Coffee News: from Seed to Cup

What’s a Fair Price For Coffee? Interpreting Transparency Data

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It’s becoming increasingly common to see consumers, roasters, and coffee shops demand more transparency in the coffee industry. Green coffee bean importers and exporters are responding with better information, which puts numbers to abstract notions of integrity.

However, since there’s no standardized criteria or actor in the supply chain, transparency information and data can be difficult to interpret. And for that reason, it’s easy for some companies to manipulate and even embellish their contributions.

Often times, the data not being shared is more important than what is being shared. Without a full context, it’s not possible to reach an accurate understanding. Something that sounds positive, fair, and ethical may not be, or it may be less impressive than how it’s being presented.

Read on to find out more about how transparency data can be selectively presented and how to guard against false claims.

Lee este artículo en español ¿Precios Justos? Entendiendo Los Datos de Transparencia Del Café

A mountain view from a coffee farm in El Salvador. Credit: Fernando Pocasangre

The Importance of Context

Transparency data should always be contextualized, for example with benchmarks and averages. It must be presented with enough information to understand what the data actually represents and this information must be specific enough to compare to other data.

Without context, it’s easy to present information in a misrepresentative way. Let’s take an example:

“I pay $3/lb, that’s three times the commodity price for green coffee, therefore, IMPACT!”

This is a paraphrased version of a statement by a roaster that I recently saw on a social media post. It probably got a good amount of likes and won the roaster some fans and credibility as an ethical business. However, it leaves out almost all of the context needed to be meaningful.

For example, what state was the coffee in when the roaster bought it and where was it purchased? US $3 as farm gate price for parchment coffee would be a very good rate in most of the coffee-growing world. If the writer were talking about farm gate, this statement would be admirable.

But after a little digging, I learned that the price mentioned was the FOB (Free on Board) price paid to the exporter. FOB includes any overland transportation costs from mills or warehouses to the port of origin. This provides no insight into the farm gate price (the net value of the product when it leaves the farm).

Furthermore, while US $3/lb is more than three times the C price, the statistic shared on social media references Costa Rican coffee. Commodity-grade Costa Rican coffee is currently trading at C+84. Based on the C price at the time of writing (US $0.93), base quality Costa Rican coffees trade for US $1.77.

So US $3 is not three times the local base price but rather 69% over. Of course, this is not bad, but it’s not quite as good as it’s made to sound. Considering the post was in reference to a specialty-grade micro lot, US $3 is a fair price, but it’s not above average.

Learn more in A Coffee Buyer’s Glossary of Contract Terms

A producer in El Salvador shows a coffee tree with ripe cherries. Credit: Fernando Pocasangre

Consider Who Benefits

Sticking with the example of the social media post, it’s important to consider who the roaster paid the US $3 to.

Did it go to an importer? Roasters have to pay importers more in order for importers to pay exporters more, who could pay farmers more. But it’s not a given that each of these players does pass on more. So when a roaster pays above average, it’s a good first step, but should not be interpreted as social impact or economic justice.

Did the roaster pay an exporter? Again, this is a step in the right direction but not necessarily indicative of an ethical supply chain. The exporter might not know or may not keep a record of farmer prices. The exporter also may or may not share them with the roaster, so it’s impossible to know how much the producer sees.

There’s nothing intrinsically wrong with paying importers and exporters. Working with them may be the most efficient way to get coffee from producers and, therefore, the method that leaves producers with most profit in the end.

But without transparency of the price paid in each transaction, there’s no legitimacy to a claim of ethical behavior or social impact. It’s a little like bragging about separating your recycling in an area that throws it all in the landfill anyway. Yes, you did your part, but it didn’t have an actual impact.

Find out more in How Is Green Coffee Bought & Sold?

A bag of ripe cherries. Credit: Fernando Pocasangre

Producer to Roaster Transactions May Not Be Most Beneficial

Perhaps the roaster paid the US $3 directly to a producer. But this also raises questions. How did the roaster handle the transaction with the farmer? What product did the roaster buy – parchment or cherries? And when, in relation to harvesting and shipping, was the farmer paid? Was the producer paid in one transaction, and how long before delivery did the roaster commit to buying the coffee?

Let’s take a closer look at the issues with each of these points.

You may also like Green Coffee Pricing Transparency Is Critical (And Complicated)

African drying beds at Fazendas Klem, Luisburgo, Brazil. Credit: Nicholas Yamada

  • Buying Coffee as Producer-Exported FOB

Buying coffee directly from a producer might be the method that brings the producer the most income. But a producer who’s in a position to run and finance an export operation, produce enough coffee to export, and wait for a roaster to pay for it is not a marginalized smallholder. Supporting producers at this level and allowing them to improve their margins is not a bad thing, but it’s not lifting anyone out of poverty and it would be dishonest to claim meaningful social impact.

