May 6, 2020

Coffee Pricing: Why We Need to Know Farmgate And Not Just FOB

April 9, 2020 - Perfect Daily Grind: Written by James Harper.

What did the farmer who grew your coffee get paid?

Finding an answer to this simple question is challenging. So challenging, in fact, that most cafés and specialty coffee roasters don’t know the answer.

This is a major concern for them and coffee drinkers, because everyone wants the higher prices they pay to reach farmers. But the uncomfortable reality is that there are often few concrete guarantees that this will happen. Worse, there is the real possibility that specialty coffee purchased at what appears to be a financially sustainable price is actually below a farmer’s cost of production.

Unfortunately, today’s industry-standard for transparency, the Freight-On-Board (FOB) price, is partly to blame. It’s time we turned to farmgate pricing instead as a measure of how ethical a coffee really is.

Josue Gomez (left), the Administrator of Finca La Loma in Huila, Colombia, alongside Eduardo Godoy (right), a coffee picker. Credit: Rodrigo Sanchez

What Is FOB Pricing & Why Does The Industry Use It?

A large number of specialty coffee roasters put their transparency principles into practice by publishing the prices they have easy access to. Make no mistake: the fact that so many roasters are doing this is something to celebrate.

However, this is nearly always the price paid to the coffee exporter, also known as the Freight-On-Board (FOB) price. This is the price paid for a container full of coffee that is ready to ship. It includes what the farmer was paid but also the in-country milling, warehousing, and transportation costs as well as intermediaries’ fees and export fees

As a measure of prices, the FOB has significant benefits. For those who can access it, it’s usually accurate.

“Most of the exporters we work with are very transparent and will let us know the breakdown of costs within that country,” says Bradley Steenkamp, Co-owner, Head of Coffee, and licensed Q-Grader at Horsham Coffee Roaster.

Second, it is useful when contrasting supply chain costs at origin versus the costs in consuming countries, as well as comparing supply chains against one another. “FOB is a great benchmark and, generally speaking, gives a very good idea about the amount of money returning to the origin country,” Bradley tells me.

Yet it has one very large limitation. “The risk with only being aware of the FOB price is that roasters and consumers are not fully aware of how much of that money is actually paid to the producer,” says Bradley.

Producer Jairo Taborda Berrio weighs coffee at Finca La Candela in Colombia alongside farm owner Alberto Lotero. Credit: Yolima Taborda Paisa Coffee

The Problem With FOB Pricing

Unfortunately, a high FOB price can mask the fact that coffee farmers are receiving unsustainable prices.

Let’s unpack a typical FOB price. The 2019 Specialty Coffee Transaction Guide suggests US $1.85/lb was the average price paid for an 82–83.9 point South American green coffee purchased in a lot ranging in size from 10,001 to 40,000 pounds. On face value, this appears a good deal for a farmer when you consider the C price, the average commodity price for coffee on the New York Stock Exchange, was US $1.02/lb in 2019.

The problem is that “there’s a major discrepancy between that [FOB] price and what the farmers are actually paid,” explains Justin Dena, COO of iFinca, a mobile app which uses blockchain to verify coffee prices from the farmgate onwards and then share them with everyone who buys that coffee, from the exporter to the roaster, café owner, and even consumer. Farmgate, FOB, and quality bonuses are all made transparent.

Traditionally, as little as 60% of the FOB price can arrive in the farmer’s hands. The remaining 40% will be for the costs of in-country transportation, warehousing, wet milling (if applicable), dry milling, and other in-country non-farm expenses.

That suggests, of the US $1.85/lb a roaster paid their exporter, that the farmer may have only received US $1.11/lb for what is by definition a specialty coffee, with superior coffee flavors and typically increased farming costs.

With production costs averaging at least US $1.20/lb for many Latin American coffee farmers, if not more, this US $1.85/lb FOB price becomes problematic. Roasters and consumers may be led to believe the premiums they’re paying are helping the farmer stay in business, when in reality, the FOB price is masking the fact the farmer lost money when roasters bought their specialty coffee.

The good news is that the calculations change dramatically if a farmer takes home 80% of the FOB price. At US $1.48/lb green, a farmer might be covering production costs and making a premium. If their production costs are US $1.20/lb, they’ll see per-pound profits of 28¢.

How can a roaster know whether the farmer received 60% or 80% of the FOB price? They could investigate the costs of every intermediary between the farmer and the exporter. An easier method would be to simply know the price paid to the farmer.

Claudia Samboni, Dayana Chimonja, Rodrigo Sanchez, and Victor Lopez work on a coffee farm in Huila, Colombia. Credit: Rodrigo Sanchez

What Is Farmgate Pricing & Why Is It More Transparent?

“You deliver your coffee [to the mill], they pay you the daily market price, and that’s it,” says Rodrigo Sanchez Valencia, a fourth-generation Colombian coffee farmer from Huila whose coffee is available with farmgate-verified prices via iFinca.

But months later, “many times, you realize that your coffee is being marketed as a super-exceptional coffee, with your name in the international markets,” he adds. (Translated from Spanish.)

