Pricing Series: Six Initiatives to Make Coffee Prices Break Free From the C-Market

The coffee industry is a breeding ground for ideas on how to tackle supply chain inequalities. Learn which initiatives and pricing models have been developed to eschew the c-market and answer the million-dollar question: how can we set prices that support sustainable production?

When we talk about coffee prices, the dominant reference is the c-market or the commodity market, set around the New York Stock Exchange, a subsidiary of The Intercontinental Exchange (ICE). The c-market determines coffee prices for Arabica using the macro-economics model of supply and demand, which assumes that all coffees are the same and therefore interchangeable regardless of origin, process, variety, etc.

In an undifferentiated market, coffee producers don’t get to define prices. For decades, farmers have been, and continue to be, price takers, expected to shoulder the risk of making a loss when costs of production are higher than market prices. Though there is a lack of data on this subject covering the more than 50 coffee-producing countries, the industry has long suspected that costs of production have exceeded the average market prices more often than not.

As the industry becomes more aware of its own shortfalls and unbalanced supply chain dynamics, organisations in the sector and private companies have sought to address the problem and answer the million-dollar question: how do we set prices for coffee that support sustainable production? In this article, the first of a three-part series on coffee pricing, we explore a handful of these approaches and initiatives led by certifications, for-profit businesses and sector organisations.

The invisible hand of the c-market

It’s widely accepted that the c-market provides safety to buyers and sellers through hedging of futures contracts. This trading mechanism also creates a standard contract that makes the buying and selling of coffee easy. It is one of the reasons why coffee became such an important commodity in the first place. However, the c-market has been equally widely criticised for embedding volatility into its model and for creating a system that homogenised a product that, maybe, should not be considered homogenous. Moreover, this market is ultimately influenced by actors that are not interested in coffee but rather in gains made by speculation.

While many specialty buyers believe to be removed from the c-market when setting prices, they are invisibly tied to it. This happens in part due to the need to fulfil contracts and the sheer volume this entails, the role of aggregators in local market dynamics and, potentially, due to the price-setting power of larger-volume buyers over smaller mills.

Take a specialty coffee lot produced by a micro-mill in Latin America as an example. In 2021 and 2022, c-market prices have hit record highs. At the same time, production declined. Then, local cherry buyers hiked up their prices to fulfil their (futures) contracts. As a result, smaller or independent mills also had to rack up their prices in order to compete, increasing their costs of production for that specialty coffee lot even if the big mills and micro-mills are working with different qualities and even different client segments.

There are obvious flaws to fixing coffee prices on the c-market. For one, predictability and stability are nearly impossible. Moreover, the c-market ignores quality, origin, and costs of production. It does not take into account the product differentiation and varying infrastructure and conditions in each producing origin. Because of this, it has a detrimental impact on producers’ well-being in most countries. Finally, it’s an inequitable way of setting prices. This is why some of the following approaches and initiatives were born.

Certification-led initiatives

1. The Fairtrade Minimum Price

Fairtrade is by far the most well-known organisation to propose a successful alternative pricing model to the c-market. The organisation sets a minimum price so that producers can “cover the average costs of sustainably producing their crop” and be shielded against volatility, acting “as a safety net when market prices drop”.

Fairtrade prices consist of two parts: (1) the Fairtrade Minimum Price of US$ 1.40/lb (US$ 0.30/lb more if the coffee is organic), and (2) the Fairtrade premium of US$ 0.20/lb. The FT minimum is the base price that cooperatives are guaranteed to receive. No matter what the market price is, there is a floor. The FT premium, on the other hand, is an extra value paid to cooperatives, who decide how it will be invested. Sometimes it goes to producers’ pockets and other times it is used to fund projects and infrastructure.

Fairtrade helps to ensure that decent working conditions and access to credit are provided to cooperative members. The initiative has been applauded for providing a greater sense of predictability to farmers. Nonetheless, the incoterm of the Fairtrade Minimum Price is FOB, meaning that the price paid to farmers can vary and often continue to be linked to local market prices.

The model has also been criticised due to the certification costs, altitude constraints and other barriers that prevent it from becoming an accessible alternative to conventional pricing. There is often questioning whether the costs of fulfilling the membership requirements outweigh the premium. Furthermore, the Fairtrade model works fairly and equitably only when the cooperatives or groups have democratic governance and it can be less efficient when organisations have weak governance structures.

Opportunities

A price floor ensures a minimum price no matter the market conditions.
A greater sense of stability for producers and cooperatives.
Additional investment incentives improve processes, infrastructure, and services for farmers.

Challenges

Barriers such as certification costs and altitude constraints prevent smallholders to join the Fairtrade movements.
Paperwork is laborious, potentially surpassing the premium earned from the certification.
No visibility on farmgate prices as incoterm is set as FOB.
The distribution and use of premiums depend on the transparency and democracy of each organisation.

2. Transparent Profit and Equal Profit

Equal Profit Sàrl, a Swiss social enterprise founded in 2019, has created two certification schemes. The first one, Transparent Profit, provides full transparency in terms of profit distribution among supply chain actors. By scanning a QR code on the packaging of the product, consumers visualize who earns what on a graph.

Equal Profit, the second certification, builds on transparency to ensure equity. In this model, the profit of each actor in the supply chain is distributed proportionally to their costs in each transaction. Information is shared both ways and the selling price is negotiated collectively with the support of the organisation. By collecting and analysing costs of production, Equal Profit ensures that each actor earns an equitable profit. The costs are verified in two ways: first, actors disclose their financial data; second, a machine learning algorithm processes the declared costs. This model attempts to combat inequitable earnings based on the power differences between actors across the value chain.

