Cool (coffee) beans

My wife and I spent some time in Colombia recently and the highlight of the trip (there were many) was visiting a coffee plantation in Salento, a town 300km east of Bogota. I grew up seeing the Juan Valdez commercials on TV but never appreciated the rich history of coffee or the differences in varieties and growing regions.

First discovered around the 11^th century in Ethiopia, coffee is considered native to the tropics. Legend has it that goats in Ethiopia were seen mounting each other after eating the fruits of the coffee tree. Humans were intrigued and coffee spread quickly throughout the world! Now we drink over 500 billion cups of coffee every year.

While there are hundreds of varieties of coffee, the most popular species are arabica and robusta. Most people prefer arabica for its taste and medium/high acidity and body. However, arabica generally has lower yields and less caffeine than robusta, so robusta has gained in popularity (at least with producers). Robusta coffee is easier to grow, can be grown at lower altitudes and is supposedly less vulnerable to pests and weather conditions. Supermarket and instant coffee is typically robusta while Starbucks and higher end coffee is arabica.

Some interesting coffee facts:

• Coffee is harvested in the rain because seeds ripen during the rainy season.
• Coffee comes with sugar inside the beans. You have to ferment the sugar away before roasting. Otherwise, the sugar will make the coffee more bitter as it cooks the coffee too quickly.
• 9 months from flower to cherries. Once picked, no coffee cherries will grow on that branch. 
• Coffee beans with the parchment layer are planted. Once you remove the parchment skin, seeds will not germinateinto trees
• Typically, two beans of same size are found in each red cherry. Sometimes, one seed will be much larger. These larger seeds are ‘pea berries’ which are very expensive.
• Skin of coffee beans are used as fertilizer.

Brazil is the biggest coffee producing country in the world, growing both arabica and robusta. Vietnam and Indonesia are number two and three, producing almost exclusively robusta. That brings us to Colombia, which, until recently, was number three but has fallen to fourth place (more on this later).

Colombian farmers produce 100% arabica coffee, considered some of the best in the world. Colombian coffee is cultivated along the three different mountain ranges of the Andes as well as in the Sierra Nevada of Santa Martaas. Colombian growers are small producers; the national average is 1.8 hectares per farm and only 5% of producers hold more than 5 hectares in coffee. There are about 500,000 active coffee producers in Colombia.

Colombia has a number of competitive advantages that make growing coffee profitable.

1. Soil: Has rich volcanic soil with low ph levels.
2. Rain: Extremely important in coffee cultivation. Colombia has two significant rainy seasons every year in the center of the country: April to May, and October to November. Colombia benefits from the Atlantic and Pacific oceans, the Amazon and the inter-Andean valleys.
3. Geography: High elevations above 3,000 feet going up to 6,000 feet provide ideal growing conditions for the coffee tree. Cooler mountain temperatures provide a slower growth cycle, which prolongs bean development, creates more complex sugars and better flavor.
4. Labor and supporting infrastructure: It is important to pick the seeds at the right time to get the best taste; hand picking is ideal. Colombia has developed an ecosystem that develops and protects the farmer. The Colombian Coffee Growers Federation (FNC) provides farmers a minimum price, technical assistance, scientific research and even health care. It was FNC who created the Juan Valdez character in 1959 to market Colombian coffee. There is a terrific post on Knowledge @ Wharton that discusses more the FNC in more depth. As the folks at Wharton point out, the FNC has done much to push R&D in coffee through a 66 person research center that focuses on quality optimization, environmental protection and agricultural disease control.

Despite these advantages, an interesting fight has been quietly brewing amongst Colombian growers because output has been falling over the years due to heavy rains, coffee rust disease and a stronger Colombian Peso. Large coffee growers favor introducing robusta because of higher yields and lower production costs (more money). Smaller producers are loathe to introduce a lesser quality coffee bean and want to stick with Arabica. At the same time, they struggle to make good margins because of the many middlemen in the system.

One of the problems seems to be that large buyers like Nestle prefer to work with large producers due to simplicity and consistency of product (no variance batch to batch). This means that large producers are usually growing one variety to keep taste consistent over time.  This type of monoculture planting has its own issues, but importantly the small coffee farmers who grow diverse varieties don’t get the benefit because coffee is graded on size only, not taste or other factors. A big debate is happening now in Colombia. Will money win?

From a pricing perspective, there is no distinction between coffee varietes. High quality arabica beans net the same price as lower quality ones. What if this wasn’t the case, and farmers could get a higher price for better varieties? This is the question that small farmers like Don Eduardo of The Plantation House in Salento is asking. His novel solution is to sell directly to buyers by allowing people to purchase specific rows of coffee trees, which are then picked and sent directly to their home cutting out the middle men and garnering a higher price for better arabica varieties. Time will tell if this model can work, but I hope this spirit of innovation is fostered so Colombia remains a high quality place to grow coffee. I know my mornings will appreciate it.

By: Sudhir Rani
CFO of TerViva, Inc.