The Specialty Coffee Financial Gap

My name is Leopoldo Flores. I am a coffee farmer in a town near Pasto, south of Colombia. I have inherited from my father his coffee farm which I took over with a lot of effort as ambition, after having finished my studies in food technology.

First thing I did was to understand how to process coffee in a proper way. My dad was called by local exporters “don Fenolio”, because well, his coffees were frequently phenolic. He was a hard-working man. This allowed him to little-by-little start acquiring some neighboring farms. Land was cheap as the value of the land followed the trend of the coffee in the market. They were that, lands, not farms. It was my dad with his work who transformed these lands into productive coffee farms. When I took the farm, I had around 30 hectares of land and converted into green coffee, let’s say we could have around 4 containers of exportable fine quality coffee.

You know Nariño as a region, every specialty coffee buyer knows it. The quality is outstanding. Having a single farm is attractive for coffee connoisseurs because we can control completely the process of coffee, and experiment, of course. They started to come, my farm, my processes and my agroforestry production attracted them like honey to the bees.

I had my first contract; my dad was reluctant. He told me to be careful. You don’t know if they are serious. It was not much, 50 bags and a hassle to export them but we did it. The buyer came the second year, he became my partner. We saw what went wrong and what could be changed. He confirmed a full container. My father was more reluctant. This is not a game anymore. Be careful. You don’t know if they are serious enough to pay a full container. We sold it, and my partner paid.

The third year arrived, and my partner came, he said the coffee sold well so he could confirm me the double. Two containers. A new buyer arrived also but from another continent. She found me on Instagram. This company seemed serious and big. Bought one container. I was in 3 years able to sell almost 75% of our production directly to a buyer from abroad.

Here is where my problems started. Financial problems. And I would explain you what I like to call the Specialty Coffee Financial Gap.

I am selling the coffee around the double of the price my father was selling it, I couldn’t understand what the problem could be? How is it possible that I did not see it coming before?

We normally start harvesting coffee in May and we can normally ship it by August. We are paid once we can send the export documents, so if the container is shipped in the third week of August, we would normally be able to be paid by the first week of September. On the first year doing it, this was not an issue. Having growth is the issue. Why?

What I have explained previously is the Specialty Coffee way of working. The way Commercial Coffee works is not that. I said we have harvest in May, remember? You can start selling coffee from May but even before because you can sell futures. My dad has always been reputed among local exporters to be a serious coffee farmer. Never they have heard of a single sack defaulted from him, so it is normally they could accept to purchase from him 6 months before the harvest, so in November. As he has always been very serious, he did never engage himself for more than the half of the coffee he knows can produce and to see what the market does, because it must go up, it just must (right?). In January the market fluctuates a bit, could go up or down, so better fix another lot. He would let the last one for when the harvest comes, and he can be fully sure he can sell it. What were his terms? I would recall again, as he is known as a serious farmer and every exporter wants to have him on their boat, they could advance from 30 to 70% when they sign the contracts and the rest when delivered. Logically you could imagine he could have received all his revenues of the harvest by May or June once he has finished delivering all the coffee harvested.

The first years I didn’t see it basically for 3 things:

a) My inexperience on handling my exporting operation

b) The coffees I continued to sell locally helped me to be my money reserve to work the farm and arrange the picking of the harvest.

c) Exporting is not the same as just delivering the coffee. I am not able to export everything on a single month.

When this money reserve was no longer there, I did not have a work capital to face my challenges. I talked my dad could sell 6 months in advance, some exporters could accept even 9 or more. The price they paid him was unfortunately secondary, the most important thing is that they could pay upfront so we can work for the upcoming harvest. If we make any money or not, we will see it later…

How is it that you don’t get a loan from the bank you might ask? Well, is not always that easy. For many reasons. My dad is a serious person, yes, but be in agriculture makes the banks be alert when giving credits. We might not get all the credit we need, and what we do get, would get it at a high interest.

I talked to my partners to ask them if they could help me by prefinancing they purchase of the new harvest. I had two response which I can also understand:

a) My oldest partner is a roaster, and he told me for this year his idea was to ask me if he could pay 50% at shipment and 50% a month after the arrival of the container, so in October. Because from his side, he had to start accepting giving 30-60 days payment term to his clients.

b) My new partner is an importer, she told me they would analyze the possibility of prefinancing 50% with the signature of the contract and the other 50% at shipment. This is the most they could do, as she explained to me, they could from their side give as well from 30-60 days payment term for their roaster clients.

Both responses I did also understand them for a reason: my demand was unexpected. Probably the option for the roaster would be to choose an importer to work with. That would help him to fill his financial gap. But not mine. With the importer, certainly my idea would be to think on a common way of finding a financing by banks (the so-called solidary banks) and we might only have to be more organized on contracting earlier than May (way earlier), because it is a contract that would help us go get a prefinancing.

As I also have developed sales for all of my production I’ve been convincing some neighboring farms to sell to me their coffee to also develop a range of regional coffees for my partners, and at the same time pay them better prices in exchange of their quality. However I’m pretty sure they would face the same challenges of myself and if I’m not able to have work capital for myself, I would neither have it for them. So I might desist on this idea.

This my dear readers, is what I call the Specialty Coffee Financial Gap.

*Leopoldo Flores is a fictional character, but his story can be found everywhere in the coffee world, and even if here we referred to him as a farmer can also work for independent specialty coffee exporters.

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