One of the bigger problems of the day for coffee is the price farmer’s get for their coffee, the farmgate price. And one of the missions of specialty coffee is to help alleviate that problem—except it’s a big freakin’ problem with a long freakin’ history.
tl;dr: Commodity prices are a global baseline meant to inform buyers and sellers of a minimum price for commodity coffee. The system is well-established and accepted around the world as a way to determine the price of coffee. Unfortunately, producers can get ‘trapped’ by the C-market price, meaning it becomes the final price for their coffee, rather than the baseline price.
A majority of coffee around the world is commodity grade and produced by smallholders in remote, mountainous regions of developing countries. For this reason, the price of that coffee can have a significant impact on the livelihoods of many, economically vulnerable people. In the early days of trading (before globalization, before commodity markets, etc), people traded or paid a price for a given product based on the value of the product. The seller was able to sell at a price they thought was fair, that (hopefully) at a minimum covered their costs and also put a little extra in their pockets. The system was small and it was simple. Sure, there were sophisticated traders who bought and sold not based on their needs or wants for the product but the price for which they could re-sell it, but their individual, local impact would be realitvely small.
Modern coffee markets are quite complex and advanced, with a wide-ranging impact. Coffee is often consumed by people who have absolutely no idea where it came from, who produced it, or if the producer got a fair price or not. And that’s the same for many products, but remember the socio-economic impact of coffee on so many smallholder farmers—it matters. Our current pricing system for coffee is based on a global commodity market trading in futures. This system is called the C-Market.
Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.1
The price for the futures is determined by many factors such as the production levels in the largest producing countries such as Brazil (as-in supply VS demand), as well as the ability to transport the coffee around the globe (think shipping routes affected by conflict or weather, etc). For a smallholder farmer in the mountains of Vietnam, for example, busting his ass to produce maybe a tonne of coffee, he doesn’t necessarily care about the weather in Brazil or some trade war that is making it difficult to move goods into or out of his country. He just cares about the price he’s going to get for the fruit his coffee trees produce. He’s not necessarily thinking about his product as a latte or as a pour-over in some cafe half-way around the world from him. He’s thinking of it as a produce that his trees yielded.
This is an important point because un-roasted or green coffee is a raw product with value only to a small subset of coffee buyers (green, un-roasted coffee is useless to the average consumer). And most coffee is a commodity grade, agronomic product no different than wheat or corn (aside from the above-mentioned socio-economic impacts). Most buyers of most of the coffee produced in the world don’t care about the quality, or how it was produced, or if it’s honey processed or if it has notes of coffee flower with a blueberry finish and a juicy mouth feel. They care if they can buy it as cheap as possible and either re-sell it for a profit or turn it into a consumable product to be sold for a profit. Most instant coffee is made from commodity coffee. Most gas-station coffee is commodity coffee. Most resturant or hotel coffee is commodity coffee. Most coffee is commodity.
I harp on this because we have an established, global system to help everyone determine the price of commodity coffee. That system is designed to be as fair and impartial as possible on a very large scale. The system is far from perfect but it’s what we have and it’s largely functional. I’ll come back to this point shortly.
tl;dr: Processing a coffee carefully and thoughtfully often involves extra labor costs, possibly different machines, and definitely different (additional) skills. The primary differentiator between commercial grade coffee and specialty grade coffee is the number of defects allowed. Specialty coffee allows very few defects, whereas commercial grade coffee has no limits. Sorting a coffee at multiple stages of the post-harvest process takes time and labor. Often a specialty coffee can be sorted three times or more!
In addition to being defect free, coffee can earn additional premiums for unique and/or outstanding sensory aspects, which can be manipulated in a number of ways, often by the processing method (washed, natural, honey, etc) or even intentional innoculation of the fermentation tanks.
Specialty coffee is manufactured. It requires better breeds of coffee trees growing in better soil that has been well fed and maintained (costing the farmer in time, labor and inputs to maintain). It requries thoughtful, deliberate, disciplined, precise post-harvest processing that is also expensive (expensive in labor, equipment, time, etc). Because specialty coffee is manufactured, it is not a commodity and it’s often not traded as such. However, the price for specialty often has a foundation in the C-Market price, because the C-Market price represents a global price foundation for coffee. If a given coffee has a determined quality premium over a commodity coffee, it can be bought and sold with a premium price added to reflect that. And while we have defined and measurable parameters of what classifies a specialty coffee, we don’t have a system in place that says a specialty coffee that scores an 85, for example, is worth X-dollars per pound. So buyers and sellers have to come to an agreement on the fair value of a given specialty coffee.
