Concerning Coffee & Its Cost
Each week, we get The Nod – the e-mail newsletter from our roaster, Intelligentsia Coffee and Tea. Usually, the content of said Nod is rather interesting, and worth passing on to you.
Last week, the Nod arrived in my inbox and I opened it and it was long. Real long. Perusing it, I could tell it would be interesting. Geoff Watts – author of The Nod & Intelligentsia’s VP of Coffee – knows quite a bit about many things, and perhaps the primary thing is coffee. In this latest edition, he explains the rising cost of Kenyan beans…an explanation that can, for the most part, be translated to many coffees and probably many of the other things Mr. Watts knows quite a bit about.
So, in order to assist you in your navigation of this explanation, a handy little summary is below (and is also offered at the end of Mr. Watt’s essay). Click on a point of interest and you can read the expanded version. I do, however, recommend reading the entire thing in context. Just start below the summary if that is your desire.
- Our movement towards Direct Trade in Kenya and investment in the farming societies and in building relationships.
The Nod:
Hola:
Last Friday saw the release of one of our favorite, and in my humble opinion, best coffees. A question that we have been asked since this time is: What’s up with the Kenya prices? Why have they risen so sharply this season? There are a lot of things that have contributed. I’ll try to explain as clearly and concisely as I can, knowing full well that the latter has never been one of my strong suits. Let’s break it down into a couple categories:
1.) The rising production costs at origin.
This is not just occurring in Kenya. EVERY coffee producer I know has seen coffee production costs rise dramatically over the last two years. It is a worldwide phenomenon. What has gone up?
A.) Fertilizer and Transport costs. This is directly related to the rising prices of fuel worldwide. We’ve felt it here in the US, but man….many developing countries feel it even harder because they do not have any buffer whatsoever. Their governments do not have the kind of reserves we’ve got or the ability to subsidize prices for farmers. So while fuel costs have risen profoundly here, they’ve gone up at an even faster rate in many coffee producing countries. As a result, everything that requires energy to produce (fertilizer is just one example) is also more expensive now. I was recently examining fertilizer costs in Guatemala and found that in many cases it has more than DOUBLED over the last two years. So the farmers are paying more for inputs than they ever have. Transporting the coffees overland (farm to wet mill, wet mill to dry mill, dry mill to exporter, exporter to port) has gotten way more expensive as well, due once again to fuel costs.
B.) Labor costs. Labor is often the number 1 or 2 most significant cost of production on a coffee farm. It keeps getting more expensive as the labor force dries out. This is especially true in Central America where there has been (and continues to be) mass emigration to urban areas and to the United States. In Africa it is not quite as big a deal as labor is still abundant in many places, but they are still facing the problem of the “aging farmer”. Most coffee farmers are in the latter third of their lives and increasingly find it more difficult to put in the work needed to manage a coffee farm to its top potential. Younger generations have not shown an interest in being coffee farmers. Why would they? They look at how their parents and grandparents have fared and they see the poverty and depressing commodity cycles and mercilessly rising costs and intense climate impacts and the sheer unpredictability of it all and they say “no way!” Why would they want to follow in their father’s footsteps when the path has failed to take them anywhere?
C.) Cost of Production per hectare has gone way up due to falling productivity. There is always a chain reaction that takes place when coffee farmers aren’t making enough money for their crops. First they stop making inputs (they use less fertilizer, spend less on husbandry, stop pruning, and stop planting new trees) and then they cut costs during harvest. This means fewer cherries per tree and more disease and fungus problems as trees become old and weak. It means less care taken in selecting cherries for ripeness. It means the per-hectare cost of production is higher than ever while the quality has gotten worse! Trees growing in poorly managed and nutrient deficient soil get quickly debilitated. They don’t produce as much coffee and they struggle to bring the fruits to full maturity. The reality is that today the costs of production on most coffee farms (and other agricultural products too) are WAY higher than they were even two years ago, sometimes by as much as 50%. The market is going to need to adjust to this somehow, or a lot of farmers are going to be in big trouble over the next couple of years.
