Price Transparency Pt. 3: Why price doesn’t tell the whole story

We talk a lot about coffee prices at Counter Culture, not just internally, but also in our Transparency Report. We do this because price is important: The amount that we pay for coffee has a close relationship with the amount a farmer gets for their coffee. A previous blog post explains that relationship further. We also use price because it’s easy to understand; it’s something we all interact with every day.

When looking at what we pay for coffee, however, price alone doesn’t give a full economic picture. Even a price given with context is not necessarily the same as the value of that coffee. Getting at that value estimate is important to us because the vision of our sourcing model is based upon the concept that supply chain partners choose to work with us because of the value we add to their operations within the specialty coffee industry. Some of that value is reflected in price and some is not, as this Daily Coffee News article discussing the intangibles in the coffee supply chain points out.

Workers hand-sorting coffee after the coffee goes through the dry mill.

One of the problems with just looking at price is that the price paid for something is a one-time occurrence. For example, if we paid $1-per-pound for a coffee one year, that would be a “bad” price, whereas $5-per-pound the next year would be a “good” price. This is an extreme example of how most coffee is bought and sold: The price is determined each year and isn’t necessarily dependent on, or related to, the price in previous years. This market instability is problematic for farmers. Consider earning an income of $10,000 one year, $50,000 the next, but having no idea what you will make in year three.

It’s difficult to make a consistent livelihood under these circumstances and hard to justify investment in farm improvements if you have no idea if or when those investments will pay off. This is why our model at Counter Culture is based on long-term purchasing partnerships. If we buy coffee from a partner every year and consistently pay, for example, $3-per-pound, that partner has a much more stable and predictable income. As a buyer, we get a more predictable supply of coffee at foreseeable prices. In this case, the value doesn’t come from the price itself, it comes from the of stability and predictability inherent in a committed purchasing partnership.

Another big issue in looking at a price alone is the relevance of volume. Paying $10-per-pound is great—it’s just not that impactful if that price only represents 30 total pounds of coffee. That farmer would make the same amount if the buyer paid $5-per-pound, but purchased 60 pounds or 300 pounds at $1-per-pound. So, in that sense, price without reference to volume is incomplete.

If we buy coffee from a partner every year and pay consistently, that partner has a much more stable and predictable income.

Even a price given in context of time and volume doesn’t give a full picture, because of “intangibles” in the coffee-value chain. There are many intangibles, as detailed in this research paper referenced in the Daily Coffee News article above.

There’s intangible value in information we share with our supply chain partners. We offer feedback to our producer-partners based on the observations from our quality control department. This feedback gives them information on what they can adjust to obtain higher quality—for example, letting farmers know that their coffee tastes over-fermented and recommending better drying to improve quality. There is also an intangible value in setting pre-harvest contracts with producer-partners. Not only does this help both of us understand what quality and volume to expect, in many cases the contract allows producer organizations to secure financing to pay farmers when they turn in coffee instead of waiting until the coffee is sold. These contracts are just another example of something that adds value for both parties that’s not reflected in price.

Accounting for value in the coffee supply chain is complicated, and we’re constantly working adjusting variables to better understand that value. Our first Transparency Report in 2009 only tracked “free on board” (aka FOB price), cup score, and duration of partnership for each coffee. Our most recent report tracks six different variables for each coffee: What product(s) the coffee went into, duration of partnership, weight, quality score, FOB, and whether we classify the partnership as a one-off purchase, just starting out, or conforming to our ideal sourcing model. We also look at additional variables for the data set as a whole: the percent of coffees classified as “model,” weighted average FOB and quality scores, the average duration of partnerships, and partnerships where we’re purchasing multiple quality tiers. The better we get at this measurement, the better we can fulfill our role in adding value to our supply chains.