Business & Society with Senthil Nathan
Inspiring and thought-provoking conversations with eminent thinkers and sustainability leaders about business in society. Hosted by Senthil Nathan, Chief Executive of Fairtrade Australia New Zealand.
Business & Society with Senthil Nathan
#3 Beans to Brews: Navigating Coffee Supply Chains and Sustainability with Carl Cervone
Sustainability in the coffee industry is more complicated than it seems. Join us as we uncover coffee supply chains with Carl Cervone, a leading authority on coffee sustainability. From the unique perishability of freshly harvested beans to the long-lasting nature of processed green coffee, Carl takes us through the journey of coffee from farm to cup. Learn about the significant impact of smallholder farmers and understand the economic landscape they navigate.
We touch on the key sustainability risks in coffee supply chains, the progress, and stringent European regulations such as EUDR and CSDDD, which, while aiming to curb deforestation, could paradoxically worsen economic conditions for small-scale producers.
Discover how technology and digitalization could help bridge the gap between traditional farming practices and modern advancements, providing new opportunities for connectivity and innovation. We delve into the challenges and benefits of digitalization, from geomapping technologies to data ownership and interoperability.
Carl shares his perspective on the importance of being open to diverse perspectives and acknowledging and learning from failures. His recommended skills for social entrepreneurs and a book that influenced his recent thinking will inspire many. This episode is packed with actionable insights and practical advice, making it a must-listen for anyone interested in coffee supply chain sustainability.
If you want to follow this podcast, please subscribe to the Business and Society with Senthil Nathan on Apple and Spotify. We welcome your comments and suggestions at bspwithsn@gmail.com.
Senthil
00:04
I'm Senthil Nathan, Chief Executive of Fairtrade Australia, New Zealand. Welcome to my Business and Society podcast, where we discuss the role of business and society with influential thinkers. Coffee is one of the most traded commodities in the world, second only to oil. We speak to its immense global popularity and economic significance. Millions of people worldwide depend on coffee production for their livelihoods and coffee trade plays a significant role in the economies of many countries, particularly those in Central and South America, Africa and Asia. To address sustainability challenges in coffee, we need to understand coffee supply chains. Joining me today to help us understand sustainability in coffee supply chains is Carl Cervone, one of the authorities on the subject. He currently leads Kariba Labs, where his team builds technology to measure impact in the open infrastructure. Prior to this, Carl co-founded Enveritas, a technology platform for verifying sustainability conditions on coffee farms. He's the Y Combinator alum and a board member of Cup of Excellence. Carl, thanks so much for joining me today. Thank you.
Carl
01:23
Senthil, it's great to be here.
Senthil
01:26
Let's begin with the basics. Could you help us understand coffee supply chains and how they are different from other commodities?
Carl
01:34
So, I give a lecture every year at Columbia University for master's students about how the coffee supply chain works, and one of the things that I typically begin with is that there's two features of coffee that make it pretty different than other commodities. The first one is that when the product is immediately harvested, it's extremely perishable, and so that means that there's a very important post-harvest processing step that needs to happen as close to the farm as possible, and for this reason it prevents there from being a lot of economies of scale at the source of the supply chain, and so farmers must figure out pretty quickly what they're going to do with their coffee. Are they going to process it close to home or on the farm, or are they going to get together into some type of cooperative to process their coffee locally? The other thing which is unique about coffee is that, once it's been fully processed and transformed into green bean, it can actually last for a very long time. It's very durable in that form, and this means that you can connect farmers in places like Ethiopia or the mountains of Southeast Asia to consumers all over the world, because their product is able to survive the journey over long roads, through deserts, across the ocean, and then eventually it can stay for many months in a warehouse without degrading too much in quality.
02:50
So, kind of as a starting point, these two features of coffee mean that it's able to travel all over the world, it's able to come from over 40 countries and at the same time it's able to touch many, many different consumers, so probably something like a billion coffee consumers around the world. And I think, if you compare it to other commodities, either they are much more perishable from start to finish or they have this future of being able to last forever from the very beginning, which means it's something like a metal or a mineral. You can mine it and then it has a very long shelf life. So those things about coffee mean that you need to think a lot about how it's going to be processed. And then there's also lots of interesting aggregation distribution opportunities once the coffee has been processed.
