Conversation with KALVE CTO / Head of Coffee Raimonds Selga
We continue to explore coffee's journey from bean to cup. In this diary entry, we had a conversation with KALVE's Technical Director and Head of Coffee, Raimonds Selga, about how green coffee is bought, KALVE's approach to green coffee purchasing, and the significance of transparent supply chains and certification!
How does green coffee purchasing work?
There are several ways to purchase green coffee. Large brands like Lavazza and Illy buy coffee through the stock market that regulates coffee trade. For example, the Arabica stock market is located in the United States, New York, while the Robusta exchange is in the United Kingdom, London. The commodity price of coffee (C-price) in the stock market is influenced by various global events, including those in coffee-producing countries, economic events, and politics. Coffee prices are regulated based on these events, and trade in the commodity coffee segment is usually conducted through importers and exporters. This way is advantageous for major coffee players who prefer working with long supply chains, including purchasing coffee in the stock market. However, in the specialty coffee industry, roasters often work directly with the producer or collaborate with exporters/importers who are transparent and oriented towards sustainability.
How is the price determined for green coffee?
Coffee prices are determined in dollars per pound. Based on the coffee's stock market price, coffee quality is assessed, and a differential is applied to each coffee. This can be positive for specialty coffee, such as adding 40 cents to the C-price. Differentials are based on the physical and sensory quality of coffee, the presence of defects and flavors, and coffee traceability. The better the quality of coffee, the higher the differential, as it reflects the additional effort put in by the grower, ultimately resulting in a higher price. If coffee is defective, has off-flavors, or lacks transparency in the supply chain and processes, the differential is negative.
How does KALVE purchase its coffee?
In the case of KALVE, the supply chain is much shorter than that of commercial brands. We either work directly with growers or collaborate with specialty coffee exporters/importers. However, specialty industry exporters/importers operate differently from commercial coffee distributors. We work with intermediaries who can ensure transparency in the process, especially in countries where we can add value, primarily of course financial.
For example, Falcon Coffee technically falls under the category of exporters/importers, but their main policy is to work directly with growers, not through additional intermediaries, which are often found in the commercial coffee supply chain. Falcon Coffees work directly with coffee growers or cooperatives and operate in countries where they have local offices, contributing positively to the local community and environment by helping growers improve coffee quality and, consequently, raising coffee prices. Falcon Coffees finds a buyer for every coffee and also helps out with the bureaucratic burden to both growers and buyers.
Another way we trade is through direct trade. Good example of this is our relationship with the Brazilian cooperative Sancoffee. In this case, our supply chain is very short. Sancoffee is both a producer and an exporter, while we are importers and direct buyers. We negotiate the price with Sancoffee based on quality. We use the stock market's C-price as a guideline and then agree on the differential to apply to the coffee based on its sensory and physical quality. This approach works only when the Arabica coffee price in the commercial coffee market is high enough to cover the producer's costs and provide added value. For example, in early 2019, the commercial coffee price was so low that growers could barely cover their costs. In such cases, an approach like this doesn't work, and growers like Sancoffee, who care about their cooperative members, suggest fixing a price that benefits us and their cooperative members, enabling them to continue producing high-quality coffee, adding value to coffee growers, their families, and communities. Now that the C-price is high again, we have returned to using C-price and differential pricing policies.
In summary, KALVE collaborates with responsible and transparent intermediaries who share our values, such as Falcon Coffees, Ally Coffee, and Raw Material. Alternatively, we follow the principles of direct trade, as in the case of Sancoffee.
What are the key considerations when choosing a coffee for KALVE's portfolio?
First and foremost, coffee's physical quality, its aging progression, and our needs for the existing portfolio determine everything.
For larger and more extended transactions, we carefully evaluate coffee in several stages. We adhere to the standards of the Coffee Quality Institute, which stipulate that a specialty Arabica sample is 350g of green coffee. This means that, for example, Sancoffee sends us a CQI sample from their farm, which we physically assess to ensure there are no defects. The Coffee Quality Institute's Green Coffee Defect Handbook lists specific defects and their significance in terms of points. For example, a broken bean is a minor defect, but a black bean is a significant defect as it dramatically affects coffee's sensory taste. Fifteen broken coffee beans or five twigs in a CQI sample result in 1 defect point. But one black bean or one rock immediately results in 1 defect point. Our defect tolerance in one CQI sample is 3 points.
