With a group of roasters signing The Pledge (click to read more) the call towards transparency in coffee just got a bit more vocal. We’re not saying that this is the first effort towards transparency in coffee (as a European company Coffee Collective’s decision from 2013 to print FOB prices on their labels comes to mind and we’re sure there are many more out there). But we see this movement as one of the pieces of the puzzle that is called transparency.
It is not an easy concept to apprehend, as most regular coffee lovers don’t know (or don’t care) where their cup of coffee comes from. There is a vast system behind coffee and lot of people are involved. And let’s be honest about all this – no one in the system works for free. It’s about economics and every participant in this economic cycle of coffee takes his share of the cake (or rather cup). In this blog post, we would like to explain, how the system works.
The big game of coffee
For all of us that live in the world of specialty coffee it’s a business that’s almost romantic, creative, sustainable and all the ooohs and aaahs. But let’s be honest. It’s not. Coffee, even the specialty part, is business. Let’s see why …
If you’re reading this, you are most likely aware that Arabica coffee is the most used type of coffee in the world and it is considered as quality coffee. But … there are two types of arabica beans. The coffee in its core is the same, but how it is grown differs a lot. First there is the “conventional” coffee, the type you will find in most coffee shops, coffee bags and elsewhere. This commodity bean accounts for about 95% of arabica in the world. And then there is the 5%. The specialty arabica. The one we love.
Commodity (arabica) coffee is, like the name says, a commodity and thus traded at the NY stock market. Yes, coffee is big business! And as every commodity that is traded in the stock market, it’s all about the price. The daily stock market price. Soooo … let’s check the market, we see that coffee is cheap at the moment, so let’s buy a lot of it. But that doesn’t actually mean you will have the coffee delivered next day or week. You might have simply booked a future for next year. Or in simpler lingo: you just bought coffee that hasn’t been picked yet. It’s a risk and reward type business that has nothing to do with the coffee we all deal with, where the sensory profile is king. Nope. It’s just about money.
The problem right now is that we are living in a time when prices of coffee are at an all time low. These prices are – mildly said – crazy. End of May the price for a pound of green coffee was 0,92$. This is a price that is even lower than it was in the mid eighties. But the overall standard (and salaries) have gone up since then, right?. These prices are totally unsustainable and can not even cover the cost of production.
OK, coffee is cheap right now. But why? It’s a complex issue but the main reason is overproduction of coffee. Brasil as the largest producer of coffee in the world is overproducing coffee and add to that that their national currency is very weak compared to the US Dollar, so the price on the market is even lower. A single country (with about 40% of coffee production in the world) can thus influence the stock market and reach ridiculus lows in the prices of coffee. But that’s commodity coffee that is traded in the stock market.
But we are in the specialty coffee business. Why should specialty coffee be different? Ahhh, we opened a can of worms there, but we’ll try to keep it simple and transparent (and as a company that is about to start roasting our own coffees, this is something we needed to learn as step 1 in the process).
Green specialty coffee buying 101
We’re entering a different world right now … Imagine you need vegetables for your meal. You have two options. The huge supermarket has a lot to offer and the prices for, let’s say a kilogram of tomatoes, are ridiculously low. But to be honest, you’re paying for a bunch of tasteless red balls with no character or flavor. Read the label and after some decoding of what is written, you will find out that these tomatoes was grown on a generic farm and most likely the tomatoes never saw any soil. We'll not even open the topic exploitation of workers on farms ...
Now head over to your local farmers market where a local farmer will greet you and offer you the same type tomatoes but grown on his farm in a rich soil, grown slowly and carefully, making sure that the tomatoes can absorb as much goodness from the soil. Yup, these tomatoes take longer to grow, need extra care and attention. But the first bite will tell the difference. A tasteless red ball compared to a firm tomato, full of flavor and aroma. But there is a downside – the price.
Coffee is no different
Specialty coffee roasters do not have trading accounts at the NY stock market. They focus on the sensory aspect of coffee first. What counts is the flavor, a good reference is the cupping score, and in the end (damn that economic aspect) they need to consider the price.
