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Cost of Production Covered Project Pilot

Posted by Caryn Nelson on

Cost of Production Covered Project Pilot

We’re talking about value chain transparency because we want to get smarter about the way we do business, and we’d like to inspire/motivate/incite a new direction for larger coffee companies. As small business owners, we’re striving for transparency in terms of our transactions with vendors, but are also looking internally at how we run our café and roasting business. I’m approaching transparency as a roaster that finds value in roasting, sharing, and educating folks about the same farm’s coffee, harvest year after harvest year. I’m approaching this issue as a green coffee buyer that, on a smaller scale, has grasped the realities of green to roasted margins and where the true value addedness lies in this value chain. As a green coffee buying company we have the power to dig deeper into what a “farm partnership” can look like, and into what questioning and advancing equity and ethics could do for our businesses and hopefully the industry.

The project began during the summer of 2016 with the help of Ana Cristina (Cristy) Guirola, owner of TerraNegra Coffee Imports, an importing company dedicated to transparent pricing and traceable information. I had met Cristy in Portland as she was just starting her importing business. I shared the project idea with her, and we kept in communication over the next few months. During a trip to Guatemala in January 2017, Cristy introduced me to a coffee producer she thought would be eager to collaborate on such a project, Andres Fahsen of Santo Tomás Pachuj. The first step in this project was finding a farm and other intermediaries to collaborate with, and who would be interested in identifying and building the cost of production into our contract. Check.

We began to work with Andres and his brother, Fernando, to learn more about their cost of production, and worked with TerraNegra to incorporate a premium based on margin on the cost of production into the actual price paid to Santo Tomás Pachuj. While aggregated country reports may show cost of production as static or universal, the cost of producing a pound of green coffee varies for all farms everywhere. Furthermore, many producers don’t know their own production costs or the value of their coffee. The Fahsens’ outstanding record keeping made identifying Santo Tomás Pachuj’s production costs possible. Through extensive electronic and in person collaboration we were able to work together with their existing data to compile a customer facing spreadsheet with condensed cost of production categories. We broke down the categories into administration costs, harvesting costs, labor costs, input costs, planting and renovation costs, and other costs.

What we discovered was that the cost of production was significantly higher than C market prices (the daily fluctuating global indicative price for coffee). This wasn’t that surprising. Even if a producer is able to cover their costs of production, chances are their margins are very thin, especially when we start to consider agricultural loans, interest, and debt. For the first year, the cost of production was identified as $2.87/lb, and was identified as $3.31/lb for the following year. For both years we factored in loan interest and covered loan interest in the price as well. We paid an additional $0.75/lb premium for the first year and $1.00/lb for the second year at 30% gross margin on the cost of production.

Big farms or small farms, if a farm happens to keep track of their production costs, they may still have debt, unexpected yield reductions, or production variability. In other words, traceable production data may not even ensure the success of their farm. Agricultural loans are hard to get for coffee producers, and depending on the country or lender, interest rates can be upwards of 9.5%. And often times the same folks who provide the loans also supply the things you need like fertilizers and other agricultural inputs.

The other step involves collaborating with project partners to educate and engage buyers, roasters, baristas, business owners, and consumers around cost of production and low coffee prices. After identifying the cost of production and the premium, we all discussed how we wanted to share this information with the public. We took several different approaches in order to accommodate different learning styles. The retail coffee bag label included C price, cost to produce, price paid to the farm, and what the price covered. We published the Ask Me About Cost of Production comic book in English and Spanish that tells the story of the project, illustrated by Jim Kettner. Pre pandemic we used the wifi password to try and engage folks in conversation or to spark critical thought. We put together various merchandise (e.g., bike seat covers!), signage around the café (e.g., signs displaying C market price), staff trainings, and public events to engage and educate.

The project continues to evolve, and we have our experience with Cristy and Andres to thank for it. From a small roasters point of view, when looking to build transparency in the coffee value stream, there’s no better place to start than with an importer dedicated to transparency and coffee producer advocacy (like TerraNegra!). It isn’t the norm for producers to track cost of production data with the kind of detail that the Fahsen’s did. As we started to work with other farms on the project, we got thinking, “wouldn’t it be great if there was some sort of template for this?” With the tremendous help of our business partner, Toby Roberts, and the inspiration and encouragement from Andres, we’ve been working on a cost of production template to gather data more quickly. The pandemic certainly changed the trajectory, but we continue to work on streamlining the data gathering process.

What did we learn from the pilot project? First of all, I truly can’t overstate the importance of collaboration and consent in a project like this. If we had any question regarding costs, marketing message, quotes, speaking engagements, how project partners would like to be represented, how each of us were to be portrayed in the comic book, we’d message or call the project partners before making assumptions or taking new steps. This is still not easy to talk about, but we’re constantly developing new strategies for consumer engagement and staff training with project partners. As a small business owner that spends most of their waking hours in the cafe, the project has been time consuming, but feasible. It’s a choice that I make in terms of how I want to spend my time and resources.

In the specialty coffee industry, we’ll often hear that quality based premiums are the only solution, but what we’re learning is that cost of production is a more accurate metric for identifying coffee price than any differential or quality premium alone. We need to base coffee prices on something tangible/measurable, related to a farms fully allocated costs, and on something more objective than a cup score. Cost of production helps buyers and producers identify a new starting point for pricing and identifying sustainable margins.

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