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What are certifications worth in this market?

2010 December 28

I have been focusing here recently on what everyone in coffee seems to be talking about — sky high prices as far as the eye can see and concern about the implications for just about everyone along the coffee chain: farmers, cooperatives, importers, roasters, consumers, etc.  With forecasts for washed Arabicas reaching $4 a pound by early 2011, it is no wonder people are anxious.  What do current market prices mean for certifications?

  • “High prices are the enemy of quality.”
    One roaster shared this perspective with me during a recent conversation, and it sure seems consistent with what I have been seeing and hearing in the field over the past few years.  For years, farmers have been encouraged to invest in improving coffee quality as a way to increase their incomes, and the results have been encouraging.  But because consumers are only willing to pay so much for their coffee, there is a limit to the premiums that roasters can pay to farmers for quality improvements.  As NY “C” prices rise against this ceiling, they begin to squeeze differentials for quality, reducing incentives for individual farmers to make additional investments of time and money to achieve higher levels of quality.  During the 2009/2010 harvest, I visited farmers here in Guatemala who have earned quality awards and premium prices for their coffee in the past.  Last year, local prices for coffee cherries were so high they chose not to even process most of their coffee, to say nothing of going the extra mile for quality.
  • Are high prices the enemy of certifications?
    My experience also suggests that high “C” market prices also represent disincentives for certification.  One recent analysis of coffee export data from Colombia that calculates certification premiums as a percentage of the total price of coffee supports this position.  The graphic below shows the premium paid for each of these certifications as a percentage of the total price for 2005 and 2010.  The 2005 premiums were paid on top of a base price of $1.09 while the 2010 premiums were paid on a base price of $2.07.  The data suggests a significant erosion of the value of certifications across the board.  Organic certification is the one that retained the most value (buyers in 2010 paid 80 percent of what they paid in 2005 as a percentage of the total value of the coffee), while stand-alone FLO Certification retained the least (10 percent).

This data comes from one study in one country.  It may not be possible to generalize on the basis of this data alone.  But it is the best data I have seen on this issue and suggests that increased defection from certifications — already a significant issue with organic certification in Central America — may be among the potential outcomes of The New Coffee Crisis.

2 Responses leave one →
  1. 2011 January 6

    good job covering a complex issue – I believe this current market highlights the need for relationships that are based on a lot more than just price – commodities markets will always go up and down – a trusted trading partner is worth much over the long term.

    • 2011 January 7

      James:

      Good to hear from you. Thanks for taking the time to comment. There is no question in my mind that a direct and sustained relationship between roasters and growers is the most essential ingredient in the recipe for long-term success at both ends of the chain, and that certification can’t substitute for that underlying relationship. I will be writing more here soon on this idea, and I look forward to your comments then.

      Michael

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