July 6, 2020

Exploring the Farm-gate Price

Producers often don’t see much of the profit generated by the coffee supply chain, making farming a challenging business. Many green buyers have recognized that one way to keep producers growing coffee is to pay them more for their crops. 

While supply chain traceability is one way for consumers and roasters to learn more about their coffee’s origin, this often doesn’t address just how much producers are paid.

Knowing what a producer is paid for their coffee at origin – the farm-gate price – offers buyers a level of transparency that they can rely on to source coffee that’s profitable, ethical, and sustainably produced. 

Despite this, there are some concerns about using the farm-gate price as an accurate measure for what a producer is paid, especially in the specialty coffee sector. iFinca is aware of these concerns, and has addressed them in its blockchain-driven transaction verification platform.

Read on to discover why it can be hard to calculate farm-gate prices, and why increasing access to verified information can improve transparency in the supply chain.

What Is Farm-gate Pricing?

Coffee passes through many hands as it develops from harvested cherry to roasted bean – with different supply chain members adding value at each stage. The amount that the coffee’s producers receive for their crop at the farm is known as its farm-gate price.

While many roasters share pricing information as part of their transparency efforts, most share the coffee’s FOB (Freight-On-Board) price – which is paid to the exporter for coffee that’s ready to ship. This FOB price does include what the farmer is paid, but also the coffee’s milling, warehouse, transport, and export costs. Consumers presented with a high FOB price may assume that the producer takes home all or most of this amount. In reality, they don’t.

Having access to a coffee’s farm-gate price can benefit the entire supply chain. José Velez is Quality Manager at el Programa de Especialización de Café (PEC) a program that helps farmers in Colombia transition to specialty coffee production. He believes that sharing farm-gate prices helps roasters to understand the true value of the coffee they receive.

José says that producers benefit from learning the difference between their coffee’s market value and its farm-gate price: “For producers, it’s good because they can understand that they can sell specialty, they will always want to have added value.” 

This information can also help roasters to market the coffee more effectively. PEC farmer Juan Gabriel Santamaria says: “You can create the understanding that the coffee you are paying a premium for is of very good quality. This generates recognition for the farmer, and even the region or country.”

When everyone involved knows what producers receive for their coffee, pricing transparency increases along the entire coffee supply chain. While traceability helps to verify a coffee’s country of origin, farm, and producer, transparency improves awareness of the coffee’s value as it moves down the supply chain, and how those involved were compensated for their work.

Finding the Farm-gate Price

Finding accurate farm-gate price data, however, is easier said than done. Historically, it has been challenging for both producers and roasters to calculate this figure – for a number of reasons.

Accurately Recording Price Data

A roaster wanting to know the farm-gate price a producer receives for a coffee could ask their importer for this information. However, if the importer doesn’t know this (which is often the case), they’d have to ask the exporter, who’d have to ask the cooperative, and so on. 

Some supply chain members might be unwilling to share this information, and others might be unable to. For example, a mill or cooperative that paid the farm-gate price to the producer might not know how much was paid for each lot of coffee if they’ve already mixed the coffee with other lots.

An inability to access or share data can make it harder for supply chain members to build relationships and trust each other. Independent and secure data recording can help.

Some platforms, like iFinca, are encrypted with blockchain technology, which means that verified information can’t be deleted or changed. Information is also provided on a permission-only basis; this means that different supply chain members will only see the information they’re allowed to view, and competitors can’t view it at all.

Jose Posada, a farmer and professor who works for iFinca, says: “What traditionally happens is that you generate trust in the supply chain by creating relationships with buyers. But this involves a lot of different costs. With iFinca, some of these costs are reduced or eliminated because it’s a third party verifying the data.

“The buyer doesn’t have to necessarily trust that the exporter is paying fair prices. With iFinca, they can simply verify it. Using the traditional system, they can’t.”

Exchange Rate Fluctuations

The amount that a producer is paid will change from one day to the next as exchange rates fluctuate. Most of the world’s coffee is traded as a commodity in US dollars, which is called its C price, and this constantly changes.

At origin, however, producers are paid for their coffee in the local currency. However, all the costs they incur are paid in this currency, too. This means that if this currency becomes worth less as exchange rates change, their profitability changes.

Jose says that with platforms like iFinca, fluctuations are less of an issue: “Once an order is accepted by the farmer and exporter, an exchange rate is fixed, and the farmer will see it in their local currency. If the producer has a 100-kilogram order and they don’t agree with the price, they just cancel it.”

The platform also allows buyers to partner with producers that are best matched to meet their needs. “Imagine you have two exporters,” Jose explains. “One of them has a farm-gate price of US$3 and the other one of US$2.80. However, the export cost for the first is US$1 and US$1.20 for the second. Even though the cost to me is the same, I can benefit one producer more.” This level of transparency allows exporters, producers and buyers to make more informed decisions.

Which Stage is the Coffee Sold At?

A coffee’s farm-gate price will vary depending on whether it's sold as cherry, parchment, or milled. Generally, the more the producer has contributed towards processing, the more costs they will have absorbed, and the higher the price will be.

When a farmer sells coffee that isn’t fully processed (i.e, in green), its cup profile is unknown. If this coffee is cupped after being sold and processed and receives a high cupping score, there are no guarantees that any bonus the exporter receives will be passed on to the producer. 

According to Vladimir Hincapié Vásquez, a freelance agricultural technician based in Colombia: “It’s important that farmers know their costs of production per kilo of their parchment so they can negotiate.

“If we all know how much money is in the coffee supply chain and how much goes to the farm,” Vladimir says, “we would also acquire a higher level of awareness of what we can give back to the initial producer.”

Jose says that platforms like iFinca keep producers informed by providing them with an integrated calculator to determine their coffee’s parchment price. The calculator uses the yield factor – a formula which calculates how many kilos of parchment are needed to produce a 70-kilogram sack of exportable green coffee. 

“This factor is used so the farmer knows the price they will receive per kilo of parchment, whether it’s a washed, honey, or natural coffee.”

Traditionally, access to farm-gate price data has been viewed as something that’s beneficial for the coffee supply chain but challenging to acquire, verify, or share. Thanks to an increased push for transparency in the sector, this is slowly changing – and platforms like iFinca have considered and addressed these challenges.

As more and more people adopt these platforms and show their willingness to share information, buyers’ decisions will be more and more informed by price transparency. Roasters will also benefit in the long term, as producers will be encouraged to keep growing the coffee that roasters sell. And when producers benefit from more sustainable and profitable prices, they can create a better future for their farm, family, and community.

*Some quotes have been translated from Spanish.

Photo credits: Juan Gabriel Santamaria, José Velez, José Posadas

Main Photo credit: Keelia Trively