Responding to the global coffee crisis

As the volatile commodity price for coffee continues to hover at historically low levels, some industry players are starting to publish the price paid at origin for their coffee. In this post, we explore some of the challenges associated with this and also some of the opportunities that exist, and share what we are doing to drive positive change and help guarantee a more sustainable future for specialty coffee.

The problem

The future of specialty coffee is uncertain. Right now, the commodity price for coffee is devastatingly low– well below the cost of production in many coffee-producing countries – putting enormous financial strain on farmers and their families. In addition, factors like climate change, new diseases and pests, decreasing yields and increasing costs of production, along with a lack of education and resources, are severely and negatively affecting coffee farmers and jeopardising the future of coffee production. Many of those who have the capital do so, or new generation farmers, will simply choose to remove their coffee trees and plant an alternative, financially viable crop.  If the coffee community doesn’t work together to address some of these issues, we run the serious risk of losing specialty coffee crops around the world.

Melbourne Coffee Merchants believes that every member of the coffee industry is responsible for ensuring a sustainable future for coffee farmers. We are committed to playing our part and doing everything we can to ignite positive change in the industry.

From the outset, we have been committed to paying premium prices for the coffees we source (which are in no way linked to the C-market price) and building long-term and mutually beneficial relationships with our producing partners. Our founding values of quality, transparency and sustainability inform all of our decisions and have a real impact on the way we buy coffee, the people we work with, and how we run MCM.

Over the last decade, we have seen the specialty coffee industry grow and positively evolve. New economic opportunities have been created for some producers as an increasing number of consumers have begun to appreciate coffee as a differentiated product and value the impact that things like variety, terroir and processing can have on cup quality. However, many of the market challenges that faced the industry ten years ago remain today, and are even more acute. Climate change is having a real impact on farms, and specialty prices paid to farmers are often still framed against the commodity futures market, which is currently at historically-low levels.

Adding to this is a lack of transparency in coffee pricing, which can be capitalised on by different parties in the coffee production chain – exporters, importers, traders, roasters – who, in some cases, are exploiting low prices paid to the farmer and/or mill, and adding hefty margins onto the coffee when the producer is not receiving any premiums. This is further compounded by roasters who falsely represent themselves as purveyors of specialty coffee when, in fact, they are buying lower quality coffee at very low prices, enabling them to undercut competition to gain traction in the café market in Australia and other consuming countries.

In the face of this crisis, many industry leaders across the coffee supply chain are recognising that we need to rethink the way we way we price specialty coffee. We wholeheartedly agree with this sentiment and welcome this discussion, and we’re very keen to play an active, constructive and positive role within it.

Let’s talk about how we buy coffee.

The conversation provides a great opportunity to share more about Melbourne Coffee Merchant’s buying practices and values. We believe that everyone in the coffee chain can and should prosper, and that a commitment to paying producers good prices for coffee quality and suitability, regardless of the commodity market fluctuations, is the best way to ensure a sustainable and viable future for coffee farming. We have built our business around these beliefs and stand firmly behind our buying practices.

When we go on a buying trip, our discussion around price with producers is pretty simple and straightforward. It usually starts with us asking what a producer wants for their coffee; and this is usually the price that we pay.

None of our purchases are linked to the New York C commodity market. Where many specialty buyers will pay a differential on top of the current C price at the time of purchase, this does not factor into our discussions at all. Rather, we take into consideration the cost of production in that particular origin, the quality of the coffee and the application and suitability of that coffee for our customers, and our ability to find buyers for it.We consider this approach to be the fairest and most sustainable way to purchase coffee.

Generally, we find that the motivations and needs of the producers we work with are different, and it is important for us to meet with them every year and maintain an open dialogue about the opportunities and challenges they are facing, and the ways in which we can best support them. For some producers, growing the volume that we are able to buy from them is their priority; this may be because their capacity is growing, or because they want to sell more of the same grade of coffee at the prices we are paying. In these situations, our priority is finding ways to grow with them and help them market and grow demand for their coffee. For other smaller producers, knowing in advance how much of a specific micro-lot or special-preparation we require (e.g. the volume of natural we wish to purchase) will help them minimise their risk and ensure there is a guaranteed market for that coffee.

Over the last decade, the prices we pay for particular coffees have remained the same from year to year, regardless of fluctuations in the Australian dollar or changes to the C market, or they have been increased and adjusted upward as and when requested by the producer. This increase may be to cover increasing labour costs (labour shortages are a challenge for many of our producing partners), or competition for cherry (something that our Rwandan washing stations have faced) or low yields (which many of our producing partners in Bolivia have been tackling). We have also paid higher prices for higher-scoring lots.

