Words by Freda Yuan
Head of Coffee, Origin Coffee
For the past decade, the specialty coffee industry has been advocating paying higher coffee price that is above coffee commodity market (C market) to the producers. C market has been a benchmark for certain coffee producing countries. There is no guarantee for the quality of the coffee. The producers’ income fluctuates based on the C market movement. The price swings daily by speculators and it’s like gambling in every harvest. In good days, they make good money. In the bad days, the coffee they have sold cannot even cover the production cost. It is an extremely volatile system. I don’t understand how people can mentally tackle this. It took a while for our industry to really push through this advocation. Getting quality coffee and paying higher than C market price is now a no brainer for most of the specialty coffee industry.
At Origin Coffee, we either work with coffee producers directly or trusted local partners. The coffee quality score and the pricing are agreed for both parties upon each harvest. The prices don't fluctuate and the partnerships flourish through these practices. For example, in Nicaragua, we have been working with Mierisch family for over a decade. The relationship and the support from both sides have been transform to more like friends and family. In El Salvador, we work with Carlos Pola and Fernando Lima for more than five years. Each year, we commit to similar quantity or more, even though the flavours of each lot might vary due to the climate effect each crop.
Things work slightly different in other countries, due to the difference of supply chain structure. We work with trusted exporter locally in Colombia, Brazil, Peru, and East Africa to help us source the coffee from local producers, which mostly are small farm holders. The local exporters providing services such as quality control, transport from rural area to the warehouse or milling facilities, and customs…etc. Each stop of coffee means extra layer of fees that reflect on the prices. Even though each country works in a different set up, the prices have always been paid above coffee commodity market and Fairtrade pricing.
In our recent published transparency reports, there are two key data that we feel we should explain a little bit more: Farmgate price FOB price. These words are commonly used in Specialty coffee community but might be difficult to understand. It might mean nothing to you, but hopefully through this article, it might give you some insight.
Farmgate price means the price for the sale of farm produce direct from the producer. It is the market value of the coffee minus transport cost and admin cost.
After intensive discussion and research, we understand that farmgate price is a very confusing term in different countries. It is very straight forward in most of the Central and South America. The coffee producers are the one who grow the coffee and process their own coffee.
However, the farmgate price is not as straight forward in East Africa as Central and South America. Most of the coffee farmers grow coffee in their back yard with around 200 coffee trees in property, which couldn’t make up enough volume themselves. The washing station and local cooperative play a big part in East African coffee industry. The coffee farmers sell their coff cherries to the purchase the cherries from the coffee farmers and then process the coffee on behalf of the farmers. Each lot of coffee might contribute by 50 – 100 coffee farmers. In this context, the coffee producers are the washing stations.
As you might notice there are different definitions of “coffee producers” in different countries. To make it more accessible and relevant to our report, we have decided to standardise our term from “farmgate price” to “price to producer.”
The general term for coffee buying when confirming the price is called FOB “Free on Board.” This means free responsibility from the seller once the coffee is on the ship. The seller in this term may be exporter or producer with exporting licences. It is a very comment word as a benchmark for any international trade. The united currency for calculating FOB is USD and the unit is in lbs. (1kg = 2.24lbs).
Before coffee loaded on the ship, it went through many different layers, which created extra costs. Depending on the differences of coffee producing countries, after the coffee was picked and processed, then eventually coffee was ready to leave the farm to be sold. Once the coffee left the farm, there is a transport cost to deliver to the local agency. The agency sells the coffee to the local exporter, there might be transport cost involved as well as service charge. The exporter storage the coffee in the warehouse, go through dry mill to remove the parchment (extra fee) and then another transport to the port. As you might already know, the coffee supply chain can be longer and can be short depending on the regions. In El Salvador, we purchased directly from producers so there are no third parties in between. However, in Colombia or Ethiopia, the coffee might have to go through 4 to 5 layers until it is loaded on the ship.
The Fairtrade prices are based on FOB terms. The organisation offers set price to purchase coffee from the producers. This rule applied to every coffee producing countries. The Fairtrade price is always at $1.40/lb FOB. It is very stable in price and the producers are guaranteed to make calculable and predictable income as long as they produce enough volume. There is no regulation for producers to produce certain qualities of coffee as long as there is volume. However, we don’t really know what are the actual prices that are been paid to the producers. Furthermore, how fair is truly fair when the coffee producing countries share different economical scales, coffee production structures, layers of supply chains and the cultures?
We have been fully transparent about our operation, even before the B Corp certification was granted. It is a very important culture that we carry through our business. With that, we apply the essence to our sourcing program and everything we do. We published the transparency data report last year as a starting point or benchmark for us in future purchases. We literally stripped down the entire supply chain and tried to get the bottom of it. The more we do, the more we realise there are plenty challenges lying ahead of us.
The purpose of sharing this information is to evaluate our own supply chain system, which might work brilliantly in certain countries, some might not. If it doesn’t work, then how could we make it better? Not just our staff are treating properly, we hope but also to take care of our partner, coffee producers and farmers. We try to make a change from bottom of the chain and make for good. Disclosing the “Price to producer” and “FOB price” and paying the right price is our commitment to the coffee producers to ensure our supply chain is economically and socially sustainable.