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Unraveling the Mystery of Coffee Prices: One Roaster’s Journey

Coffee in parchment. Daily Coffee News photo.

When I started a small roasting company six years ago in Salt Lake City, Utah, I was surprised by how often I had to field these questions:

“Is this coffee Fair Trade?” they’d ask. “Is it organic?”

It annoyed me a little bit. Did my customers really know the intricacies and differences between concepts like “direct trade” and certifications like Fair Trade, organic, Rainforest Alliance, Bird Friendly and UTZ? Or did they just want to see a label to make themselves feel good without having to do any of the mental labor?

I mean, are the kale or tomatoes you bought from the farmer’s market certified organic? Probably not, even though they may well be produced organically.

I came up with a couple stock responses to these questions. “Well,” I’d say, “We actually buy direct trade, which is better. Fair Trade offers just a minimum price, and we actually pay 30% above that price for most of our coffees — not to mention that most small companies, farmers and roasters alike, can’t always afford the costs associated with certification.”

There was some modicum of insight in that reply, but I blush now at my own arrogance and ignorance. In January, I decided to change things up a bit to learn more about the production and importing side of the business, joining the team at Sustainable Harvest Speciality Importers.

Why does any of this matter?

As of this writing, the Intercontinental Exchange (ICE) price for coffee futures contracts — known as the “C” price — was USD $1.0565 per pound for September contracts. In early May, that price was down to $0.8665 per pound, representing the lowest “C price” for coffee since 2004. By most expert analyses, however, none of those prices come close to meeting the costs of production for the majority of the world’s coffee farmers. We’re talking millions and millions of families. Consider for a moment how bad things must be for families from Central America and Mexico if the best option is to risk life and limb on a harrowing journey north, away from all you know and love, towards an uncertain future and a horribly unwelcoming political climate in the U.S. 

What are the solutions?

Fair Trade

From the perspective of a scrappy independent roaster, it might be tempting to throw certifications like Fair Trade under the bus. I get it. Perhaps they feel like a solution from a different time; or less relevant because you think Fair Trade is just about price and not quality; or confusing, because in markets like the U.S. you have to distinguish between certifications by Fair Trade USA and Fair Trade America. [Note: for the sake of sanity in this story, I’ve just used the phrase “Fair Trade” to connote them all.]

As a conscientious buyer, it’s more convenient to think that by bypassing “bureaucracy” like Fair Trade certification, you’re somehow avoiding another corporate middleman, while also putting more money directly into the pockets of producers when possible. I wasn’t necessarily anti Fair Trade when I started buying coffee; I just thought Fair Trade provided only the bare minimum (a price floor, as it’s called), and that my roasting business was paying much better.

Today, you see this sort of sentiment on virtually every high-end specialty coffee bag: “We pay premium prices to ensure farmers get a fair wage,” etc. Yet, most roasters still know very little about the prices their importers or partners pay, what FOB is, and what price the farmers they buy from actually receive. This is not necessarily the fault of roasters. Many importers’ methods and pricing details are often kept under tight wrap. It’s hard to educate yourself on a topic when few people want to discuss it publicly.

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Public domain photo.

Despite the prevalence of origin trips, and the depth and accessibility of information online, a lot of confusion remains among baristas, roasters, importers and producers about the actual costs of production and economic realities of coffee purchasing.

In the example of the roasting biz I started, yes, we may have been paying something like 30% above the Fairtrade or FTO (Fair Trade and Organic combined) price, but that did not necessarily translate to a 30% increase in income for producer organizations, individual farmers, farmworkers and others at the opposite end of the supply chain.

First of all, in regards to income, a 30% revenue increase is meaningless without also considering the cost of production.

Secondly, even if the entirety of that 30% premium makes it all the way through the chain to the pockets of producers, that purchase may just be a drop in the water of that producer’s total production. And, from the farmer’s risk-management perspective, predictability is key. Can they count on that 30% next year? Will the buyer even return (even if the quality is exquisite)?

