Coffee farm economics - adding context to the ‘c’ price

by Dale Harris and Alejandro Martinez

The Learning Project is a powerful tool for us to look at areas of our knowledge that aren't covered by the practical skill-sets we develop in ourselves, and others, in our normal day-to-day work. It's a way we can deep-dive, and build our shared understanding of things that we often touch on in our conversations with customers, peers and other parts of our industry: the way we taste, the way we brew, and the way we work, design and serve.

My personal belief is that a key role of the barista in specialty coffee is to be an ambassador for the idea of 'specialty coffee’: to communicate to our customers what that means and why it's important. Sometimes I question whether it is: Could the thing I'm building a career in just be an entitled, middle-class, snobby ‘value’ —the joy of tasting something nice? Or is it an essential part of making the existence of a coffee industry permanent? Often, I’ve suggested to my customers that commodity coffee pricing is unsustainable due to the cost of production and that specialty is a more viable model because it pays more for the coffee. Is this true? When I quote the ‘c’ price, does it mean anything to me other than a number?

I wanted to use this months ‘Learning Project' to look at coffee farm economics to add some detail and context to help us understand and communicate what the price paid per pound of green coffee really means to a producer. This post is my understanding, based on contributions from Salvadoran coffee grower Alejandro Martinez, of Finca Argentina. This is an abstract of average prices and costs for illustration only, ignoring seasonal and annual variation in the cost of land, seed, labour and food, but it’s based on real numbers, in US$, to help us relate it to the prices paid for coffee. I’ve tried to keep to simple maths and short overviews only to paint a clear picture, I’ve also tried not to let opinions influence them and clearly state any assumptions made.

The article below is based on a Salvadoran farm, and as such there will be clear differences in costs within other countries. It is fair to assume that the better the quality of life within a country, the higher the cost of land, labour, and production and the higher the required income to make a farm viable. I'm excited to read links and comments about this subject from others within all parts of our industry, with the intention of building a resource that will help us answer questions about sustainability, pricing and the cost of coffee in a more informed way.


The costs of creating and maintaining a coffee farm

For this illustration we are going to assume that someone has decided to create a new coffee farm, in El Salvador (due to the country’s proven track record in coffee production, cup quality and favourable climate conditions). The basic area unit in El Salvador, as in other Central American Countries, is a ‘manzana’. One manzana is equivalent to 0.7 hectares or 1.7 acres. For simplicity’s sake, the new farm will be an area of one manzana. A single manzana could cost anywhere from $1,500 to $7,000 for the land, dependent on location and condition, without any existing coffee but at the current time (April 2015) more likely with previously grown coffee dead from leaf rust and mismanagement. We will assume our new coffee producer finds a location suitable for growing specialty coffee at a price of $5,000 per manzana.  

Our  producer will need to populate the farm with new coffee plantlets since the acquisition price was just for land. Such plantlets will take about three years to provide our farmer with a first decent crop. Table 1 below shows the calculations based on the cost to purchase, plant, maintain and harvest the coffee on one manzana until our farmer begins to obtain a return from the initiative. 

This is the cost of entry only. From this point forward our new farmer’s manzana could be expected to produce, with good husbandry, anywhere from 10 to 30 quintales of green coffee each year (1 quintal is equal to 100lbs).  Depending on the location-specific conditions it is not unheard of to obtain even higher yields, but we will work with an ambitious yet achievable average production of 30 quintales of green coffee each year. The cost of production each year could average around $70 per quintal of green coffee, or 70¢ per lb. This cost includes labour, fertiliser, fungicides and materials on top of the maintenance cost already spent bringing the farm to this point. There is also the cost of picking the coffee, which is set at a minimum of $20 per quintal of green coffee. Thus, every year our new farmer needs to front about $90 per quintal in order to get the coffee out of the farm and into the mill.

The mill processes the picked cherry at $40/quintal of green coffee on average.  This price is for processing, which is likely to also include the mill sorting the coffee, removing defects, cupping, assessing the resultant quality and finding a buyer for the green coffee either through the ‘c’ market (commercial buyers) or through their existing relationships with visiting buyers (specialty buyers).

