Improving Farm Gate Coffee Prices

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

(I have an audio version of this article that includes supplemental information, or you can just read on)

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 mischaracterized 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 are about to read should be construed as an attack or an attempt to belittle anyone. My goal with all of this 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

raw material → intermediate product → consumable product
farm → mill → roastery

Coffee farmers who don’t mill 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; un-roasted, green coffee. Milling coffee cherries is a separate skill from growing coffee trees and often (but not always) it requires special equipment and special processes in order to produce an acceptable product—even more so to produce a competitive product.

See also: In Defense of Tastemakers - Different products, different goals

It is quite common for small farmers to be able to minimally process their own coffee and sell it as un-roasted coffee instead of selling the raw coffee cherries. But oftentimes with smallholders, 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 smallholder 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 smallholders do indeed produce a consistently excellent product. But in many, many cases, the best help a farmer can get right now is assitance 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

Un-roasted coffee (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 mark-up.

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 limiting 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 (two days after I haven’t had any 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 very large coffee companies to own farms and transportation divisions, warehousing facilities, have export/import/customs specialists on staff, etc. But that is not the norm.

The typical roastery buys coffee that has been bought and sold many times and has had many ‘value-added’ services applied, all of which increases the value and 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 cost 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:

  1. Milling the coffee
  2. Transporting the coffee overland to port to be shipped
  3. Customs documentation/procedures at export
  4. Shipping from producing country to consuming country
  5. Customs documentation/procedures at import
  6. Transporting the coffee overland from port to warehouse (could be end-roastery but often is a green coffee supplier)
  7. Transporting the coffee to 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 is 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, etc. 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 and all of the equipment and incidentals necessary to do the following:

  1. Actually roast the coffee (the roaster is a large investment for a roastery)
  2. Bag the coffee
  3. Brand the coffee (labelling)
  4. Store the coffee until it’s sold
  5. Get the coffee to market(s) (could be an attached cafe, could be sites across the country)

The location itself comes with costs; property costs, insurance costs, utility costs, etc. All of those costs (along with all of 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 advantange a local roastery may have is knowledge of the local language, culture, and market/economy, all of which greatly help in the marketing and brand-development processes. 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/economy it is very difficult to do successfully. Which is another argument in favor of middle-men or brokers.

By the time a coffee is ready to be enjoyed in a typical, consuming country, the value and cost has increased tremeandously 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, etc, all of which further complicate a fair and equal comparison between a farmer’s 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 useable by more potential customers. When the work is done to properly market and brand the product, 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, a professional, largely automated roastery, many staff, etc.

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. They planned to save money in the long-run by not opening and staffing a roastery in the US 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 US that had already invested the resources to develop a market for Indonesian coffee roasted in Indonesia. That Indonesian coffee company has now lost money on the coffee they shipped to the US as well as all of the equipment they bought (including an additional roasting machine to handle the anticipated capacity).

Think about how difficult it is to convince coffee buyers in the US, for example, that Indonesian coffee roasted in Indonesia has more value than the same coffee roasted in the US (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 (effective anti-staling measures in place through the coffee’s entire journey from Indonesia to the US) then coffee X roasted in Indonesia will be indistinquishable from the same coffee roasted in the US. Therefore the only reason for a customer in the US to buy it is the perceived, symbolic, social value. We know perceptions and attitudes are low on customers lists of reasons 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:

On the one hand, consumer perceptions and attitudes clearly influence 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....[emphasis added]

(De Pelsmacker et al., 2005)

See also: Ethical Consumption

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.

Roasted coffee bagged and ready to be vaccum-packed. This coffee was eventually packed into a shipping container and sent to the US to be sold as coffee roasted in Indonesia. I was excited for the potential this type of project afforded and I'm bummed it didn't work out for them. It's definitely 'out of the box' thinking. I hope this doesn't dampen their creative, business spirit!

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 they 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 also be considered on a case-by-case basis. But my point is that this 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.

  1. De Pelsmacker, P., Driesen, L., & Rayp, G. (2005). Do consumers care about ethics? Willingness to pay for fair-trade coffee. Journal of Consumer Affairs, 39(2), 363–385.

Michael C. Wright

Michael is a licensed Q Grader, licensed Q Processor Pro, an Authorized SCA Trainer (AST), and most recently, a graduate with a degree in horticulture and a concentration in horticultural business management. He has over ten years experience in the coffee industry operating on both the supply and demand sides of the value chain.