After the physical inspection, we taste the coffee and assess its quality in relation to the offered price. In this stage, we also evaluate whether this coffee is needed in our portfolio.
The third step is determining coffee's aging curve. Before coffee is shipped, we receive a pre-shipment sample, usually after 3 months from receiving the farm sample, which is sufficient time to see how the coffee ages. Coffee should not lose more than half a quality point in 3 months.
If at any point something is amiss, if the quality doesn't meet the promised quality, we communicate with the grower, clearly and specifically explaining what needs improvement.
What are the biggest challenges in green coffee purchasing?
From a business perspective, just a year ago, unstable and unpredictable prices were the biggest challenge due to factors like Brazil's frost, unrest in Colombia, and Russia's full scale invasion in Ukraine.
Often, the challenge is uncertainty about what will happen to the coffee. For example, coffee doesn't age in the first 3 months, but after 6 months, its quality declines rapidly. Similarly, seasonality is both our blessing and curse. The beauty of seasonality is that we can buy fresh coffee, but it also brings instability because its availability can fluctuate. This forces us to look for ways to ensure product consistency, such as through roasting, but that's another story!
Maintaining relationships also has its complexities. Our business often relies on our relationships with growers and intermediaries. However, we work with people, and coffee is a very human product, which is great because we can talk about it!
How important and significant is certification?
In terms of business certification, BCorp or CO2 Neutrality are the most significant and best certifications, but they do not directly assess coffee quality; instead, they evaluate business and its sustainability. The organic farming certification is undoubtedly the most sensible certification that directly looks at product quality and production, and it is genuinely controlled through inspections!
However, forgive me, Fair Trade and Rainforest Alliance enthusiasts, but I believe these certifications are senseless. This opinion isn't just mine; coffee growers themselves share it. Fair Trade doesn't give them much because the premium they receive for Fair Trade-certified coffee is only 1.5% above the market's C-price. Of course, in large volumes, this can be significant, but it's not substantial enough to outweigh alternatives. The alternative is a real, direct agreement with the grower - how much they need to earn to make their farm self-sustainable, sustainable, and continue developing. Fair Trade works well in very commercial directions where, for some reason, direct trade isn't feasible, but some form of ensuring grower's welfare is necessary. However, the contribution is so small that a direct agreement is more significant and valuable.
Similarly, with the Rainforest Alliance certification, we could easily obtain this certification and put it on all our products, as long as we pay the organization the membership fee. The Rainforest Alliance certification gives consumers assurance that they are part of this supply chain, but there is no real impact or feedback going back to the farm. Even if we paid the organization's membership fee, no financial benefit would reach the producer/grower. The Rainforest Alliance is excellent for marketing. We can buy and sell Rainforest Alliance coffee, but we cannot claim this certification on our coffee until we have paid the organization's membership fee.
Are there any specific coffees you would like to see in KALVE's portfolio?
Many already are! I enjoy working with Diego Baraona and the Los Pireneos farm, and we expect to add their coffee to KALVE's portfolio soon!
However, the most important factors are the coffee and the people behind it! Clearly, there are farms that are more well-known, such as Finca Hartmann and Finca Esmeralda in Panama, Fazenda Inmaculada in Colombia. But for us the name is not the most important, and it appears that it's not the most important for our consumers either, as what matters most is what's in the cup. Sometimes, the opposite effect can occur, where the farm's name is used for marketing, but it doesn't reflect the coffee's quality! The most crucial factors for us are coffee quality, the correlation between quality and price, our relationships with all parties involved, and the added value we can provide to coffee growers.
However, without romanticizing unnecessarily, the added value from our side can be as simple as paying a fair price, paying it on time, and knowing that the money has reached the grower, not the intermediary. This allows the coffee grower to continue working on improving coffee quality. As our company grows, our purchasing power and ability to buy more coffee also increase and we can purchase more coffee and make more direct relationships with growers!