Coffee News: from Seed to Cup

Green Coffee Pricing Transparency Is Critical (And Complicated)

There are real concerns about the future of specialty coffee. And one of the most pressing is the incredibly low incomes earned by coffee producers.

Yet it is one thing to recognize that green specialty coffee prices need to be higher. It is another to determine appropriate prices.

Doing so requires greater pricing transparency, something that some specialty roasters are working towards. However, there are several challenges in the way of its widespread adoption. Allow me to discuss them – along with five actions that will make pricing transparency more attractive and feasible for roasters as well as producers.

Lee este artículo en español La Importancia en la Transparencia del Precio del Café Verde

coffee cherriesCoffee cherries ripen on the branch on a farm in Tenejapa, Chiapas, Mexico. Credit: Quentin Café

Rethinking Sustainable Prices

We cannot ignore the truth: farmers do not earn enough to supply the specialty coffee that is required to meet demand. In fact, prices rarely cover the cost of investing in equipment, resources, or marketing. Current prices are so low that younger generations are moving away from coffee.

Efforts to find “sustainable prices” – such as discussions about minimum green coffee prices – are not the only, and not necessarily the best, solution, however.

Instead, we should be allowing specialty coffee markets to find and settle on more appropriate prices. By appropriate, I mean that they should provide genuine economic opportunities for farmers and real incentives to produce more of the coffees that consumers want to buy.

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To achieve this, we need more information. Think about a market where anyone can sell anything by hiding the product’s true quality. This was happening in specialty coffee before the adoption of cupping standards. Supply chain traceability is also helping to reduce concerns. Combined, these two things help buyers to be confident that, when they pay for excellent coffee, excellent coffee is what they get.

We have been addressing quality – but what about the current lack of appropriate information about green coffee prices?

Coffee seedlingsCoffee seedlings sprout at a farm in Colombia. Credit: Angie Molina

Pricing Transparency Is Critical

Most agree that commodity prices provide flawed pricing benchmarks for specialty coffee negotiations. They are too low, too volatile, and not linked to quality. However, creating new benchmarks is difficult.

For a start, few people agree about what pricing information should be revealed and to whom. As Jon Allen of Onyx Coffee Lab told Barista Magazine, because “no one really shares anything about buying green coffee … many people have really no idea what something [is] worth.”

When credible price information is missing, there is less equity. This is because people who are uninformed or disconnected can be exploited. There are more inefficiencies because buyers and sellers cannot adjust their plans as market conditions change.

These kinds of problems will begin to disappear, however, if we encourage a transparency movement within specialty coffee markets.

 

Coffee farm Sítio Rancho Dantas, owned by  Mr. Joselino Meneguete and his family, sits in the mountains of Espírito Santo, Brazil. The farm placed 6th in the 2017 Cup of Excellence Brazilian Pulped Naturals. Credit: Ivan Laranjeira Petrich

Pricing Transparency Is Complicated

At the most basic level, transparency is straightforward. As Fairtrade America says, it is “the free and open access to knowledge, which implies that information flows all ways.” Yet when we start applying it to an industry, things become a bit more complicated.

Transparency is not one thing, but several related things. Buyers are transparent when they share information with suppliers (supply-chain transparency), with other buyers and sellers (sector-wide transparency), and with customers (customer-facing transparency).

All three of these are important:

1. Supply-chain transparency supports more balanced negotiations

For many buyers, pricing transparency begins at home. Take Intelligentsia in the US: because markets leave coffee farmers in vulnerable positions, the company builds its sourcing relationships around a program of clear disclosure. It mandates that “all trade participants must allow transparent financial disclosures back to the individual farmers”. By sharing information with the producers, they commit to more open sourcing practices. In turn, this leads to better prices.

coffee plantEl Injerto’s coffee plant nurseries or “almacigos“. Credit: El Injerto Coffee

2. Sector-wide transparency provides context for negotiations

For farmers to effectively negotiate prices, they must know how much is paid for other similar coffees. This gives them benchmarks that let them know what their crops are really worth.

