A perennial topic in the coffee industry is the balance of economic sustainability and market forces.
Every year, questions surrounding value and producer income are explored in endless detail in filled lecture halls at industry events and in earnest white papers; yet every year the chasm between procurement and sustainable value distribution seems to grow wider. The coffee industry over and over again has stated its commitment to valuing farmers, yet routinely fails to meaningfully address income distribution.
This failure has had ramifications. Younger generations are abandoning farms for careers with greater stability and pay. Meanwhile in some coffee-farming communities, food insecurity and lack of other opportunities can drive migration.
According to Cory Gilman, director of strategic initiatives at Heifer International, an INGO that has worked with smallholder farmers for more than 75 years, “The lack of viable livelihoods — stemming from untenable prices — is a systemic problem which traps producing communities in poverty cycles.”
Gilman further stated that while production of Arabica coffee has increased close to 50% since the 1990s, farm income from coffee has correspondingly halved. In Nicaragua, for example, one of every two coffee farmers lives in extreme poverty and up to 70% experience food insecurity, according to Heifer’s research.
As Gilman stated, “Lack of adequate compensation deeply impacts entire rural communities on multiple socio-economic and environmental levels.”
This also leads to environmental ramifications. According to Gilman, when higher production volume is the only marketable option to earn more, tree canopy tends to come down and crop density goes up.
Said Gilman, “Deforestation is an inevitable result of moving away from the kind of agroforestry coffee production typical of smallholders to more intensive cultivation.”
Some buying organizations invest at the farm and mill level to improve quality and efficiency, but those benefits are easily canceled by a retrograde market, and ultimately often benefit individual buyers rather than large groups of producers.
“Of course, these projects are supportive of farmer well-being; in a good market, the combination of technical support services can bring producers to a living income or above,” said Gilman. “But good markets are few and far between, so usually what’s realistic is livelihood improvement rather than truly thriving families. In these cases, projects are the difference between hanging on and falling off an economic cliff. Absolutely the most impactful, sustained results come from a combination of farm improvements and pricing commitments.”
The Coffee Supply Chain is Unbroken
The coffee industry is built upon a set of structural double standards that apply to the scale and the manner of distribution of income while delivering the most economic and marketing benefits to actors in historically consuming countries.
Despite a genuine interest in equitable exchanges with producers, green coffee buyers continue to turn to the commodities market as a price discovery mechanism — i.e. a measure of value. Meanwhile, those same actors who buy and roast coffee are able to set their own prices at will.
In the specialty coffee segment, where dollars per pound of coffee often appear to be significantly higher than the commodities-market rate (loosely referred to as the “C price”), the double standard remains. Even proud and genuinely well-intentioned “direct-trade” coffee companies, who buy based on relationships and cup quality, are susceptible to the double standard, since their purchase prices continue to be measured against the C, no matter how much they may wish to be detached from it.
Yet what international standards define how we price roasted coffee? There are none. In a down market or an up market, the cost of a bag on the shelf is relatively stable. More importantly, its price is determined entirely by the seller.
Here’s another double standard: Imagine delegations of coffee farmers touring roasting facilities and cafes to recommend operational changes for increased productivity, or to study the local living wage requirements, then taking that information to determine what to charge for their own product.
Or, imagine a scenario in which roasters were market-forced to sell coffee at an unsustainably low price, then told by farmers that they need to diversify their income streams to protect themselves against market volatility.
As absurd as that may sound, actors in consuming countries are engaging in these kinds of activities, vestiges of colonial practices. Buyers will go to coffee-growing communities and look for alternative ways through which farmers can survive, even though green coffee is an essential product in every roasting business.
No matter how well-intentioned both sides may be, they are adhering to entirely separate standards.
Additionally, some third-party certification schemes in coffee literally involve double standards. While they may or may not result in increased prices paid to producers, most certifications require producers to meet standards to which buyers or resellers have no genuine equivalent. To put this another way, “claims-based” marketing puts the majority of responsibilities on the farm, while the highest potential reward is actually on the retail shelf.
Of course, the quality of a bag of coffee depends in large part on the work of those who farm and process it. A roasting company contributes to quality, and brands present the end product in a way that supports its price, but the foundation of all this is the coffee itself. Why then are the most important contributors to the value of coffee the ones left at the mercy of a commodities-driven pricing structure?
“The distribution of the final consumer price among actors along the chain is generally not considered something requiring tinkering, based on the orthodox economic assumption that value added = value captured, which has sadly been solidified as common sense in a lot of circles,” said Karl Wienhold, author of Cheap Coffee and PhD candidate at University of Lisbon. “Questioning this would essentially unravel the assumption of social and economic justice under free market capitalism, the notion that the market works and ‘you get what you deserve’ from it.”
Wienhold also noted that these marginalizing effects exist largely along colonial lines.
“It’s time to stop and think about why all of these charitable or ‘impact’ programs that essentially just redistribute income — sometimes in self-serving, performative, and condescending ways, and sometimes not — are even necessary,” said Wienhold. “How do you justify that the initial distribution leaves one side with a surplus that they can choose to share some of, and the other side in need of charity in order to survive?”
