Take a stroll around coffee websites, packaging, and social media, and you’re sure to encounter language like ethical, sustainable, and fair. It sounds great—who doesn’t want to support fair and ethical sourcing?
The problem is, the economics of coffee aren’t so rosy as the buzzwords imply. Underneath the marketing language exists an industry that’s working desperately to solve its greatest challenge.
The coffee market is unbalanced, forcing producers to bear the burdens of outdated pricing models that leave millions in poverty.
Despite years of sustainability-focused initiatives and PR campaigns, the situation has hardly changed. According to an SCA report in 2018, most coffee workers around the world still receive less than a living wage.
Simply put: this isn’t working.
A Tale of Two Coffee Prices: Something Doesn’t Add Up
Research from across the industry has confirmed over and over again that market prices for coffee have not risen alongside the cost of production. When you contrast these two metrics, it’s easy to see how significant a problem this is.
Let’s start with the C Market, the commodity coffee exchange where most coffee in the world is bought and sold. The c-price is the benchmark price for the delivery of green coffee that meets a bare-minimum quality grade. Oversimplified, the c-price is largely based around global supply and demand. The more green coffee produced in a year, the lower the market value and c-price. The less green coffee, the more people are willing to pay to get their hands on it.
Most market activity isn’t trading coffee that exists today, however, but coffee futures. Futures contracts are essentially agreements to purchase a set amount of coffee (37,500 pounds) at a specific price when the contract expires. This mechanic allows end-buyers (like large-scale roasters) to buy future shipments of beans when the price is low if they expect the price to rise in the future when they need those beans. It also allows investors and speculators to buy futures low, then sell high down the road, leading to greater liquidity in the market.
Do you see what’s missing from all of this?
The scandal of the C Market is that the pricing mechanics have no sense for whether a price is sustainable, or how it impacts producer livelihood.
In 2018, Caravela Coffee released a report of their findings of the cost of production across five Latin American countries: Colombia, Ecuador, Nicaragua, Peru, Guatemala, and El Salvador. The study concluded production costs varied widely across geographies, ranging from $1.05/lb in Nicaragua to $1.90/lb in Ecuador. The c-price, however, didn’t come close to covering the cost of production for many of the producers.
When coffee prices are this unsustainably low, someone pays the price.
At the time of the study, the average producer in four of the five countries experienced a negative profit margin ranging from -1.7% (Colombia) to -38.7% (Ecuador). Only Nicaragua would generate a positive profit margin of 11.4%.
The situation is similarly dire in other areas of the world. It’s no surprise then that the average age of coffee farmers globally is increasing as younger workers look for greener pastures.
For an investor or trader to be able to generate a profit trading coffee futures while the producers themselves experience a loss year after year is a clear indication that value distribution in our industry is off by a wide margin, and the inevitable consequence is systemic poverty for millions of producers.
For Most Coffee Farmers, It’s One Challenge After Another
On top of a pricing structure that can’t keep up with regular costs, many farmers face compounding challenges to improving their communities.
- The 2020 Atlantic hurricane season was the most destructive ever recorded. The 17 tropical storms and 13 hurricanes that plagued Central America last year left over half a million people displaced.
- La Roya (coffee leaf rust) disease can decimate an entire year’s crop. From 2012 to 2017 La Roya was responsible for over $3 billion in damages, forcing nearly 2 million farmers off their land.
- Climate change threatens future security. A series of reports by SCA indicate that warming temperatures will make existing farmland unsuitable for coffee production. In Colombia, for example, nearly 30% of the current coffee farmland below 1,000 meters above sea level will have to be transitioned to other crops.
Inflation, market swings, increasing migration, lack of access to lines of credit, the coronavirus pandemic—the deck is stacked against producers in the global south.
Increasing green coffee prices to meet the cost of production, while an improvement for many producers, would still leave most farmers vulnerable to these unexpected environmental and market factors out of their control.
Why Recent Interventions and Certifications Aren’t Working
Despite numerous intervention attempts to make producing coffee an economically sustainable venture in recent years, especially since the market dropped to below $1.00 in 2017, gains from these initiatives have had a relatively small impact on the global industry.
Let’s quickly explore why most coffee producers and workers have not experienced a meaningful rise in income from recent intervention efforts.
When visiting producing communities, the lack of physical infrastructure can feel shocking. This contrast has led to an abundance of project-based interventions, where coffee buyers and NGOs suggest investing in projects they believe will enhance quality of life for farmers.
Building clean water wells or new processing stations are examples of projects.
Unfortunately, project-based interventions, though well-intentioned, are often misaligned with the deeper needs of producers.