As a frame of reference, in 2018 the median FOB purchase price that we paid was $3.25/lb; more than three times the current commodity price. The minimum was $2.10/lb and the maximum was $30.00/lb.

With some producers, we forward contract, which gives them an assurance of how much coffee we will buy, and how much they can expect to make from that year’s sale (which can also help the producer secure financing pre-harvest). And with all of our longstanding supply partners we communicate year-round, and are always as open and honest about our buying intentions as possible, as well as sharing our own market challenges and opportunities with them. For each coffee we purchase, we also send a report back to the producer that explains where their coffee was sold, and the QC results from landing through to six months post-landing.

Our goal in every origin we work in is to build long-term, transparent and mutually beneficial relationships. We invest a great deal of resources into finding and developing our supply relationships, whether that be with an exporter who connects us to talented producers, or directly with the producer themselves. We always choose to work with likeminded people who are familiar with the origin’s complexities and are committed to supporting their coffee-producing community through various avenues (such as training and education, resources, community programs, micro-financing etc).

Each party along our supply chain adds value to the product, and we are grateful to work with such skilled and dedicated people in every country we buy from. Ultimately, the success and longevity of these relationships depend on a high level of openness, honesty and trust with likeminded and reliable suppliers that share our values; much like our relationships with many of the customers who have chosen to work with us.

And how we price coffee.

As a general rule, for all of our coffees, we need to add a minimum gross margin of 20% to the landed cost, which covers overhead expenses like warehousing, handling fees, palletisation, sample distribution, financing, hedging, insurance, marketing, staffing and office space. This margin also covers the investment that we make in travelling to visit our producing partners year on year – to maintain and strengthen relationships, build trust, and gather information, stories and photos of the people and farms at origin, which we then pass on to our customers. This commitment to traceability is at the core of MCM’s business practices, as we firmly believe the spotlight should be on the people who grow and process the coffees.

For spot coffees (those that are purchased without already being sold) we increase that margin to 25-30%, which covers the risk we take on in regard to delay, damage or loss in transit, having excess stock (that we may need to sell at discount or loss), or any quality issues that might arise post-landing.

Some spot coffees are sold at a lower margin; for example, in Bolivia the cost of production is high, and volumes are very low. As a result, we pay extremely high prices to account for this and ensure that there is an incentive for small producers to remain in the coffee industry (in Bolivia, other industries such as Coca, which is used to produce cocaine, compete with coffee production). We sell our Bolivian coffees at a very low margin to ensure that they will be competitive and sell in the Australian market, and we also invest heavily in education, to ensure our roasting customers understand why the prices are high and why this is such an important origin to support.

Coffees contracted in advance by our customers will attract a smaller margin as there is less inherent risk for us as a business, both in terms of cash flow forecasting and knowing that there is a guaranteed buyer for our coffees.

Contributing beyond pricing:

Beyond how we pay for coffee, we are actively seeking new and meaningful ways to contribute to positive change across the coffee industry. We don’t have all the answers yet, but what we do know is that we are committed to building a more sustainable future for coffee. Our team has spent many months discussing what the best way forward is, and looking for constructive and effective ways for MCM to contribute to the conversation.

Our first step in this direction has been to commit to providing all of our purchasing information to the Specialty Coffee Transaction Guide, an amazing initiative that has been spearheaded by Chad Trewick and Peter Roberts and their team at Emory University in Atlanta, USA. The Specialty Coffee Transaction Guide is designed to give producers and buyers a reference for pricing their coffee beyond the C-market price, which does not take into consideration the additional resources, labour and skill that farming specialty-grade coffee requires. This project relies on an expanding group of data donors, including Melbourne Coffee Merchants, who provide detailed data from coffee contracts between supplier and buyers from recent harvests. The researchers at Emory then use this anonymised information to create tables that detail the distribution of recent prices for green (unroasted) specialty coffees.

By donating all of our purchasing data to the study –including FOB price, origin, lot size and cup quality –we are joining a group of dedicated roasters, importers and exporters hoping to contribute to, and create, a better understanding of specialty coffee pricing, and to help build an effective tool for producers and buyers to use when negotiating the price of a coffee. The ultimate goal of this project is to dislodge the specialty coffee market from its almost exclusive reliance on commodity indices for price discovery, and to create a new frame of reference.