2.) The Kenyan Auction system dictates market price.
The Kenyan Auction system was the model on which the Cup of Excellence was founded. It has consistently been the world leader when it comes to delivering the BEST price per pound for coffee of quality. Every year there are a handful of coffees that crack through into the $4.00+ range and sometimes quite a few. It is a great system for finding “market value”, as there are close to 20 exporters who compete at auction to purchase the best coffees. Each exporter receives an “auction book” and accompanying set of samples every week, and each Tuesday there is a live auction during which all those coffees get put on the block. There can be ferocious competition sometimes, especially whenever a true 90+ coffee passes through.
This season was a low crop and the general quality was not very great. When that happens, the prices for the best coffees get even higher than usual since everyone is scrambling to get a piece. That’s the nice thing about the auction from a farmer’s perspective. It also rewards scarcity, so when there is a down year in volume or quality, it drives prices for the good stuff even higher than expected because various buyers are fighting over a smaller number of available coffees.
Unfortunately, the individual farmers are not always beneficiaries of these nice prices. The link from farmgate to auction is not as clean and direct as it should be, and layers of organizational inefficiency (and outright corruption as Kenya as a nation has managed to institutionalize corruption like no country I’ve ever seen!) eat away at the profit until there is next to nothing left for the farmer. Banking is screwed up there, with interest on debts overwhelming any income.
So while the auction has yielded many clear benefits, there is still a lot of work to be done to make the system sustainable, meaning making it viable for the farmer.
This is the first year that Intelligentsia has begun to purchase some Kenyan coffee using our Direct Trade model. It is super-freaking-exciting to me, because I’ve wanted to work more closely with farmers in Kenya for almost a decade. It is my favorite coffee year-in and year-out, and it has always been profoundly saddening that the farmers, despite great auction prices, never seemed to really be able to move forward.
About half of what we purchased this year was purchased under Direct Trade principles with prices negotiated directly with the farming communities, full transparency in the chain, and quality rewarded with premiums. It is a significant step for us and for Kenyan farmers as it was not permitted under law to deal directly with farmers until about 22 months ago, and today the huge majority of coffee is still passing through the auctions.
We WANT TO BE AN EXAMPLE. We want to show Kenyan farmers what is possible and participate as leaders in the effort to re-engage farmers and introduce new expectations about transparency and commitment at the farm level. We want to earn the trust of the farmers and prove to them that pursuing a long-term, Direct Trade relationship with Intelligentsia is a great option for them. Based on lots of experience buying coffee in Kenya, it is my opinion that we’ve partnered with some of the best cooperative groups in the country, in the heart of what I consider to be the top growing region in Kenya.
I’m hoping that next year all of our Kenyan coffee will qualify as Direct Trade and that we will be able to sell it that way. For now it should be considered “Direct Trade in Transition”. This season we purchased some coffee in the auction and some directly, all from the same cooperatives whose coffees we’ve been buying in the auctions for several years. For any DT system to work in Kenya it is vital that the farmers are able to see a true benefit by selling direct versus selling through the auction. So the auction will continue to function as a sort of “market regulator”, at least on the high end, and at least until Direct Trade takes hold and farmers begin to really understand the value of working closely with roasters and establishing reliable, long-term markets for their coffees.
3.) The Falling Value of the Dollar
We feel this pretty hard-core in many countries. The problem is that farmers pay everything in the local currency, pesos, shillings, quetzales, francs, cordobas, lempiras, but they get paid in dollars. So labor, fertilizer, bags, boots, everything has gotten more expensive for the farmer due to the fact that the local currency is worth far more versus the dollar than it used to be. If this continues, at some point the industry at large will need to decide whether or not the coffee market can continue to be tied to the dollar since another 5-10% drop in value will make the equations completely untenable for the farmer. Even without adjusting for inflation, most farmers are making LESS today than their parents did…in real dollars per pound. That is not acceptable.
4.) The rising costs of production here at home.