None of this is to say that positive development projects in places where coffee is historically grown that involve funding from places where coffee is consumed is a bad thing. Such projects can and do generate huge benefits.
But what if mutual benefit was at the heart of every transaction?
Tying the Beginning Price and End Price Together
What if the price the coffee consumer paid was directly and irrevocably tied to the price the coffee producer was paid? This is the question we are attempting to answer at Torque Coffee.
Instead of starting with the floor of the international green coffee commodity market, we’re starting with the ceiling of the local, highest value retail market. We call the model Proportional Pricing, and it’s remarkably simple: Farmers get the first cut.
Torque simply pre-pays coffee producers 20% of the planned retail price of our roasted coffee. The higher the price at which a coffee sells, the more the coffee producer gets paid. It is a clear and transparent 20% ratio that ensures equilibrium and delivers equity to coffee producers.
Producer-focused pricing certainly isn’t status quo, but it’s not impossible — nor is it one size fits all. There are various ways to model equitable, long-term pricing commitments for key commodities.
Some companies still use market-based contracts but add a “living income” differential. Other approaches completely break from the market, creating standalone sourcing methods that shore up supply chains while facilitating living incomes.
For example, Heifer International has developed a Living Income Pricing methodology to help determine sustainable price points specific to individual supply flows, It has been successfully piloted with importer Sustainable Harvest and green coffee buyer Bellwether.
Proportional Pricing: A New Model To Break the Double Standard
The normal rule of capitalism is to increase the distance between cost and price in order to extract the largest possible value. In the coffee industry, the vast majority of income is collected at the consuming end of the value chain. We contend that this hollowed out structure is unsustainable and that it is not the only profitable way to operate a business.
A proportional pricing structure is not one that pays producers a specific dollar amount, nor does it start with a floor price and add differentials. It is a structure in which the price paid to the producer is tied directly to the market value of the end product.
A distribution of economic value based on the final price flies in the face of old school capitalism, in which unequal exchange is the primary mechanism for the accumulation of wealth.
Our vision is that every specialty coffee roaster who values coffee and wants a more equitable coffee supply chain will adopt mechanisms and models that tear down the coffee industry’s long-running double standards. The current value chain needs breaking.
[Editor’s note: Daily Coffee News does not publish paid content or sponsored content of any kind. Any views or opinions expressed in this piece are those of the author/s and are not necessarily shared by Daily Coffee News or its management. Do you have a story idea for DCN? Share it here.]
A Worker Owner at Equal Exchange and the co-founder and roaster at Torque Coffees, Nanelle Newbom also co-founded Barefoot Coffee Roasters in 2003 before leading coffee service and roasting programs for a range of clients in the foodservice, education and community development fields.
You stated that, “Meanwhile, those same actors who buy and roast coffee are able to set their own prices at will.” This is untrue. The prices for roasted coffee are subject to the laws of supply and demand, and are arrived upon based upon what buyers are willing to pay.
Great article, which addresses much of why, even though I love coffee and roasting it, I am quite ambivalent about becoming a commercial roaster.
I do wonder a little bit about the math involved to come up with the 20% figure. Obviously, for the grower, that’s not pure profit. And for the roaster (assuming they are buying direct), there are plenty of costs involved, including overhead, capital, rent, salaries, insurance, utilities. I just wonder, when it all shakes out, are the growers and roasters “profiting” at the same percentage?
It is our belief that the coffee producers profit margin is not our business unless they choose to share it.
We decided upon 20% because it is a simple even number, it ends up paying the producers 25-35% MORE than they were paid by anyone else for the exact same coffee. And most importantly everyone knows what everyone is getting. It’s equity in action
We agree 20% is a bit crazy, but so are we. We also don’t believe the exact percentage is the key thing. It’s the simple transparency of the equity share that matters.
We know that most roasters will give producers less equity, likely in the 12-15% range, which is still world changing!!! And some amazing roasters will do 35%!!!
We hope to increase our percentage as we grow.
Of course the unseen hand of the market applies pressure to roaster prices. But what international standards tell you what your coffee price is? And are your prices compared directly against a roaster in another country? Aka lowest replacement cost valuation.
The double standard is that green coffee is valued by a global market that sets floor prices and roasted coffee is valued by a local market that sets ceiling prices.
Mucha “filosofia barata” en este artículo. La razón de fondo del tema, es que los tostadores abusan de su capacidad financiera para esquilmar , lo más que se pueda, al cultivador (productor) de cafe. No hay correspondencia relativa entre preciode compra al productor y precio de venta como producto final al consumidor. Nosotros los cultivadores estamos completamente sometidos a las leyes implacables del mercado impuestas por los tostadores. Quienes actúan como dueños absolutos del negocio. ESTAMOS JODIDOS.!!
Nosotras estamos de acuerdo 100%!
por eso creamos precios proporcionales. el productor de café obtiene el 20% del precio de venta al por menor del café tostado.