This year, we also joined World Coffee Research’s check-off program, which is helping to fund their vital research and development around the world. WCR is a non-profit organisation whose mission is to grow, protect and enhance the supply of quality coffee, and the livelihoods of those that produce it. By taking a coordinated, collaborative and worldwide approach to scientific research into coffee, WCR is working towards creating a toolbox of coffee varieties, genetic resources and technologies that will support a more viable future for coffee production. Their findings are openly shared with producing countries to improve and drive profitable agricultural practice, minimise environmental impact, and maximise farmer yields and income.

As World Coffee Research relies on funding from the global industry, we see it as vitally important to offer our support. Melbourne Coffee Merchants has committed to sending $0.02 (AUD) to WCR for every kilogram of coffee that we sell. We strongly encourage our customers to consider doing the same and have made it easy for them to get involved. While the investment requirement is minimal, collectively this has the potential to be extremely powerful and impactful.

A move to transparent pricing… is it the answer?  

Recently some industry players have made the decision to publish the prices that are paid to the producer, in an effort to distinguish their buying practices and ensure a sustainable future for specialty coffee production. Here at Melbourne Coffee Merchants, many of our customers are starting to ask what the producer was paid for their coffee. In light of everything that is happening in the coffee industry right now, this is a valid and extremely important question. But this question is just the beginning. There are additional questions that need to be asked, and other complexities to be considered.

As an importer, we have been trying to navigate our role and responsibility within this context. Fundamentally, we think the intention to be more transparent is commendable, and we are excited to work with people who have an interest in making sure producers are being paid fairly and profitably for their coffee. However, it’s an incredibly complex issue and, while asking what a producer was paid is a great place to start, it is virtually meaningless without the wider context of the cost of production, and an understanding of each unique supply chain, which vary greatly from country to country, region to region, and producer to producer.

So, here is our take on transparent pricing –its challenges and the opportunities it presents. We start by unpacking the most common terms used to communicate what a producer is paid, and then explore some of the challenges associated with publishing these prices. We then share how we can work with customers towards better and more transparent buying practices.

Unpacking the terms: C-Price, FOB and Farmgate Pricing

The three most common terms used to try and communicate what a producer is paid are C-market price, farmgate price and FOB price.

C-market Price

The C-market price is the reserve price for Arabica coffee traded by Intercontinental Exchange (ICE), a large international commodity trader based in NYC. This price is determined by supply and demand economics, and changes minute by minute. Most Arabica is traded either via this Exchange or priced in relation to the current C-market price. The C-price is notoriously volatile and affects all coffee producers globally. It is currently exceptionally low, as a result of speculative trading and an excess of global supply of Arabica. C-price is internationally communicated in USD/lb and refers to coffee that is milled and ready for export.

Farmgate

This is the price that a producer directly gets for their coffee.  This term can be confusing, as there is no standardised way of determining the farmgate price and its definition will depend on different people’s interpretation of it. Also, depending on the supply chain, the farmgate price will vary from what a producer gets paid for their coffee cherry, or their coffee in parchment, or their milled coffee. There is no international standard for how Farmgate price is defined or communicated.

For Example:

In Rwanda, the Dukunde Kawa cooperative producer-members deliver their coffee to a central mill and get paid a set price for their coffee cherry. The coffee is then processed, graded, cupped, milled and sold. The cooperative will receive different prices according to the quality of the different grades of coffee. At the end of the harvest, the producer will get a secondary payment based on the premiums secured for the higher quality coffees.

In Brazil, this picture looks very different. For example, we work with a single producer called Fabiano Borré, who owns a large estate with its own wet and dry processing facilities. His ‘farmgate price’ is much higher than the Rwandan producers’ ‘farmgate price’ because he is processing and milling the coffee himself. However, his cost of production is much higher than theirs.

Free On Board (FOB)

This represents the price of the milled coffee, in bags, at the port, when it is ready to ship. These prices are typically reported on export contracts and indicate the pre-export valuation of the coffee. This price only tells part of the economic story and does not necessarily reflect what the producer actually got paid; there may be middle-men like millers and exporters who were part of the supply chain and took a cut . FOB is internationally communicated in USD/lb.

Why publishing the FOB or Farmgate price is complicated.

Our main concerns with publishing FOB or Farmgate pricing are as follows:

  1. It doesn’t tell the whole story.

The challenge with both Farmgate pricing and FOB pricing is that the dollar amounts alone do not tell the entire story, and these are often not taken in context with a broader understanding of the quality or cost of production for a given coffee.

  1. For the end consumer it can be confusing and misleading.

We have reservations about publishing figures like FOB price for marketing purposes. If we are looking to appeal to the final consumer then we have to recognise that there is very little context or understanding of those prices amongst the wider public.