So, these are our costs. Now we can apply coffee pricing models, both commodity and specialty, to this. The commodity price is based on supply and demand of coffee, with coffee being looked at as a standardised product, with established parameters and some regional taste, price, and expected quality variation (differentials). For a very brief overview on the ‘c’ price and specialty, check the current entry on wikipedia.

Model based on a farm selling only through the ‘c’ market

Lets work on the assumption that the ‘c' price for coffee is $1.84/lb —the average through the last 12 months.

For the purposes of these numbers I’m not taking into account ‘differentials’ – the offset against the ‘c’ price based on a coffee’s origin, determined by NGO’s, the ICO and the buying community, a little less fluid than the actual market price. I’d love to find out more about differentials.

TLP1_table2.png

As described in table 2, our new coffee farmer on the first production year achieves an income of $1,620 from the single manzana, and 3 years management of it.  

Farming is a long term business and our new farmer’s initial investment would be spread across the productive life of the trees planted. Let’s suggest 20 years. There is also a certain scale required for a farm to have the costs as listed above so lets base a business projection based on 20 manzanas over 20 years. Lets also assume that established costs are financed through a loan, incurring some interest (8% is a currently available rate). Land would remain a valuable investment regardless of the success of coffee production.

This equates to $1,283 a month, a good income. For comparison, the minimum wage in El Salvador is $250 and an office worker would achieve $400-500 per month. However over 20 years the quality of this income is based on the assumption that prices paid for coffee would go hand in hand with the cost of production and the cost of living for the next 20 years. In addition, this income isn’t guaranteed. The ‘c’ price has been on a strong downward trend in the last 6 months, with the lowest prices over March 2015. Peaks and troughs happen - over 20 years the range has been from 42c to $3. Whilst we can make assumptions based on trends the volatility is real.

Graphs 1 and 2 showcase the impact of price volatility on the farm economics and the farmer as an individual.  Prices go up and down—there could be more good years ahead than bad—but if a farmer’s ability to support their family depends on a certain income level, reliance on the ‘c’ price remaining high is a scary way to live (especially since there are other factors not being contemplated in the analysis like yield volatility). This is of course a problem common across all commodities, especially agriculture, but let’s see how the numbers in a specialty-focused operation can work.  

 
Model based on a farm selling through both specialty and the ‘c’ market.

An alternative marketing approach for a farmer is to look for specialty buyers to purchase their coffee, or a proportion of it, at mutually agreed prices based on cup quality, not the ‘c’ price. This is the essence of the specialty coffee transaction.
I will again make some assumptions:

  • We’ll assume our farmer had purchased land that was capable of growing specialty coffee and had farmed in a way that allowed it. The challenge is a sales/marketing one only.
  • Even picking is a key aspect of high-quality cup profiles – we will increase the cost of picking by 25% (raising it to 25¢ per lb).
  • Specialty coffee benefits from improved care at the mill – we’ll increase processing costs to $50 per quintal.
  • Not all coffee produced on a farm can be specialty – let’s assume that only 50% of the crop achieves a specialty cupping score and can be offered to premium buyers.
  • Let’s set the price the coffee buyer will pay for coffee of specialty quality to $2.50/lb, a low but realistic price for better quality. Let’s fix this price against quality, and not tie it to the ‘c’ price.

Our new farmer’s cost per quintal now rises to $1.45/lb. An illustrative gross profit and income calculation based on the last six months average ‘c’ price of $1.84 per pound is shown below in table 4.

Based on the numbers shown in Graph 3, you can see that specialty doesn’t guarantee wealth compared to commodity coffee growing, but what it does guarantee is a more consistent return. A stable price, based on an agreed quality of product that tends to be somewhat consistent year over year, protects a farmer’s family, allows them to invest in quality and themselves, and allows a stability to our supply of coffee. 

Not every farm that produces coffee can produce specialty, but many don’t that could. Key challenges for those include poor infrastructure or routes for farmers to market their product to buyers, poor knowledge within farming communities of what specialty buyers desire but the pre-dominant reason is the small size of the specialty buying industry, and this is something baristas can influence. The proportion of coffee bought at higher prices is completely dependent on the quantity of coffee sold as specialty. The more baristas promote the idea, the more customers who discover and enjoy and support quality in the cup achieved by paying farmers more for their care, the stronger our industry becomes at every level.