Third, how much of that 30% even makes it to the farmer? I learned that there’s an important distinction between Freight on Board (FOB) and farmgate pricing. What I thought I was paying farmers back in the day might have been going to importers, exporters, and others — which is fine, so long as they are offering critical services that add value and are not just pocketing all the premiums themselves, with high-end specialty farmers getting stuck with local market pricing.

I would encourage every roaster, for the sake of transparency, to ask their importer, broker, etc. how much of the price you pay is actually reaching farmers. If you’re proudly paying $3, $4, $5 or more for your coffee with the goal of supporting a quality coffee supply, don’t you want to know where those premiums are going? 

Finally, it would be naive to think that the only value of Fair Trade is price. Farmers who are part of the Fair Trade system are also members of farmer-owned producer organizations. Those organizations, when well run, provide critical business and social services. These are services that can lower default risk, increase quality, enhance equality and inclusion, and improve farmer livelihoods.

The current price crisis has served as an important reminder that Fair Trade is a model built precisely to withstand the ups and downs of the C market by providing a minimum price to producers, along with the added bonus of resiliency through community reinvestments. That’s why I’ve become a believer in the model and its impact. By the way, these days over half the coffees bought by that roasting biz I founded are Fair Trade.

Direct Trade

When I was younger, I often heard a line that went something like this: Traders were blocking access to really good coffees, and pioneers in the industry took it upon themselves to go directly to origin to hunt, search and forage for the best of the best and the rarest of the rare. Then they would work directly with the people growing the coffee to bypass all the middlemen and coffee exchanges to source the best coffees possible.

There was some truth to this narrative, but it turned out to be more like mythology.

On principle, direct trade is a brilliant concept. However, without any kind of voluntary certification behind it or third-party auditing, no two direct trade models look the same, and all of them essentially ask us to trust the organization running them. What happens when the market dips? Or management changes? We all might say we like to ensure fair or more-than-fair prices are being paid to everyone in the coffee supply chain, but in the end, low prices benefit roasters (at least in the short run).

Are we really supposed to buy into the idea that hordes of quality-focused roasters, especially those not engaging in transparent disclosure, are always voluntarily paying higher-than-market prices for coffee? In the coffee value chain, roasters and cafes and retail shops are the players with the best margins. It might not seem like it to the average small roaster or cafe owner who is barely getting by after payroll, rent, insurance, taxes, etc., but they might be the ones reaping the cost benefit of this economic and humanitarian crisis.

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The 10-year price chart for ICE arabica futures.

In this globalized economy, is operating solely on the basis of trust really going to work? Most of us living in the U.S. or Europe will never have to experience food insecurity or other side effects of extreme poverty brought forth by global commodity prices. Subsequently, most buyers may not feel the same urgency to take extreme measures as many farmers have — such as abandoning their farms and migrating northward.

Furthermore, even if the “specialty” segment bands together to demand greater transparency and accountability throughout the supply chain, we still have giant multinational traders and conventional brands that dominate the coffee sector. What’s their motivation for change?

While increased consumer desire for more fair and sustainably sourced products has certainly impacted corporate sustainability reports, the real change continues to be precipitated by the smaller specialty players who gain traction, and size, in the market. In recent decades, this has been accomplished largely by some combination of Fair Trade and direct trade — both models that, while radical at the outset, have limitations.

Is there a third way — something that could build on the best of Fair Trade and direct trade, delivering a living income to farmers and a living wage for farm workers, while maintaining competitive prices for buyers and still incentivizing the pursuit of quality? What role could emerging verification systems, like Enveritas, play?

The International Coffee Agreement

Sometimes I like to think of the specialty world as one big farmer’s market. We’re all basically neighbors who are here for each other and trying to do the best we can to support one another — roasters, producers and coffee shops alike. But looking at coffee prices and the predicaments facing producers today, it seems not everyone is cooperating in a neighborly way, and perhaps a more global approach is in order.

