Coffee News: from Seed to Cup

Minimum Green Coffee Prices: Common Sense or Catastrophe?

A minimum green coffee price, based on the cost of production: this idea was the talk of the town at the World Coffee Producers’ Forum 2017. It wasn’t on the agenda; it came up purely by chance, when one panelist was spontaneously led to the suggestion by several uncoordinated audience questions. But it dominated the conversation.

Yet what would really happen if we had a minimum coffee price? Is it feasible? And are there perhaps better ways to work toward more equitable prices for producers?

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Producer and exporterChecking that washed coffee is drying evenly, a critical element in controlling coffee quality and so increasing prices. Credit: Direct Origin Trading

An Intoxicating Proposal

Millions of small farmers live with the reality that coffee may not earn them a living wage. They know that the crop into which they invest time, energy, and capital may not be profitable come harvest time and that, if so, they may not have any net income to live on until the following harvest – if then.

Living this way is like constantly walking across a sheet of ice, never having any idea of its thickness. You don’t know when or if you and your family will be plunged into frigid water.

Find out more! Read Study Confirms Many Farmers Don’t Earn Enough to Live On

In this context, needless to say, the suggestion of a minimum coffee price was well received. The prospect was intoxicating. Most suggestions and questions in remaining panels revolved around the idea.

The following day, there were facilitated discussion groups in which participants democratically suggested, debated, selected, and built out solutions to several topics, the most popular of which was titled “price volatility”. 9 out of 19 groups independently decided on a solution involving a minimum price based on production costs.

We need to be asking about how to improve coffee prices so that producers can afford food, homes, education, healthcare, farm investments, and more. We need to be creating a more equitable, sustainable industry, and the World Coffee Producers’ Forum provides a useful space in which to debate solutions. But before we decide that a minimum coffee price is the best way to improve the coffee industry, let’s apply some basic economics to see what the consequences would be.

coffee producerA coffee producer uses a Fermaestro, a tool to evaluate the level of mucilage remaining on the coffee beans and therefore ensure quality processing. Credit: Nicholas Gonzales, Estas Manos Coffee Roasters

Minimum Coffee Prices: The Hope

A minimum price is, in other words, a price control. Without studying the potential futures trading behavior it would cause, this would, in a vacuum, increase the average price.

An increase in the average price would increase the average margin (profitability) of coffee farming across the board. It would incentivize capital flows toward coffee planting. More growers (of all sizes in all regions) would be encouraged to plant more coffee as opposed to other crops and investments. Three years later, there would be a lot more green coffee on the market.

An increased supply would normally reduce coffee prices, since the supply-demand function typically drives the market towards “the perfect price”: that at which all that is produced is purchased. However, producers would be protected by the minimum coffee price. If the price cannot fall to the level at which all produced is sold, it would hit the price floor and stop.

So far, so good? Yes – but here’s where things start to go bad.

screen sizeChecking green bean sizes: a few more large or small beans in a sample can mean the difference between breaking even and bankruptcy for a farm. The commodity market values large screen size more than the specialty market. Credit: Karl Wienhold

Minimum Pricing: The Reality

There would be excess coffee that no one wants to buy at the minimum price at which it is offered. Under normal trading conditions, when there is excess coffee, sellers compete by lowering their prices. Seeing opportunities to profit, buyers are convinced to make additional purchases. Yet this time around, there would be no reduction in prices and buyers, who already have enough coffee, would not be incentivized to purchase more. While this is a simplification of a complex formula that needs to take into account farming conditions, consumer demand, and more, the basic principle will apply to the majority of cases for the majority of years.

So, in this case, some farmers’ coffee would get sold at a price guaranteed to cover their costs. However, other farmers would not be able to sell their coffee at all. (During the 1930s, the Brazilian authorities – who had used state subsidies to boost the coffee trade, leading to overproduction – were forced to dump excess coffee into the ocean.)

Continuing down this hypothetical rabbit hole, if not all coffee produced can be sold, whose would be sold and whose would be left without a buyer? One could suppose that the farmers able to sell their crops would be the ones with the greatest marketing budget, sales ability, and access to and control of marketing and logistical channels.