This daily price that Rodrigo often receives is the farmgate price – the price paid directly to the farmer, not to traders and mills.

It’s not that the mills are necessarily trying to underpay Rodrigo and other farmers. Sometimes, the discrepancy occurs simply because farmers deliver cherry or parchment to the mills in bulk. It’s not yet clear if the coffee will cup well after it’s been processed.

“Now fast forward three months down the line, that coffee has been cupped and scored really well and it fetches a really good price on the market based on its high quality,” Justin tells me.

The mill or exporter could send a quality bonus back to the producer. Yet with limited traceability, it’s hard to see if this actually happens. “Normally, what would happen is that whoever was the final seller of that product, maybe the exporter, would keep all that… bonus money,” Justin says.

This can be frustrating for roasters who want to run an ethical business and have paid a high FOB price, expecting the farmer to receive significantly more than the lower end of the prices offered by mills.

Farmgate pricing removes all this confusion and makes the coffee supply chain truly transparent.

Yet until the invention of innovative platforms such as the iFinca mobile app which uses Coffeechain – as blockchain verification platform, it was often impossible to access this data, trust that it was correct, or link it up with quality bonuses paid later in the season.

Christian Muños, the Processing Manager of Finca Monteblanco, Huila, Colombia, pours coffee cherries onto a covered drying patio. Photo credit: Rodrigo Sanchez

Why Farmgate Pricing Is Traditionally Difficult to Find Out

Justin tells me about a cooperative he visited in rural Haiti, where they had “a very accurate ledger system of each farmer’s name, how much cherry they brought to the cooperative, and how much was paid to [each] farmer” – i.e. farmgate prices.

If a roaster wanted to know these, in theory, they could ask their importer. But Justin tells me that the importer would often be unable to access that information. “Me, a roaster buying that product… You know, I can ask the importer, but then the importer has to ask the exporter or the exporter asks… the big cooperative, the big cooperative has to ask the small cooperative,” he says.

Because the coffee has changed hands so many times, a simple information request can quickly become a burdensome trail of emails that tread on commercial sensitivities.

Horsham Coffee Roaster Co-owner Bradley seconds this sentiment. “In our experience, we’ve found that most coffee importers simply aren’t able to get hold of this data. While some don’t want to share financials, even those that do aren’t always able to get hold of farmgate prices as the data can be difficult to work out in some countries.”

And even if you go back to the local cooperative or mill that paid the farmgate prices, it’s hard to pinpoint your specific lot of coffee if “all the coffee goes into a community lot and it’s all mixed together,” as Justin tells me. Outside of direct trading arrangements with coffee farms, coffee beans are often combined at each stage of their journey to the roaster.

Miguel Medina picks the first ripe coffee cherries to appear on Finca Monteblanco, Huila Colombia. Credit: Rodrigo Sanchez

Why Even Direct Traders Might Struggle to Tell You Farmgate

Some roasters source coffee directly from a farmer – but obtaining accurate farmgate prices can still be difficult for them, even though they’re the ones paying it.

Bradley purchases his green beans directly from farms in Rwanda, Kenya, Costa Rica, and Brazil, as well as from importers. He also makes purchases through the iFinca app that provides verified farmgate prices per pound in US dollars.

He tells me that even when buying directly, he still relies on the FOB price when calculating farmgate. “It can still be challenging. We have to work out the data usually by working backwards to remove the export costs from the FOB pricing.”

This is a product of the fact that when farmers deliver coffee to their local mills, they deliver their coffee in bulk in multiple rounds as the harvest season unfolds. In these sacks of tightly compressed coffee beans, some exceptional, individual coffee beans will be surrounded by their inferior cousins. During the milling process, the beans are re-grouped according to quality.

Each consignment of coffee from the farmers to the mill will also be priced differently due to the fluctuations of the market rate, meaning that different farmgate prices will be paid depending on the day. This makes knowing the farmgate price an even greater challenge since it’s unclear which of the many sacks of unprocessed coffees their exceptional micro lot has been sourced from.

Once a roaster knows what the farmer was paid, conversions are then necessary. They need to navigate local units of weight, such as the Colombian carga compared to a Salvadoran quintale, not to mention the weight and processing differences between consigning parchment versus cherries.

Coffee being weighed at a Finca a Candela in Colombia. Credit: Yolima Taborda Paisa Coffee

Farmgate has been discussed by traders for a long time now, but often dismissed as impossible to find out. Yet times are changing – and for the better. Farmgate offers a true insight into whether coffee prices are sustainable, and as an industry, we need to hold ourselves to this high standard.

As Bradley says, “We’ve worked very hard to source as many coffees as possible that offer true transparency and traceability. Knowing the farmgate price means we can communicate this with our customers and we find that most customers love the transparency.”

Feature photo: Christian Muños, the Processing Manager at Finca Monteblanco, Huila, Colombia, carries cherries to the covered drying patio. Feature photo credit: Rodrigo Sanchez