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?)
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…
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.”
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?
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.
And furthermore, what kinds of profits are the farmers getting? As farm care becomes more organic and labor-intensive and processing quality goes up and becomes more labor-intensive, the costs of coffee production at the farm also increase. So your $11/lb coffee, even if it puts $4/lb in the pocket of the farmer, does not necessarily put the farmer in a better financial position than $6/lb coffee for which its farmer is paid above the cost of production. Labor costs vary widely over coffee growing regions, from what I’ve seen and heard from farmers we work with.
Good points raised by Michael here regarding the promising TTC work and Jen on the variable cost of production which most likely does increase with higher quality lots. There are lots of additional details to be sorted out here above and beyond what a fairly simplistic measure can give us.
What I find fascinating about this discussion (beyond the nerdy details that us researcher types love) is the underlying assumption around value. If the TTC approach is correct about the final value of high quality coffee, then why is the overall pricing model still implicitly based on the NYC price? Clearly we are talking about a different product that follows different economic logic and should be priced accordingly. This work should lead us to question the underlying value model that uses NYC as a reference price.
If, in fact, we are talking about two different products (specialty vs commodity coffee), then why don’t we have a different price discovery mechanism for specialty? One that more accurately reflects the economic value of the crop and rewards producers in a transparent fashion? It is high time to re-start the conversation about transparent pricing starting from the final consumer price and working back to the farm. Hopefully this work by TTC and others will help move that conversation forward in ways that can help answer the underlying question of what is a reasonable, just and sustainable return to the farmers based on the true value of their product. That is a conversation that I for one would love to take part in.
Michael. I very much appreciate the attention, and the passion in this post. And, I agree, we are nothing if not transparent. Please see http://www.transparenttradecoffee.org/seg.
A few other comments to put some context around our work.
First, with respect to your concern that “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.” … Please see http://www.transparenttradecoffee.org/registrationinfo, where we note that “only single-origin coffees sold through direct trade or near direct trade channels can be featured on the Transparent Trade Coffee website” … “and the green price per pound (f.o.b.) paid to the grower.” While there is a lot to think and talk about in terms of the variable relationships between f.o.b. and “farm gate”, we believe that a critical first step is providing more consistent, comparable and visible information (to everyone in the market) about these prices. For this reason, we are proud to be working with our (currently) 15 TTC roasters who voluntarily report these f.o.b. prices for their direct trade coffees.
As for the core concerns about stimulating changes that will allow coffee growers to capture more appropriate shares of the monies spent on their coffees … this is exactly why the TTC program was launched. Our belief … if we can gather more real pricing data (for green and roasted coffee), and if we can make sure that all of the market’s observables – and their various interpretations – are made available to everyone in the market (including growers), we can create an updated market environment that will produce more appropriate price outcomes.
This is the motivation for presenting the rather persistent observation about a premium associated with (though not necessarily caused by, in the strict sense of the word) featuring coffee growers in specialty coffee promotions. The more that folks are aware of and talking about this, the more chance we have of steering more of the “naming premium” (that is most likely rooted in the quality of the coffee itself) toward the growers.
Hope this helps.
Peter Roberts (for the TTC Team)
Delighted to hear from you!
And yes, TTC is indeed transparent about its connection to the SEG team. But the Insights are not signed, so it isn’t clear where to direct comments. (But even if authors signed the posts, the TTC site supports no conversation function, and the SE@G site does not publish staff emails.) The About page does make it clear the whole affair is Powered by SEG, but the link provided is to a program, and none of the program staff bios make mention of TTC, so it is not clear which of you is working on this particular project. So, kinda transparent, yes, but not particularly user-friendly for folks wanting to be in the kinds of open and public dialogue you seem to want to foster with your analysis!
As I said in the post, I am a fan of the work and DO very much agree with your idea that consistent reporting of FOB prices is an important starting point. I would welcome the opportunity to explore possibilities for piloting an approach that combines FOB data from TTC’s registered roasters with cost-of-production and farmgate price data from our work in the field. Failing that, I would like to be able to contribute to your worthy EGS construct by tying those data, where we have them, to retail prices that we can track directly to see how your FOB/retail price formula compares with a farmgate/retail price calculation. Then we can back out the production costs from these extraordinary lots to add another layer of analysis focused not on revenues but net profits and margins. And consider those data as part of the farmer’s overall production and profitability picture, since frequently the coffees sold as fully traceable, single-farm, grower-named lots are just a part (and often a small part) of a farm’s total production. Our research into this issue in Colombia suggested for the 2013 crop year, when the NY C market price was slumping, the only coffees that were profitable were indeed the traceable direct trade coffees. But they were such a small percentage of total production that they didn’t fundamentally change the overall profitability picture for most farms.
