Colombia Farm Gate Pricing Case Study

colombia case study

We need to talk about prices.

You don’t need an economics degree to know that profitability is an important aspect of a business. At the most basic level, being profitable means earning more than you spend. For coffee farmers, in addition to controlling costs for things like inputs and labor, a farm’s yield, and the price received all contribute to the profitability of growing coffee.

The specialty coffee industry prides itself on being different from commodity coffee by talking about the relationships behind our coffees, partnership-based supply chains like fair trade and direct trade, and paying higher prices for higher quality coffee. However, currently, costs are outpacing profits across the industry, forcing many to abandon farming coffee. Meanwhile, the demand for coffee, specialty coffee in particular, is only going up. If these two trends—farmers leaving coffee and consumers wanting more coffee—continue to move in opposite directions, the industry is in trouble.

Farmer profitability is key to ensuring not only the livelihood of farmers, but also our supply of coffee. As roasters, we may not be the best people in the coffee supply chain to help farmers reduce their costs of production, however, price is the part of the profitability equation that we are well-positioned to influence.

It’s important to acknowledge that price isn’t fully within our control. To some extent, prices are influenced by market rates. If a cooperative fixes their contract at an inopportune time, for example, that can translate to lower prices for their farmers. Exchange rates also impact how much money ends up in a farmer’s pocket, a factor that can have a sizable impact in countries where the exchange rate with the U.S. dollar fluctuates frequently, like Colombia. But that doesn’t mean we have zero control.

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Coffee supply chains are long and disconnected and this is a hard truth: The ability of a supply chain to deliver quality coffee is not a good indicator of equitable information and cash flow within that supply chain. Quality is definitely an important aspect of specialty coffee, but just because a coffee tastes great doesn’t mean the farmer is doing well. Another hard truth about price: Just because a roaster pays more for their coffee does not always mean the farmer receives more. Sometimes, the increased costs go to covering the added expenses it took to get that coffee to a roaster, from logistics to marketing.

Right now, most roasters who share prices, Counter Culture included, do so using the “free on board” or FOB price. FOB is the price paid for coffee at the point of export. It is a useful metric for comparing origin versus non-origin costs within a supply chain and comparing supply chains to each other. It includes the costs of all of the services it takes to get coffee out of a production country, from farming to transportation, milling, and exporting. Most of the time, there are multiple supply chain participants involved: farmers, cooperatives, dry mills, exporters, etc. However, since FOB is a composite of all of these costs, it does not tell you how much each of these participants got paid. To positively affect a producer’s farm gate price—the actual price a farmer receives for their product—we need to look at different indicators.

First, we need to be able to trace coffee back “up” the supply chain from ourselves, identifying all of the people and organizations involved, and understanding the services they perform. Traceability and transparency are key. Everyone—the cooperative, the exporter, the importer, us, etc.—needs to be willing to share costs because you can’t make changes to prices if you don’t know what those prices are to begin with. So, how can we make changes that will result in more money in the pockets of the farmers?

Sometimes the answer is that no efficiencies can be found, and the best way to increase farmer profitability is to pay more for the coffee or work on a different factor altogether, like increasing yields.

Other times, we can make changes that result in increased farm gate prices. This has been the case for one of our supply chains in Nariño, Colombia, where, by sharing price information and looking for potential changes together, farmers got paid more without sacrificing quality.

The Nariño Value Chain

First, we took a step back from looking at the coffees from this supply chain solely on a price-per-pound basis. A farmer’s profitability depends not only on how much they receive per pound, but also on how much coffee they can sell for that price. One of the main services provided by a dry mill is sorting—taking out beans with defects and beans that don’t otherwise meet contracted specifications. Of the coffee a farmer delivers, only some of it is ultimately “sellable” for the prices agreed to in a contract. This and the parchment weight loss determines yield. In 2016, the average yield for farmers in this supply chain was 68 percent. In order to increase this yield, in 2017, we changed our specs to accept screen size 14, rather than continuing with the standard practice of accepting screen 15 and up. This change, coupled with improved harvesting conditions, increased the average yield to 74 percent in 2017, meaning that farmers were able to sell a higher volume of their coffee at specialty prices.

We also sat down with our exporting partners, Caravela, and the leaders of each of the associations to look at the services each of us performs in this supply chain. Caravela provides valuable services to the farmers––in this case, financing, milling, and exporting––but their normal levels of risk and work are somewhat reduced in this supply chain because 1) the associations handle their own cupping and 2) Counter Culture has already agreed to purchase the coffees. Given these conditions, Caravela agreed to discount their services and, through this change as well as the increase in average yield, farmers received a $0.09 increase per pound in 2017 on about 120,000 pounds of coffee.

In 2018, we are consolidating more lots for the coffees we buy specifically for use in our year-round products. These coffees will still have traceability, but instead of milling many small lots separately, we will be milling 250 bags of coffees together. This increased efficiency reduces Caravela’s costs and, consequently, they are able to charge less for their services. This reduced milling cost, coupled with Counter Culture’s agreement to increase the price we pay by 2.5 cents, means that farmers will get $0.05 more per pound for their coffee in 2018 for 150,000 pounds of coffee. After this negotiation, the other roaster purchasing coffees from these farmers agreed to the same increase, which helps demonstrate the impact that transparency can have in increasing prices for farmers.

colombia case study

The process of price discovery and negotiation in this supply chain wasn’t without challenges. For example, prices along most supply chains don’t use the same “units.” Farmers in Colombia express their farm gate prices in pesos they were paid for parchment, while our ex-warehouse price is expressed in the dollars we paid for green, exportable coffee. Exchange rates between currencies can also complicate the calculations. A volatile exchange rate of dollars to pesos in this case meant that actual farm gate prices differed day-to-day.

This example shows what can happen when partners within a supply chain are willing to be transparent about their prices, to explore solutions to change those prices, and are all committed to raising farmer income. The increases in farm gate prices were made possible because Caravela was transparent and willing to discuss options, the farmers were at the table providing information about profitability and what additional services they could take on, and we listened and dug into the calculations.

One thing this example doesn’t address is the responsibility of roasters to find efficiencies in their operations as well. Reducing warehousing time in order to lower the cost of storage and managing operating costs can give roasting companies more flexibility in the price they pay, rather than relying on increased retail prices as the only avenue for paying farmers more.

It’s time to get real about our role in farmer profitability. Whether we’re exporters, importers, roasters who pre-contract coffee, or roasters who buy from importers, we each have a role to play in addressing this issue. By looking beyond FOB and striving toward farm gate prices, we can explore the ways in which the prices we pay can be distributed more equitably across a supply chain. In doing so, we can get closer to our goal of ensuring that the prices farmers receive are above their costs of production and correspond to the quality of their coffee, both of which are integral to securing a sustainable supply chain of specialty coffee in the future.