by Michael Sheridan of CRS Coffeelands Blog
This is the question David Griswold, ex-President of the SCAA and co-founder of the innovative coffee importer Sustainable Harvest, asked a panel of coffee luminaries at last month’s Let’s Talk Coffee event in El Salvador: Is the coffee business broken?
The answer was a resounding yes.
Much of the conversation in specialty coffee over the past year has focused on the coffee leaf rust epidemic in Central America. And the Let’s Talk Coffee event during which David posed this question was followed by a separate event devoted exclusively to the search for solutions to the current CLR crisis. But leaf rust was not the issue that was weighing heaviest on the minds of the experts he had assembled; they were more concerned about coffee prices.
(more: Farmers Struggle as Coffee Prices Continue Dramatic Downward Slide, ICO Says)
They are low — lower than costs of production — and they are falling. They are volatile, and the prices roasters pay for their coffee bears no relation to what it costs farmers to grow it. Additionally, the primary mechanism for determining prices, the NY C exchange, is increasingly influenced by factors not directly related to the underlying fundamentals of coffee supply and demand.
The expressions of concern for the coffee business were candid.
Luis Fernando Samper, Communications Director for the powerful Colombian Coffee Growers Federation, said Colombia can’t make it in coffee in a $1.04 market. He should know: Colombia’s government has responded to not one but two national strikes led by coffee growers, with a march on Bogota scheduled for 3 December, and the Federation is currently paying growers subsidies to keep them afloat in this miserable market.
(more: Hurt by Low Prices, Brazilian Co-ops Threaten Government with Protests)
Chad Trewick, who spent many years buying coffee for one of the largest specialty coffee retailers in the United States, confirmed that farmers aren’t breaking even with today’s prices. He wondered aloud how many of us would continue to work in a business in which our earnings were so often negative, and were determined by processes as inscrutable as the movements of the futures exchange are to the average coffee farmer.
Gilbert Gitali of KZ NOIR in Rwanda was asked what single message he would convey to consumers if he could communicate with them directly. His answer: You need to pay more for your coffee.
Oscar Schaps, a fourth-generation coffee grower and risk guru from Hencorp, said there is simply too much coffee out there, and that farmers who can’t achieve high levels of production efficiency or cup quality don’t have a future in coffee.
The coffee business, in other words, is broken. And the biggest problem in the coffee market may be the market itself. Or at least, the way it goes about determining what prices farmers will earn for their coffee.
But price is only one of the ills ailing the coffee business. There is a long list of other challenges at origin that we know about — limited farmer organization for the market, low productivity, low quality, rising input costs, limited access to agronomic and financial services, limited investment in research, diseases like CLR, gradual loss of coffee suitability due to climate change, seasonal hunger in coffee communities, etc. And there are, most likely, other challenges at origin we don’t yet fully comprehend.
The coffee business can be fixed. But before we start talking treatments and cures, we would be well-advised to spend a bit more time agreeing on a diagnosis.
Michael Sheridan
Michael Sheridan is the Director of Sourcing and Shared Value at Intelligentsia Coffee. He also orchestrates the Extraordinary Coffee Workshop (ECW), an annual supply chain summit that convenes Intelligentsia’s Direct Trade partners from around the world. Prior to joining Intelligentsia, Sheridan led coffee programming for the international development agency CRS for more than a decade. He is a member of the SCA’s Sustainability Center Advisory Council, and has served as a volunteer advisor to the industry on sustainability issues since 2012.
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people who invest in quality have nothing to worry about there are farmers who are THRIVING RIGHT NOW because they have a quality product and everyone else is just flooding the market with junk just like our modern economy and you wonder why its broke? geez is the whole world this stupid and brainwashed?????? you cant get something for nothing
Hmm. No, you can’t get something for nothing. I agree with you there. But I couldn’t disagree more with the blanket statement that “people who invest in quality have nothing to worry about there are farmers who are THRIVING RIGHT NOW because they have a quality product.” After 10 years of working closely with smallholders at origin I can assure you that cup quality is no guarantee a farmer will thrive. Despite the extraordinary advances in sourcing and traceability to the farm level, there are still LOADS of farmers out there producing AMAZING coffees that are not finding their way to buyers who are willing to pay for what they are worth. We found growers producing coffees scoring 88 and 89 and even 90 points in Colombia who had never earned a penny in quality premiums. And even the growers who do aren’t necessarily thriving. They may place a high-value microlot one year and not the next. They may have only a few acres to their name. And a family emergency that obligates them to sell household assets or maybe a depulper. If the coffee market is broken, it won’t get fixed until we get deeper understanding of what is really going on in the coffeelands.
