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139. Renegotiation

I am writing this post from the coffeelands in El Salvador, where many of the cooperatives we accompany made the ill-advised decision to fix the prices in their coffee contracts for the 2010/11 cycle as early as last September.  Contracts fixed then at $2-$2.25 a pound were cause for celebration —  in some cases these represented the highest prices the cooperatives had ever achieved.  The idea that prices might go significantly higher never seriously occurred to them.  (I remember one coop leader last year joking that the organization would commit their coffee to a buyer for 5 years at a fixed price only if it offered $2.50 a pound — an idea that was considered so outlandish that is elicited a round of hearty laughter from the famers assembled there.) By the time that cooperatives had collected the coffee they were selling for as little as $2 a pound, of course, the NY C price was closer to $3 a pound.  The coops’ decision to fix prices at $2 meant they were leaving as much as $1 on the table for every pound of coffee they sold.  For coops selling 30 containers (more than 1.2 million pounds), that is no small sum.

Most cooperatives have chalked this up as a (costly) lesson learned and are trying not to think about all the ways they might have spent the money they didn’t earn.  Others have had the remarkable good fortune to be in trading relationships with buyers that have been willing to “renegotiate” the prices they paid.  I put the word renegotiation in quotes because it doesn’t seem to be the most accurate description of the process — one in which importers and roasters are volunteering to pay more for coffee they already own.

As someone who works with smallholder farmer organizations to help them participate more effectively in the specialty coffee market, I am of course delighted by these renegotiations.  I think this approach is fair.  I think it represents the kind of risk-sharing that should be standard in the industry.  But it is not the standard practice, which makes it worthy of special recognition.

Unfortunately, the buyers who have been doing the most renegotiation are those least eager to let this practice be known.  It is not hard to understand why.  If word gets out that a particular buyer is renegotiating its contracts, its suppliers across the board will seek to renegotiate in this market, putting a buyer’s entire supply at risk.  One cooperative we work with recovered more than $140,000 from one buyer alone through a process of renegotiation.  Multiply that by 20, 50, 100 suppliers in a buyer’s supply chain, and the sums grow exponentially.

So while these buyers might not want everyone to know who they are, coffee cooperatives sure do.  And as they look to the future, they have not only learned their lesson about fixing prices early, they have also identified the trading partners in their chain willing to share risk and profits fairly.

 

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