"Our approach is that we only work with very select partners that we know well and with whom we maintain a close relationship. We therefore cannot and do not want to simply switch to other suppliers if there are supply bottlenecks." Erol Bay, Managing Director at Pakka Sourcing GmbH.
Erol Bay: As Managing Director of Pakka Sourcing GmbH, Erol is responsible for raw materials trading within the Pakka Group. After many years of experience in the cotton trade in Australia and the USA, he joined Pakka in 2017. He is currently completing a part-time MBA at the Open University.
The Pakka Group's business divisions cover the entire nut value chain: From cultivation, financing and trading to the distribution of processed nuts and snacks. In an interview with Erol Bay, we learn exciting insights from the raw materials trade. He tells us where the major challenges in his business lie, why nut prices have come under pressure in recent years and which food trends are evident in his work.
Interview
Zurich, 24 February 2020
"Pakka": Where does Pakka Sourcing fit into the Pakka world?
Erol: Pakka Sourcing is the link between the origin of the raw materials and the customers in Europe. We bring the raw materials to Hamburg by container ship and store them there. Depending on customer requirements, we also process the nuts into semi-finished products, such as pastes or chopped, roasted nuts. This processing step takes place in Europe.
"Pakka": Who are your customers?
Erol: On the one hand, we supply Pakka Products AG with nuts, which are then sold on the shelves under the Pakka brand. On the other hand, my customers also include industry and wholesalers, e.g. chocolate manufacturers, large bakeries and retailers.
"Pakka": Where do you see the biggest challenges in the nut trade?
Erol: Quality is always an issue. Although nuts can be stored, they are also sensitive in terms of fungal infestation, mould or moisture content. They have to comply with the food law guidelines. Another major challenge is logistics and ensuring that we deliver on time. Our approach is that we only work with very select partners that we know well and with whom we maintain a close relationship. We therefore cannot and do not want to simply switch to other suppliers if there are delivery bottlenecks. In such situations, it would of course be easier to buy goods from somewhere and fall back on goods already stored in Europe, so-called "spot lots". But as I said, this is not in line with our business philosophy. In addition, the selection of possible suppliers in our organic and fair trade niche is not particularly large. It is particularly difficult to source high-quality organic and Fairtrade almonds and Brazil nuts. This all harbours certain risks that we have to overcome.
"Pakka": What about the prices?
Erol: These are of course dependent on supply and demand. On the supply side, for example, weather events play a role, which can lead to crop failures and drive up prices. On the other hand, the expansion of cultivation areas can lead to an increase in supply and put pressure on prices. The latter has been the case in recent years. The supply of organic and Fairtrade quality nuts has clearly increased, as many are jumping on the sustainability bandwagon. However, we have also noticed that there are players who are taking shortcuts when it comes to sustainability or are not focussing on small farmers. This can be seen, for example, in the situation with raw cashew nuts, which are shipped on a large scale from Africa to Vietnam or India to be cracked and processed more cheaply in industrial plants. These nuts are then sold relatively cheaply in the retail trade as Vietnamese or Indian organic and Fairtrade cashews. However, this ignores the fact that an important part of the added value is shifted from Africa to Vietnam or India, which is bad for the development of the African economy. This raises the question of how "fair" these cashews really are. Generating as much added value as possible in the country of origin of the raw materials is a core concern of the Pakka Group.
"Pakka": And how are the price negotiations with the suppliers going? How do you agree on a "fair" price?
Erol: As a reminder, a minimum price and an additional Fairtrade premium are guaranteed through Fairtrade certification. Beyond that is our room for negotiation. And it is not unusual for us to find ourselves in a delicate area of tension. We always try to finalise contracts as early as possible in order to give small farmers security. However, this means that we are fully exposed to the risks of the market. As there is no exchange for nuts, we cannot hedge the prices. If they ultimately fall at the time of delivery, we bear the full loss. We can minimise this risk by trying to sell a large proportion of the nuts early on. This is not always easy, as many of our customers buy at short notice. They are used to the fact that we always keep goods in cold storage in Europe for such cases.
"Pakka": Which is currently the most exciting product?
Erol: Indian cashews are still a very important product for us. The Pakka story began 15 years ago with the Fairtrade Alliance Kerala (FTAK). Since then, we have enjoyed a long-standing friendship and invested a lot of heart and soul. In addition, the FTAK continues to be a flagship project in terms of biodiversity.
The Fairtrade almonds from the Mountain Fruits Farmers Association in Pakistan are also unique. The small farmers cultivate over 40 different varieties of mostly wild almond trees. And they do so in the Hunza Valley against an extremely impressive geographical backdrop! The Fairtrade almonds are also exciting because the Fairtrade standard for almonds has not been around for so long. And the industry is slowly getting used to the fact that Fairtrade quality almonds can be procured. The number of exceptional authorisations is therefore decreasing.
"Pakka": exceptional authorisations? Can you explain this?
Erol: All products with the Fairtrade label (FLO) are subject to the rule "All that can be Fairtrade, must be Fairtrade". For composite products, such as chocolate with almond slivers, this means that all ingredients that are available in Fairtrade quality must also be used in this quality. As there were hardly any Fairtrade almonds available for a long time, non-Fairtrade almonds were used in composite products such as almond chocolate. However, nut chocolate was still allowed to be labelled as Fairtrade. Fairtrade almonds are now available, for example from us. But not all of them have replaced their almonds with Fairtrade almonds. They were granted an exceptional licence to still advertise their products as Fairtrade. These exemptions are now becoming fewer or are slowly being phased out because there are more and more Fairtrade almonds.
"Pakka": The cashew harvests take place in spring, so they are just around the corner. Does that mean a lot of work for you?
Erol: For me as a trader, my workload doesn't depend so much on the time of harvest. There are various tasks throughout the year. Contracts are usually concluded before the actual harvest so that the farmers can finance themselves. After the harvest comes the logistics, i.e. the shipping of the goods. Then comes storage and quality control. Different nut varieties are harvested at different times. We therefore do not have an actual peak season.
"Pakka": Do you notice certain food trends that are reflected in the enquiries?
Erol: Due to the spread of the vegan lifestyle, the topic of milk substitutes has certainly become more important. This is particularly noticeable in enquiries for almond paste for almond milk, but also for cashew curd for vegan cashew cheese. Peanuts in organic and Fairtrade quality are also a big issue - demand far exceeds supply. That's why our own organic Fairtrade peanut project in Colombia is so exciting. We are expecting the first harvest this year and are very much looking forward to the result!
"Pakka": What do you like about your work? Why did you become a trader?
Erol: Every day is different. You come into the office and don't know what to expect. What I also like is the international aspect and being the link between the different cultures and regions of the world. And then I certainly also like the nuts as a product: a concrete, unadulterated food. Trading an abstract financial product would not be my thing.
Of course, it's also great that we at Pakka are in a niche where we can make a difference. Our partners at the origin are not the big nut producers of this world, but the small ones. Our cooperation enables them to develop and compete alongside the big players, which is motivating!