We sell 340g for $20. Our producers were prepaid 20% of that farm gate (export ready green but before FOB costs) so that’s $4.75 a lb. Not the highest price but 25-30% higher than they were paid for the same coffee. And you know exactly what your equity share is
This truly IS a very complex situation. There is no one-size-fits-all solution. Truth is, many who farm are NOT business people, and lack the specific wisdom to grow high quality AND reap a profit that will keep them producing another year.
A decent sized operation have the capital to send their people to origin and deal directly, often procuring amazing coffees at reasonable prices that stilll take care of the needs of the producers. Long term relationships make things go better for everyone. But not all small to mid sized operations can use this model. being smaller, I am limited to dealing with a select few seasoned importers who deal fairly with the long game in view, with the producers, helping them learn how to produce more and better coffees to increase the value of their work and rewarding them for the extra effort. Some of the importers with which I trade have been very generous with their producers, helping them to succeed and prosper over the decades. Yes, their coffees are more dear, but the quality merits the additional expense.
I have also traded directly with some smaller producers who have a presence here in the US, most often a family member living here. They all work very hard at producing the best possible coffees, and getting them on concrete here. They set the price and I agree to pay it or not buy that one. Most often it is well worth the asking. Some of these have put some phenomenal coffees into my hands on a regular basis.
As a much smaller operation, I have little option other than simply paying the asking price FOB warehouse floor, I have been aware for many years that the C Market price is just background noise, and has very little direct relationship with value or sustainabilituy. I rarely even know what C is….. and don’t much care, I know I do not trade in “commodity” coffees, but rather in a different commodity altogether.
Breaking the “connexion” between commodity grade coffees and what WE trade would certainly be an important step, and should be taken quickly and thoroughly. But the critical bits are not so easy to identify and then far ore difficult, how to implement them,.
quote: The double standard is that green coffee is valued by a global market that sets floor prices and roasted coffee is valued by a local market that sets ceiling prices.
This is not a double standard. It is two different standards that happen to operate at opposite ends of the value chain in coffee. Only the C market price is set by the global market. We all know we are not trading in that commodity, thus are not bound by what “they” decide is the ever-fluctuating price of commodity grade beans.
The producers and importers I’ve been dealing with for near a couple of decades now set their price based on a number of base factors. Some varieties produce small yields, take extra time and/or care, are fery “fussy” or “sensitive”, Gesha will always come far more dear than catuai or tipica. And I’ve had some plain old borbón coffees that are far better than some geshas, and at a fraction of the price, both set by the producer C market not in view.
And yes, the retail price for a 12 ounce high brrier valved bag full of great coffee will be different in San Francisco than the identical coffee on offer in San Antonio Texas or South Haven Michigan, and also depend on WHO is offering it. Should the farm gate price vary in consideration of who will roast package and retail it and into what market? Each retailer will be operating on a different value chain thus making true equity for every sale a chimera. One might be roasting on an early Ambex put into service fifteen years ago at a cost all in of $15K, while the one two counties over and in another state with very different tax structure, labour costs, and real estate prices are struggling to pay off their new Loring and thus must charge more. Should the same grower selling to the chap running the antique Ambex get less “reward” for the same coffee shipped to the folks with the Loring and the different overall finncial structure? Equity is NOT a valid goal.
Each entity must work with the pieces of their own value chain, and that will include all the variables in each case. Same with the producers.
Some importers I know and deal with have, since their beginnings, detarmined to help their producers grow and process better coffees….. for which happily pay considerably more, knowing they will, in turn, charge ME more, but for a far superior coffee, which then lets ME charge more because the flavour in the cup in front of my customer is so far superior to what it was before the grower made the suggested improvements.. and the entire chain moves up a few notches on the price pole, including what my retail customer now has to pay ME for what I had accross the counter.
You have arrived t the 20% figure, it seems to work well within the value chain of your operation. Well done. But let very many of the signficant links in that chain change, from whatever cause, and the 20% will no longer work so well. That number may have to change. Let YOUR numbers determine how much change is needed for all concerned to survive.
Out of genuine curiosity, I would love anyone’s thoughts regarding how well this approach addresses power dynamics and the very real ‘vestiges of colonial practices’ in the coffee industry. I am really trying to think through all the moving pieces and possible impacts of this approach, but I am left with some unanswered concerns.
It seems like this ‘proportional pricing’ keeps producers as price takers, not price makers. Specifically, within this proportional pricing system, producers seem to remain in an unchanged position of lower relative power and authority in setting the price of their product. The power dynamic where the roaster/coffee buyer decides what to pay the producer remains unchanged/unchallenged. I can see the value in the upfront transparency and the possible increased farmer income, but without addressing the unequal positions of power, is this enough?
I am always stoked to see new ways of thinking about coffee buying to make things better, so I really appreciate this perspective and conversation! But things are complex, and I think it is important to think critically about any new possible ‘solutions’ if we want to work towards a better industry. Any and all thoughts are much appreciated!