A producer using this method may receive a higher price than if they had sold parchment to an intermediary, but they also spend a lot of time and money getting it to FOB, so they may actually end up with less profit. You can’t compare this price to the price paid for parchment to a producer at the farm gate, which doesn’t include any of the costs of packaging and logistics.

Is it better for your money to go to a producer who will spend US $1/lb on logistics and end up with US $0.20 profit? Or to give it to an exporter who will spend US $0.30 on logistics, keep US $0.20 for themselves, and allow the producer to make US $0.70 profit? Is the aim to have direct transactions with the producer or use the method that provides them with the fairest income?

Learn more in What Does “Direct Trade” Really Mean?

Coffee plantations in the mountains of Espirito Santo, Brazil. Credit: Ivan Laranjeira Petrich

  • Parchment or Cherries

It’s important to understand what coffee product is being bought and sold when we discuss prices. Depending on quality and other factors, clean green coffee represents about 70–80% of the weight of parchment coffee. So when we talk about how much of the amount paid for a pound of green coffee went to the farmer, it can vary depending on the parchment to green yield factor, as the screen preparation and defect tolerance.

In another social media post, an importer claimed to have paid a farmer in Colombia 1,000,000 pesos per carga of cherry. Sharing numbers seems admirably transparent, but how many of their European roaster clients understand whether that’s a good price or not? The statement is actually complex and unclear, even for someone familiar with Colombian currency and local coffee terminology.

First, a carga is 125 kg. In the coffee industry, this measurement is usually used with parchment, either wet or dry. But the post mentioned cherry. Was this price paid for 125 kg of fresh cherry? That would be over US $7/lb for green beans, which is an outstanding price.

In the comments on the post, someone asked for clarification. It turns out that the farmer was paid this price divided by 5.13, a believable conversion of cherry weight to dry parchment weight.

So even though cherry was purchased by the importer’s local operation to process, the price they shared was for the unit of dry parchment that the cherry could have reasonably represented. But who would have known that from the post? Did the importer expect people to understand it or just to appreciate the fact that they are sharing numbers? For the record, it’s still a very good price by local standards.

Organic ripe coffee cherries at Fazendas Klem, Luisburgo, Brazil. Credit: Nicholas Yamada

Then, there’s the issue of currency. At the time of writing, US $1 is equal to about 3,250 Colombian pesos. The exchange rate varies but local cost of living is mostly consistent in the short term. So when the coffee was sold could make a big difference in how good of a price it was in terms of what quality of life it affords the producer. Most of us understand this and can figure out the calculations without too much difficulty, but how many people scrolling through Instagram would take the time to?

In general, we assume that if a company is releasing information, it must be ethical and positive and that they are acting with integrity. But we should be careful to analyze the data before accepting that a company is creating meaningful social impact.

Coffee drying in Minas Gerais, Brazil. Credit: Ivan Laranjeira Petrich

Consistency & Long-Term Impact

An importer or roaster may pay an above-average price, but is it a one-off event? It’s disingenuous to promote the ethics of paying a premium if it’s only for a small amount or on a single occasion. These transactions are unlikely to benefit the producer in any meaningful way.

If a roaster buys three or five bags at a really good price but the rest of the harvest is sold at commodity price, there is almost no real financial impact. This is normally the case with competition auctions. The competition lots usually represent a small fraction of the farmer’s harvest and there is almost always a different winner.

We should also consider when the farmer was paid. Was the farmer paid the published price when turning in dry parchment? Or did they have to leave parchment on consignment and borrow with high interest to bridge the gap? Or are they paid the daily price and then the premium comes in some months later when a roaster pays for it?

Payment structure can make a huge difference in how much a price actually means to a producer. If they’re forced to take out high-interest loans in the meantime, this could negate the premium entirely.

A producer dries coffee on raised beds at a farm in Honduras.

How to Protect Yourself Against Selective Transparency

It’s easy to become cynical and disheartened when you start to analyze transparency data. But don’t be put off and dismiss any seemingly positive message as dishonest. Instead, do your research into the facts behind public statements.

Read comments and articles from both supporters and detractors and consider their arguments. For example, there are dozens of academic papers and articles about the pros and cons of fair trade. Read them and consider whether you’re comfortable buying coffee with this model. Being more informed can help you better understand seemingly positive transparency statements and make better purchasing choices.

Buying coffee is a great responsibility and your choice can dramatically affect the lives of families all over the world. We each have a responsibility to educate ourselves on the intricacies and dynamics of the supply chain to know what questions to ask.

We need to fully understand the information being shared and identify what isn’t. By becoming more conscious consumers, we are contributing to the holistic sustainability of the coffee supply chain, from soil microorganisms to reusable straws.

Find this interesting? Check out How Much Should We Pay For Green Coffee?

Written by Karl Wienhold of Cedro Alto.

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