Senthil
03:37
Could you talk about the producers of coffee, Carl? What share of coffee is produced by smallholder farmers?
Carl
03:44
So, coffee tends to be a smallholder-dominated crop. There's two ways that you can look at that. So first, if you just do a census of coffee farmers, there's a little over 10 million coffee farmers, around 12.5, 13 million or so around the world, and the vast majority, by that count, are smallholders. So probably more than 98% of the world's coffee farm population represents a family farm which is less than five hectares in land size, so very small by most measures. The other way of looking at it is actually the share of production that comes from smallholders, and so here obviously there are some larger farms which can produce a disproportionately large amount, and estimates vary, but it's probably around 60% to 80% coming from smallholders and the remaining 20% to 40% coming from larger farms.
Senthil
04:36
Could you talk about the value distribution in coffee supply chains, particularly the prices farmers get?
Carl
04:45
One of the things I've looked at for a large part of my career is this very question. So, if you consider the price that the consumer is paying and you try to look at all the transformations that happen between the farmer and the end consumer, who's taking a cut? Is it a fair cut? And how do you identify opportunities for farmers or others to improve and get a larger share? So, to answer the big question are farmers getting a fair price? I have to find something to compare that to. So, if you look at in the context of coffee farmers, relative to other farmers in a given country, is coffee a better crop to grow than whatever alternatives you might have? The answer tends to be yes, and I think this is a bit of a troubling answer for many people who can look at the price of coffee and look at the income that coffee farmers are making and saying this is extremely low, which it is. However, if you do the other work of comparing opportunities that exist for farmers if they were to switch coffee, if they were to produce some other combination of crops, in most cases coffee tends to be one of the highest income, best livelihood opportunities that exist in those regions of the world and so, relative to other opportunities that might exist, coffee does tend to offer a comparatively higher income.
06:04
Taking the other perspective and saying okay, if I'm paying $3, $4, $5, $6 for a cup of coffee, how much is the farmer getting, and is that changing over time? The answer to that question is well, it can be a little bit depressing. So, in general, the price that farmers have been getting has not been changing very much over the past 15, 20 years, at least since I've been in the coffee sector. It tends to be pretty, pretty flat and as a share of the price that the consumer is paying, if anything, it has been declining. So at least for the past 10 years or so, I've been tracking this quite closely. If you look at the retail price of coffee, that has consistently been going up, maybe $2, $3, $4. These days you can find $5 or $6 cups of coffee and in general, the price that farmers are getting around the world, as I said before, has not changed very much. So as a proportion of the price that consumers are willing to pay, coffee farmers are getting a small share, and that has probably been declining over time.
Senthil
07:06
Could you also talk about two or three major sustainability risks in coffee supply chains? When you say the pricing is depressing, I assume that that leads to a lot of other problems in the supply chains.
Carl
07:18
Yeah. So, there's definitely a number of economic challenges that you see in the coffee sector. The one that I spend most of my time looking at is the question of poverty and income for coffee farmers, and I would say that that is one of the most persistent or systemic risks that the coffee sector faces is just that coffee farming is not going to be comparatively attractive relative to other things that people could do and, as I said before, it's probably less a question of coffee being outcompeted by another crop. It's much more that services and manufacturing and other types of jobs are likely going to pull a larger share of the population that could be coffee farmers in the future. So obviously there's an exodus from rural areas. There's young people who want to get jobs and don't want to be farmers anymore. These kind of demographic and economic trends are definitely a major risk to the long-term survival of coffee as we know it today.
08:18
I think another thing, which is what we'll probably get to later on, is just the fact that coffee is a very sensitive crop, especially higher quality Arabica coffee. It grows at certain altitudes, it requires very, very specific climactic conditions and if those conditions continue to change over time, then it's going to be very difficult to grow the same coffee varieties and get the same quality that the market has been used to over time. Now, because coffee is a tree crop, it's actually very difficult and expensive to uproot it and to switch to something else, and, by the same token, it's very difficult to move your farm up a mountain or to a place that has a better climate. So, I think over the next 10 years or so, as we continue to see climate change affect the face of coffee production, it's going to be very difficult for certain segments of the population to adapt.