Specialty coffee needs a lot of care and attention during growing, processing and farmers nowadays experiment with new processing methods. They want to improve the coffee they grow. Because the flavor determines the price. The better the coffee, the higher the price they can get for it. And this is where the price difference when compared to the coffee that is traded in the stock market is notable. But it is the quality of coffee that makes specialty roasters pay more for their coffee: 3 times, 4 times, 20 times, sometimes even a few hundred times more comapred to the beans in the stock market.
These prices need to be earned. Farmers know that and are working their asses off to deliver better beans every year. That costs money. Let's see why.
Let’s start with the people who make first contact with coffee when it is ripe – the pickers. Yes, specialty coffee is hand-picked to ensure that only ripe cherries are picked. Pickers are paid about 0,5 euro per kilogram of coffee cherries (let's call this an average for coffee producing nations). It takes about 6 kg of cherries for a kg of coffee beans. Coffee just got its base price of about 3 eur/kg. But the farm needs to survive and invest into new technologies, new processing methods, social security for workers. A coffee farm is a company like any other. They do not work for free. that adds to the price.
Next stop for the beans is the dry mill and the company that takes care of exporting the beans (most likely also the owners of dry mills). The exporter determines the prices based on what is needed; special graded coffee costs more, a certain screen size costs more, microlots separation costs more etc. The coffees are packed in jute (or lately more common Grainpro or similar bags) and ready to ship out to the customers. At this point we get acquainted with the term F.O.B. – Free On Board. This is the price of produced green coffee that includes the pay for the farm workers to pick and process the coffee, the selection and deparching in the dry mill and the transport to the harbor where the coffee is stored and awaits customers. Lately more and more roasters have decided to disclose the FOB prices of their coffees. It is not the perfect indicator of the value of everybody that produces and processes the coffee but it is a very good start towards transparency in the specialty coffee’s value chain.
Next it is the importer’s turn to handle the coffees. And yes, they work with a margin as well (don’t act surprised, companies work for a profit not out of good will). These are (usually) large companies that work with farms, cooperatives and mills to source the coffees, they handle the quality control and handle the transport out of the producing country. These are the people that will send you the samples you need to find your specialty coffee roaster’s next line-up of beans. Oh, there is one more important thing they need to do – they need to pay for the coffee that arrived in the harbor. They pay the FOB price for the whole bunch of coffee but we mostly forget is that they will only get the payment from roasters a few months later when the coffee is actually delivered to roasteries.
Transformation from green to brown
Beans have exchanged quite a lot of hands already and finally it’s time for the roaster to get his hands on them. It takes a lot of work to select the coffees to roast and samples from importers help a lot. Then it’s time to order these coffees (and of course pay for them) and get roasting. First thing first, after roasting, about 15% of the coffees’ weight is lost and the price is already higher for a kg of beans. Add to that the cost of the roasting equipment and labor plus the marketing to even sell the coffee. Yup, these costs add up and let’s not forget again that the roasters also do not work for fun. It’s a business. It’s survival.
Let’s sum it up …
Production of a proper cup of specialty coffee will cost somewhere around 15 euro per kg of beans (the price from a small specialty roastery where the quantity is low). We’re talking about a decent washed specialty coffee. Now let’s head back to the NY stock market. 0,92$/pound roughly equals 1,5 eur for a kg of coffee. Now read the paragraphs above again to see what needs to be done for coffee to be produced (keep in mind that specialty coffee requires much more hand labor compared to commodity coffee where machines do a lot of work). Something is not quite right …
Bottom line – the prices of commodity coffee are low. Too low. And it is a disease that is spreading from commodity trading into specialty coffee as well, as there is no guarantee that the high price of a coffee you buy as a roaster (and drink as the end customer) is justified. That is why we need more transparency in coffee. Don’t stand still. Ask questions about your coffee and how it was produced, processed, traded, imported. And if you’re lucky, you are holding a bag of coffee in your hands from a roaster that knows all that. And is willing to share this information with you.