”

 

~The session breaks and the size of the group decreases in half for a more intimate conversation for part 2 of session 3. ~

 

The session reconvenes to continue to explore the role of the importer and challenges for the buyer who does not want to purchase a whole container. We realized that the perspective missing in the conversation was one of the smaller cacao or coffee buyer.  

 

Nick shares innovations happening in specialty coffee including repackaging or consignment models that distribute risk and reward. “Often the roasters and importers will break the beans into smaller bags and sell them at a higher price” to a market that otherwise would not able to purchase the product at all. “This model is consignment, so the roasters and importers bring the coffee into the US and market it. The mark up allows them to recoup costs or risks in import. However, the farmer bears some of the risk and reward along with them and if they do sell it, they split the markup with the farmer.”

Jon asks an important question, “Isn’t that not necessarily solving the farmer’s immediate need of cash?”

Nick replied,  “Right, no. It seems paying cash upfront is still a major challenge of coffee as farmers won’t receive full payment until the process is completed.”

The conversation shifted into understanding cash flows of a chocolate maker.

Lawrence sketches a few points out, “Cacao is sold at about $3000-6000 a MT. A tonne can produce about 15,000 bars, (.20¢-.40¢) which wholesale at about $4-$5 a piece.”

And Jon was curious to understand more about what gaps exist for the smaller maker. I did my best to reply on behalf of the buyers, “Like Maya mentioned I believe it’s a cash flow issue and a capacity issue. Shipping costs make it more economical to buy a full container but many small makers don’t need the total 25MT. For example, one maker needs 5MT for operations and finds two other buyers to split a container but then they still need to sell 5MT to a new market. There is a need for financing to bridge capital flows throughout the production cycle. And there is also the added risk of finding a market to buy the extra beans as well as extra storage and admin costs associated with that.”

Jon clarifies, “And that financing would be a similar bridge loan and is just a way to give them the upfront capital to buy a better prices that allow them to make the margins that they need to make?”

I reply, “Yes and I’m curious if there are options. Kate, if a buyer only needs a portion of the container, whose responsibility is it to sell the extra beans in the container. Would ECOM take on that responsibility as well?”

Kate replies, “It depends. In the US, Dan Domingo may take that responsibility and it’s his job to sort out the potential from the demand side. And with ECOM we often have other outlets to sell, providing a safety net.”

Kate continues by offering a bit of context of opportunity of collaborations, “We ship 20 and 40 foot containers. I think the max amount you can put in a container is about 15 tons, usually around 12.5 and the max you can put in a 40 foot container is 25 tons.” And offers an example of collaborative shipping model, “Now it depends, we began a pilot project in the beginning of last year where we got together about four or five different associations or small farms that were able to give us at least a ton and a half of cocoa.  We shipped a 12 MT container to Atlantic with four or five different types of cocoa.  So if there’s an association or an exporter who has 25 tons and the chocolate maker needs five of it…. Well, it can all depend on certification, flavor profile, and it all depends on price. If we can also sell some of a container to a different buyer, then it’s easier for us to pick up that whole container and have inventory in the States.  I know it’s a big effort on the part of chocolate makers to bring in a shared container, which is why I think I’m just really interested to hear more from chocolate makers and more this side. As Nick said earlier, the import is really risky because on my side I am trying to get farmers to really push their quality, to really improve – working with them, we’re putting a lot of additional resources in and we are expecting to sell it at a higher price. The question is if the market is there. That’s why I think Yellow Seed is a really great opportunity for people to get awareness about quality cocoa.”

Kate adds, “The question is if the market is there. That’s why I think Yellow Seed is a really great opportunity for people to get awareness about quality cocoa.”

Michael asks, “What tools are you using to assess the market demand side?”

“It’s a pretty solid group of chocolate makers who have really started to form – it’s not an official association or bond but there’s a good number who are participating in a lot of industry events and beginning to collaborate.” She spoke to her excitement of engaging with this new market and opportunity to create positive impact, “This is the fun stuff” and adds “just because you’re talking to a big company doesn’t mean we’re not just as interested in [serving this new market] because we want to feel good about what we do too.”

I add, “That’s great. What are the challenges with organizing collaborative shipping containers? Because I understand that may take more energy on your side to coordinate.”

Kate agrees, “I think part of it is the relay between chocolate makers. It requires use to send out tons of samples in order to gauge interest. We actually have a lot of flexibility at origin to create a mixed container. For example, part of the container can be conventional cocoa or bulk, so you can be creative with the shipping. Again the challenge is just having the demand be concrete and continuous.  And building that demand takes time,” Kate says and adds “but I do think there are many buyers looking for something special.”

