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Editor’s Note: This article is part of a series originally published in Tea & Coffee Trade Journal. It is reprinted here with permission. You may download the pdf here, graciously provided by T&CTJ.

Reflections on the Purpose and the Path Forward for Coffee Auctions

In part one of this series, we looked at the history of auctioning coffee throughout the world. Part two focused on modern iterations of coffee auctions. In the final installment, we ask what benefits does the coffee industry gain from auctions, especially microlot specialty auctions.

By Chris Kornman

 

This is a remarkable moment in history, one in which microlots can gather astronomical prices and as well-established, long-running, large-scale auctions seek to adapt to the modern coffee buying landscape.

Previous installments in this series have examined the history and scope of the coffee auction platform, and now there seems no better time to step back and ask ourselves what we’re doing here. What benefit is the industry as a whole reaping from auctions, particularly microlot specialty auctions?

There are, in my estimation, three broad categories that have been used to justify auctioning coffee: discovery of price, quality/market preference, and relationships. Let’s dig into each of these a little and appraise their success and value.

Price Discovery

With regard to price discovery, the kinds of prices fetched by top bids in microlot auctions are clearly not scalable. Geoff Watts admits, for example, “there is a correlation between [small] lot size and [high] price,” and that the “windfall profit for the farmer is only a small portion of that producer’s harvest for the year.” But he also stressed his belief that “every dollar earned for coffee is a small victory for all of coffee in small ways.”

For the average smallholder, producing around 2,000 lbs of green coffee annually; a great price for a few bags can be a one-time boost to income, but reliance on a purchasing model that requires coffee be held back until late in a season and then hoping for good returns at an unpredictable auction seems unreasonable.

Microlot auctions appear well equipped to reveal the upper limits the market can handle for coffees of small quantity and unusual quality, but have yet to prove an effect by moving the needle of the larger global coffee economy. After all, the buyer bidding $20/lb at a microlot auction is, in many cases, also the buyer of bulk blenders bidding fifty cents over the C market, (which spent the majority of 2018 under $1.35 and has hovered close to $1.00 since September 2018).

Larger government auctions in Tanzania and Kenya manage to elevate the price of coffee to the buyer, but maintain the status quo while clipping the wings of direct trade and siphoning money from farmers to marketing agents and bureaucracy. A noteworthy study by Harvard Business school revealed a decline in farmer payouts: in 1975 a Kenyan smallholder would take home an average of 30% of the NCE auction price, by 2000 that figure was 10%.  In 2014, Nyeri county’s best paying cooperative dealt out a pathetic Sh75 per kg to its members, roughly $0.34 per pound.

So-called Second Windows in government auctions allowing direct trade through select channels, like that in Kenya, have resulted in lower average prices at auction over the last decade. This is because the top 5-15% of coffees trading outside the government’s control. Many specialty importers and roasters, my employer Royal Coffee included, prefer to deal directly with outfits like Kenya Coffee Cooperative Exporters, a farmer-owned group supporting a network of cooperatives, rather than navigating the auction.

Recent history at these state-run auctions show a mix of reactionary policies. Most recently, Tanzania has completely outlawed direct exports, while Ethiopia has liberalized and allowed them. The ever-changing nature of these entities creates complications for both buyers and sellers and can obscure the discovery of truly fair and traceable costs.

Quality Discovery

It could be argued that if a primary purpose of auctions is quality discovery, the results have been mixed. Inasmuch as Second Windows reduce the highest prices paid for auction coffees, so too do they reduce the pool of available exceptional quality. Similarly, at auctions of any size, quality could be said to be in the eye of the beholder – one roaster’s trash might very well be another’s treasure. The auction results (and, if applicable, accompanying quality competitions) serve more broadly to set a benchmark than they do to establish objective superiority of one coffee over another.

To the extent that microlot auction winning lots are undoubtedly of some of the highest sensory quality available, they achieve a high degree of success in fulfilling the quality discovery goal. Yet a closer look at the jury panel participants reveals problems in the objectivity of evaluation. Quality judging panelists frequently represent companies bidding on the selfsame coffees – a great marketing strategy, but a clear conflict of interest in unbiased cupping assessment.

Juror calibration guarantees very little in terms of cupper precision, as different roasters or regional groups value different qualities. At one Cup of Excellence (CoE) I attended, a prominent American coffee buyer was scoring specialty-quality coffees in the 50s and 60s, coffees calibrated judges rated no lower than 85 points. The same buyer then scooped up discounted coffees after some of the lots were dropped from the auction for having too low of a score.

An implicit truth of competitions like the Cup of Excellence is that there can be relatively little practical distinction of the financial exchange at auction from the evaluation of quality. As Watts admitted to me, the “value is determined by the audience.” And the resolution to this problem is “still an open question” because organizations like the CoE still need jury participants and coffee buyers – the system would not continue to exist without a transaction. All three of the CoE board members with which I spoke attempted to divorce the quality competition from the auction in at certain points in our conversation, but it is clear that in practice, if not theory and purpose, the two are intertwined.

However, quality competitions accompanying auctions often more broadly accomplish their goals of elevating overall quality and discovering spectacular coffees. They also can lead the industry in recognition of important new quality factors. The Gesha variety is a notable example, more recent trends have led the industry-wide acceptance of “natural” dry process coffees and carbonic/anaerobic fermentation methods. Darrin Daniel was especially proud of the 2017 results from Nicaragua, in which CoE finalists used fungus-resistant hybrids, and “skeptical farmers were converted based on the competition results.”

Relationship Discovery

Relationship discovery at auction is a double edged sword, at least for the proprietors of said auctions. Tightly controlled government auctions, like that in place in Tanzania at the moment, assure that no coffee will trade outside its boundaries. Thus relationships discovered – whether through the auction or not – are guaranteed to continue their financial transactions through the bidding process. Thus a high bid above the maximum price for a well-established exporter relationship with a producer might unceremoniously end what was once a steady supply.

On the other hand, auctions like CoE, which cannot possibly handle an entire harvest from one producer, let alone hundreds, face a crisis of attrition. As Darrin Daniel projected, “why should I be [an ACE] member if I already have all of these relationships?” It creates a tenuous at best, and unsustainable at worst, scenario for the organizing body.

The continuing business for a relationship discovered at an auction is often of mutual benefit for the producer and buyer, however. I interviewed Marysabel Caballero, Honduras CoE winner in 2016 and multi-year finalist as far back as 2004, who maintains that “In our particular experience, the Cup of Excellence was the showcase that manifested our coffees to the world; it was the means by which we met each and every one of our clients. So we can convincingly say that the Cup Of Excellence helped us connect with our customers… 90% of our relationships are direct with roasters.”

Geoff Watts notes that “when you measure the success of CoE, or any other auction, you have to ask ‘What did it leave in its wake?’” In that regard, auctions functioning at their full potential are ones that not only discover exceptional one-time prices and unique coffees of high quality, but those that allow buyers “to become connected to a farmer in a more direct and meaningful way over time.”