[S4:E13] Coffee News Report: Commercialization of specialty coffee

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How Brazil’s co-ops could disrupt the specialty coffee market.


Article: How Brazil’s cooperatives could disrupt the specialty coffee status quo - Coffee Intelligence

ICO World Coffee Production, data as at May 2021

Related episode: Coffee News Report: High-end specialty coffees

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In this episode, I continued to explore the idea of commercialization of specialty coffee. In a previous episode, titled "Coffee News Report: High-end specialty coffee," I talked about the far right tail of specialty coffee, the 90 plus coffees.

When I talk about the far right tail, I’m referring to a distribution curve of coffee. Think of a graph depicting a bell curve; the X axis represents quantity and the Y axis represents quality. The bell curve illustrates that most of the coffee on the market is an average or mediocre quality at the peak of the curve. Left of the peak is the left tail. And that illustrates very low quality coffee.

This coffee is often used to make instant or soluble coffee. And as we move lower in quality, it’s typically sold near production at an extremely low price. To the right of the peak is specialty coffee. And the far right of the peak with a very low quantity being sold is the high end specialty, the 90 plus coffees.

The commercialization of specialty coffee will result in a widening of the bell curve. More quantity of higher quality is going to be produced. This also means that overall the total quantity of coffee will continue to increase.

In the article titled "How Brazil’s cooperatives could disrupt the specialty coffee status quo" from Coffee Intelligence, Peter Gakuo talks about a real life example of how this is starting to happen.

Gakuo first describes the level of organization and support that coffee farmers experience in Brazil. The article describes a Brazilian co-op that is so large and well organized that it produces more coffee than some entire countries. Here’s a quote from the article.

The Cooxupé cooperative has over 16,000 members, 95% of which are smallholder farmers throughout 200 municipalities. This year, the harvest in Cooxupé’s regions is expected to reach approximately 8.3 million 60kg bags. As a comparison, this is significantly more coffee than the entire country of El Salvador.

According to the ICO, El Salvador produced 600,000 60-kilo bags in 2020. That means a co-op in Brazil produced over 13 times more than the entire country of El Salvador.

Because of their size and the level of organization, these co-ops, they’re able to perform more roles within the supply chain, such as exporting, shipping to consumer countries, et cetera. Here’s another quote from the article:

Thanks to their scale, Brazilian cooperatives are also often able to handle exporting, directly connecting with buyers and shipping their coffee.

In these cases, the cooperatives have unparalleled reach into other major consuming markets – giving them direct access without relying on intermediaries. This also often means faster payment terms too.

Remember the central dogma of coffee. As the coffee moves through the supply chain, we add a little cost and a little more value. If the same entity can perform more of the tasks required to get the product to market that entity captures more of that value.

The strategy these co-ops are following is quantity first, master the supply chain, then shift towards quality. This makes sense; developing the ability to produce a lot of quality, figure out how to get it where the big money is then exploit more and more of that wealthier market. Here’s another quote:

The entry of major Brazilian cooperatives like Minasul and Cocatrel into the specialty coffee market signifies a clear shift in their focus. These cooperatives have recently established dedicated specialty coffee departments demonstrating their commitment to explore and capitalise on the growing demand for specialty coffee.

In economics a market in equilibrium is one in which the quantity demanded equals the quantity supplied. It’s a concept that helps us to understand how markets fluctuate and move. It’s rarely something that truly occurs or lasts for long when it does occur, especially with larger globalized markets. But it can help us understand the impacts of a bigger player moving into a new market.

The Cooxupé co-op has mastered the ability to produce large quantities of coffee and get it to the markets where there is a willingness to pay higher prices.

They are now improving quality and are entering new markets. Their goal is to leave the commodity market and enter the specialty coffee market. Because they are such a large player already, this will drastically increase the supply of specialty coffee.

In the short run, demand will remain roughly static. Therefore an increase in supply will lower prices to a point of disrupting the market’s equilibrium. Again, a quote from Gakuo:

Their capacity to generate such large volumes of coffee will be disruptive in itself. As they gradually begin to produce more specialty coffee they could begin to outcompete regions unable to operate as cheaply.

Small holders in other regions will need to improve operations if they wish to continue to compete in the specialty coffee market. This is especially so for smallholders already having a hard time participating in globalized markets. Their business models must be well executed and they need to continue to develop and hone whatever their differentiation is from other specialty coffee.

So in conclusion, small holders will have a hard time competing with well-organized, well-funded co-ops that are increasing the volume of specialty coffee. Brazil is already very influential in the price movement of the C market. I see no reason for the same trend, not to eventually happen in the specialty coffee market.

In a previous episode dealing with high-end specialty coffees I briefly discussed the commercialization of the specialty coffee industry and I expressed my hope that this would increase demand for specialty coffee. However Gakuo makes a good point; Brazil is already the 800 pound gorilla in the commodity coffee markets and there’s no reason to think they won’t be the same in the specialty coffee market. Small holders should plan accordingly.

This is Michael of Oil Slick Coffee. And this was the coffee news report. Thank you for listening.