Lindsay begins to sketch a visual map, “I want to make sure I’m understanding the need. So from the maker side and from a financing perspective there is a credit need but also a cost efficiency need; so if you’re a small maker you’re absorbing some higher costs because you need smaller quantities and can’t ship efficiently. And smaller buyers often want a variety of product, so sourcing from multiple origins adds more complexity because [specialty] cacao is not a standard product so they may not always want ‘cocoa A’ every six months for example. And there is also an interest or a demand in having a relationship all the way to the farmer, which that seems difficult [to manage.]”

Michael clarifies, “And they want to actually have a relationship with the farmer?”

I reply, “It depends on who the buyer is. Craft makers who focus on quality often want a direct relationship so they can partner with that origin to improve the quality of the product. Others may want transparency so they can share story of added value to their customers, for example.”

I ask Kate,  “What are your challenges with managing all that information about preferences and details from the farm for the buyer?”

Kate adds, “Yes, from my personal experience it’s a lot of back and forth emails, it’s a lot of interviews with farmers, it’s a lot of pictures, it’s a lot of video, it’s a lot of personal visits. It’s really a time commitment and a resource commitment. So for marketing there is a question to the buyer of ‘what do you want to know.’  I feel like in specialty coffee, there’s more of an established kind of process.  They have a flavor profile or a flavor spectrum which provides everybody a common language. That’s something that I don’t think really exists in cocoa. So how do we describe ‘this is spicy’ for example? For now, we just do the best we can, but it is a lot of one on one feedback.”

 

Kate speaks to challenges to managing information from smaller buyers, “Yes, from my personal experience it’s a lot of back and forth emails, it’s a lot of interviews with farmers, it’s a lot of pictures, it’s a lot of video, it’s a lot of personal visits. It’s really a time commitment and a resource commitment. So for marketing there is a question to the buyer of ‘what do you want to know.’  I feel like in specialty coffee, there’s more of an established kind of process.  They have a flavor profile or a flavor spectrum which provides everybody a common language. That’s something that I don’t think really exists in cocoa. So how do we describe ‘this is spicy’ for example? For now, we just do the best we can, but it is a lot of one on one feedback.”

Michael inquires,  “And how many of the people that are purchasing the cocoa are building those relationships directly with the farmers and still using you as the intermediary?”

Kate replies,  “Quite honestly it’s a percentage. It’s not everyone.”

I add, “But then those people act as the trust links to the rest of the market. They are known to the industry and verify quality via word of mouth.”

Kate replies, “Yes.”

Kate replies,  “And for Ecuador it’s a really difficult thing because there’s such an issue with CCN which currently many origins are producing. If somebody says ‘Oh that’s CCN’, ‘Oh never mind, I don’t like it.’” Kate is referring to CCN-51, a genetically modified varietal which is highly productive and generally sold for mass production.

I summarize, “So, based on what I’ve heard, something that would be supportive to you is 1) a way for people to learn about all the origins and the people they work with, 2) a way for buyers to state preferences and agree on preferences as a group, and 3) an order process that aggregates and coordinates a timeline of who wants what and when?”

Kate agrees.  “Yes.”

Lindsay adds, “And a way for that demand to be matched based on what is being produced in a season and a way for people to bid on “I want half of that” or “I want more of that.” And you also need that intermediary at the field level going out and verifying quality, verifying supply, verifying other information.  And once those buckets get filled then the exporter can feel really confident.” And she adds, “So, the ability to look at all the options that they have for origins and then say these are the ones that fit what I’m looking for and this is how much I want of each of them.”

Michael adds,  “Like a menu.”

Kate agrees, “Yes.”

Jon wonders, “That must be happening on level but perhaps not in an organized way.”

I add, “Yes, that’s true. But it’s word of mouth.”

Kate continues to ideate,  “I really like the description of the spot coffee importer. However that wouldn’t necessarily work because the cocoa wouldn’t be in the United States, it would an origin. But there is a level of creating a platform so that this information can be more shared. And the relationship of someone like Maya, the broker requires a lot of one on one interactions. And providing a lot of the same information to a lot of people. So if there was an open platform where you can choose from the ‘strong coffees or floral, fruity or wild flavors of cocoa’ for example, it might [accelerate] the conversation.”

 

Kate offers, “But there is an [opportunity] of creating a platform so that this information can be more shared. And the relationship of someone like Maya offers to broker the quality cocoa requires a lot of one on one interactions. And it’s a lot of providing the same information to a lot of people. So if there was an open platform where you can choose from the ‘strong coffees or floral, fruity or wild flavors of cocoa’ for example, it might [accelerate] the conversation.”

 

I ask, “What are the ways a system of information and the people that are sharing this information, can support quality verification and vetting for services. What would help you or Kiva reduce risk for buying or lending?”

