Why Your Cappuccino Is Getting More Expensive While Coffee Farmers Make Less
It’s all about the futures market
While the love for third-wave roasters and flat whites is only growing, coffee farmers are not necessarily benefitting financially from this rising demand. Commodity coffee prices in 2019 fell below $1 a pound for green (unroasted) coffee beans. That’s the lowest they’ve been in 13 years.
“For a large share of the producer population, margins have been eroding for many years,” says Carl Cervone, co-founder of Enveritas, a nonprofit building data for the coffee sector. “A structure built on a weak foundation can’t handle big shocks. The coffee community needs to better understand and fortify the weakest parts of its structure. For me, this moment is a wake-up call.”
In May this year, coffee prices dropped to 87 cents a pound, compared to $1.13 a pound a year ago. Most of the industry estimates that growers need $1.20 to just cover costs. Anything less than that and the growers are operating at loss.
Small coffee farmers, however, have never really made much money from this popular crop, says Cervone. “Even before prices dropped, two out of five coffee farmers were living below the poverty line.”
There are several reasons for this, starting with how coffee is produced, the way it’s sold, and the effect of currencies in the global market.
Coffee production has multiple layers. Farmers harvest the cherries. These cherries are then hulled for the bean. Some farmers have the capacity to hull on-site and process their own beans; others sell their harvest to a processor who will dry the beans out before exporting. The beans are sold to an exporter who works with an array of customers in the coffee business: roasters, brokers, and other traders — each of these players mark up the per-pound price.
As a result, the farmer, who is responsible for growing the actual coffee and taking care of the crop, gets a very small share of the final price of a bag of roasted beans at a cafe or grocery store.
But unlike most produce, coffee has one more challenge: It’s a commodity. Therefore, its price is dictated not by farmers, or any individual, but by demands of the market.
Konrad Brits, the founder of Falcon Coffees, a coffee trading company that works with brands such as Starbucks, Blue Bottle, Stumptown, and Whole Foods’ Allegro, notes that coffee is sold on the futures market: thus coffee is given a future value based on the anticipated supply and demand. And this system, he says, is flawed.
“The original intended use of the futures market is that it allows both farmers and buyers to fix a sale,” he explains. “[However] the coffee futures market, at times, becomes severely distorted by market forces, usually penalizing the farmers. Now is such a time.”
There’s a huge supply of coffee in the world currently, which Brits, among other coffee experts, attributes to Brazil’s production. According to a report by the International Coffee Organization, in May, world coffee exports rose by 19.4 percent compared to a year ago to 11.6 million bags of green coffee. This growth, the report says, was “led by shipments of Brazilian Naturals,” which increased by 65.4 percent to 3.5 million bags of coffee.
“As the producer of 40 percent of all the world’s coffee, Brazil’s annual crop size really matters to the supply and demand equation. But it’s not a fair fight,” Brits argues. This is because a large influx of coffee beans in the market can decrease the commodity price; plus Brazil’s currency, the real, has been depreciating since March 2018.
The bulk of Brazil’s coffee is grown on large farmers. The second-largest producer of coffee is Vietnam, growing primarily Robusta beans; these are not as highly regarded as the Arabica variety and used to bulk up blended roasts. Meanwhile, the farmers growing the more prized beans in hilly regions have smaller yields. These include countries such as Ethiopia, the birthplace of coffee, as well as Sumatra, Colombia, Kenya, and Rwanda. Though their coffees are more desired, the growers get less money because of lower coffee prices globally.
There’s an additional key difference: The majority of these Arabica coffee growers are smallholder farmers, owning less than 5 hectares (about 12 acres) of land, and doing the bulk of the work by hand. According to Enveritas, they make up an estimated 12 million small farms in the world and are responsible for two-thirds of the global coffee supply.
In contrast, Brazil’s farms are large swaths of flat land. “The size and topography of the farms in Brazil means they can mechanize many of the processes, avoiding labor costs, the highest component of coffee farming, Brits says.
As a result, companies such as Falcon, which depend on high-quality beans for its more than 500 clients, are concerned about the future of these small farmers. The average age of a coffee farmer is 55 to 60; young people are leaving the crop because it’s failing to produce a livable income, according to Food Tank’s Kyle Freund.
“We are witnessing the death of diversity in coffee. The bitter irony is that the demand for specialty coffee is on the rise, but not swiftly enough to save the other origins,” Brits adds.
“This is not a coffee crisis as much as it is a humanitarian crisis. Coffee farmers are poor. The ongoing low prices are grinding them deeper into debt and further below the poverty line.”
Fair Trade pricing recognizes the need for coffee farmers to be paid more for their labor and for the health of their crop. Paul Rice founded Fair Trade USA in 1998 after living for more than a decade in the coffee-growing country of Nicaragua.