As you know, Intelligentsia is a company that believes in constant research, development and innovation. We’re freaks about quality, and we spend money, time, and energy to make sure we get it right. That’s why we’ve invested in roasting locally in LA, that’s why we keep hiring staff for Quality Control and Roasting, and that’s why we invest so much in our Baristas. We’re always doing things to try to make our coffees even better, and there is a price that comes with that. I would hazard a guess that we have one of the deepest teams in the industry when it comes to coffee expertise and knowledge.
But beyond the costs of innovation and intense quality control operations, our raw materials costs have risen sharply. Fuel costs are high, and we depend on fuel to roast and deliver coffee. It runs our roaster’s afterburners, which clean the exhaust to ensure that we are good stewards of the local environment, but those suckers eat up gas like it was candy. We will probably need to invest in alterative technology soon.
5.) Coffee has always been very under-valued and under-priced.
There is another point that must be made, one that is to me more important than everything I’ve just mentioned: The fact is that coffee has never been valued correctly to begin with, dating back to well before all of the recent economic downturns. The only coffees that have succeeded on a large scale over the last 20 years in getting the value they should have been a handful of well-known brands from Jamaica and Hawaii (Kona). And as we all know, those coffees usually cannot even hold their own in the cup when compared to the best coffees from places like Kenya, Ethiopia, Rwanda, Guatemala, Bolivia, and so forth. They get smacked up and down and exposed for being very well cultivated, very clean, very well-handled but altogether too mild and, for lack of a better word, just boring.
When I say “the value they should” what I mean is this: valuation based on actual costs of production and real intrinsic/material quality. Just like any other business, coffee farmers ought to have the opportunity to sell their coffees at a price that nets them a profit, and that is tied to measurable quality. The better the quality, the more a coffee farmer can stand to earn in a competitive market.
Let’s select a couple of industries for comparison. The wine, spirits and beer industries all have some obvious similarities with coffee. Wine has a lot in common with coffee with regard to the way it is produced (fruits produced under specific environmental conditions and then processed into liquid goodness) and in the way it is talked about. The language of tasting is nearly identical between them, although coffee is actually the more chemically complex of the two beverages and has a greater range of potential flavor. When we talk about beer and spirits, there is similarity with coffee because these are considered “luxury goods” and they are consumed as liquids.
Now consider the range of prices you might find when shopping for a nice bottle of Scotch whiskey. You can probably find a fairly cheap bottle at your local supermarket, something that is kinda nasty going down and even worse once it has had time to soak in. You can find something mid-range, a decently distilled blend of decently produced malts. And if you go to specialty importers or big-time liquor stores you’ll find a huge variety of small-batch, limited production single malts that have been aged for many years to improve the texture, perceived sweetness, and complexity. The prices will range from $10/750 ml for true swill that will surely pummel you into joyless submission by the next morning to perhaps $150 for the finest commercially available single-malts. Most Scotch drinkers likely find their place of comfort somewhere in between, happy to pay $30-$40 for a nice bottle of Glenlivet or Macallan.
With beer it is the same…your basic six-pack of aluminum Milwaukee’s Best cans can be had for a couple of bucks, while you could easily pay $12.00/16 oz bottle for a nice Belgian small-batch.
Surely wine has been the best explored by most consumers when it comes to “tasting the range” and learning about what the low-end (frighteningly astringent and sour and ethanol-like with big-time headache power) and the high-end (ah, kill me now while I am floating on this cloud of sweet and savory bliss) can deliver on the pleasure scale. Most wine people, like beer or scotch drinkers, settle somewhere in the upper-middle of the range. No cheap stuff, but save the tip-top-barely-out-of reach shelf for those who have made a lifestyle out of sipping priceless delicacies. The $10-$40 range seems to serve people quite well when it comes to measuring out a nice pleasure-to-value ratio.
Then we could even expand the discussion to cheese, where the scale takes us from Velveeta all the way to the nicest 15-year old hard cheese with more taste per square millimeter than there are bad jokes in Marc Johnson’s arsenal. (Marc is our Marketing Director, he tells lots of bad jokes, and my comment means infinite taste, for those keeping track at home.) One costs $1.50/lb, the other costs $50.00/lb. One makes you fart and weep and rot away from the inside, the other one makes you want to high-five the cheese guy.
