[S4:E10] Articles Read: Improving Farmgate Coffee Prices

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This article was written in 2020 and was part of my development of the Central Dogma of Coffee. I was mainly addressing the argument that roasters take more than their fair share of profits from farmers, an assertion I feel is invalid.


Read the original article here: Improving Farm Gate Coffee Prices

Read about the central dogma of coffee here: The Central Dogma of Coffee

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Michael: A big part of what I’m trying to achieve with articles like this one is to describe the situation as it currently is. So that we can react and adjust to it appropriately.

This article was part of my development of the concept I call the central dogma of coffee. The central dogma states that coffee progresses through three basic phases from a coffee cherry to a green unroasted coffee to a roasted coffee.

Each phase amounts to a process needed to physically and chemically transform the raw cherry into a green un-roasted bean and ultimately into a consumable roasted bean.

Coffee is bought and sold by weight. As we transform it from a cherry to roasted coffee, we reduce its weight significantly. Therefore, all other things being equal, the act of processing the coffee, means we must increase its price at each stage in order to not lose money.

Lastly, each stage has a separate and distinct market. For example, the vast majority of buyers of roasted coffee are not interested in buying green coffee. It is certainly accurate to say that farmers can capture more profit by roasting and selling their own coffee. But in order to do so they need skills and equipment And buyers who can afford the product.

Before I would recommend roasting to a farmer. I would take a good look at their farming business. Do they know their cost of goods sold. If not, how are they determining price? Do they have reliable market access for the product? Or are there more appropriate markets that might pay better? Can the farmer leverage those markets.

In other words, why is the farmer failing its selling farm produce? And how do we fix that rather than add new skills and new market requirements to the equation? And that’s the gist of this article. I hope you enjoy it.

I’ve heard it expressed often, recently that roasters quote ‘take profits from producers.’ Or that the profits, the roasters receive are , somehow actually the producers profits. Neither of these assertions are true.

Before I go further. I want to make clear that I believe very strongly that many, many coffee producers should be making more money.

A vast majority of the global coffee supply is produced by small holder farmers who exist in economically precarious, often outright impoverished situations and those farmers need help. I believe in this so much that I have personally worked closely with farmers to help improve their ability to participate in the coffee industry. And I hope to continue to do so for the foreseeable future.

But in order to properly solve the problem, we need to properly define the problem.

The problem with farm gate prices for coffee is not that coffee roasters are taking more than their fair share of profits. And as long as the problem is mis-characterized as roasters taking more than their fair share, we will not be able to solve the problem and will only continue to create animosity and resentment between groups of people who should be cooperating.

Also none of what you were about to read or in this case hear, should be construed as an attack or an attempt to belittle anyone. My goal with all of this and all of this includes the blog. The YouTube channel. The podcast. Is to do what I can to contribute to a better coffee world, even if only in my very small circle of influence.

We win with communication, cooperation and understanding. We lose with animosity and resentment.

Farmers produce a raw material. Coffee farmers who don’t mail their own coffee actually produce a raw material; coffee cherries harvested from trees. These cherries have to be processed or milled to become an intermediate product, which is unroasted green coffee.

Milling coffee, cherries is a separate skill from growing coffee trees and often, but not always requires special equipment special processes in order to produce an acceptable product. Even more so to produce a competitive product.

It is quite common for small holders to be able to minimally process their coffee and sell it as unroasted coffee instead of selling the raw coffee cherries. But oftentimes with small holders, this produces an inconsistent product because they don’t follow strict procedures or have sophisticated equipment to monitor the process.

It is quite normal for a small holder coffee farmers to farm in traditional ways that are effective yet simple. They get the job done and produce a sellable product, but not a consistent product of high value. That’s not to say they can’t. Many small holders do indeed produce a consistently excellent product.

But in many, many cases, the best help a farmer can get right now is assistance in developing business literacy and a business model in which they consistently produce at the highest value their market will bear.

Mills produce an intermediate product. Unroasted coffee or green coffee is a stable, intermediate product that must be further processed before becoming consumable. It therefore has a much more narrow or focused customer base than roasted coffee. Green coffee is only valuable to someone who either can roast it or who can sell it at a markup.

Maybe we should stop calling it coffee until after it’s roasted.

And to be clear. I’m not saying producers shouldn’t or can’t roast. They certainly can. And if they’re able to roast, it could be a way to increase their profits. But roasting requires an entirely new business model and skillset.

That intermediate product often has to travel. The coffee tree is economically productive in very limited circumstances, typically within the tropics and typically in mountainous or at least relatively elevated regions. This means that most of the economically productive regions for coffee coincide with remote regions in developing countries.

This means that in regions that produce coffee. There is likely much less disposable income with which to buy coffee. And coffee is a luxury item. Although two days after I haven’t had my coffee my wife might disagree with that.

This means that to get really good money for a coffee sellers have to go where the money is. And that is most often developed countries that are outside of the tropics. To get the coffee from the farm to the cafe involves a supply chain that can vary in size from just a few to several different companies.

It is possible for a very large company to own farms, transportation divisions, warehousing facilities, to have export import custom specialists on staff, et cetera. But that is not the norm.

The typical roastery buys coffee that has been bought and sold many times and has had many value-add services applied. All of which increases the value and the cost of the coffee before it is even roasted.

Below is a generalized example of an export supply chain where each link or step adds value and costs to the coffee before it is roasted. Each step transforms the product, producing a new product of increasing value, meaning it’s no longer the same product that the farmer harvested from his or her trees.

The example is first milling the coffee, then transporting that coffee, overland to port to be shipped. Customs documentation and procedures have to happen at export. Then shipping from producing country to consuming country. Then customs, documentation and procedures at import. Then transporting that coffee Overland from port to warehouse. And that could be the end roastery, but often it’s a green coffee supplier with warehousing facilities. And from there it’s transported to the coffee roastery.

