Why roasters and producers are cutting out the middleman

man cut out
  • Direct trade emerged as a response to intermediaries’ bad reputation, but ironically, it still heavily relies on third party services
  • Cutting out the middleman can avoid a finder’s fee, but financing coffee is expensive – taking up to 120 days to see a return on investment
  • Many producers and roasters are seeking out alternatives where they have more control over the product and demand, and cut brokerage costs

DIRECT TRADE in coffee is no new concept by any stretch. In specialty coffee especially, foregoing the middleman is a common practice by now, as both roasters and producers seek a more direct relationship. However, transactions labelled as direct trade are often anything but – with most of the exchange still handled by a third party. 

Now, many coffee roasters and producers are testing out a new approach to direct trade – one where they bypass the traditional intermediary in favour of a more flexible option that allows them more autonomy and fewer expenses.

Coffee roasters originally established the concept of direct trade, positing that by cutting out the traditional middleman, buyers and sellers could improve direct communication and maximise profit at both ends, ensuring fairer compensation for farmers.

It emerged as a response to issues linked to trading through intermediaries such as lack of transparency, inconsistent pricing, and exploitation of producers, which tarnished their industry reputation, especially in the specialty coffee segment. 

“I think the reason why middlemen have received such a bad reputation throughout the years is because in the traditional trade model, they tend to take ownership of the supply chain,” says Ricardo Pereira, Chief Business Development Officer at Purity Coffee.

“They are literally taking control of the demand and are also in control of the physical product, and with that they’re speculating a market to potentially maximise their gains.”

However, even with the rise of direct trade practices, it has become increasingly apparent that completely bypassing middle organizations poses its own set of challenges. Logistics, quality control, and financial risks associated with international trade require expertise and resources that many coffee roasters may lack. 

As a result, some roasters are finding it difficult to entirely eliminate the need for intermediaries – but they are finding new ways around that.

Avoiding the finder’s fee also carries some risk

A core underlying factor that explains why both producers and roasters are seeking out more truly direct transactions is to cut costs and third party reliance in a context of economic uncertainty. 

The way most importers operate, even in a context of “direct trade”, is to offer a service that brokers the match and relationship between buyer and seller, and also covers all paperwork and logistics linked to the transaction. 

For this, they charge a finder’s fee of sorts, which is expensive for both parties. In a green coffee trading crisis, it seems more profitable and ironically less risky (as intermediaries are usually hired to absorb risk) to find a way to avoid this. 

However, roasters run the risk of drowning under the financial and logistical requirements of transaction management, and producers are pressed to take on additional responsibilities related to marketing, distribution, and quality control – which isn’t always sustainable in the long term.

“It can take up to 60 days for coffee to arrive from origin to destination, depending where it is,” says Ricardo. “If you’re paying the full amount, you’re not going to see that money coming back to you for probably 60 to 120 days, even more. If roasters aren’t familiar with the paperwork or have cash flow limitations, they may not want to take that on.” 

Meanwhile, producers looking for roasters directly in consuming countries often struggle, as it takes more than connecting with a handful of buyers and bringing a few samples over to make a sale.

“They often don’t think of all the steps necessary to actually move coffee from point A to point B,” says Ricardo. “You definitely need to have an expert consult for you, whether you’re a roaster or a producer, and that sometimes costs you as well.”

Producers and roasters are engaging in a more circular model of direct trade, with better control

While direct trade initially emerged as a way for coffee roasters to connect directly with producers, a notable shift is occurring as producers seek out roasters in turn to establish direct partnerships. 

“As technology advances, people have more information at their fingertips – and that includes coffee producers,” says Ricardo. “They’re becoming more tech-savvy, aware of trade shows, and have started to travel and network – really flipping the traditional narrative by going to consuming countries and finding roasters there to buy their product, rather than the other way around.” 

While producers – and roasters – want to avoid the expense of a finder’s fee in tough economic times with thinning profit margins, most are reluctant to take on the risk and responsibility of managing the associated finance and logistics themselves.

As a compromise, many are now looking to handle the bulk of the relationship directly, delegating only the finance, paperwork and logistics to brokers or importers who then act as service providers. 

“In that scenario, both parties take control of the relationship, and importers become a mere service provider within that, where relationship, information, and pricing flow both ways in a more circular trade model.”

Ricardo posits that this allows for a more transparent transaction for both sides, and helps share the cost of doing business. 

“It’s better for everyone, including the trading houses, because they no longer need to speculate on the market as they know exactly how much coffee they need to provide services for,” he says.

While challenges remain in completely eliminating intermediaries, there is a growing movement towards direct trade relationships between roasters and producers, in the truer sense of the word.

If it picks up, we could be seeing importers and exporters not being cut out exactly, but perhaps moving into a different role that remains vital, while distributing ownership and profit more equitably across the supply chain.

Coffee Intelligence

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