What does transparency mean for coffee prices? What exactly is FOB? How high are coffee production costs? And what is Direct Trade?
It's absurd – on the consumer side, coffee is becoming increasingly diverse – there's more and more selection, more roasteries, new blends, new forms, new machines – while at the origin of coffee, diversity is shrinking. For many producers, coffee production is no longer profitable. More and more producers are leaving the coffee business, switching to other products, or turning their backs on agriculture altogether.
Transparency = Fair Coffee Prices?
In this context, the demand for fair prices is growing louder. But what is fair? What is just? Many coffee roasters see a first step in disclosing their purchasing prices. More and more roasters are talking about FOB – Free on Board, about production costs, about farm gate prices – these are all so-called Incoterms, or delivery conditions, which can say something about the price paid for coffee.
However, understanding these figures is limited among the general population. That's why we invited Pascal Herzog, Head of Volcafe Select (2015-2019), to discuss these topics with us.
Logically, one would have to dare transparency in both directions. If the producer dares the data striptease, the trader does it too, then the roastery could also do it and show how their accounting breaks down.
Pascal Herzog, May 2019
What came out of it is a podcast that clarifies many questions, raises new ones, and puts coffee roasters to the test.
What is Direct Trade, FOB, and Production Costs?
Pascal Herzog defined four terms for us and summarized them briefly and concisely.
FOB – Free on Board
- FOB or Free on Board is a clearly defined contract clause (Incoterm 2010). The clause states that all costs and risks transfer to the buyer once the traded goods are loaded onto the ship. FOB contracts are often used as references in the coffee industry to keep transaction costs as low as possible. Accordingly, a price comparison on an FOB basis makes sense.
COP – Cost of Production
- COP or Cost of Production. Production costs include all direct and indirect costs incurred on a coffee farm. Examples include wages (opportunity costs), costs for land, fertilizers, machinery, seedlings, etc. Unfortunately, there is no standardized method for calculating COP. Accordingly, a direct comparison of the data is difficult and sometimes even problematic. Only an individual assessment does justice to the farm; at the same time, regional data can of course be used as a reference to better assess a farm.
Direct Trade Coffee
- Direct Trade: Here too, there is no clear definition. The lowest common denominator is probably direct communication between the roaster and the coffee farmer, or the responsible cooperative. In general, this can help increase transparency within the supply chain. Most coffee suppliers today offer to ship, finance, import, and ultimately deliver directly traded coffee for the roaster.
And finally, a brief input on a topic we discuss in more depth in the podcast – it's about the "coyotes," or middlemen. Pascal Herzog on this:
- Cut out the middle man: Here you want to keep supply chains as short as possible. In my view, it must be assessed on a case-by-case basis how long a supply chain should optimally be. Local conditions must be taken into account, as well as the function of each link and their bargaining power.
Further Reading/Listening on this Topic:
Podcast with Peter Lerch on Global Coffee Trade.
Podcast with Roger Wittwer and Peter Lerch on the Coffee Price Collapse.