However, generations of isolation have robbed most farmers of the ability to access this information through their own networks.

For this (and other) reasons, a growing number of roasters are disclosing information about green coffee prices in transparency reports. On their Fair Trade Proof website, twenty members of Cooperative Coffees (USA and Canada) ensure that specific information from all coffee contracts – including prices paid per green pound – is available to everyone.

These roasters see their transparency reports as ways to ensure supply-chain integrity.  As US-based Counter Culture writes, they know that they “could share [their] opinion of how things are going” but “think it’s more valuable to show [their] progress by sharing actual data.”

Other roasters are working with Transparent Trade Coffee, of which I am the Academic Director. Among other things, this program turns price data from specific specialty coffees into benchmarks. This lets sellers and buyers know what decent green prices look like.

Poul Mark explains why Transcend Coffee values this collaboration: “Transparency within the coffee supply chain is the only mechanism we see that will compel the industry to pay sustainable prices for green coffees.”

coffee pricesSector-wide information on coffee prices that has been gathered by Transparent Trade Coffee.

3. Customer-facing transparency creates additional pressure

For negotiations to be fair, informed farmers must hold some of the bargaining power. This means having numerous potential buyers. Again, however, generations of isolation limit this option for most coffee farmers.

Yet progressive roasters can, instead, bring customers into pricing conversations and add pressure this way. They do so by disclosing green prices in their marketing efforts. Onyx Coffee Lab, for example, provides the FOB price (the price paid for the coffee once it has been transported to the port for shipping), the market price, and the Fairtrade price at the time of purchase for every coffee on their website. This kind of transparency encourages customers to ask questions and demand answers.

In the same spirit, The Coffee Collective in Denmark reports green coffee prices on their coffee bags. The company wants to cultivate an understanding among consumers about how coffee is actually traded and to “spur a debate amongst consumers on these issues.”

Students cup coffeesStudents cup coffees with Klaus and Sebastian of The Coffee Collective Kenyatta University Nyeri in Kenya. Credit: The Coffee Collective

Recognizing The Risks

Yet despite the benefits for specialty coffee farmers and markets, there are few actively transparent coffee buyers. Counting the (roughly) ten roasters that publish transparency reports, the (roughly) twenty roasters that participate in the Fair Trade Proof program, and the (roughly) thirty roasters that share green pricing information with the Transparent Trade Coffee program, there are less than 100 transparent specialty coffee roasters working around the world.

If pricing transparency is so critical for the fairness and the future of specialty coffee markets, then why is it so rare? Because investments in transparency involve risks for those who voluntarily disclose prices:

Negotiation Risks

“Negotiations are fundamentally exchanges of information,” according to Kellogg Insight, published by the Kellogg School of Management at Northwestern University. Revealing information “indiscriminately” can limit “your ability to claim value,” the article continues. Simply put, giving away information also gives up control over negotiations.

coffee cherryFreshly picked coffee cherries at Finca La Familia in El Salvador. Credit: Cory Phillips for Finca La Familia Coffee Farm

Interpretation Risks

It is one thing to provide new information to the market. It is another to control how people will respond to that information.

Because green coffee contracts are complex, many sellers and buyers cannot easily determine when green prices are appropriate. For instance, East Africa presents a different market situation than Latin America. Systems are not as established and harvests tend to be less consistent. However, it will likely be more obvious to some sellers than to others that green prices should differ across the two regions.

There are also concerns about appearing unscrupulous in the eyes of industry peers or customers, should disclosures reveal prices that may not seem “high enough.”

Customers, in particular, typically lack the ability to evaluate prices. When considering investments in pricing transparency, roasters must ask how customers will respond to a $5.00 per green pound price – which many industry professionals would consider excellent – when they are paying $4.00 for a cup of coffee?

