Editor’s note: This article was first published in Roast Magazine’s July/August 2023 issue, and is reprinted here with permission.
Transparency is an act of devotion
When you love something (and specialty coffee people love coffee), you’re naturally compelled to want to learn everything about it. And if you believe your coffee has value, you’re more compelled to share what makes it valuable. For roasters, achieving transparency beyond the exporter’s price into the internal markets of coffee-producing countries can be incredibly challenging to do, and to understand. For producers, it can be difficult to explain and sensitive for everyone involved. For both, it can be a deeply rewarding thing to accomplish together.
Farmgate coffee prices have become a fixture in financial traceability efforts by traders and roasters. The term is self-explanatory: The farmgate price is the price paid to a farm for its coffee. And yet, whether you have personal supply chain experience in coffee or not, if you sit with the term for more than a few seconds, it starts to seem blindingly complex.
Think of what you know about how coffee is sold from a farm into the market. The vast majority is hand-picked and sold in small increments over many months. Most of the world’s coffee exports are grown by smallholders who blend their parchment together by the tens or hundreds. In some parts of the world, farms export their own coffee; in others, perhaps right next door, coffee leaves the farm as unsorted cherry. In any case, the farmgate price is often far upstream from the free on board (FOB) price—the exporter’s price—and they are not necessarily correlated.
Additionally, it is rare that a single price is paid for all of a producer’s coffee. Every brutally hard-working producer who creates incredible coffee will also, by necessity, sort out terrible coffee somewhere on the farm and sell that, too—or perhaps they can’t, and it is ultimately discarded. And quality premiums
notwithstanding, the C market price, which underpins the majority of the world’s coffee pricing (yes, including almost all specialty) tends to move every tradeable minute, changing the prospective value of each producer’s coffee as long as it sits there unsold. Coffee is no different than a lot of the world’s global agriculture. Most of what we buy is blended in some way from smaller volumes, from various farms and picking days, and from varying qualities. Due to the whirlwind of conditions at play, each of these small contributions may have had a different original farmgate price.
Despite its complexities, smallholder farmgate price transparency matters to many of us because, for one, a living wage for growers is one kind of bottom line for the survivability of so much of coffee itself. It is hard to face the possibility that the coffee we buy, whose quality is synonymous with our brands or whose profits sustain our businesses, may not adequately feed or educate the community that produced it, regardless of how high prices may become as a coffee trades downstream. Farmgate price discovery can be a way through this unknown, the way a certification might communicate efforts toward environmental stewardship or democratic decision-making in a cooperative. Price transparency, along with some context, can provide a concrete “yes” or “no” answer to the question: Does a certain community earn what we thought they did for their efforts?
Easiest Price Wins
Given how varied farmgate prices can be, it’s no wonder the FOB price is used instead as the benchmark value in financial traceability schemas. FOB prices are clean. Most of them are in the buyer’s currency and weight, and the coffee is in every case ready to be roasted, so it communicates the full amount paid to the origin by the importer, whether they are the roaster or not. Since importers and roasters tend to drive the dialogue of coffee price transparency, the prices they have right there on their contracts are going to be much more usable than a cacophony of internal market levels and processing states. Not to mention farmgate prices are rarely shared outside the sensitive relationship between a producer and their local buyer. FOBs, on the other hand, are documented and easily comparable, so it’s understandable that they are often used as a stand-in for farmgate prices—at least as an indicator of where farmgate prices might be.
Real Farmgate Coffee Examples
One of my jobs, along with my colleague and Honduran coffee producer Mayra Orellana-Powell, is soliciting farmgate pricing from exporters and producers with whom we work. When this is successful, the data provided is always in a kind of provincial form, usually copied and pasted out of internal spreadsheets, or enterprise resource planning (ERP) platforms if those are used. Sometimes we get digital receipts. Sometimes it’s given as a range or average across months of local price fluctuations. It is almost always in local currency, which has its own volatility relative to the dollar, the currency on which export prices tend to be based. In very rare cases, an FOB price is nearly the same as a farmgate price—when estates are dry-milling and exporting their own coffee, all from the farm. Nevertheless, regardless of how high a portion of an FOB price a farmgate price may be, exporters aren’t selling on a strictly farmgate basis.
What follows are three examples of farmgate pricing at the smallholder level to show how technical it can be to understand in the context of a single FOB price. The truth about these two different payment points in the supply chain is that farmgate prices, while more varied and localized, are actually far more straightforward than the resulting FOB price—they are just less often exposed to public discussion.