09:10
So high level, I'd say that there is a big bucket of economic risks and then a big bucket of environmental risks that face the coffee supply chain. The irony is that for most of the past 20 years or so that this is changing, the coffee sector itself has been much more focused on some of the social issues, and so I haven't spent a lot of time looking at other sectors. My guess is that, even though there are some important social issues that affect coffee workers and the coffee supply chain, if you were to compare those to other commodities and other crops, my guess is that coffee performs probably similar, if not better, than some of those.
Senthil
09:44
Yeah, on which sustainability criteria has the sector made progress?
Carl
09:50
Yeah, so I think that there's definitely been progress in a number of areas. It depends a little bit how you define sustainability and what you consider in and out of that definition. One thing where I would say the sector has made tremendous progress over the past 20 or 30 years is in the area of quality and basically improving the post-harvest processing, improving the ability for certain coffees to fetch very high prices and be rewarded in the market, the distribution of, I guess, technology and protocols for assessing coffee quality through something called cupping. 20, 30 years ago there were only a few parts of the world that produced very high-quality coffee and now that it's been much more widely distributed. Earlier in my career I spent a good amount of time working in East Africa helping farmers upgrade quality and go from selling commodity coffees to selling specialty coffees. I think the sector has made a lot of progress there. You can point to a number of countries that have really upgraded their coffee quality over time.
10:48
I think another area where coffee tends to get a bad rap in consuming markets but actually on the ground things are quite different is around pesticides and around the chemicals that are used for coffee production.
10:58
I think in general coffee tends to be a very low chemical consuming crop, or I should say that there isn't a large amount of pesticide use that is found in coffee and at the same time, because coffee has processing that happens after it's been picked even the pesticides that may be used, the residual impact on that is likely going to be quite low.
11:23
So, I would say that over time, both in absolute terms, pesticide use has probably been declining and in terms of the impact that might have on consumers, it's also been getting better. Maybe a third area just to pick one would be around access to finance. I think that over the past 10 or 15 years I've seen a lot more integration between coffee communities and the banking sector and suppliers or exporters that are able to provide financing for coffee farmers. So, 20, 30 years ago the narrative might have been that coffee farmers are completely cut out from financing. They're not able to receive any kind of formal loans or pre-harvest financing for picking. I think these days it's probably quite different, that many farmers around the world now have access to the loans and basic saving products.
Senthil
12:13
Have you seen a reversal of progress on any of the sustainability priorities?
Carl
12:19
I would be hard-pressed to point to something where there's been a dramatic reversal.
12:23
I think the more common pattern is just stagnation.
12:27
So there's a few areas you could point to, probably poverty as a whole in the coffee sector.
12:34
You could probably point to worker wages, and the coffee sector really has not outperformed other sectors. My guess is that if you were to plot the income or the wages the income of coffee farmers or the wages of coffee workers then, and you compare that to other sectors of the local economy, coffee has performed the same, maybe a little bit slower than the rest of them. So sure, wages probably have gone up in most countries because of inflation and other reasons, but I don't think the coffee sector has done a kind of led the way by offering dramatically higher wages and, by the same token, as I mentioned before, coffee does tend to provide a higher income than other crops in many parts of the world. However, if you were to look over the past 10 or 15 years at the economic growth that coffee farmers have realized versus other sectors of the economy, my guess still is that it's underperforming. So less like a major regression and more just a lot of stagnation on certain areas of the sustainability agenda.
Senthil
13:33
Do coffee consumers understand the language of sustainability? Particularly we see inflationary pressures across the world, some say coffee is recession-proof or inflation-proof, but how do consumers partake in the sustainability activations of businesses?