Competitive Risks

As more pricing information is made available from more buyers, farmers will be able to offer their coffees to those who pay better prices. While this represents one of the main benefits of transparency programs, it also creates supply chain costs and risks for buyers.

Privacy Risks

Finally, although sharing specific price information sounds harmless, the farmers who receive better green prices might think differently. They may not want others knowing about their elevated incomes.

Wet processed coffeeWet processed coffee dries on a patio at Sacramento Coffee, Guatemala. Credit: Sacramento Coffee

Working Toward Better Pricing Transparency

The current ratio of benefits to risks has encouraged only the few first steps in the direction of greater transparency. Moreover, it is probably naïve to expect the sector to collectively require mandatory disclosures, like we see for CEO salaries in publicly traded companies or nutrition facts on packaged food.

To make further, and some would argue real, progress, we must:

1. Stimulate collective action

Merling Preza, General Manager of PRODECOOP (Nicaragua), stresses that “for transparency to work, it has to be across the entire supply chain and with every actor.” Collective action is key.

We must develop programs that share best practices for supply-chain transparency. We must also find ways for sellers (including cooperatives) and buyers (including importers) who have real concerns about interpretation and privacy risks to engage in sector-wide programs. This might mean supporting efforts that turn anonymized data into pricing benchmarks.

2. Do a better job of marketing

Most coffee consumers do not currently care about transparency. Therefore, risks are not offset by increased demand for transparently traded coffees. We need to figure out how to make “How much was the farmer paid?” one of the core questions that consumers ask when buying specialty coffee. After all, farmer compensation is as important – if not more so – for coffee quality as elevation and varieties.

coffee beansWashed processed coffee beans flow through fermentation channels at a mill in Guatemala; this helps to separate coffee by quality. Credit: Truth Trading Co.

3. Help with the interpretation of pricing information

In marketing, words and numbers should work together. To address interpretation risks, we must encourage thoughtful individuals to openly discuss the green prices that people will be seeing. We must define key terms, like FOB versus farm-gate prices. We must discuss how competitive conditions in selling and buying countries and exchange rate fluctuations influence appropriate prices.

This will help drive sellers and buyers to shared understandings that are more nuanced than “higher prices are always better than lower prices.”

4. Find methods of verification

These early stages of the transparency movement rely on trust and the good intentions of those who voluntarily disclose information. However, for a more widespread transparency movement, we must invest in sensible accountability mechanisms. Broader participation is more likely if trusted third parties promote and manage transparency initiatives.

5. Think about cost containment

Genuine commitments to transparency programs invite concerns about cost. While we want roasters to make their data available, compiling, verifying, and presenting this information can be expensive.

As such, we must leverage non-profit and academic resources. If not, we risk reducing roasters’ green sourcing budget and, therefore, the money that they have available to pay for coffee. In the end, transparency costs money – money that could otherwise go back to farmers.

green coffeeCoffee dries on raised beds at Fazenda Esperança in Mina Gerais, Brazil. Credit: Academia do Cafe NL

These investments in pricing transparency will help to address the specialty market’s most pressing problems. With more supply-chain transparency, green coffee negotiations will be based on consistent information that is shared among sellers and buyers. With more sector-wide transparency, markets will provide appropriate and credible pricing benchmarks. With more customer-facing transparency, consumers will include appropriate farmer compensation among their key buying criteria.

By cultivating a specialty coffee market that encourages prices to adjust to more appropriate levels, transparency programs will ensure that talented individuals remain interested in coffee farming. They will ensure that funds are available for much-needed investments. And they will ensure that real economic opportunities are presented to individuals at every step along the coffee value chain.

Found this interesting? Check out The Complicated Role of Money in Specialty Coffee

Written by Peter W. Roberts, Academic Director of Transparent Trade Coffee.

All views within this opinion piece belong to the guest writer and do not 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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