Coffee pricing structure

June 15, 2017

There are a number of stages between us and the farmer. Stages the coffee needs to go through before it can be exported. Stages where value is added and costs are made. Coffee is a cherry and it needs to be processed to take the bean out. It needs to be picked, pulped, fermented, washed, dried, hulled and sorted and selected various times at various stages. Then there is the exporter and the shipping company, who transport the bean from origin to the consuming country.

All off the steps have a purpose, and each adds cost to a coffee. Also, each participant is entitled to earn a profit margin. The farmer needs to feed his family, but the truck driver and the exporter also need to send their children to school.

Sometimes the farmer is the mill and exporter, and sells the green bean. Sometimes the farmer sells his cherry through a cooperative. And then there exists many variations or structures within these models. You cannot easily compare those structures.

COP is not only labour, fertiliser, etc. To understand COP you need to sit down with producers, after harvest and exporting and check the numbers. How many kilos of cherries did they buy/harvest? How many kilos of coffee did they sell? The first obvious step is making sure farmers keep good and reliable data on this. You’d be surprised at how many farmers do not keep accurate records on cherry weight/parchment weight. You’d be surprised how many farmers/coop’s do not monitor and analyse their cherry/parchment/green rates.

Occasionally, you see depressing numbers in the newspapers; farmers get only 1% of the price of a final cup of coffee. The truth is I don’t know what a fair-share is. We are a wholesale company, with no coffee shops, – so I’ve never really dug into those numbers. What I do know, is that even if the barista gets paid the minimum wage, his hourly wage will be almost twice what a day’s work in producing countries is. Then there is rent, equipment and cups and sugar etc. Again this is an example of how important it is to analyse things in their context.

In my work I have been trying to find ‘the golden standard’ expressed as a percentage of the Free On Board (F.O.B) price that should go as a minimum to the farmer (his share of the F.O.B. price), but I haven’t figured it out yet. Calculations are just so difficult and context dependent.

Instead of paying a ‘high price’ to the farmer, a cooperative might opt to use some money/profit and provide farmers free agronomic advice, or subsidise input projects. They might even invest in non-coffee related projects such as health or education. They might choose to buy a car, to attend to their farmers better. If agreed upon in the general assembly (a farmers meeting where they sit down and talk and approve how the profits are going to be spend) who am I to say no that’s not a right investment of your profits you should pay the farmer more in order to fit the golden standard?

I know your head will be hurting by now, but the context of this issue is so important, if you decide that you want to make numbers comparable and convert all prices paid to farmers (cherry, parchment, green) to its green bean equivalent. You might miss very important details when you are analysing and interpreting the data.

And this is where it becomes even more complicated! What are we actually looking for?

1. Do coffee farmers make a profit? (Absolute number,depends on the point you measure it (has the farmer just pruned or planted) I can make a profit, – but still not make a living to be profitable)
2. Is coffee farming profitable (Relative number, my ability to make profit this requires a long term view)
3. Are coffee farmers making a living? (this depends on many more factors)
4. Are farmworkers making a living?

These are four very distinct questions, – and then we need to factor in that coffee in some cases is the farmers only cash crop and income source and in some cases, it is one of many sources.

It’s really important to know the farmer covers his cost of production, and earns a decent (in every sense) profit margin. We also need to accept/recognise that even if we do that, some farmers are still not making a living. A farmer that produces 100 kilo’s of green coffee (which is a realistic number for many smallholders) and earns a net profit of a dollar per kilo, still only makes a thousand dollars of profit for a year’s work. He needs to feed his family, send his children to school, pay for health care, do additional coffee investments, etc, etc.

-John Smith is a contributor for the Specialty Coffee Magazine.

Talking about cost of production in a well-informed manner automatically means taking the context. There are No blue prints, no golden standards and no silver bullets.

-Rachel Northrop is a contributor for the Specialty Coffee Magazine and the writer of When Coffee Speaks.

Relationship Coffee
Photo Credit: Landon Yost
RACHEL NORTHROP is a contributor for Specialty Coffee Magazine. Her articles focus on agriculture, environmental and economic sustainability at origin, emerging US roasters and retailers, and the personal narratives of people involved at all points along the supply chain. She began researching coffee production in 2012 for the book When Coffee Speaks: Stories from and of Latin American Coffeepeople. She works as the Northeast US & Canada rep for Ally Coffee’s specialty division. Read more at whencoffeespeaks.com.

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