Financials, Current Coffees
While seemingly simple in many ways, financial transactions within the coffee supply chain can be incredibly complex. The coffee itself is bought and sold based upon weight; however, from a picked cherry to a roasted bean, most coffee changes weight no less than four times at different processing steps. The yields from one step to the next can vary based on a number of conditions. Additionally, farmers and supply chain actors in the country of origin are paid in local currency, yet coffee is ultimately bought and sold in U.S. in dollars--currency valuations can have significant impact.
Commodity prices for arabica coffee are published and easy to find, yet within certain countries and under certain conditions, small premiums are paid above this commodity price. We have utilized a commodity price of $0.97 per pound of green coffee, as this was a reasonable commodity price on the dates these coffees could have been traded in that market.
In making estimates, we seek to rely on known facts when possible and make reasonable and justifiable assumptions when needed.
With our Direct Access model, we are able to control and establish many of the supply chain economics upfront.
The following is a representation of the impact we can ultimately have with our current participating farmers and cooperatives under the Direct Access model. The following assumes that at some later date, these farmers would choose to utilize the Direct Access model to sell all of their crop. In evaluating a potential annual income, we have utilized a reasonable size Colombian farm as a benchmark size and yield that we have applied to all other farms. This benchmark Colombian farm would be 5.5 acres in size and grow enough coffee to lead to 12,925 pounds of export grade green coffee annually.
A look at potential outcome for our current participating farmers:
We would like to go a bit deeper and share OUR economics in this model...
If you happen to have even the smallest social justice vein running through your body, I would ask you to sit down, stay calm (deep breaths), and keep an open mind. You will be tempted to read the next chart and pointedly ask, "Why does so-and-so make so much, when the farmer gets so little?" In broad strokes, this is THE problem we are tackling: we are looking for a new way to approach the coffee supply chain to create efficiencies and eliminate gross disparities, shifting profits more in favor of the farmer.
Here is what the money flow looks like for a typical finished 12-ounce bag of specialty coffee at your grocery store:
The above chart is based upon a number of assumptions:
-production cost of $1.35/lb of coffee to the farmer (an average across seven Latin American countries based on data presented by Caravela Coffee in their 2019 white paper underpinned by extensive on-the-ground work, https://caravela.coffee/wp-content/uploads/2019/07/COP-White-Paper-July-2019-FINAL.pdf)
-$1.35 per lb farm gate price paid to the farmer (a great price versus the low commodity market at present (August 2020)--the farmer is actually doing much better in this example than if they sold on the commodity market.
-fairly typical processing and import expenses
-8% distributor fee
-5% grocery broker fee
-42% grocer margin
You might ask if this is possible. Are these economics reasonable or common? After all, the farmer is merely breaking even. Not only is this quite possible, this can be almost typical in some countries. In 2018, 53% of the smallholder specialty coffee growers in Colombia lost money on their crops according to the Specialty Coffee Association, based on a collaborative study from University of Muenster’s TRANSSUSTAIN research project, University of California Davis, and the International Coffee Organization, https://sca.coffee/sca-news/25-magazine/issue-11/the-cost-conundrum
So now, why do all of those other people get so much money, when the farmer is getting so little? There are in fact some good reasons in many cases. Even with domestic products with relatively little processing, the farmer often receives a very small percentage of the final retail price. In coffee's case, there are a large number of necessary, value added steps that must occur between a coffee cherry being picked and your purchase of a roasted bean in some locale thousands of miles removed from the farm. There are a lot of hands that must touch your coffee on that journey, and all of them are looking to get paid.
There in fact, are not a lot of people getting filthy rich in the specialty coffee trade--those who are, are outliers. In real dollars, grocery stores make the most off of each bag of coffee sold as you can see above. Factor in the overhead that the grocery store faces, however, and the grocer may be among the least profitable members of the supply chain. An international shipper who makes only pennies off of each bag that ultimately sells on a grocery shelf is moving huge volumes, may have the least risk in their business model, and the owners might be doing Scrooge McDuck dives into piles of cash. The roaster... yep, the roaster typically receives a lot of the overall take from the sale of a 12-ounce bag, but for most specialty roasters (ourselves included) equipment, labor, and marketing costs are significant, and these costs are incurred in an expensive, developed economy.
A family will starve on a few thousand dollars of income in a year in the United States, yet in many coffee growing countries the median annual income is in the hundreds of dollars, not thousands. There are vast disparities between the local economies and normal or accepted “standards of living” between supply chain actors at the beginning and end of the supply chain. These factures should not be an excuse to avoid taking action, but they should be recognized when we look at the supply chain and try to determine what is equitable (or even reasonably achievable) for all parties. While the determination of what is equitable might be subjective, barely breaking even or straight out losing money is unsustainable for all. Smallholder farmers are among the most vulnerable of all the supply chain actors when they do find themselves unprofitable. At present, there are significant numbers of smallholder coffee farmers who are losing money on their crops and only surviving by tapping into additional “free” family labor or supplementing with other crops.