Carl
13:51
I think that consumers, they play a role, of course, in the sense that they vote with their wallet, and so they will make decisions over a period of time about what products they like more than others, and sustainability is an element of that. I've read a number of studies that suggest that actually words like sustainability, like fair trade, like responsibly sourced many of the certification seals, consumers have a hard time differentiating among them and in most cases, what they're looking for is some kind of assurance, but they've become less loyal to any one particular assurance on the front of the coffee. I remember doing an interview with a user one time and they basically said if you have that long paragraph of text on the bag of coffee, I never read it, but because it's there, I know it's probably a good product, and so I think a lot of people are just mentally saying, ah, okay, this appears to have something, it's all right, and they kind of move on and they compare products on other aspects like price and quality and taste and things like that. So, I think that the demand from the consumer side has been successful in the sense that now it is basically taken for granted that you're going to have some kind of sustainability program built into your product. On the other hand, I think there's been a loss of narrative and the ability to differentiate products on the basis of sustainability. I think right now, consumers are not in a position where they have very nuanced opinions about this and it's probably the third or fourth priority when they go to the supermarket.
Senthil
15:27
Lately there has been a lot of discussion in the sector about regulations, particularly the top-down ones, coming from the European Union. Do you think regulations such as EUDR and CSDDD place unreasonable demands on smallholder producers from developing countries? To remind listeners, EUDR is the European Union's Deforestation Regulations, and CSDDD is the European Union's Directive on Corporate Sustainability Due Diligence.
Carl
16:01
One of the challenges, I think, with standards in general is the question who are they for? and the reality is that most standards that exist are for Western consumers. They are written with the farmer's interests in mind, but they are driven by a desire to ensure that consumers feel that the businesses they are purchasing from are acting responsibly, that there aren't any scandals or scares in the products that are ending up on the supermarket shelf in their country. And so, because of that, I think there's always a bit of a disconnect between the standards that regulators expect companies to adhere to and the standards that exist, like the reality that exists in coffee communities, and how those standards intersect with them. It illustrates a bit of the disconnect and the challenge of coming up with global standards and then enforcing them consistently all over the world. Specifically with deforestation, I think this one is particularly challenging, because deforestation events are events that have already happened in time, and so you can identify that a coffee or a bag of coffee or something else has come from an area that is deforested. But then you have the question okay, so now? What are we going to do about this? Are we going to stop buying from this area? Are we going to try and prevent future encroachment in the same area and, if so, what is the role of the company versus the community and local government?
17:25
I think here the standard is very strict, but it doesn't really provide a blueprint for how these problems are going to be resolved over time.
17:35
What I worry about is that the option that is simplest is just to embargo certain parts of the world that have historically faced deforestation problems, and, given that there's a pretty strong link between deforestation and poverty or economic conditions, I'm not sure if that's going to have the right impact.
17:52
It might cause people to buy less from that area as the economy becomes weaker in that area, then, as one consequence, there might be greater deforestation risk because there are fewer economic opportunities involved for people there, and so the forest might be under greater threat because of that there. So, whenever you see these types of large-scale regulations, I tend to be a little bit sceptical that they're going to have the, that they're going to kind of fix the root cause or they're going to address some of the systemic issues that make that a problem. So again, I think everybody should be against deforestation, but we should be on the lookout for solutions that are going to be able to get at some of the root causes, because I'm again sceptical that just embargoing or deciding not to buy from areas that have had a history of deforestation is going to address the root cause of preventing deforestation from spreading.
Senthil
18:53
Could technology help, Carl? What is the impact of digitalization and technology on overcoming challenges like deforestation or any other issues in coffee supply chains?
Carl
19:01
So, you can answer this question, I guess, from two perspectives. So, one perspective is how has the supply chain itself changed as a result of technology and what are some of the trends that could happen there? I think, in general, if you were to look at the way the coffee sector or things happened in the coffee supply chain 50 years ago and look at it today, a lot of the same things are very similar the way that the coffee is processed, the way it is transported, even some of the accounting and bookkeeping processes. They have not changed very much at all, despite the fact that you have computers and mobile phones and a lot of things that can change how these things are done. On the other hand, you do now have a coffee sector where probably every farmer around the world is within access to a mobile phone. If they don't have one directly, you can see that things like electricity and mobile phone penetration or wireless penetration have increased dramatically across the face of coffee. So, I think you do have a large amount of penetration. However, it has not delivered some of the promises that might have been… people hoped for 10 or 15 years ago in terms of revolutionizing the way that coffee is traded or the way that you're able to trace coffee from farm to end consumer.
