We’ve been working hard over the last few weeks to prepare our upcoming 2014 Transparency Report. One of the metrics we include every year in this report is the “FOB” price paid for each coffee. Following an internal review of the draft report this week, I got some really good questions about this metric merit a post on the topic of price transparency. FOB stands for “Free On Board” and represents the price paid for a coffee at the point of export, when it is ready to be loaded onto a ship at port. In terms of the coffee supply chain, it’s a point that falls somewhere in the middle between what the farmer gets paid and what Counter Culture pays. This is because there are a number of supply-chain steps between us and the farmer: the mill, exporter, international shipper, importer, warehouser, and domestic shipper to name a few. Each of these steps serves a purpose, and each adds cost to a coffee. The wrinkle is that every coffee supply chain is different: Sometimes the mill and the exporter are the same entity; sometimes the coffee comes through a co-op; etc. There are also important distinctions at the farm level between a farmer who does their own processing and a farmer that delivers coffee cherries to a mill, for example. To compare them on the same standard would be confusing. The only point in the supply chain that is guaranteed to happen for every coffee is that it will get on a boat bound for the U.S., and that’s why the FOB price is the standard reporting metric in the coffee industry. The problem with the FOB price metric is that it’s neither what the farmer gets paid for coffee, nor the price Counter Culture pays for green coffee. So why do we use it? Isn’t knowing what the farmer got paid what we’re really after? Well, yes. And, in many cases, we do know how much the farmer actually got paid. But how is knowing that a farmer in Burundi got paid $3.00/lb helpful? How is knowing that or the FOB price helpful, or meaningful across local (country) and international markets? My point is this: Knowing what the farmer gets paid isn’t meaningful without a whole lot of context. What we really want to get at is fairness. Is that farmer getting paid a fair share of the final retail price for their contribution to that coffee’s supply chain? The answer to that question is in traceability. Any single price point in the coffee supply chain doesn’t mean much; what’s really important is how all of the pieces fit together. Can we look at a coffee’s supply chain, trace the costs that get added to it between the farmer and Counter Culture, and justify those price points?
Our coffee-buying philosophy is to build supply-chain relationships and use them to push the quality and sustainability of coffees. This philosophy doesn’t work unless everyone in the supply chain is committed to it as well.
For example, let’s say a coffee will taste better if we can speed up the time between harvest and shipment to Counter Culture. Everyone in the supply chain will need to be involved to make that happen and will likely incur cost to do so. If we’re successful, everyone should also share in that success, and the only way we can be sure that’s happening is through traceability. Right now, we’re reporting the FOB price because, as a common industry-wide metric, that allows you to compare us to other companies. That’s just the beginning of what we’d like to do. To be able to incentivize quality and sustainability improvements, to fill in that context that’s missing with FOB price, we need to be able to trace price throughout every coffee’s supply chain. Then, we need to figure out how to report on that traceability. The forthcoming 2014 Transparency Report is the first step of many in that direction. Price transparency is a complicated topic, and what I’ve laid out here only scratches the surface. In a future post, I’ll fill in some of the details I’ve left out here—with specific examples from our supply chains and how traceability has played an important part in those examples.