We recently sat down with Konrad Brits, founder and CEO of Falcon Coffees, to gain some insight into the current and future state of sustainability in coffee and what Falcon is focused on.
Brown Brothers Harriman: On the surface, green coffee trading seems like a simple business model. You source beans from farms at origin and deliver to roasters in consuming countries. However, you’ve quoted Falcon Coffees’ purpose as a business that “profits from sustainability.” What does that mean to you, and how has it changed the way Falcon participates in the green coffee supply chain?
Konrad Brits: I started Falcon Coffees in 2008 with the view to build a company with a dual purpose – to be for-profit but also have positive socioeconomic impact. This has in recent years been extended to include an environmental component in the face of the rising climate crisis. After nearly three decades working in coffee supply chains, some basic truths and realizations have shaped Falcon’s business model into what it is today.
First, by and large, coffee farmers are incredibly vulnerable socioeconomically, while coffee roasters and distributors are far more robust financially. Coffee producers lack access to resources such as credit, education and healthcare. The obvious conclusion is that when the people producing the key raw material to a particular industry are under threat, the entire industry shares that threat. This is why sustainability is such a big conversation in coffee today.
The green coffee trade, which operates in the middle between farmers and roasters, is on the front line. The primary responsibility of coffee roasters and the green trade is to ensure that all stakeholders in coffee supply chains are economically viable. It is only after achieving economic equilibrium through shared value that we can leverage the social and environmental standards required to build a sustainable future.
The second realization is the idea that when you look at the coffee supply chain, the only two participants that add any intrinsic value are the farmers who produce the coffee and the roasters and retailers who ultimately generate the revenue that pays for the entire supply chain. When you look at it that way, the rest of us – from the exporters to importers, bankers to brokers, traders to transporters – all exist purely to facilitate this relationship between the farmers and roasters. It’s the idea of service provision. Services normally come at a fee charged. So, rather than follow the traditional trading model of buy low, sell high (for a hidden margin), we prefer to declare our margin as a service fee. Our clients should feel that the fees we charge are justified by the value we bring to their supply chains.
We have had a very positive response to operating transparently. There is a growing demand in the market for traceability back to individual farm households. You must know who the people are at each stage of the supply chain. Traceability is the first building block in any sustainable initiative. Without traceability, there can be no credible initiative to transfer value or create access to markets and resources.
Traceability has led to economic transparency. A growing number of our clients want to understand who was paid how much by whom in each supply chain. This demand for transparency data is usually requested in conjunction with a third-party certification or verification. The market for commodity-grade coffee is waning, as it does not speak to the rising trend of responsible sourcing.
Falcon’s early adoption of traceability, economic transparency and a culture built on open collaboration has benefited us strategically as the market has moved in our direction.
BBH: Taking a step back, why are coffee-producing countries disadvantaged? Can you name a few origins where the environment is particularly challenging for farmers and why?
KB: If you look at coffee-producing countries, they are often characterized by one of four poverty traps, which make it difficult and expensive to operate, particularly in the agricultural sector. These origins are often subject to bad governance, are landlocked countries surrounded by poor neighbors, suffer the mineral wealth trap, often causing civil unrest, or are in a post-conflict situation. This creates an environment where the cost of doing business is substantially higher due to lack of infrastructure and a high cost of capital. More specifically, if you look at the socioeconomic profile of farmers, they often don’t have land title or assets to leverage, so they are not creditworthy under the traditional due diligence performed by lenders.
Over the past 70 years, the large multinationals that dominate coffee and other agricultural supply chains brought the working capital into those countries to enable the flow of export commodities. Because the coffee itself was the only collateral, supply chains were built to protect this investment. The result is a supply chain built to take control of the collateral as early as possible in the life cycle of the product. On the other hand, farmers are under pressure to sell their crop swiftly, as it is their primary source of income. The impact is that most farmers liquidate their crop as fruit or partially processed beans, denying them the ability to participate in the highest value of their crop, which is coffee at the point of export. Access to affordable credit remains poorly structured and expensive for most coffee farmers.
Capital is a coward. Compare the profile of farmers in Brazil to those of the Democratic Republic of the Congo. In one, there is a highly developed agri-economy that has invested in increased yield, quality and cost efficiency, benefiting from strong research and development and a supportive government. In the other, ongoing conflict, high levels of institutional corruption and punitive export taxes have collapsed production to 10% of what it was 40 years ago. Coffee is smuggled in the dead of night in dugout canoes to neighboring Rwanda, where stability has brought the investment and working capital to support its coffee industry.
BBH: You talked about the importance of traceability. What are you doing at Falcon to plan ahead and operate in an environment where this is the new norm?
KB: It’s a pivotal moment in the sustainability conversation in coffee. There’s a current trend that I refer to as sustainability drift. That is an adoption by some retail brands of third-party certifications and seals as their total commitment to the sustainability challenge. While these seals provide a valuable set of standards and offer a degree of brand protection, they are not the silver bullet to sustainability. This sustainability drift removes the energy, momentum and investment out of fixing some of the enormous problems at origin, such as climate change, gender inequity and aging farming populations.
However, the move to traceability is reinvigorating innovation in the supply chain by companies like Falcon. That’s the service we provide and the value we add. We have an increasing number of clients demanding 100% traceability in conjunction with the certifications they support.
This is a vital next step in the sustainability journey. Current supply chain audit methodology applies a square root system. As an example, if you have 900 farmers in a single supply chain applying for a certification seal, the auditors will audit 30 farms out of the 900 and then apply that standard to all 900. This does not satisfy the demand for 100% traceability to household level.
The growing demand for this amount of granular data requires us to be far more sophisticated in our approach to collecting the data. As an industry, we’re turning toward digital innovation – the nascent technologies out there that enable us to capture data in an immutable, affordable way in real time. We’re just at the beginning of that journey, but there is significant momentum behind it. I said to someone recently that I don’t feel pressure to win the digital race, but I do recognize it is strategically imperative to be investing in it. We don’t need to be first to market, but we have to be able to meet and match our contemporaries both now and in the future.