For a large part of the late 20th century, the quota system established by the International Coffee Agreement (ICA) in 1962 helped stabilize prices globally by aligning with production and consumption levels, based on international cooperation from both producing and consuming countries. Through its heyday between 1963 and 1989, those decades generally saw reduced price volatility for both producers and sellers, compared to the deregulated period since. This is even despite two major price hikes that threatened the agreement as a result of weather-related production shortages.

The ICA was utilized by the Kennedy Administration as a Cold War tool to hold back the rise of communism in the “third world.”  It wouldn’t be fair to say that things were great for everyone back then though. While pricing was predictable, the system was manipulated by those with more power and resources — partially undermining the agreement’s purpose since smallholders and indigenous producers were disproportionately marginalized. It’s not a coincidence that this iteration of the ICA came to its end in 1989, when the Berlin Wall fell.

The latest version of the agreement, signed by dozens of countries in 2007 and overseen by the International Coffee Organization, maintains the guiding principles of equity and sustainability, yet without the regulatory teeth established with the quota system. The latest blow to the agreement came when the U.S., the world’s biggest consuming country, withdrew its participation.

A groundbreaking 2001 academic paper by Stefano Ponte called “The ‘Latte Revolution’? Winners and Losers in the Restructuring of the Global Coffee Marketing Chain,” covers a lot of interesting ground related to market regulation in the coffee trade, finding that volatility for both buyers and sellers was dramatically increased in the free market system. Ponte’s forthcoming book, called “Business, Power and Sustainability in a World of Global Value Chains” is definitely on my reading list.

The establishment of quotas or other pricing regulation might sound like an outrageous proposition to some buyers, but they are not without historic precedent. Right now, producing countries are hinting at taking regulation into their own hands, with Colombian leaders calling for $2 FOB per pound international minimums. 

Working Towards Solutions

For me, self education is step one. There are so many great resources, and lots of folks in our community are doing innovative things to push change. Caryn and Mike Nelson of Junior’s Roasted Coffee in Portland, Oregon, have been on a long campaign to educate baristas and consumers through their “Cost of Production” seminars and related zine. If you are looking to learn more about costs of production, that’s a great way to start.

The bottom line is that producers are being asked to shoulder far too large a burden of responsibility in addressing the current price crisis. Now is the time to chart a path towards more authentic global collaboration. 

Beyond the conversations last week in Brazil, the Specialty Coffee Association has been galvanizing numerous leaders in the industry for its Coffee Price Crisis Response Initiative (CPCRI). Former SCA Executive Director Ric Rhinehart is heading the initiative, and he outlined some of its early work with the Boss Barista team in their latest podcast episode.

Liam Brody, the president of Sustainable Harvest who also happens to be my boss, was at a recent CPCRI meeting, and he shared with me a few key reflections:

Farmers are desperate and can’t hang on much longer. We must all step up and do what we can now. We can’t wait for someone else to save this thing we all love so much. We each must find ways to take leadership and be part of the solution. Don’t wait for permission or an invitation.

What defines specialty coffee cannot be just quality. A coffee cannot be special if it is not sustainable. How can you celebrate the bean and not treasure the planet and people that brought it to us. This should and could be done as consistently and quantitatively as we now measure Q grades.

We must recruit new allies, ideas and resources. While we each must step up, this is now far bigger than just the coffee industry. This is about migration. It is about narco-trafficking. It’s about a humanitarian crisis in the making. It’s about human rights. It’s about climate change. It’s about foreign policy…and so much more.

It was in 2001 that coffee prices sank to as low as $0.43 per pound, jolting the entire sector. When the market picked back up by 2004, then International Coffee Organization Executive Director Néstor Osorio warned of the economic and social tolls that the crisis had on producers and, subsequently, on the global economy. In words that resonate clearly today, he wrote:

The industry has flourished, new products have been developed, the value of the retail market has more than doubled, and profits have risen. This is something to celebrate, but the question must nevertheless be asked as to how long such a state of affairs can be sustained. Coffee farmers have shown enormous resilience and one way or another most have managed to survive and continue to produce. But not all and not at any cost.

The true cost of today’s prices remains to be seen.

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