Kate replied,  “A direct relationship is essential. ECOM provides inputs, consistent oversight and sort of companionship to the farmer. If you don’t have that [level of support] it’s really difficult to manage a loan and get to a level of verification.”

Jon replies,  “We try and work with co-ops and associations through field partners such as the work Uncommon cacao is doing to work directly with those farmers.”

I add, “And help me understand what their role is. What’s involved in actually managing loans on the ground?”

Kate replies, “It depends on the financing we are doing and it’s usually distribution of the input and not necessarily cash.” And adds, “We have one person who administers all of that information, including the distribution of the input. Then we’ll manage a timeline based on harvest cycles. For example, there is an expectation of repayment within the first month or two of harvest. And the first year, we limit the number of loans to a community to build trust and understand rate of repayment before redistribution. And breaking the loan down into a smaller number of community members creates a shared responsibility between neighbors.”

 

Kate speaks to challenges of the smaller buyer, “There is a desire to be directly linked with the origin producer, meaning ‘I am the chocolate maker and I’m going to physically take my money and give it to the farmer and then six or eight months later he’s going to send me beans.” And I’ve talked to a few chocolate makers who have done that and then six or eight months later they get moldy cocoa, they get poor quality cocoa, they get something that they didn’t expect. I’ve been on both sides so I understand that maybe the cooperative had a terribly rainy season, couldn’t dry their cocoa, and did what they could do to payback their loans. Now both sides are at risk; the association wants to get paid and the chocolate maker doesn’t want to pay. They lose their money and their confidence in being able to do that direct business. An option that Ecom has created is a premium to service that transaction, regardless if they use us for logistics. If that cocoa ends up not being what the chocolate maker asked for, instead of paying $3,500 or $5,000 a MT for that cocoa, all they pay for is $500 to mitigate risk, which goes into a program to improve quality.”

I shift the conversation and ask, “What [information] does ECOM need to understand how to meet the specialty market preferences?”

Kate answers, “A number of chocolate makers make trips to origin and I gather a lot of information this way. And so having that feedback and then being able to triangulate that feedback; so we can work directly with that chocolate maker to do what they need on the ground. Also it is the buyer’s responsibility to create the financing terms, so ECOM needs more information from chocolate makers on how to make financing work for them.”

I reply,  “That’s great, yeah. So what type of information would that be?”

Kate adds,  “It’s kind of assessing what the needs are and what the structure is.”

I ask, “I’ve heard that transparency on prices paid to farmer is important in this story, and possibly more important than if it is “direct” for example, to ensure they are getting paid a fair wage. Is that information traceable or available for your clients?”

Kate adds,  “Yeah, so I think it depends on the model and it depends on I think the situation. For example, ECOM has worked with Taza chocolate since the very beginning, since the first container. And Taza has been transparent in terms of this is our cost; this is how much it takes to warehouse it. So I agree with you, I think transparency is more the issue and yes, we can provide.”

“Wow that’s great. This has been really helpful to hear your point of view on what trends you’re seeing and the needs of all sides. Thanks for all your input.” I say.

Unidentified female:  “Thank you.”

Lindsay starts a conversation around comparison with other industries with similar dynamics and wonders “How do other commodities become more specialty?”

Kate mentions the volume, “Coffee is more advanced than cocoa and in coffee, there’s a lot more mid-sized established grocers in the States who are buying a more significant volume.”

I thought back to a conversation with Joe Whinney, founder of Theo Chocolate who admitted that Theo experienced a growth in sales the last few years due to the entry of so many new craft chocolate products. I added, “In Session 2 it was mentioned that the growth of craft beer industry allowed greater level of product differentiation, as consumer awareness and appreciation for craft grew as a whole.  For example, no one knew what a sour beer was and now there is an entire niche market for sour beers. I see a high level of innovation possible for the cacao industry as the system is able to digest the product through the chain. For example, by adding levels of processing, transformation or services so smaller buyers and makers can a wider array of differentiated and higher quality products.”

Kate agrees, “Yeah, I think the kind of chef or the restaurant example is a great one. Valrhona is a strong industry leader and I do know craft makers are moving into this category, so it does help with growth.”

I ask, “Related to Lindsay’s question, what other comparisons can we look at in terms of commodity and specialty?”

Lindsay replied, “Seafood is an interesting example. If you try to actually know where your seafood comes, that cost of transparency becomes a lot more expensive. You need a lot more accountability and awareness at every step of the supply chain.”

 

Lindsay speaks to comparisons, “Seafood is an interesting example. If you try to actually know where your seafood comes, that cost of transparency becomes a lot more expensive. You need a lot more accountability and awareness at every step of the supply chain.”

Jon shifts the conversation, “I’m curious what exactly are we talking about when we say ‘there is a lack of equity or that risks and rewards could be distributed more evenly.”

