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Cost of Production Covered Project: Peña Blanca

Posted by Michael Nelson on

Cost of Production Covered Project: Peña Blanca

This second coffee in the Cost of Production Covered (CoPC) Project was illuminating. Taking place during a tumultuous year of global pandemic, the project gave us a glimpse into the kinds of disruptions we might expect to see throughout the coffee supply stream. As roasters, our coffee volume projections are distorted, our café sales are reduced, and our green coffee orders are delayed (green/raw coffee ages!). Importers are seeing drastic changes in their sales as roasters and producers adapt to new buying and selling capacities (i.e., modified or cancelled contracts), and are experiencing drastic changes in transport logistics (e.g., holding times at port, new shipment deadlines, etc.). On the producing side, the pandemic disrupted farm to mill transport logistics, farm practices overall, and brought dramatic sales reductions (i.e., modified or cancelled contracts). Despite these challenges, we were able to collaboratively identify the cost of production through consistent communication and number crunching. We based our premium on the profit margin on Peña Blanca’s cost of production; Sal and Marielisa made profit on the coffee they sold to us.

Global pandemic or not, we don’t expect any CoPC coffee to look the same. These costs vary from country to country, region to region, farm to farm, year to year. Identifying the cost of production is inconveniently complex, and requires greater commitment to equity in a multi national transaction. From the roaster’s perspective, coffee buying transactions can be as simple as filling a shopping cart online and checking out, or can be as easy as emailing an intermediary (i.e., importer, broker, or exporter) and signing a contract. These purchases involve one’s own inventory management and price targeting, but can require literally no direct communication with the coffee producer. Was the cost of production affected this year because the coffee was sold at a lower price to avoid risk, or was it affected to a greater extent by an extreme climate event? Producers deal with uncertainty and risk every year, and unless our price negotiations take variability into account, coffee farming won’t be a sustainable livelihood.

We’ve been talking about collaborating on a CoPC coffee with Salvador and Marielisa, owners of Peña Blanca, for several years now. We were introduced by Ana Cristina (Cristy) Guirola, owner of TerraNegra Coffee Imports, back in 2016. In fact, Peña Blanca was the first coffee that we purchased from TerraNegra. After we got the project started with Andres Fahsen, co-owner of Pachuj, we started building a cost of production template to assist with future projects. We introduced the project to Sal and Marielisa, but we all knew that it would take some time to work up to the project. Sal and Marielisa were in the process of a major farm overhaul, as Sal had bought his fathers farm that had gone years without farm renovation. We all kept in contact, and, pre-pandemic 2020, we decided to move forward with the project.

The project was digitally collaborative, and wouldn’t have been possible without the work put in by Sal, Marielisa, and Toby Roberts. After talking with Sal about moving forward with the project, I sent over a cost of production questionnaire that Toby and I had been working on for some time. The questionnaire was intended to guide the collection of production data that would be relevant for calculating farm profit margin. Over the next six months we’d be sending the questionnaire back and forth in order to fine tune the questions and get a better picture of Peña Blanca’s actual production costs. We plugged the questionnaire responses from Sal and Marielisa into our spreadsheet/model, and analyzed their revenue and business costs. While in years past we had the luxury of communicating in person about the project, this year was spent working through WhatsApp, email, and text message.

After plugging in the farm data we discovered that Peña Blanca was not making 30% profit on their cost of production. Margin less than 30% makes it difficult to cover the business overhead expenses, and leaves little room for other expenses. With the prices they were receiving for their coffee in the specialty and non specialty markets this year, they were not making any profit.  Some of this has to do with the fact that they are still waiting on younger coffee plants to be productive (newly planted coffee plants can take two to five years to yield fruit that can be harvested and sold), which would increase their yields, and much has to do with low prices received for their coffee. Their cost of production was $2.56/lb for the 2019/2020 harvest, with an average farm gate price of $2/lb. Their production costs were comprised of hand picking labor, other harvest costs, transportation, fixed/annual labor, farm maintenance costs, and other expenses. After factoring in revenue they received for selling coffee byproduct (which contributed to the 30% margin), as well as the $3.13/lb paid directly to Sal and Marielisa by TerraNegra, we paid $3.45/lb for Sal and Marielisa’s coffee. We paid our premium directly to Sal and Marielisa after receiving the coffee this year.

Next harvest, we plan to change our strategy. We aim to factor the premium into the contract price; we plan to pay them a premium before receiving the coffee. Sal and Marielisa will be able to use this last harvest as a reference point for collecting their cost of production data during the upcoming harvest. This initial assessment has laid the groundwork for a more detailed look into the cost of production and pricing data for this upcoming harvest. From this experience, we found that FOB and farm gate aren’t always so clear cut. In this case, the importer, TerraNegra, paid the producer directly, whereas in other cases the FOB price would be the price the importer paid the exporter. For the next harvest, we’ll ask more questions about direct payments rather than just limiting questions to “FOB” and “farm gate”.

Let me tell you what this coffee means to me. First I fell in love with how this coffee tasted back in 2016. I’m telling you, it tasted like peaches. Then I met Sal and Marielisa, and we talked about what it was like running businesses. We connected over that shared experience first before talking about processing and drying techniques on the farm. They were very real about the daunting task of taking over the farm, and were very realistic about their business planning. Running a farm is running a business, and while I first connected with the Fahsens as business owners with their in depth P & L sheets, I connected with Sal and Marielisa as new small business owners. I want to support their business, and I believe they want to support ours. They also happen to be good human beings with big hearts and strong senses of humor. I think about all of this as I roast their coffee, as I brew it, and as I sell it to customers through plexiglass in our café.

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