In the following cases, exporters have consented to their records being shown here because they are proud of what they pay their contributing producers. We are also looking at very good quality coffees, whose prices are significantly above domestic market minimums for that reason. Which brings up maybe the most important point of all: Farmgate prices are entrusted, not obligated. There can be complications to sharing farmers’ prices that affect relationships between neighbors, financing institutions, and buyers and their customers, so the decision to publicize always requires mutual trust and an understanding of context.
Collective Production: Ecuador
In Table 1 (above), we’re looking at a group of 19 producers in southern Ecuador. Each producer has processed their own coffee to fully dried parchment, mechanically depulping and fermenting in tanks overnight, and drying on screen beds to a designated moisture content. Parchment is then transferred to the exporter in Cuenca who grades, mills, blends and packs the coffee into 25-kilogram boxes. The exporter is small, having only recently begun working with producers beyond their own 14-hectare farm, so they are very cost-cautious, seeking to build a scalable milling model to include more and more growers.
This farmgate breakdown is easy for an American buyer or final consumer to understand because the growers are paid on an exportable-pound or “green coffee” basis, and the work of translating into dollars and exportable pounds has been done already. (It doesn’t hurt that the U.S. dollar is the official currency of Ecuador.)
While the producers’ names have been redacted, it’s easy to understand the values: The farmgate prices paid in dollars per exportable pound are in the “Buy” column; the remaining columns show the costs of various milling stages (“Thresher” and “Packing”), hand-sorting (“Picking”), containerizing the boxes and transporting the container from Cuenca to port in Guayaquil (“FOB”), and even the tiny costs of machinery usage and amortization during the process. The exporter in this case also gives us a rare glimpse into their exact gross profits, which are used to cover things like extension training, the full-time salary of an employee local to the producers’ area, fertilizer, seeds, transportation and final margin.
Farmgate prices themselves are their own kind of miniature market in these situations. Price often varies based on quality, milling yield from parchment to exportable green, costs to collect (the producers are very spread out), and time of purchase during harvest if a local market is involved. In the end, for this exporter, even though producer volumes range from a single 25-kilogram box to 215 boxes, and cup qualities range from 83.75 to 86.12, all 19 producers’ coffees were blended and exported as one lot with one clean FOB price: $3.55 per pound for 400 boxes, roughly half a container of coffee by weight. The farmgate average across all contributing growers ends up as $2.08 per pound, or 59 percent of the FOB price. But of course, we can see the reality behind the one FOB price is that farmgate prices varied up to 60 cents per pound per producer, and the exporter’s margin varied almost as much.
Collective Production: Timor-Leste
We can look at another variation of smallholder parchment pricing from an exporter in Timor-Leste (see Table 2, below). Unlike the first example, the farmgate price is in parchment and is fixed across all producers. There are 11 members of the community, located in the Ermera district in western Timor-Leste, and their farm sizes and total coffee income on a parchment basis can be seen in the final two columns.
The producers here all use identical processing standards established by the exporter. Coffee is hand-picked and processing is mostly a manual affair, as it is throughout the country. Here, coffee is most often hand-depulped using homemade wooden pulpers with metal discs, fermented in personal containers, and dried on raised screens. The blank values in the final column are for growers who, despite being community members and coffee growers, were not able to process their own coffee this year and therefore sold as cherry to other collectors.
Prices paid are irrespective of individual qualities and yields, treated instead as an average—a cooperative-type model, even though the group is not legally a cooperative. The rate for all producers within the exporter’s network for this past crop was $3.25 per kilogram of dried parchment.
At face value, the price doesn’t appear very generous: only $1.47 per pound of parchment coffee. But the exportable yields here are low, typically 65 to 70 percent, so on an adjusted exportable green coffee basis producers are really earning the equivalent of $2.10 to $2.27 per pound. This coffee sold for an FOB price of $6.65 per kilogram, or $3.02 per pound. So in this case, producers are capturing 70 to 75 percent of the FOB price. The remainder is covered by the exporter, with many of the same variables as in the last example, including transportation and storage, dry milling and packaging, sampling, security and paperwork for exportation. It’s worth adding that in this case, due to Timor-Leste’s muggy lowlands and storage complications, the exporter can find themselves re-drying coffees that have gained humidity somewhere on the way—an added cost and liability. All these actions are covered by the average 84 cent per pound margin, not to mention the organic certification maintenance, which comes with its own administrative work and annual expenditures. This exporter works with around 400 producers in the same region.
Microlot Production: Peru
Contrast the previous cases with a more complex one, this time from northern Peru. In this case, the data concerns a single producer with 1.5 hectares of land whose coffee, thanks to its delivered cup quality, was accepted to be sold on its own as a microlot.