I answer from a system’s perspective, “On the side of the farmer, there are many farmers, especially cacao farmers that are not actively connected to markets, say 80%. This is due to invisibility or lack of coordination or logistics needed to meet market standards. They resort to selling their beans for less than fair value at the farm gate. On the buyer side, there are a lot of new makers and also consumers who are looking for quality sources of cacao from sources they can trust. Right now craft makers are limited to a handful of origins that they know and trust often because of years of relationship building and quality training invested to create a consistent product that meets market standards.  The benefit of producing quality chocolate is the farmer receives a higher price for a differentiated product and thus is rewarded for the care and skill of the work. And higher quality varietals usually are grown and produced in such a way that it is also good for the environment. However, the market size of specialty market is small. In ECOM’s world, it may be less than 1% of total goods sold. Most of the chocolate we currently eat, say 60% is sourced from 2 countries, the Ivory Coast and Ghana, however due to climate change there industry will likely face a shortage of supply. So even larger buyers will be searching for more sustainable produced supply to meet demand.  So our current trade system that is designed for efficiency and scale, which limits trade to a handful of players. Cacao is grown all over the global tropics and widely dispersed forest ecosystems. However, our current system does not know how to surface and coordinate all of this value that exists.”

Nick adds the point,  “For a supply chain to be healthy, it has to be a functioning ecosystem. My personal opinion is that it has to be top down approach because until you can really differentiate specialty cacao, farmers are never going to be able to command the [true] price of cacao. It will be tethered to the commodity price until it becomes a completely different product. The only way you can do that is by consumer awareness. For example, a consumer will pay $200 for a bottle of wine because they appreciate all the nuances of that wine. But until consumers can value chocolate in that way then they’re not going to pay the additional premium for specialty cacao, leading into additional revenue for farmers.”

Nick later adds, “In order for it to be sustainable, it needs to be more about business for the farmers too. Like doing projects to help farmers get clean water and things like that sounds great, but at the end of the day that’s just a handout. But if you get 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.”

 

Nick speaks to the importance of shared language of flavor, “In order for it to be sustainable, it needs to be more about business for the farmers too. Like doing projects to help farmers get clean water and things like that sounds great, but at the end of the day that’s just a handout. But if you get 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.”

 

I ask Jon, “How do you decide who to loan to? What’s your process for inviting a field manager?”

Jon replied,   “First and foremost is it a product that meets our social impact goals. We have a financial due diligence process and as a loan product, it has got to be able to come back.”

Lindsay is curious about the risk mitigation, “What are the ways that you dilute or diversity risk or that are more the functions of a market place than the functions of any like one to one financial transaction?”

The group discussed different ways that typical philanthropic activities are beginning to prove to be effective to supporting markets and the greater economic ecosystem. Michael mentioned that groups such as RSF are using a blended financial approach to impact investing portfolios and activities.

Lindsay later adds, “If we are talking about creating market infrastructure, the costs of this communication or like the platform Yellow Seed is essentially trying to build is like ‘the tragedy of the commons’  where it’s not like any one person’s best [economic] interest to fund this ability to see into the buyers, into the suppliers. However, looking at the example of Kiva, that flow of information has unlocked so much new capital because people can see where their dollars are going.”

Lindsay adds, “If we are talking about creating market infrastructure, the costs of this communication or like the platform Yellow Seed is essentially trying to build is like ‘the tragedy of the commons’  where it’s not like any one person’s best [economic] interest to fund this ability to see into the buyers, into the suppliers. However, looking at the example of Kiva, that flow of information has unlocked so much new capital because people can see where their dollars are going.”

 

Jon agreed, “Yes, you’re either tracking inventory or you’re super transparent with all this information and who has what and where it is, and then attaching that to Kiva like profiles of the origin and farms. That could be great.  However, I don’t know how it would be paid for. We could finance it if it would come back, right? For example, if Kiva were to give you a loan  and each player in the system is paying a small amount for that to be maintained or paid back over time. But like you were saying, who is going to fund that essentially?”

Lindsay punctuates, “Yeah, who funds that information layer?”

 

Lindsay punctuates, “Yeah, who funds that information layer?”

 

Jon surmises, “There is likely a way to monetizing that type of information in order to subsidize [benefit to the whole.]”

The group does a closing round of comments and appreciations. That’s a wrap! Thanks for following this collective journey with us. Feel free to email nancy@yellow-seed.org with comments or feedback on the topics discussed.

 

***

Participant List for Session 3

 

Jon Bloom, Kiva

Gina Cooper, Prosperity Exchange

Daniel Goldman, Prosperity Exchange

Stu Fram, RSF Social Finance

Michael Gabriel, RSF Social Finance

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

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