In our opinion, comparing the price to a Fair Trade Certified or commodity coffee is also flawed and misleading, as these are both very different products to a specialty grade coffee. Specialty grade coffee is arduous to grow and process, and it discredits the farmer when we don’t recognise the additional investment, cost, hard work and commitment that it requires when a producer decides to grow and/or process coffee intended for the specialty market.

We shouldn’t expect our customers to try to unpick these prices and understand them. They may mean something to us in our specialty coffee industry ‘bubble’ but, even then, they are confusing and take some time to navigate and understand, especially when communicated in different currencies without wider context.

  1. Sometimes a producer may not want the price paid published.

In light of the current conversations around transparent pricing models, we have been asking many of our producing partners if they are willing to have the prices we pay them published. The response from many has been a resounding no, and many others have concerns, particularly in the case of the prices being available publicly for anyone to access.

The reasons for this are varied, but one of the main concerns is that these prices would be published out of context and open to misinterpretation and misuse. It does not, for example, show how much coffee was purchased in total by a particular buyer, what the quality of the coffee was, or what the cost of production was. It also doesn’t reflect the longevity of the buying relationship and the mutual long-term commitment and trust that may exist between the producer and the buyer.

For example, with some producing partners, we may buy an entire container of specialty grade coffee, consisting of several small micro-lots and some larger volume lines. The cost of production for the producer will differ for their micro-lots and bulk lots, and they will dictate the price to us accordingly.

This same producer may sell similar lots directly to another roaster but charge them a higher price. There may be many reasons for this; it could be due to the fact that the roaster has lower volumes, but costs as much to service as we do. It could also be due to the fact that they have the capacity to pay a higher price as they are not going via an importer. They might also buy sporadically or opportunistically, and not provide the security of a contract or long-term commitment to purchase the coffee year after year.

If the prices are published publicly, a producer may be forced to deal with confusion and confrontation from their other customers. This may result in a downward pressure on the prices that they secure; exactly the opposite effect of what we would be hoping to achieve by publishing them!

So, what is MCM’s position on Transparent Pricing? 

We are proud of the prices we pay, but working out how to support the movement toward sharing FOB prices publicly is a tricky thing to navigate, particularly as an importer. This is partly because while we can share this information with our roasting partners, we don’t control how it is presented to the end consumer. To be honest, we’re still figuring out how to approach this in a way that is in the best interests of our customers and our producing partners, and also protects our investment and minimises the risk that MCM takes on when we purchase coffee.

We are willing to share FOB prices with our customers, provided certain conditions are met:

1) Agreement is sought from the producer for this information to be disclosed (and if requested, published). Where we can, we will try to add context to this pricing and make it more meaningful.

2) The customer has committed to purchasing the particular coffee lot at the buying stage (when MCM purchases it from the producer) either in person at origin, or after tasting offer samples. This demonstrates the buyer’s commitment to the producer and the coffee, and helps mitigate our exposure and risk.

Finally – the conversation does not stop here!

Our ultimate goal is to facilitate a strong and meaningful connection between our customers and the people who produce our coffees. We believe the most sustainable model for coffee transactions is when particular roasters support specific suppliers year on year, in committed, reliable and long-term buying partnerships. We want to make this as easy as possible for our roasting community, and we’re curious to hear from you what you need to make it work? Are there considerations that we are missing? We know that we work with an engaged and invested group of people and we’re looking to you to help us navigate forward. Your insights are valuable, and welcome.

Overall, we are enthusiastic about how the specialty coffee community is evolving and maturing. There are so many great conversations and initiatives taking place right now, and we expect (and desperately hope) there to be outcomes that positively influence coffee producers. We don’t have all the answers right now, but there are some very smart and engaged people working on it. In supporting projects and organisations like the Specialty Coffee Transaction Guide and World Coffee Research, MCM is hoping to contribute to positive, collective change, and we encourage our customers to take similar steps.

Don’t hesitate to get in touch if you’d like to talk about how you can get involved, or to discuss how you’d like to purchase through Melbourne Coffee Merchants.

Further Reading:

On Speciality Coffee Transaction Guide:

See “Another Giant Step for Transparency with the 2018 Specialty Coffee Transaction Guide”.

See “A New Guideline for Coffee Prices.”

See “How Much Should We Pay for Green Coffee?

See “Building New Specialty Coffee Benchmarks to Secure Better Prices, Supplies.”

Another importers take:

Red Fox have done an awesome series of posts on pricing called Paying for Coffee, its Complicated. We particularly like this post, which talks about the questions you should be asking your suppliers and yourself.