It is my understanding that the farmers that get above fair price for their coffee are doing fine. I am not talking ‘fair trade’ labels; I am talking about importers or traders that will pay what the coffee is worth and not mark it up 500% to sell to a roaster like myself. Of course the coffee has to be top grade, with little to no defects to guarantee a shot at getting top price. I believe some large buyers, brokers and unscrupulous traders are buying decent coffee for low prices because they can. There is also a lot of bad coffee out there, being sold for less $ per pound than good grade coffee for obvious reasons and being brewed in shops charging top dollar for it. *$ comes to mind. This has become what the public perceives as specialty coffee, unfortunately. There is an aspect that breaks the coffee business as much as at the farm level.
Tony:
Thanks for your comment here and your commitment to buy the good stuff and pay top dollar for it.
To follow up on a few of your points, I am curious what you consider to be a “fair price.” I struggle mightily with this. A grower participating in our Borderlands project in Nariño sold a 90-point coffee last year for $3 farmgate at a time when the local market rate was closer to 90 cents. Was that a fair price? If he had sold that coffee in 2011, when the NY C was cresting $3, it might have sold for $5 FOB or more. Would that have been a fair price?
And I wonder how many roasters out there who would say they are paying fair prices have any idea how much of their FOB price reaches the farmer. I would hazard a guess that there are very few, indeed. If a roaster doesn’t know what the growers in its supply chain are earning, it doesn’t have a sense of how secure that source of coffee is.
Michael
Direct trade would alleviate that and with the advent of technology if the SCAA was serious about investing in the future they would make a website for each farm so that they could communicate directly with their potential customers and eliminate the kabals from the industry
there are a myriad of ways to fix this if your practical, but just like the rest of the world, theres too much power behind the scenes making sure things ARE JUST THE WAY THEY ARE all markets are a manipulation and the sooner you realize that the sooner you can do real things instead of being stuck in the status quo. no better time then now
We at Mukilteo Coffee Roasters, have made an agreement with our farmers, to pay what the coffee is worth, to assure that they can keep producing quality coffee, and ensuring them a living as well as ours.
Gary:
This is a great approach and one taken by lots of companies that have real dialogue with their supply chain partners and whose business models are compatible with big price differentials, whether based on a shared idea of a fair price, certs, quality, etc. As other comments here suggest, those differentials can help farmers make the economics work even when the overall market environment is less than favorable. The problem in my mind for the majority of growers is that these direct trading relationships and differential-based models are still just a small part of the overall market. The commodity exchanges can occasionally produce prices that deliver profits to growers, like the $3 NY C in 2011, but they are just as likely to generate prices well below the cost of production, like the $1 NY C in 2013. There are plenty of businesses out there that are constrained in their pricing by the market–if the C market is at $1, buyers can’t justify to shareholders paying twice that amount across-the-board even if that is what it might take for growers to turn a modest profit. So while your commitment “to pay what the coffee is worth” to Muktileo is commendable, a systemic response requires other benchmarks beyond the commodity exchanges so buyers for companies whose models are different from Muktileo can start the conversation somewhere else–instead of beginning the differential conversation at a $1.04 NY C price, perhaps they can begin at the official cost-of-production price of say $1.65.
Great post and even more interesting is the conversation that developed in the comments section. Michael, it’s a year now since this post was published and I know that there is a ‘cost to produce vs price’ seminar coming up at SCAA this year and I was wondering if you’ve got any more insights into this topic that you would like to share here?
My own input is that origins are so different and thus the idea of who ‘the producer’ is varies. In Burundi ‘the producer’ is the washing station, not the coffee farmer (for myriad reasons). Yet the washing station cannot produce without the coffee farmer so there is a co-dependence that needs to be supported in a sustainable way. Secondly, Burundi is a tiny origin and from my experience and current research growers and washing stations need to almost put all of their effort into developing trading partners who pay according to quality and not only the NY C as there is simply no way for farmers and washing stations to win selling simply on the C – Burundi is just too small to be competitive.