What’s in a name? Apparently, a whopping $9.56 per pound.
In December 2015, that was the difference between the average retail price that select specialty roasters charged for lots that included growers’ names and the average retail price of those that didn’t, according to the folks behind Transparent Trade Coffee (TTC).
Whoever they are. (Am I the only one who finds it ironic that people promoting the concept of transparency in trading relationships don’t make information about their own individual identities readily, stupidly available?) Anyway, whoever is behind TTC, they are making important data-driven contributions to the conversation around supply chain and price transparency. I am a fan of their work and their mission, which involves “working to change specialty coffee market conversations and, in doing so, improve economic outcomes for coffee growers.”
But if their finding that naming growers generates a retail “transparency premium” of almost $10 per pound sounds too good to be true, that may be because it is.
(Besides, they don’t explore what may be the most important question raised by their claim: if it is true, what does it mean for the growers themselves?)
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CAUSE AND EFFECT?
TTC calls its blog posts “Insights.” In its latest Insight, TTC analyzes recent price data from roasters in its Specialty Coffee Retail Price Index and finds “a prominent price premium associated with identifying growers.” In a related Tweet, TTC says that “Identifying growers drives price premium…at upper end of the market.”
The way these are written suggests strongly that the coffees command high prices because they name the growers. That the grower’s name and additional information TTC calls “credentials” (awards, farm location, farm elevation, post-harvest process, etc.) are the source of the coffees’ added value. In my experience, the opposite is true. Growers are named because the coffee is amazing and likely to command high prices, not the other way around. The primary source of the added value is not the name that goes on the bag but the intrinsic quality of the coffee that goes in the bag.
Coffees that mention the grower’s name may be correlated with higher retail prices, but TTC’s claim that including the grower’s name is what causes the higher prices higher may be a stretch. I am not saying it isn’t true. It may be. I’m just saying that there is an equally plausible argument to suggest the causal arrow doesn’t run in the direction TTC says it does, but in the opposite direction.
There is a lot to explore here—too much for one post. I will plan to revisit this topic soon. Meantime…
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SO, WHAT?
The retail price premium that TTC reports may be an important enticement to roasters to invest more in direct sourcing and supply chain transparency. But it doesn’t say anything about the impacts of the transparency premium for the growers whose names are used to help sell these coffee—impacts that seem to me to be tied up with the concepts of EGS, GPP, FOB and farmer equity.
The E-G-S, the G-P-P and the F-O-B
On its Transparently Traded Coffees page, TTC introduces the idea of effective grower share (EGS), which it says “is the percentage of the retail price paid by a consumer…that is returned to the coffee grower.” TTC explains the methodology behind the EGS like this: “EGS is calculated by dividing the green price paid to the grower (GPP) by the green-pound equivalent price charged for each bag of roasted coffee.” TTC gets its GPP data from roaster websites.
There is only one problem here, but it is a big one: what TTC calls GPP is generally not the GPP. Not the green price paid to growers. Rather, it is almost certainly FOB—the “Free on Board” price specified in most roaster contracts. A price paid not to the grower but the exporter. Once the exporter discounts what it charges for its services (and perhaps also a cooperative or lender or both will do the same), the amount of money actually received by the grower can be significantly lower.
And guess what? Exporters tend to charge more for the kinds of fully traceable, single-farm lots that are marketed using growers’ names and other credentials. Why? Because that kind of traceability costs more. A business that does a large number of very small and fully traceable lots of extraordinary quality has a different cost structure than a business that moves large volumes of blended, non-traceable coffees efficiently according to standard operating procedures: it is more inefficient and has higher per-unit costs.
In sum, what TTC calls the EGS is not really the EGS. Not the true EGS. The true EGS is always and everywhere lower than TTC suggests it is. It may even be regressive, with lower returns to growers as a percentage of the retail price as the retail price rises. Unless and until the EGS goes further upstream in the supply chain to capture information about farmgate pricing, we can’t know. Meantime, EGS is really “EES” or “effective exporter share.”
Farmer equity
TTC omits the data point that I am most interested in, the one seems to speak most directly to the grower outcomes that are such a central concern for TTC: the true EGS for the coffees in its survey. Based on farmgate and not FOB prices, how much does the grower earn as a percentage of the retail price of coffee that bears his or her name?
And the conversation I am most interested in revolves around what a true EGS should be for that coffee: what is a fair EGS for growers whose names are used to help sell coffee? TTC says the retail price of grower-named coffee is 40 percent higher than anonymous coffee. What is the grower’s fair share of that additional value?
If it turns out that TTC is right and I am wrong—that the grower’s name is in fact a driver of higher retail prices—then one might argue that growers deserve the lion’s share of the premium. If the grower’s name is the intangible asset that is the principal driver of additional value, shouldn’t the grower capture the principal share of the value added?
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FUTURE DIRECTIONS
If this sounds like a critique, I suppose it is. But it is designed to be a constructive critique—one that contributes to further refinements in TTC’s promising approach that help make future findings more accurate, insightful and ultimately actionable.
I have been working for years to promote supply chain and price transparency in the smallholder coffee sector because I believe deeply, based both on principle and empirical observation, that they can contribute to improved outcomes for smallholder farmers. If I am critical of TTC’s findings, it is because I see in its approach the potential to move my belief in transparent trade from the realm of faith to the domain of reason by buttressing it with better data analysis.