See also: What Is Specialty Coffee
Depending on the study, specialty coffee only represents around 15-30% of global coffee production. Specialty coffee is difficult and costly to produce and it takes significant skill and expertise to do so. It also requires a market channel for the producer. If a smallholder farmer also does his own post-harvest processing, he needs to have a buyer for his coffee. Since commodity is the majority of coffee out there and the markets are already prolific in producing countries, it is much easier for farmers to get rid of their commodity coffee. The specialty grade coffee can be more difficult to move.
tl;dr: Producing microlots reduces the overal quality of the main lot of coffee produced. Therefore they must earn enough money to offset the reduced value of the main lot of coffee. Otherwise they represent lost revenue.
Microlots were really popular a few years ago but I think things have cooled down a bit for them. Microlots are very special lots or groups of a coffee that represent the best of what a producer can do. Microlots are the cream of the crop, separated from the rest of the production lots to be sold separately as a distinct product. When a producer removes the very best of a coffee from the main lot, they reduce the quality of the main lot. Therefore the price they get for the microlot must be enough to offset the reduced price they’ll likely get for the reduced quality of the main lot. Otherwise they’re failing as a business in the long-run.
When we, in the specialty industry and often far-removed form the producer recommend he produces a microlot of that crazy-floral coffee we had last year, we need to realize what we’re recommending. And unless we are willing to pay up-front for the coffee irregardless of the outcome (i.e., assume the risk), we should be extremely careful about what we, as buyers, recommend to producers.
Coffee farming as a business
tl;dr: Business literacy for coffee farmers, especially smallholders will help empower them to better negotiate prices that include the total cost of production in the price—something that is critical for the longevity of coffee producers.
Too many smallholder coffee farmers are business-illiterate and they don’t necessarily treat the coffee farm like a business. Yet they do business often with individuals and companies who are business-literate and who do operate as a business. This puts the producer at a disadvantage. If he isn’t treating the farm as a business, he isn’t tracking his costs and therefore his selling price is not an informed price—it’s a guess. Coffee farmers of any-and-all sizes should be tracking and recording their costs; costs of inputs, labor, etc so that when they sell their coffee, they can recoup those costs at a minimum, but hopefully also net a profit. Having a record of their costs of production allows them to negotiate a better price and that is exactly what was said to the coffee producers by a Starbucks representative at the first-ever World Coffee Producer’s Forum in Colombia. It wasn’t received well by the producers in the room but it is indeed an inconvenient truth.
One panelists response: 'You should negotiate for better prices.' To boos and whistles #WorldCoffeeProducersForum— Michael Wright (@OilSlickCoffee) July 11, 2017
In order for producers to be in a position to better negotiate, they need better business practices and if we hope to help move them away from the trap of the C-market price, we need to help them become better businessmen and women. Any solution that doesn’t include business training simply perpetuates a power disparity that at best disadvantages the smallholder but at worst is leveraged against the smallholder to the advange of the buyer.
See also: Coffee Should Be More Expensive, Or Not
To wrap it all up with a nice bow: The C-market price is a global system with global impacts, but is well established and understood by the major players. We aren’t going to change the system (i.e., fix it) quickly or easily or with any single solution. It’s going to take time and a lot of slow experimentation.
In the meantime, field work done by NGOs, private companies, and governments is probably the best short-term solution. This field work should be geared towards understanding the conditions of local farmers and informing local solutions that will likely vary depending on producing region. For example, the problems faced by Brazilian coffee farmers, where industrial-level production is more common, may be very different than the problems faced by Vietnamese coffee farmers, where low-tech and small-scale farming is more the norm. Training should include business training as well; basic book-keeping, finance, etc. This is critical.
We can’t (and shouldn’t) blame low farmgate coffee prices solely on the C-market. Farmers need training (business training, farming training, in some cases processing training, etc), buyers can assume more of the risk, buyers need to be more careful about what they ask of producers, etc. There is no big-fix, but rather a whole bunch of little fixes put together to eventually make a big impact.