Organised by the International Coffee Organisation (ICO) on 6 June to discuss the challenges of the coffee value chain during historically low coffee prices. I was invited by Gerardo Patacconi, Director of Operations. I know some of my readers are wondering is there such an organisation, yes there is and….
The ICO is the main intergovernmental organization for coffee, bringing together exporting and importing Governments to tackle the challenges facing the world coffee sector through international cooperation. Its Member Governments represent 98% of world coffee production and 67% of world consumption.
The ICO sounds like the kind of place that for me, as a development economist who loves coffee would like to work in and yes I confess that it is one of the places I would love to work in, especially located in my fave coffee capital in the World, London. Anyway I digress.
More on the jargon – the SDG stands for “sustainable development goals” and are sometimes known as the Global Goals. In any case they were initiated through the United Nation (UN) and are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity.
So, this Symposium was organised together with the European Coffee Federation and hosted by the European Commission (EC) bringing together coffee sector stakeholders (buyers, farmers, academia, civil society, partners) and is part of ICOs sector wide consultation that will lead hopefully to a roadmap with concrete actions to address the coffee price crisis and volatility, which has resulted in affecting coffee farmers livelihoods and which will eventually, if left unchecked, affect the sustainability of the coffee industry.
In summary, coffee prices are very low at the moment, whereby you can buy a pound (.453kg) bag of coffee greens for about US$1 at the world commodity price. Price varies with quality and with type (robusta/arabica), but a few years back it was double that (in 2010 it was three times this around US$3 per pound), which means that coffee farmers have seen a 50% drop in their income depending on other factors. Initially, you may be thinking like I did, hold on; “my specialty coffee roaster sells a kilo for about US$30 but only pays US$1 or up to US$3, so the roaster is king”. In fact, in a recent Financial Times article it was calculated that for each US$3 (UKGBP2.50) for a cappuccino, the roaster got 10p and the roaster 1p – yikes.
This seems very unfair and unsustainable, but there are other factors and as I mentioned on my linkedIn article on “coffee and economics”;
Perhaps the big players should consider diverting some of the profits to;
- coffee research into new varieties to address climate change
- investment for the local communities such as centralised washing stations and hence clean water, like Stumptown did – see “A Film about Coffee”
- investment in transport access,
- promotion of the crop in the local communities especially with the youth, which are running away from coffee farming. Use social media,etc.
- educating the communities in life skills, even entrepreneurial skills.
On point (i) and (ii), Starbucks highlighted that they work with 450,000 coffee farmers and have supported research to create 400 varietals of which 5 have been released on farm trials.
On the point (v) and in general, I really believe, that the more you give the more you will get back. It runs through some of the points I have raised under my #honestmanagement series, if you show respect to your employees (and in this case we can say coffee farmers), you will foster loyalty and they will go the extra mile to grow the best coffee. Whoever in the coffee chain has the most and in any industry they will know who they are, should really think about how the coffee industry can be sustainable for future generations – after all there is no doubt that the demand for coffee is constantly growing, so there will always be a market for it.
In summary, for coffee lovers we want everyone to get a fair deal for the best of our planet. We know that low coffee prices “never” translate to lower prices for our daily cappuccinos or flat whites, pour overs, etc, but at least those at the source, the farmers should benefit somehow, if not we will all loose out.
In short it was a very interring symposium for me, looking at the other side – away from my traditional view (cafes and quality) to the upstream side, where it all starts from the farm. That’s my take for now, but I’m working on this as a side project, so I’m welcome to any more ideas.
Sources
https://www.linkedin.com/pulse/coffee-economics-lameen-abdul-malik/?published=t
From Coffee With Love 
I read that ft.com article and wrote to ft.com accusing them of clumsy journalism. This is what i wrote:
Dear FT.com
I would like to bring to the attention of the authors of the above article which appeared in the ft.com on the 4th June.
The first graphic portrays roasters earning an 80% margin on roasted coffee. Whilst this may be the case with the dominant roasters this is not the case for the small but growing band of roasters of which I own one. This article has upset a lot of roasters as it is very very misleading.
The dominant roasters as you show in another graphic dominate just 29.6% of the market, so you should give some attention to what I am about to write.
Dominant roasters have significant investment behind them. To name one German roaster it has three plants in Europe: 2 in Germany both capable of 40m KG of roasted coffee p.a. and one in Poland capable of 33m KG p.a. The cost per tonne of investment is approx EUR4,000 per tonne. The sums of money are enormous, one robotic arm used to lift units from just one production line to pack onto a pallet costs EUR250,000 but it works 24/365. These roasters bring in green bean by the container loads of 18,000KG and production roast in typically a 160KG roaster every 12 minutes. The green bean will be low grade robusta or commercial arabica which indeed costs very little and often supports your conjecture that the farmer receives 1p in every cup. These roasters achieve a gross margin of 80% only because of scale and use that margin to cover 1. the depreciation of the equipment AND 2. cover the cost of the enormous marketing budgets supporting the various brands that have in the horeca and household shopping channels.
The rest of the 70.4% is most characterised by many smaller roasters. Who will have different cost structures depending on what quality of coffee they roast. At the higher end of the market, and recently the fastest growing, you have the local artisan roaster who is more focused on specialty coffee. This roaster will typically pay above GBP5 per KG and anything up to GBP80 for Geisha………….with many microlots priced around EUR8-14 per KG. These roasters require very little investment, they require an enormous amount of work as almost everything is manual (no budgets for robots), they have very poor distribution power, weak brands and certainly no marketing budget. In such cases the gross margin on the green bean is approx 40-50%. A very different story.
Furthermore approx 15% of the weight of the green bean will be lost through humidity loss in the bean so you must adjust the gross margin for that.
Finally the ICE price quoted is only given for green bean that can be delivered on contract in containers. So this price is not a lead indicator for the higher quality coffees I mentioned above.
Your article and the graphic portraying a gross margin of 80% was too simplistic and has upset A LOT of roasters. I think you should set the record straight and highlight this margin only applies to the dominant roasters.
Thanks Nick for your enlightening article. I learnt a lot and that’s why I tried to be cautious on those margins.
Good