20:19
So, I guess, to get to your question specifically, I think that digitalization has had a huge impact on coffee farmers, but in terms of changing the way the coffee is traded, there hasn't been a huge amount of innovation, in the sense that most of the steps that exist in the coffee supply chain are effectively the same as they were previously.
20:42
Most of the accounting and traceability systems, if they exist, have not been upgraded very much. There certainly is much more information about market conditions and price information, but that is happening kind of bottoms up, decentralized, where farmers are just messaging each other or using WhatsApp groups to communicate on price. I think there have been a variety of attempts to work on some of these issues. I think that what's difficult about coffee is that you have very, very strong conditions or kind of local standards and it becomes very difficult to take a solution that works well in one country and make it more universal and spread it across borders. So, one of the things that I certainly look for is the ability to come up with digital solutions or technology solutions to be able to transcend borders, to be able to work in Colombia, but then spread to Peru and to Brazil and to countries that have different languages and different ways of processing and trading coffee.
Senthil
21:37
What do you see as the future of sustainability interventions in the coffee sector?
Carl
21:42
Some of the trends that are underway right now, you know, relate to geo-mapping and being able to really identify, kind of link the farmer to the pot of land where the coffee is grown on. So, you can see that, certainly as it intersects with deforestation work, but also many of the challenges that the coffee sector faces, there is a opportunity to improve certain things based on having geospatial information about where the coffee is grown and who controls that land. So obviously you can imagine doing farm recommendations if you're able to look at weather and you're able to look at soil conditions, you can imagine being able to measure productivity and the incidence of pests and disease by looking at vegetative health over time. From a sustainability compliance perspective, if you're able to link the physical product to the piece of land that it came from, you can look for deforestation or you can kind of audit the information that your supplier is giving you to determine if you believe that the coffee came from that place. So, there are definitely a number of opportunities over there.
22:50
I think the kind of big, open question, as I see it, is who's kind of?
22:55
You know, where does ownership sit when it comes to this data and when it comes to information about where coffee comes from and the transformation that that happens to it. Right now, you have a pretty strong push for, it could be the supplier, or it could be other companies to build their own system and own all this information about where the coffee comes from, and which farmer provided it.
23:20
The challenge, though, is that these systems don't interoperate very well, and most coffee farmers they don't just have one buyer, they have four or five buyers, and so you have this double counting issue where the same farmer might be appearing on four or five different registers of farmers. They might be appearing in four or five different supply chain management softwares. So I think there's a big greenfield of opportunity for trying to unite some of those data sources and come up with a standard or protocol that enables a variety of different players to build off of the same information base and make decisions on top of that, and obviously the one that I would care most about is farmers being able to leverage that data to make better agronomic decisions, better price marketing, quality decisions, because, ultimately, the data originates from their farm, and they should be able to take advantage of the best transformations or tools on top of that data.
Senthil
24:11
Carl. Let's move to the final segment of this episode we call it as how I did it where we ask all our guests four personal questions to draw lessons from their life and career. How do you handle conflicting views or differences of opinion?
Carl
24:29
I think that it's very important to have certain non-negotiable, certain opinions that you hold very strongly, but I think that they should be like a minority of the views that you have out there, at least that you are willing to entertain.
24:43
I think the ability to expose yourself to different perspectives, to constantly be trying to evolve your thinking on certain things is one of the trademarks of great intellectuals and business leaders their desire to learn, their desire to be open-minded and, when presented with new information, to update their priors. So, I think in my own case I tend to identify… If I'm in a room where there are people that have a certain type of that there is a lot of similarity in how they're thinking, then I try and actually take a more extreme position in the other direction. So, if there's a lot of people that are very if you're doing, say, product planning or something, if they are very detail-oriented, then I try and take the big picture role. If it's a group of people that are very theoretical, then I try and be the one who's getting into the nitty gritty, implementation details.
25:39
So, I think there's a technique that you can develop over time, which is to identify the natural working style and mental models that other people are using and try and adapt in response to that and ensure that you're able to have a kind of well-rounded set of perspectives when it comes to ideas that you're exposed to.