There are two figures to this example, the first of which (Table 3) is a pricing table for parchment. These types of value calculations are used almost everywhere by aggregators to plan their margins and anticipate their logistical costs. Prices here are straightforwardly based on the overlap of cup quality and exportable yield—the most important things that affect an exportable coffee’s potential value. Cupping scores are grouped by columns (“Taza”) and exportable yields are shown as percentage values across the rows. Farmgate price levels in the table are in local currency, Peruvian nuevos soles (PEN), and the unit of purchase is a quintal, locally 55.2 kilograms of parchment coffee.
Table 3 gives us a clear picture of how a coffee’s final value is chiseled away from its bulkier state on a small farm. Since this table is producer-facing, it also shows us how a small farmer might understand their own earning potential with this particular exporter, where the earning potential ranges from PEN 865 to PEN 1,265 per quintal.
There may be an entire dissertation’s worth of socioeconomic analysis behind this table alone, but for the purposes of this article, it’s worth noting two meaningful details. First, the cup score columns almost never overlap in price. One producer’s 83, for example, no matter how high the exportable yield, cannot earn more money than another’s 84, no matter how low the exportable yield. That is, until a coffee is a very high-yielding 86. This is presumably due to the impact of higher microlot pricing on each usable pound of exportable coffee. Second, the price increases due to milling yield are linear, with 5 PEN paid for each additional percentage of exportable yield, presumably due to fixed operational costs of removing more coffee at the dry mill. This exporter uses multiple tables like this one, each with unique values per municipality where they buy parchment, due to the unique challenges in transit logistics required to reach each one. This particular table applies to the producer’s community of Chunchuquillo in the north of Peru’s Cajamarca region.
Yields and costs specific to this producer’s collection are all shown in Table 4, above. Here, the producer’s cup quality and exportable yield has been established by the exporter’s quality team and her farmgate price has been finalized: 1,170 PEN per quintal, or 21.20 PEN per kilogram of dried parchment. The total delivery is just 62.16 kilograms of parchment, which will be 46 kilograms of exportable green coffee, about two-thirds of one exportable bag.
Regardless of size, the conversions must continue if the coffee is to be sustainably sold. At the time of purchase, the nuevo sol was 3.91:1 against the dollar, so the conversion to dollars amounts to $5.42 per kilogram of parchment. From here on, all costs are in dollars, the coffee’s export currency. The estimated exportable yield of the parchment is 74 percent, and of the other 26 percent removed at the dry mill, 6.8 percent is acceptable for Peru’s internal market. The remaining 19.2 percent is parchment loss and defective or unsellable coffee.
The middle section of Table 4 itemizes the rest of the export chain in three clusters. First, under “Coffee Collection,” we see all costs of parchment collection, including the total farmgate payment ($336.97), transportation and administrative costs. Next, under “Milling Costs,” costs for dry milling, packaging and marking of bags are shown. The last cluster, “Export Costs,” shows costs for transit to port at Paita in northern Peru, security, sampling and paperwork. The bottom line, “Total Egresos,” shows the exporter’s total costs for these 46 kilograms of exportable coffee, which have come to $374.94.
In this example, like in Timor-Leste, the producer is paid on a parchment basis—the exportable yield is the exporter’s to determine. Thanks to its quality, the FOB price for this producer’s coffee is $450 for the entire 46 kilos, or about $4.44 per pound to buyers. The exporter’s margin will be the FOB price minus all the costs between the farm and port. This comes out to $75.06 for the entire lot, about 74 cents per pound for about 101 total pounds.
Farmgate coffee is easy; FOB is hard
Every coffee supply chain is shaped like an hourglass: wide financial and logistical complexity upstream, a tight and tidy FOB price in the middle, and then increasing complexity again as green coffee is imported, broken down, roasted and brewed all over the world. From just a few examples, we can see how an FOB price is a tempting reference for what farmers earn, but that the truth for smallholder production is often more varied.
Farmgate price levels on the whole, year after year, certainly do shift with macroeconomic factors like the C market, exchange rates, climatic shifts, politics and conflict. The examples here were all harvested in the middle of 2022 when the C market was relatively high. Also, for an average coffee export, there are potentially many different farmgate prices blended together— consider the last example and remember that full-container lots are frequently made up of hundreds or thousands of deliveries this size.
So, there is complexity. But that doesn’t mean farmgate prices themselves are complicated to understand, least of all from a producer’s perspective. The examples in this article aren’t looking at cases where coffee is exported at a loss to exporters due to a market shift, or where coffee is hedged and sold as a future instead of an outright price. There are many ways to further abstract an FOB price from the original coffee, all of which further loosen the FOB’s strength as an indicator of farmer incomes. Even in the highest quality markets, there is volatility within every export price. FOBs may look clean and easy, but that is rarely the case.