Roasters have to develop and market a product. Just because one buys a roasting machine, some green coffee and some valve bags doesn’t mean the roaster’s now laughing all the way to the bank. Simply having roasted coffee does not make you a successful roaster. I wish it did. I’ve had my own roasting company and it took a lot of effort to market and sell the roasted coffee.

That effort is brand development, marketing, channel development, et cetera. You need market access, which takes a bit of research. Or you need to develop a market which takes time and even more research. The roastery also has to invest in a location for roasting all of the equipment and incidentals necessary to do the following: one, actually roast the coffee. The roaster is a large investment for a roastery. Two, bag the coffee. Three brand the coffee, which means labeling. Four, store the coffee until it’s sold. Five, get the coffee to market. And that could be an attached cafe, but it could also be sites across the country.

The location itself comes with costs, property costs, insurance costs, utility costs, et cetera. All of those costs, along with all the transportation costs, getting it from the farm to the roastery, get packed into the cost of that pound of coffee that took only a few minutes to roast.

A key advantage. A local roastery may have is knowledge of the local language, culture, and market or economy, all of which greatly help in the marketing and brand development process. And that argument works in reverse for roasteries, hoping to do direct trade with a farmer. Without an understanding of the local language, culture, and market or economy. It is very difficult to do successfully. Which is another argument in favor of middlemen or brokers.

By the time, a coffee is ready to be enjoyed in a typical consuming country. The value and cost has increased tremendously due to a number of factors that are not limited to the roasting process itself. Also not factored in is the difference in cost of living. Currency conversions, et cetera. All of which further complicates a fair and equal comparison between a farmers’ margins and a roaster’s margins.

To belabor the point. Yes. Roasting adds great value, but mainly because it is a relatively costly process that transforms an intermediate product into a consumable product and opens up a very wide market with the disposable income available to pay a higher price for it.

In short, the coffee becomes usable by more potential customers. When the work is done to properly market and brand the product then the symbolic value increases as well.

In short, producers as roasters is risky. Making the argument, even implicitly that roasting coffee represents an unfair advantage in the coffee industry can encourage risky behavior.

Take for example, a real life case, an Indonesian coffee company that has done very well for itself within the Indonesian coffee scene, with multiple cafes, professional, largely automated roastery, many staff, et cetera. That company decided to invest in shipping roasted coffee from Indonesia to the U S to be sold in outlets in the us. They leveraged their existing roasting facility in Indonesia that was expanded to accommodate the new operation. The planned to save money in the long run by not opening and staffing a roastery in the U S and potentially capture more of the profits by controlling more of the supply chain themselves.

Unfortunately, what happened was the coffee did not sell because there was no previously established brand recognition. There wasn’t a business unit in the U S that had already invested the resources to develop a market for Indonesian coffee roasted in Indonesia. That Indonesian company has now lost money on the coffee they shipped to the U S as well as all of the equipment they bought, including an additional roasting machine to handle that anticipated capacity.

Think about how difficult it is to convince coffee buyers in the U S for example, that Indonesian coffee roasted in Indonesia has more value than the same coffee roasted in the U S — especially given the amount we’ve already invested in educating consumers on freshness. The gamble is that enough us customers will consume based primarily on the ethics of getting more money, closer to the producer.

However, if the roastery is good and the supply chain is good, which means effective anti staling measures in place through the coffee’s entire journey from Indonesia to the us. Then coffee roasted in Indonesia will be indistinguishable from the same coffee roasted in the U S. Therefore, the only reason for a consumer in the U S to buy it is the perceived symbolic social value.

We know perceptions and attitudes are low on customers’ lists of reason to buy a product. The following is from the article titled, do consumers care about ethics, willingness to pay for fair trade coffee published in the journal of consumer affairs in 2005. Quote. On the one hand consumer perceptions and attitudes clearly influenced behavior as conceptualized and tested in several models of ethical consumption behavior.

On the other hand, it is well-documented that attitudes alone are generally poor predictors of buyer behavior, especially in the social marketing area. While some consumers refuse to buy products with an unethical background. The majority of people evaluate product attributes jointly in making purchase decisions.

Price quality, convenience and brand familiarity are often still the most important factors affecting the buying decision. End quote.

The reason this isn’t done more often isn’t because roasters in developed countries, aren’t allowing it. It is because it is incredibly difficult, time-consuming and often very expensive to change habits of consumption.

I didn’t highlight that example to show that the company did something wrong or naive. I highlight it as a real life example of the difficulties and complexities involved in such a global operation.

They tried and they learned and it didn’t go belly up as a result and i respect that it indicates a healthy business trying to expand in creative ways.

Again to be perfectly clear i’m not saying it can’t be done or shouldn’t be done But it should be done in an informed manner. And there are many other options for getting more money closer to production that should be also considered on a case by case basis But my point is that it is not the cause of roasters in developed countries taking profits from coffee farmers.

Making this argument also causes and or reinforces resentment and animosity between two groups who should be working as closely as possible roasters and farmers The notion that roasters make vastly more money than farmers lacks nuance and creates an inaccurate picture of what actually happens to get that pound of roasted coffee into the hands of a consumer.

It is also important to note that this discussion is independent of the discussion about local consumption. Personally , I would rather see attempts to develop local markets within a producing country So that a country can enjoy the very best of their own production. But that’s a different and as lengthy discussion

Not all impoverished farmers can succeed in integrating into globalized value chains. In those cases where they can’t they should focus on local markets Or they should be assisted in alternative pathways out of poverty, from shifting out of the coffee industry entirely or even migration where possible. As a coffee professional I don’t necessarily want to see someone leave the industry entirely but if it also means leaving poverty behind, then it’s the right choice