25:58
Again, if you only get your news from one source or if you only try to interact with certain people that share the same views as you, your views are not going to evolve very much over time, and so it's kind of important to leave those echo chambers to seek out new ideas, to try and diversify your source of information, just so that, mentally, you're able to stay fit and keep pushing yourself. Another obviously useful thing that you can do is actually just travel and go to other parts of the world, because you will immediately be confronted with new ways of doing things, new ways of thinking and many ideas that might challenge some of your priors. So, expose yourself to different sorts of information, Be aware when you're in a room where people are all talking the same way and try and offer a counterbalancing force to that, and then travel and try and seek out different views wherever possible.
Senthil
26:49
Have you had failures? How do you manage?
Carl
26:53
Certainly, yeah, so I've had a number of very big failures over the course of my professional life and obviously personal life as well. I think in general, I tend to be pretty even keeled, and so as soon as something goes wrong or happens, I tend to immediately move to trying to come up with some fix or some way of not letting the problem repeat itself. I understand that people respond to adversity in different ways. In my cases, I'm very quick to not hold a grudge, to try and move on and immediately start thinking about the next thing.
27:35
For me, though, it's very important that you actually acknowledge that something has happened. You do the act of a retrospective and say, okay, here's what happened, discuss that as much as necessary to feel that you have closure on the issue, and then, once you do, you kind of commit and disagree, or you forgive and forget, and then you try and move on. So, for me, that process of like reflection getting out there, this is what happened, and then that being cathartic and being able to move on is very important, and once I've done that, I'm actually able to move on very, very quickly. But kind of the need to acknowledge failure, what went wrong, is like a pretty critical piece in the process for me.
Senthil
28:16
Can you recommend a book or two on business or sustainability or any subject to our listeners?
Carl
28:22
I've read a lot of books over the years. I think that if I were to pick one that stands out as having had a big impact on my recent thinking, this might feel a little bit random here, but it's a physics book. It's called the Beginning of Infinity by David Deutsch, and it's much more than just a physics book. There are some very deep, intense sections about quantum physics and hardcore physics, but there's also some very, very beautiful sections about what makes humans different and where ideas come from and how they spread and how this affects culture and the evolution of science, and so for anyone who wants to broaden their perspective of how to think about the world and to identify truth and to constantly be on a quest for pushing truth and pushing understanding, I think this is one of the best books that you can possibly read.
Senthil
29:19
Excellent. Finally, what are one or two essential skills for professionals wishing to start ventures with social impact?
Carl
29:28
I think the most important piece of advice that I typically give. It depends a little bit on the stage of your app. So, if you're earlier in your career, you're just getting started. I think one of the best things that you can do is have a very good mentor. The second thing just when it comes to entrepreneurship in general, whenever you are working on a business or trying to be creative, the much more important thing is the velocity of coming up with new ideas and testing them out than being stuck to any one particular idea. So, fail fast, be quick to move on and try new ideas. That's kind of the generic advice.
30:07
I think the specific advice that I would give people is that you really need to be obsessed with a certain problem.
30:14
It's a problem that every day when you learn more about it, you just come up with new problems and new things that you want to pursue, and so if you find yourself becoming bored with the domain or feeling like, once you've learned something about it, there's nothing more that is going to intrinsically motivate you to keep learning or keep pushing the envelope, then I think you've probably you're not intrinsically motivated enough to explore that domain or, again, this just might not be the thing for you.
30:44
I think the people that tend to be the most relentless are ones that get inspired by a certain domain or problem area and just can't stop. They want to go deeper, and deeper, and deeper, and everything they learn opens up thousands of new questions that they want to explore. And so, they find this little fractal and then they go and explore it from all ends, and because of that characteristic they try so many things and they're exposing themselves to so much information that they're very quick to move on whenever they have an idea or a solution that doesn't work. They're obsessed with the problem; they're not obsessed with the solution. I think, as a general advice, that's probably the most important thing for social entrepreneurs to try and cultivate.
Senthil
31:27
Great. Thanks so much, Carl, for joining me and sharing your very valuable perspectives. It was wonderful talking to you today.
Carl
31:35
Thanks so much, Senthil. I had a great time as well.
Senthil
31:38
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