Ask Me About Cost of Production
You have probably heard somewhere that we need to pay more for coffee. If you haven’t, we’re here to say that we, as coffee buyers, need to pay more for coffee. And not just the “fancy” stuff either. We’re here to tell you that coffee producers don’t receive coffee prices high enough to cover costs, and that it’s the responsibility of all coffee buyers, especially the large coffee buying companies, to pay prices that more than cover the costs that went into growing that coffee. We have to learn more about what paying more for coffee really means.
There are many problems facing the coffee industry, from climate change, to pests and disease, to food insecurity, and these problems are all compounded by the way that coffee is traded. Although we treat it as a specialty, coffee is traded as a commodity, and the global indicative price that coffee is traded for is very low. The prices paid to coffee farmers per pound have gone unchanged since the 1970s, and certainly haven’t taken inflation into account. These prices are sometimes below the cost to produce a pound of green/raw coffee. It’s important that we understand these costs so we can appropriately compensate farmers, and not perpetuate inequitable trade relationships.
We focus on the cost of producing a pound of green coffee because farms are businesses just like us. Unless these businesses see a healthy gross margin on their costs of production, from prices and premiums that we have a part in setting, we are contributing to an exploitative business relationship. Even in the specialty coffee industry, coffee contracts are loosely based on arbitrary market forces and quality based premiums rather than actual farm (business) costs. It doesn't matter how "high" the price is, if we don't know what a farm's cost of production is, we can't identify gross margin. We think that coffee contracts should be more collaborative, based on equitable terms, and based on something real, like a farmer’s cost of production and profit margin. By ensuring that these costs are met and that margin is secured, we can ensure that the supply stream can continue and all businesses in this transaction can thrive.
Our Cost of Production Covered (CoPC) Project intends to serve as our guide to green coffee buying practices. Working with importers and exporters that we trust, we aim to identify farms that are willing to collaborate to identify their cost of production. The first objective is to build the cost of production into the price actually received by the farmer (i.e., the farm gate price or FOB price if the producer is paying exporter fees). The cost of production varies country to country, region to region, and farm to farm, and obtaining this data can be difficult for anyone, farms included. Over the years we've worked with farms, importers, and exporters to fine tune our own template to help farms identify these costs. You can find that template here. Once we identify the cost of production we can find out a gross margin to base our contract price upon. The second phase of the project aims to educate and engage buyers, roasters, baristas, business owners, and consumers around cost of production and low coffee prices. The project takes many different approaches to sharing knowledge, because let’s face it, not everyone learns the same way. With the consent and input of project collaborators, the project intends to share the message via coffee labels, social media, printed media (e.g., our Ask Me About Cost of Production comic book), and public events. We hope that transparent coffee buying practices will help inform consumers about the hidden costs of other food systems, and will motivate larger coffee companies to pay prices that actually ensure producer partner profit.
Ask Me About Cost of Production Comic Book
Ask Me About Cost of Production is a six-page comic book put together with the help of our first project partners, Ana Cristina Guirola (Cristy), owner of TerraNegra Coffee imports, Andres Fahsen, owner of the Guatemalan coffee farm and mill Santo Tomás Pachuj, and Jim Kettner, illustrator. Written with research article structure, the comic attempts to detail our first CoPC Project, how it was carried out, what was discovered, and what we should take away, in six, multi paneled pages. The story begins with a recounting of the project’s inception, and is then followed by an explanation of the global coffee market, how it concerns the coffee consumer, and a quick look at the implications of low coffee prices for coffee production. Then the comic details the process of gathering and analyzing cost of production data. The comic concludes with recommendations for the reader, and gives a short afterword with acknowledgements. The comic is available in English and Spanish.
Education
If you are interested in joining our efforts to share this message, and want to be able to effectively and concisely communicate this idea, read through the following training material that we’ve used in staff trainings and public events. Don’t forget to check out the Junior’s Journal for updates and stories about the CoPC Project.
First of all, what is the cost of production?
- The coffee producer’s cost to produce a pound of green coffee
- Can be fixed or variable costs
- Some of the main cost groups:
- Labor
- Farm inputs
- Milling
- Export costs
- Farm reinvestment
- What other categories can we come up with? How about farm risk?
- Potential metric for coffee buyer/farmer contract negotiation
- Potential metric for identifying farm profitability
How is coffee traded, why is it unsustainable, and where can companies start to help?
- Coffee prices are determined by the C Market Price: Coffee futures contract price, indicative global price for coffee based on daily commodity future contract trading at the New York Mercantile Exchange, as well as on trading floors in London and Singapore.
- The coffee trade is exploitative. Coffee is a commodity traded in commodities markets with a global price (C price) that changes every day (imagine dealing with that kind of volatility as a farmer who is at the mercy of things like climate variability and change!) based on supply and demand, volume speculation, and future contract trading, rather than on the actual costs affiliated with producing it. In other words, when the C price is low, coffee roasting companies benefit!
- The global price per pound for coffee is so low it sometimes won’t cover the cost to produce it.
- At a minimum, buyers should be able to identify the price paid by the importer to the exporter (FOB price). Identifying the prices received by farmers is the farm gate price, and is a step closer. This isn’t always easy, especially when dealing with cooperatives of hundreds or thousands of members that pool their coffee together.
- When buying coffee each year, roasters/coffee buyers should aim to collaborate with farmers to explore how much it costs to produce a pound of green/raw coffee and base their price negotiations on that, farm reinvestment, and other premiums like quality based premiums.
- Cost of production and gross margin on those costs is the best way to ensure a farm is appropriately being compensated for their work.
What is the Cost of Production Covered Project?
- It is a farmer to consumer transparency project that uses cost of production and profit as a metric for fair coffee contract prices.
- It serves as Junior’s Roasted Coffee’s guiding principles for buying coffee.
- A project that pays a premium to cover the cost of production, farm reinvestment, and profit margin.
- It is a collaborative effort It is ongoing.
- A concept that insists that we need to pay more for coffee because it costs more to produce than we think it does.
Events
Junior’s hosted the “Ask Me About Cost of Production” event on November 26, 2018 at Buckman Coffee Factory. Over 75 members of the Portland coffee community and beyond gathered to learn and discuss the fundamentals of the coffee market, why it is in crisis, and what we as consumers & coffee professionals should know to make informed buying decisions. The event included a presentation by Chad Trewick, Founder of Reciprocafé LLC followed by a large group discussion using the World Café model.
Read more about the event below!