“Our price, or the Fair Trade price, is $1.40 a pound, and that’s pegged to the sustainable cost of production for coffee. That’s not just the cost of just growing coffee but the other add-ons like taking care of the land, the things that coffee farmers need to think about also.”
In addition to the $1.40 a pound, Fair Trade offers a 20-cent premium that must go toward improving social, economic, and environmental conditions for the coffee farmer. However, Fair Trade pricing does not include services like crop insurance for farmers.
Though that’s better than the commodity rates for coffee farmers, it does not go far enough, says Karen Lickteig, marketing and sustainability director at Portland-based roaster Nossa Familia, which sources its specialty coffee from Central and South America. Nossa does not participate in Fair Trade certification; instead, Nossa Familia sets prices directly with coffee cooperatives and growers, paying higher than Fair Trade prices, and, at times, double or triple that for high-quality coffee, she explains.
“Even the Fair Trade price, which has not been raised since 2011, does not cover production costs in many Central American countries,” she says. “We communicate directly with farmers and our responsible importing partners, and specifically ask questions about the cost of production to make sure that we are paying sustainable prices to provide for farmer livelihoods. Because of this structure, our prices paid to farmers generally increase year over year, instead of responding to volatile market forces.”
But Rice worries that these direct-trade models developed by roasters could be problematic. While some companies may actually be paying higher prices to farmers, others could be using it as marketing, he worries. Plus, he says, coffee relies on middlemen to get the coffee from the farmers to markets such as the U.S. “And that’s true even in the so-called direct trade model.”
The answer instead, he argues, lies in greater transparency.
That means disclosing how much is actually being paid to farmers. Melbourne-based roaster Seven Seeds, for instance, puts how much the company paid for each coffee on the packaging itself, along with the commodity price and fair-trade price for comparable beans. They include both the “farmgate” price and the “FOB” price.
Farmgate prices are what farmers actually receive. The FOB price, in contrast, is the amount paid for the coffee after it’s been stored, processed, bagged, and transported to the port, ready for export.
Seven Seeds also pays higher than Fair Trade prices. Printing these details on its website and packaging is one way of saying it’s going beyond the market and certifying bodies to ensure that farmers get a share of the profits.
While Nossa does not disclose the farmgate prices of each variety, it does a price comparison in its annual sustainability report, explaining how much is paid for a Guatemalan coffee versus the commodity and Fair Trade prices.
Starbucks, which reportedly buys 3 percent of the world’s supply of green coffee, has developed its own social and environmental standards for coffee called C.A.F.E Practices (Coffee And Farmer Equity Practices), which were developed with Conservation International, an environmental nonprofit and a third-party. Starbucks states that it now sources 99 percent of its coffee ethically, and the CAFE Practice program includes 400,000 coffee farmers in 28 countries. This is all part of the company’s pursuit to make coffee the “first sustainable crop” in the world.
“Economic transparency is key in C.A.F.E. Practices,” says Molly Spence, Director of Social Impact Communications at Starbucks. “What that means is that we know where our coffee payments go; we’re able to see the names of all the farmers we buy from and how much they received. And surprisingly in the coffee world, of which we buy 3 percent, that’s rare.”
But due to the complex and global nature of Starbucks’ supply chain, she notes that the company does not publicly share any data on how much it pays for the coffee.
Recognizing that it’s important to have data that goes back to the root of the supply chain, Falcon Coffees has built a dashboard for its supply chain partners; it documents all the transactions in the various layers of exporting coffee down to the household level.
For Brits, a South African who has spent decades developing coffee supply chains on the African continent, the coffee sector is more than just a business opportunity. Coffee growers, he argues, have to be seen as partners in a collaborative supply chain to preserve the future of coffee. The volatility of coffee pricing is also causing an environmental crisis, he says.
“Many of these farming communities live in or near tropical rain forests. Many will seek to feed their families and communities through deforestation, producing narcotics and possibly poaching.”
To counteract this, Falcon Coffees incentivizes better farming practices, helping farmers figure out how to increase their yield, produce higher-quality beans, and as a result, increase their income. If the taste and quality of a coffee are more developed, it’ll fetch a higher price. Falcon then shares that premium with farmers because they can track where each lot of coffee is coming from.
“The connection between smallholder prosperity, global food security, and mitigating the climate crisis in the world’s tropical rainforests is deeply complex but utterly solvable,” says Brits. “I’ve made it my life goal.”
Esha Chhabra is a freelance journalist who writes on social impact, development, and mission-driven brands. Her work has been featured in The New York Times, Forbes, The Guardian, and more.
