Price Transparency Pt. 2: How much of what we pay goes to the farmers?

This post is a follow-up on a price transparency blog post our sustainability manager, Meredith Taylor, wrote in September 2015. Our understanding of price transparency has come a long way in the last two years, so we’d like to revisit the topic to share some of those insights.

We believe that consistently high-quality coffee comes from long-term purchasing partnerships based in resilient coffee-growing communities. (See our “sourcing philosophy” in our most recent Transparency Report.) The profitability of farming operations is a key aspect of this resilience. Without economic sustainability, no environmental or social projects and investments can last long-term. The price we pay for coffee is a piece of this farm profitability equation, and that’s why we’re focusing on price transparency.

What is price transparency?
The phrase “the price we pay for coffee” might seem straightforward, but it’s not so simple. We don’t hand farmers money directly—nor would we want to. To put it simply, it’s risky to carry around or possess large amounts of cash and access to financial institutions can be limited in places where coffee is grown. Instead, the money we pay goes directly to importers. From there, money goes to warehouse fees, customs fees, ocean freight shippers, export fees, exporters, co-ops, and then farmers. And that’s just a simplified example. Each of the participants in the supply chain adds value to a coffee—like proper storage, fast shipping, meticulous sorting at the exporter’s mill, etc. They aren’t “bad middlemen,” rather they’re logistically specialized, risk-sharing contributors who help ensure that the quality of the coffee when it’s picked at the farm is retained throughout its journey to us. To us, the term “price transparency” in the fullest sense means being able to take the price we pay to an importer and track that money all the way down to a farmer’s pocket.

Each of the participants in the supply chain adds value to a coffee—like proper storage, fast shipping, meticulous sorting at the exporter’s mill, etc.

This way, we can better evaluate where money is being spent and whether that spending results in better coffee. This is a process that’s going to take time, so we’re starting with the most important part: calculating what percentage of the money we pay for a coffee ends up in the pocket of the farmer(s) of that coffee.

For the moment, let’s call this percentage “return to farmer” or RTF. First, we want to know the RTF for as many of our coffees as we can. It won’t be 100 percent right away, but we should get relatively close.

Why does price transparency matter?
By tracking RTFs, we can answer important questions like whether or not they differ widely by country or region or co-op members versus non-members or by which exporter we use. After we break that information down, we’d like to settle on a set of average RTF. We say “set” because the RTF will differ depending on how a supply chain is structured. The RTF for a farmer who sells coffee that’s already been depulped and dried, for example, will be—and should be—different from the RTF for a farmer who sells unprocessed whole coffee cherries. Finally, we will look at purchasing relationships where the RTF falls outside of what we expect and ask ourselves whether that difference is justified.

Side note: Talking about price in terms of RTF is different than talking about it in terms of “free on board” or FOB. For a discussion about FOB, see part 1 of this blog post.

What’s the relationship between price transparency and profitability?

Investigating price transparency is important, but it’s really only half of the equation that determines whether a farmer is making a profit.

The other half centers around a concept called “cost of production” or COP, which is pretty much what it sounds like: a farmer’s cost to produce a coffee. This cost includes things like fertilizer, labor, membership fees, certification fees, etc. In order for a farmer to break even, RTF has to equal COP. In order for a farmer to make a profit, RTF has to be higher than COP. Right now in the industry, we cannot consistently say that RTF is greater than COP, because no one is collecting and calculating this data on a large scale. Secondary evidence, like farmers leaving coffee to grow other crops, movement to cities, emigration, and younger generations not wanting to take over their family farms all suggests that RTF isn’t higher than COP for many farmers.    

That’s why this is such a big issue from our perspective. If RTF continues to be at or under COP, people are going to stop growing coffee. The business case is simple: Working on this issue within our own supply chains reduces our risk of losing access to high-quality coffee. Working on this topic as an industry means ensuring that we still have coffee to buy and sell decades down the road. There are also a lot of ethical considerations around this topic, which could take up a whole other post.  

Next year, you’ll start to see some changes in our Transparency Report as we’re able to calculate RTF for more of our coffees. As we mentioned in the beginning of this post, the reason we’re even writing about price transparency is because it’s key to our Sourcing Philosophy. That being said, focusing on price alone doesn’t tell the whole story. In a future blog post, we’ll fill in some of those other metrics that build long-term resilient partnerships.