We are confident that there is a model that allows all supply chain actors to make a more predictably sustainable income, and importantly, provides more income and long-term sustainability for smallholder farmers. An annual income of a few thousand dollars goes far in a country with a median income in the hundreds, and we know how to achieve that greater income with Direct Access.
We are eager to share the cost structure that exists with Direct Access. More than allowing consumers to purchase directly from farmers, we are going directly to farmers with the deal being offered by consumers. We are not so much “direct to consumer” as we are “direct to farmer”. “Hey farmer, this is what consumers are willing to pay for your delicious coffee, and this is what it will cost you to process, ship, and roast it. And after all costs are paid, you keep what is left over. Do you want to sell your coffee in this manner?” Stacked against the next best option, Direct Access income is compelling to most farmers. Because we feel transparency is important, we are happy to share those numbers.
Here is what the economics look like for a 12-ounce roasted bag of coffee that is sold by a farmer through Direct Access:
This is the actual retail price, the actual gross profit we realize as a roaster, and actual cost of packaging. Where supply chain costs can be variable, we have made the same assumptions as the first chart: $1.35/lb production cost, typical processing and import expenses, 8% distributor fee, 5% grocery broker fee, 42% retail grocery margin. There is an additional financing fee assessed to the farmer, as we are lending directly to or assisting the farmer to borrow so they can cover costs as the coffee leaves their farm (pickers need to get paid and living expenses need to be covered). We have assumed that the farmer will borrow enough to essentially break even on their farm cost as the coffee leaves the farm.
Under the Direct Access model, the farmer owns their coffee deep into the supply chain, so the farmer is borrowing money to pay for processing, shipping, storage, packaging, roasting, etc. up until the coffee is sold into grocery. Because the roaster (us) does not have to cover such a relatively large cost of goods as in the status quo/transactional manner that coffee is normally purchased and resold, the roaster can operate with less relative gross profit and still be more profitable in terms of margin percentage. That profit that is freed up from the roaster goes to the farmer. As Direct Access gains more scale and efficiencies in shipping coffee from origin countries, additional money will be freed up along the supply chain that can go to the farmer.
We hope that you recognize the true impact potential that 50- or 60-cents per 12-ounce bag in profit can mean to a smallholder farmer. On a 5.5 acre farm with reasonable yields this can mean thousands of dollars in profit each year through Direct Access. There is one way that we could make even more for a smallholder farmer, and that would be only selling directly to consumers, online. And of course we do sell online. If you are thinking through the economics, by cutting out the grocer, distributor, and broker, the farmer could make almost $7 more per each 12-ounce bag sold. So why don’t we just sell online, and what happens to that extra money with Direct Access? Does it go to the farmer? The answer is “no”, and this is something farmers must agree to in order to participate in our program and sell under the Direct Access brand. We want to provide true scale for our participating farmers (many, many farmers) in a way that can have impact on the whole specialty coffee industry. When a bag sells online the farmer gets paid just as if they had sold the bag through grocery, and the leftover money is utilized to market our farm partners' coffees in grocery. Why would we do that? Both online and selling in grocery are expensive from a marketing standpoint, but grocery chains have many hundreds and thousands of locations per chain. We are experienced in both channels, and we are convinced that grocery offers a better opportunity to benefit the farmers in our industry with this model.
One last note—we are bold enough to be transparent. That comes with risk and opportunity. Weighed against one another, we found that focusing upon the opportunity was more in-line with our character. That said, there will be some who would like to make comparisons between us and this or that certification program or with what that other roaster says they pay for coffee. We welcome those comparisons, as they can only make us better. The coffee supply chain and how numbers are reported, however, is complex—most certification programs are willing to tell you an amount they paid a farmer (or more likely a cooperative) but are unwilling to talk about the cost to the farmer or what percentage of money paid to a cooperative reached the farmer—was the farmer even profitable? Some roasters who are well intended are quick to publish the price they paid for coffee from an importer in the States, yet these figures don’t actually provide information about what a farmer was paid in the preceding transaction that happened many months beforehand on the farm. In short, we welcome comparisons and input; we do ask that you embrace the true complexity and nuance of this supply chain as you provide input or commentary on our model. Most of all, we hope that you embrace what we are doing as an audacious counterpoint to the status quo coffee supply chain, as a new model that holds hope for a prosperous future for smallholder specialty coffee growers around the world while bringing delicious coffee to your grocery aisle.