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A closer look at what a $2.75 /lb. FOB minimum price means

2017-03-13 Comments Off on A closer look at what a $2.75 /lb. FOB minimum price means

A few weeks ago, Kickapoo Coffee Roasters publicly committed to paying farmers in their supply chain a minimum of $2.75 FOB per lb. FOB (FOB stands for Free on Board, which means this is the price of the coffee ready for export) for all of Kickapoo’s green coffee purchases.  Their press release says that it is the highest published minimum price for green coffee, which is true.  I have seen quite a few roasters publish their average prices, or prices paid for certain coffees, but to my knowledge, others have not established a public price minimum.

Posted prices at the Plaza, Nariño, Colombia. Photo by Kraig Kraft.

Posted prices at the Plaza, Nariño, Colombia. Photo by Kraig Kraft.

Let’s take a closer look at $2.75.  Compared to the NY C price, this is incredible.  Perhaps a more accurate reference price would be the other milds price listed by the International Coffee Organization, which is at 159.26 on March 9. The Kickapoo minimum price is over 75% higher than this price.  However, if we compare this price to other prices paid for specialty coffee, we see that it is in the same ballpark.  Last year, Michael Sheridan wrote a piece on the Transparent Trade Coffee project out of Emory University  that discussed their report on transparency and how traceability and how retail price correlated to if the farm name was used as part of the marketing. On their webpage, they have a list of transparent coffees. Looking at the 52 “transparent” coffees on their website, the average FOB price paid is $3.65, and only 8 of the 52 coffees had FOB prices lower than $2.75/lb.

In the last harvest of the Borderlands project, the 2016 harvest, coffees that were directly traded to our partners received an average price of $3.20/lb. FOB – this was for coffee from Nariño that was graded A, AA, or AAA.  Other roasters have made efforts to share the prices that they pay for green coffee, but usually the average prices paid is what is made public.  For instance, in Counter Culture’s 2015 transparency report, they report an average FOB price of $2.96/lb. for all their coffee purchases, while their single origin coffees received an average of $3.53/lb.  So, in looking at what data is publicly available on green coffee purchases, we find that the $2.75/lb. price is in line with prices paid by specialty buyers and is probably on the low side for high quality single origin.

I would like to make it clear that I am in no way trying to disparage Kickapoo Coffee’s minimum price guarantee. In fact, there are several things that I really like about this announcement.

Things I like about this:

  1. Transparency in price setting

In several CRS value chain projects that we have completed in Latin America, we have found that the more transparent the value chains that are, the more equitable they are for farmers.  When supply actors are open with their price setting structure and can clearly communicate this to farmers, we find that farmers are more capable of responding to the market requirements and have better perception of their role in the value chain.

  1. Breaking away from the commodity price as a basis for price discovery

In certain circles in the coffee and the cacao supply chain, price is a dirty word.  Price is established by the relationship of supply and demand, some cry.  Yet we know that global supply and demand have little to do with the transactions of lots of high quality coffee.  In side comments on this blog and in discussions with others who are wiser and more experienced, there have debated the pros and cons of using the commodity price as the basis for establishing prices for specialty coffee.  The bottom line is that the coffees that Kickapoo serves to its customers are a totally different class of coffee that what gets sold and transacted in these huge electronic trades.  Kickapoo Coffee can’t substitute commodity coffee to run their business successfully, and therefore, they need to establish their own norms and benchmark prices.

  1. Make it public, stand by your word

Our friends at the Sustainable Coffee Challenge have created a great model to engage actors in their platform.  It starts by making a public commitment on a sustainability goal and reporting it out.  Making it public means that it is a public contribution to help make coffee better by becoming accountable for what you have committed to.

From where I am sitting, it is easy to criticize decisions or actions that other supply chain actors take.  So, I’d like to frame these following comments as:

Things I would like to see more discussion about

  1. What is a $2.75/lb coffee?

This is a purely rhetorical question.  Those of us who work with coffee can probably guess at what a $2.75 coffee is.  It probably cups above 83-84 and there is traceability of the lot down to the farmer’s field.  I would love to know more.  Is quality the only premium?  Are there any premiums for environmental performance?  Any social premiums?  We know that the market rewards cup quality – but at $2.75 and above, I think there is room for incentivizing improved stewardship of natural resources and for investing in social structures that strengthen communities.

  1. What goes to the farmer?

This isn’t just directed at Kickapoo.  Many times, we list the FOB price yet farmers are receiving a percentage of this – because the exporter charges fees, or the coffee is sold through a farmer organization who needs to add their margin and may not return all the premium in the 2nd payment. So, the farmer gets anywhere from 60-75% of this FOB price.  In the Transparent Trade Coffee page, they introduce an interesting metric for a better understanding of the equity in the coffee supply chain– the RTO or return to origin.  This is a proxy indicator of how much of the retail price goes back to origin, expressed as a percentage and can show us how equitable the supply chain is.

  1. Price is just part of the farmer income equation. Profitability = (Price x volume) – (production cost).

The future long term supply of coffee depends on profitable farmers. There is relatively little discussion on cost of production as the basis for price discovery. Costs for specialty coffee are undoubtedly higher than commodity.  It takes extra labor to only harvest the ripest cherries and to process and separate out the best qualities.  In an ideal world, we would take this data into account before establishing our prices. Much like how exporters and farmer organizations need to make their margin, why don’t we start by pricing in a margin for the farmer on top of their costs?

For Kickapoo Coffees, this was a brave step to announce their minimum price.  It puts this under scrutiny from opinionated armchair quarterbacks like myself, but this is a very concrete contribution to the larger discussion on how we can make coffee better. Kudos Kickapoo.

– Kraig H. Kraft