Let’s say that you’re one of those farmers whose coffee is not sold, since no one that has not already purchased at the minimum price is willing to pay that much. Would you throw away the coffee you spent all year and your entire budget to produce? Or would you look for a way to recoup at least a little of what you put into it?

No doubt there are still people out there that would take it for the right price, just not at the established minimum price. If you sold to them, against regulations, it would be called “dumping”. A shadow market would emerge for unsold coffee from desperate farmers. When those “dumped” coffees hit the roaster and consumer market, they would undermine the established minimum price.

In doing so, they would effectively leave us where we started, likely with small farmers having to sell into the shadow market for even less than before.

view from a farmThe view from a coffee-producing community: beautiful, isolated, rural, and poor. Credit: Direct Origin Trading

Price Floor Per Origin: Is It Feasible?

There’s another issue with the concept of a minimum price: the varying costs of production across different countries. This was also brought up in some discussion groups and the dominant suggestion was that the price floor be dependent on origin. So, since it’s cheaper to produce Arabica in Brazil than Colombia, the Colombia price floor should be higher than that of Brazil.

This sounds fine for producers, but in the world of commodities trading, differences in price levels not tied directly to quality would make some countries’ coffee more attractive to buyers than others.

Colombia can establish a price floor that covers producers’ costs, but that would in no way guarantee that international traders and roasters would purchase at those prices. They would, without a doubt, simply substitute those origins that have high price floors with others that have lower price floors yet a similar quality.

In origins with high price floors, the sector would either be exterminated or, when governing authorities realized this was happening, there would be a race to the bottom. They would lower their price floors to attract buyers until we were back where we are now, with supply, demand, and quality setting the market rate.

Cuppers make notesCuppers make notes on a coffee’s quality: something that will determine the coffee’s price but that typically happens independently of the producer. Credit: Nicholas Gonzales, Estas Manos Coffee Roasters

If Not Price Floors, Then What?

Let me make one thing clear: I want to see producers achieving better incomes – but I don’t believe this can happen if the conversation is derailed by ideas that will not work. We do need to be asking ourselves how we can improve the economic sustainability of the coffee industry. We need to be focusing all our efforts on this, and we cannot allow ourselves to be distracted by concepts that are too good to be true.

So, what other options do we, as an industry, have?

Ways to make coffee growing economically sustainable for all farmers is too broad for this article, as there is no quick fix. However, we must not forget that price in an efficient market is determined by supply and demand. The market can be distorted by inefficiencies and manipulation (which should be corrected), but those factors do not change the fundamental fact that supply and demand controls prices.

The only way to sustainably change the price of all coffee is to reduce supply or increase demand – not that this necessarily should or could be done. National efforts to increase output across the country are well-meaning but also increase world supply, putting further downward pressure on price.

Some worthwhile starting points are increasing the share of FOB prices going to farmers through transparency efforts, rationalizing pricing based on value (cup quality, sustainability, etc.), and reducing distortions of the physical market caused by futures trading activity not tied to fundamentals.

In other words, there’s no easy solution. It will require hard work.

If all coffee drinkers purchased the more expensive option because it meant better prices were paid to small farmers, that would be great. Yet if everyone investigated the impact of each of their purchase decisions on each stakeholder and always made the most humanistic choice, there would be no sweatshops in the world. In reality, there are many.

The truth is that people are price-conscious. We need to accept this fact and look for ways to add value to products that can, therefore, command higher prices. We cannot convince the market to pay more for the same product on a large scale.

For growers, this could mean implementing measures to improve cup quality and/or environmental sustainability. For the supply chain, it could mean transparency and traceability programs and content. For roasters and shops, that could mean highlighting these aspects in a way that increases the value of the products to end users.

There is good news: several segments of the coffee industry are on the right track. There is more collaboration in the supply chain and interest from consumers in transparency and sustainability than ever before.

Progress is happening. It will not be overnight, but if we can work together as an industry to understand each other and leverage communication technology, things could get a lot better for a large portion of producers.

Enjoyed this article? Find out what else was discussed at the 1st World Coffee Producers Forum!

Written by Karl Wienhold of Direct Origin Trading.

All views within this opinion piece belong to the guest writer and do not necessarily reflect Perfect Daily Grind’s stance. Perfect Daily Grind believes in furthering debate over topical issues within the industry and so seeks to represent the views of all sides.

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