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A Brand New Coffee Investment Opportunity

http://www.fool.com/investing/general/2013/10/19/coffee-with-integrity.aspx

Jon Quast
October 19, 2013

Coffee--the world just can't get enough of it. Consumption estimates run as high as 2.2 billion cups worldwide per day. At first we all want to act surprised by that number, but then we remember how many cups we personally contributed.

Every year coffee is in higher demand around the world, which leads to higher prices -- a seemingly good thing since most of the world's coffee comes from rural farmers in developing countries. Yet historically, many coffee producers never taste the benefits of this century's coffee boom.

Social responsibility
Consumers have become more aware of farmers' needs through initiatives such as Fair Trade Coffee. Several studies have found that not only do consumers care about where their coffee comes from, but that they are often willing to pay more for java grown in a responsible way.

Coffee companies know this is a big issue for the average consumer. Most websites answer the questions of where the beans come from and how the company gives back to the coffee communities. Big players like Starbucks (NASDAQ: SBUX), Tim Hortons (NYSE: THI), and McDonald's (NYSE: MCD) are each committed to their own ethical coffee standards.

Gaviña Gourmet Coffee -- a McDonald's supplier -- has a "code" that it insists all of its farmers adhere to. Something in the code includes no slave or child labor. If a farmer breaks the code, his business relationship with Gaviña is immediately terminated, though the company admits it doesn't personally check up to make sure the code is kept.

Tim Hortons' "coffee partnership" initiative is Tim's way to make a difference. This program provides education for the farmers, prohibits illegal pesticides, and is assessed by an independent third party. The company's goal is to educate farmers to be better businessmen and learn to run their farms more efficiently to increase profits.

Starbucks obviously has the biggest impact of these companies due to its size. Its program is called CAFE, or Coffee and Farmer Equity, and is committed to improve economic, social, and environmental situations. This plays out practically by seeking to improve living conditions, water conservation, and long-term coffee viability. The company hopes to source all of its coffee from farms adhering to CAFE practices by 2015.

Starbucks could also be coffee's savior. Coffee plants around the world are suffering from a disease called "coffee rust." This devastating disease kills coffee plants and can easily wipe out a small-scale farmer's entire crop. Starbucks recently bought a farm in Costa Rica where it's trying to hybridize coffee plants to make them immune to the disease. A project of this scale could never be taken on by a small-scale farmer.

Lingering problems
One tough hurdle for the small-scale coffee farmer is getting the certifications that major coffee chains are requiring. These certifications involve major changes to coffee practices, which often aren't cost effective. Also, these farms are too small to market their coffee, so they need to join a coffee association to market their beans. Critics claim these associations and cooperatives often swallow the financial benefit of ethically grown coffee -- a benefit consumers believe is going to the farmer.

For example, Starbucks' global assets report studied 2.9 million workers from 2008 through 2010. During that time, 425,000 -- only 15% -- of workers earned better than minimum wage. 

Coffee companies are very busy in the social project arena building schools and digging wells, but often a farmer would just prefer some extra money in his pocket instead of a project for the community.

Can we do better?
Recently Chipotle Mexican Grill (NYSE: CMG) started testing out coffee at one of its Washington, D.C. locations. The coffee is being sourced from a company called La Colombe Coffee because Chipotle believes this business is best aligned with its "Food With Integrity" mantra.

La Colombe Coffee has many community development projects like the other companies mentioned here. It requires certain certifications of its farmers, and also insists on fair pay and health conditions. But La Colombe does two major things differently than most competitors.

First, it provides grants -- not loans -- to farmers needing financial assistance to get their certification. Secondly, it sources its coffee directly from the farm and thereby cuts out any middle man that would otherwise eat into the financial benefit for the farmer.

This coffee development conjures up two real possibilities for Chipotle. One possibility is the company could be toying with the idea of a nationwide breakfast launch. While the company says there are no plans at this time, common sense says it's not just testing out co