There are also further nuances on the market end of the chain, not least of which is that retail tends to be the smallest sales channel by volume for most of the roasters in your index, which sell most of their coffee to cafes and other retail outlets at lower price points. An even better EGS would reflect the farmgate price as a percentage of the AVERAGE sales price for those coffees across all channels. I say “better” because it can contribute more directly, I think, to developing alternative approaches to price discovery by bringing more precision to the total revenue picture for those coffees for roasters that can be paired with total total revenue and profitability picture for growers that includes but is not limited to grower-named lots.
In the end, though, it is all powered by the kinds of transparency you are working for, and there is no more natural place to start than the place where data are most available—FOB prices as reported by transparency-minded roasters.
Obviously, there is still loads of work to be done here! Clearly, we are pushing in the same direction and share the same aspiration, I think—to explore ways that growers who create more value on the farm can capture more of the market value of their coffee.
If mentioning the farmer doesn’t affect price, then can the same can be said about Fair Trade labels? If quality is the only thing that really drives prices to where they need to be, then should we reconsider the industry’s dedication to certifications as well?
I love it when two of my favorite sources of specialty coffee information come together. Thank you both (CRS and TTC) for all that you put out there for the rest of us to learn from.
What you all publish has had a tremendous impact on the way our company tries to do business.
This conversation points out some of the blind spots – difficulties figuring out cost of production and calculating actual returns to producers,…not to mention the fact that the volume of specialty coffee probably has an insignificant impact when compared to the massive market of commodity coffee.
But I think TTC unlocks one of the most difficult questions for me- What is the starting point for understanding the value of the specialty coffee I want to sell? Answer-look at the retail value of the roasted coffee.
I find the commodity market price of green coffee is beyond my understanding. But if I sell green coffee to a roaster and that roaster can sell a pound of that same coffee roasted for $ 20 USD or more, I think I can have a transparent conversation with that roaster about how much of that $ 20 should go to the producer.
I think there are lots of other variables to consider but when less than 10 per cent of that $ 20 per pound of coffee finds its way back to a producer who appears to live in poverty, it would seem a little disingenuous to put the blame on the market price of coffee.
There is money to be made in the specialty coffee industry and TTC has provided me with a transparent way to evaluate how the spoils are being divided by some of the best in the business.
I think most of the roasters who bravely provide information to TTC to post for the public to see are looking at the percentages and asking themselves how they can do better. I predict that we will see the percentages paid to producers going up over time because there will more roasters with incentive to participate in this form of evaluation.
We worked on the exact model that TTC is now using back n 2009 and 2010. We built a model that showed the percentage of BOTH retail bags and wholesale bags that went directly to the farmer. Anyone who does Direct Trade type sourcing uses the price paid to the farmer NOT the LANDED/FOT/EXW cost or even the FOB cost. What they are doing is awesome! the idea is fundamentally to push the conversation with PRODUCERS and roasters that there is a reasonable percentage of the retail price that should go to a producer. At my company we had a minimum of 20% and except for one coffee we bought before we finalized that rule we maintained a 20-24% f retail price paid directly to the farmer.
What CRS and TTC are both doing is both sides of the same coin. We should all work together on this. It is crucial.
Even MORE important is to figure out how to get those same farmers mid range quality coffee (83-85 point) that is extremely hard to sell for consistently good prices sold and promoted as well.
Thanks so much for your comment and your encouragement. And good on ya for putting a target out there for farmgate price as a percentage of retail price: 20 percent! I have been looking at this for a while and don’t think there is an industry standard on that issue. Maybe yours is the first benchmark!
And I couldn’t agree more about the 83-85 coffees you mention, although we have had some successes in helping growers earn consistent premiums from 84 and up, the reality is that most coffee isn’t there. It may cost just as much—or nearly as much—for growers to produce as coffee that does earn higher scores but doesn’t command a premium in today’s market. What makes sense from the perspective of buyers whose job is to source the finest coffee available and to keep prices within a target range may not make sense from the perspective of farm-level arithmetic. And if the numbers don’t add up on the farm, well, that becomes a problem for all of us.
the numbers do NOT currently add up. in anything but Specialty they never will. However i do believe that we MUST build a market for these friendly coffees. I wrote about it here http://www.andynewbom.com/in-defense-of-friendly-coffee/
I believe we need to bring back blends AND more friendly coffees that are long and strong on quality and sweetness even though they don’t make you cry with every sip.