- Projects are typically band aid solutions. Not having accessible clean water is a serious issue that millions face, but there’s a deep-rooted cause for why communities haven’t been able to resolve these issues already. The root problem isn’t unclean water, but economic forces that have kept communities from building their own solutions.
- Projects limit producers’ business autonomy. Empowering producers to establish sustainable prices for their coffee where they can resolve their own challenges creates opportunities to enhance business acumen. Projects don’t offer those same opportunities.
- It’s easy to bulldoze over true community needs. Producers struggling to break-even year after year do not always feel capable of speaking up against project ideas that do not truly serve their communities. We’ve seen more than a few projects completed by ambitious buyers that the local community had zero need for (all while the buyer praises the initiative in their marketing efforts).
While there are stories of positive outcomes from project-based initiatives, projects do not offer a large-enough-scale resolution to begin to tackle the coffee pricing crisis.
Opaque supply chains are a barrier to enacting measurable change. You cannot thoughtfully improve what you cannot see or track. But improving traceability isn’t the same as creating a more sustainable industry.
Traceability initiatives are often marketed as the connective tissue between producers and consumers. The unspoken assumption is that, if you show consumers where their coffee comes from, you somehow empower the farmer.
Connecting the dots from farm to cup doesn’t create or ensure any meaningful improvement on the part of the farmer.
It might discourage unethical buying behaviors, because others can find and communicate with those farmers (and create a stir when they discover unethical business practices on the part of the farmer), but it doesn’t actually encourage fairer prices. For all the consumer knows, those farmers could still be paid peanuts.
Direct Trade was an honest attempt for individual buyers to exit the C Market and negotiate contracts directly with farmers. The idea was, if buyers could cut out the middle-people (traders, speculators, wholesaling importers), it would result in a higher percentage of prices going directly to farms.
A handful of coffee companies have done extraordinarily well with the direct trade model, publishing the prices they pay to farmers transparently and demonstrating that they’ve followed through on the direct trade premise.
For most roasters, however, the direct trade model does nothing to guarantee fair prices.
Deals made directly with farmers, if not published transparently, have zero checks and balances. There is no accountability or regulation, so there’s no way to ensure farmers are actually receiving a higher, fairer price.
The phrase direct trade became even more of a buzzword when it began appearing in marketing materials for roasters who met farmers directly, but still primarily sourced beans via importers. Ultimately, direct trade is far too nebulous to resolve our industry’s crisis.
Fairness and Environmental Certifications
Certifications that create elevated price floors based on cost of production have helped a small set of farmers, but there are two key drawbacks.
One, the burden to become certified is primarily on producers. The time and money it takes to pay for audits, make farm adjustments, and achieve certifications is a deal-breaker for many producers who struggle to operate at break-even.
Two, and more importantly, they rarely take into account context-specific living income benchmarks. Meeting the cost of production, therefore, doesn’t mean what many believe it to.
Despite the lower cost of production (and higher profit margin on average), 69% percent of Nicaragua’s smallholder coffee farmers still experienced food insecurity in the 2000s. Achieving a “break-even” price for farms doesn’t guarantee that workers are actually paid a living income.
The mechanisms that certifications use to help farmers reach the cost of production are the price premium and price floor.
Price premiums are differentials ranging from +$0.05 to +$0.30 that buyers pay farmers for their coffee, which is certified to be farmed more sustainably. The problem is, many of these premiums are built on top of the c-price. And when the c-price is as low as it has been for years, even higher premiums do not help producers reach the cost of production, let alone pay a true living income. Price floors are a mechanism to determine a minimum price a buyer can pay for green coffee.
Unfortunately, both premiums and floors are rarely context-specific, which makes them helpful, but not a long-term solution since they are incapable of adapting to the unique needs of different countries and regions.
Experiments with certifications over the last few decades have given us a lot of good work to build on top of in future efforts, but existing certifications alone—as long as they are still based around the c-price—cannot go far enough to provide a living income to producers around the world and resolve the pricing crisis.
We Created a New Green Coffee Pricing Methodology
It’s not enough to aim for the cost of production, because even when farms break-even on absolute costs, there’s still the hidden cost of millions of workers who aren’t yet paid a living income.
In order to reach sustainability, the coffee industry must become fine-tuned to the living income realities of producers at a local level, like education, healthcare, and adequate housing.
That’s why we joined forces with organizations across the coffee sector and hope to set a new industry standard for price discovery and actionable data collection that ensures producers are paid a true living income.
We’re calling the methodology: Verified Living Income.
Using this process, we discovered that we at Bellwether were not paying as fair a price for green coffee as we believed we were. It’s time for that to change, both for us and in the greater coffee industry.