My point is that consumers have learned how to differentiate value pretty well for most products out there in the world today. They, of course, sometimes attribute value to certain things due to reasons of fashion or trend. And sometimes clever marketing combined with gullible consumers can lead to freaky pricing for what are really low-quality goods. But most of the time people come pretty close to getting it right, over time.
When you consider coffee, one thing to realize is that there is a very small amount of truly high-quality coffee available in the world. Just isn’t produced very much. Why? One reason is that it is very hard to accomplish. Really, really hard. The second is that the world has rarely been willing to pay farmers what it actually costs to produce this kind of quality. Instead of being priced according to actual costs of production, with better coffees getting additional premiums as a result of their better taste, coffee is priced like corn, cotton, soybeans, petroleum, or other commodities out there. It is a futures market that has always determined value.
Much has been written about the “coffee crisis” of 1999-2004, which put hundreds of thousands of coffee farmers out of business because the prices people were paying were below even the most basic, rawest costs of production. One thing that was exposed was that we as consumers (and those of us working in the coffee business as roasters, retailers, baristas, restaurant owners) really need to re-think the way we understand value as it applies to things like Specialty Coffee, and coffee in general, which is not actually a traditional “commodity” in any practical way. The range of different qualities, different production costs, and different cultural traditions behind the coffee are huge and diverse.
The reality is that we fight nearly a century of history during which coffee was bought and sold as a commodity and where the idea of the “bottomless” cup became entrenched in the minds of most consumers. Coffee has usually been a loss-leader for most restaurants and shops, given away for free or for next-to-nothing. Cheap coffee is far-and-away the norm.
Our objective is to try to get things right. We want to pay farmers what these coffees are really worth. When someone purchases Intelligentsia coffee, they are getting an amazing deal. Some of the best coffee produced on the planet for what still amounts to very little compared to what one might expect to pay for any other consumable the sits at the top end of the quality spectrum. That’s not to say we over-pay. We’re not a charity, and I do not have much faith in development models that show up in Africa or anywhere else and give money away without building anything that can last. That model has proven over the last 30 years that it simply doesn’t work, and in many instances has even made the problem of poverty WORSE.
We pay what both we and the farmers agree to be the right price, call it whatever you like: fair, just, honorable…those are just adjectives. The whole nature of this business, as I see it, is to figure out what farmers need to earn in order to produce extraordinarily great coffee. That’s what I do; I work with them to figure out how much everything costs, to quantify those things, and make sure that the farmer, who shoulders so much responsibility and so much risk in this whole deal, is profiting from his/her work and is in a position to grow and evolve. We want to contribute to building a coffee industry where growing coffee is an attractive career choice. Where the children of coffee farmers will decide they DO want to continue the family tradition, and can make that choice without needing to be certifiably insane.
That might have been a bit too long winded, a bit too lengthy to divine the key points. In acknowledgement that this is likely true, here is a summary. In short, the prices we paid this year for our Kenyan coffees reflect:
- Big rises in costs of production at the farms in Kenya.
- A shortfall of volume and of quality coffee in the recent harvest, leading to greater competition over top quality lots.
- Our movement towards Direct Trade in Kenya and investment in the farming societies and in building relationships.
- The falling value of the dollar.
- Greater costs of production here in the US with the costs of everything from roasting, packaging, and transporting having gone up.
- A reworking of the quality pricing model to better estimate real costs of production and attribute appropriate value to exemplary/exceptional quality coffees
- And of course the coffee is among the best harvested the entire year in Kenya, so you know it is worth it, my brethren.
And with that, read even a bit more about Kenyan coffee, the subject of this week’s Nod.
As always, find our Nods at:
http://www.intelligentsiacoffee.com/origin/offerings.
Best,
Geoff Watts
VP of Coffee
Intelligentsia Coffee & Tea
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