Although in its infancy, the company aims to scale up thanks to the development of a standardized cost calculation methodology and of an easy-to-use IT platform. This allows for digitising the two processes, which generally represent a high cost for supply chain actors, i.e., the auditing and certification process. Each stakeholder enters its own data into the system, and the system replaces an auditing entity by verifying that the standards are respected and the data is correct. Based on the data and the certification that is selected, the platform discloses the actual distribution of profit (if Transparent Profit certified) or calculates the distribution of profit in an equitable manner (if Equal Profit certified).

The Swiss roaster Xalala has implemented the Equal Profit certification for the first time in coffee together with Ensambles in Mexico. Results of the analysis are available here.

Opportunities

Challenges the traditional pricing model based on unequal power distribution (e.g. North-South divide) by giving equitable weights to each actor across the value chain based on their costs.
Third-party verification brings accountability.

Challenges

All actors within a supply chain should be willing to participate.
Requires that producers or organisations can calculate their full costs.
Restricted implementation when data on costs of production is not available.

Private-led initiatives

1. Mercanta’s Price Guarantee

Mercanta, a green coffee importer based in the UK, claims to buy all their coffee without links to the c-market. “Before this subject was topical, relevant, or much discussed, we had set a minimum FOB Origin price of US$1.80/lb for Arabica coffee, below which we will not buy coffee. We trade NO coffee on contracts connected to the New York C commodity market,” shared Mercanta’s founder Stephen Hurst in April 2019.

Mercanta’s price was calculated by adding 20% to US$1.50/lb, which they consider to be above the costs of production of most of their suppliers. “On farms where the cost of production exceeds US$1.50/lb, we make that adjustment accordingly and in discussion with the producer,” they write. Similar to the FT model, it supports producers to predict earnings, helping them further invest. However, as with FT, if differentiation is not made between farmgate and FOB and if social, political, and economic reasons are not considered to adjust the price guarantee, it might not be effective in the long term.

Opportunities

More predictable prices for producers.
Potentially meets the costs of production for origin businesses.

Challenges

If differentiation is not made between farmgate and FOB prices and if social, political, and economic reasons are not considered to adjust the price guarantee, the model may not be as effective in the long term.
Keep producers as price-takers.

2. Sustainable Harvest’s Verified Living Income

In 2021, importing company Sustainable Harvest - in partnership with Heifer International and Bellwether Coffee - published a research paper on Verified Living Income. Adapted from Heifer’s Living Income Benchmark, their model focuses on a price that can guarantee a living income for producers. The benchmark adapts a methodology originally developed by Richard and Martha Anker to estimate living incomes for households.

Living Income is explained as a collective earning of a household that meets, or exceeds the cost of a decent standard of living (consisting of decent food, decent housing, essential needs such as school and clothing, and margin for unforeseen events) in alignment with international decency standards (e.g. WHO, ILO, and UNHabitat).

The VLI model hopes to determine the minimum prices for green coffee based on farmers’ livelihood needs. The initiative, in its pilot phase, collected data from 38 smallholder coffee farmers in Colombia on costs of production, farm productivity, and land size to develop what it calls a sensitivity analysis model, then overlaid it against a Living Income Benchmark. In their pilot study with the Asociación de Productores Ecologicós de Planadas (ASOPEP), they found that US$1.89/lb farmgate (green coffee) has to be paid to a household solely dependent on coffee to achieve a local Living Income benchmark.

If successfully implemented, the VLI model has the potential to help producers lead a more sustainable and thriving life beyond simply meeting their costs of production. However, challenges exist for the implementation at scale and when there’s no data on costs of production for each farm.

Opportunities

Goes beyond the costs of production and supports sustainable livelihoods.
Verifiable model based on field research.

Challenges

Implementation at scale can be challenging due to the complex collection and verification of data for multiple countries, regions and organisations.
Restricted implementation when data on costs of production is not available.
Focus on price floors rather than profitability.

Other initiatives

1. Algrano’s Price Makers Approach

As Algrano is not a buyer, it doesn’t enforce a pricing model as such. Instead, it creates an environment where producers can set their own prices according to their own calculations of cost, risk and profitability. Roasters then decide to buy based on the proposed price, quality, and other elements such as producers’ stories. The platform makes it possible to negotiate and facilitates direct linkages between the producers and buyers.

This model challenges the existing approaches’ inherent power dynamics as producers become price makers and have the opportunity to further differentiate their products through branding and storytelling. The platform gives sellers complete freedom and agency to set prices. They can also view the prices of other coffees and evaluate their private performance reports to better price their coffees.

The opportunities and benefits here are evident as producers get exposure, enjoy pricing agency and learn about the market. However, challenges may exist if producers do not fully understand their costs and, as there is no benchmark, it can potentially lead them to propose lower prices to be competitive. If buyers are not sensitive and attentive to the varying factors affecting the costs of production, independent smallholders can shoulder more of the risk. Nonetheless, the platform facilitates a space for conversations that can aid mutually beneficial relationships to be formed.

Opportunities

Shifts the power dynamics between buyers and sellers ensuring that producers are price makers and not takers.
Transparency supports producers in price discovery which is not directly linked to the c-price.
Challenges the traditional pricing model based on unequal power distribution (e.g. North-South divide) by giving equal weights to each actor across the value chain.
Creates learning opportunities for both ends of the supply chain.

Challenges

Accessibility to smallholders as many might not be able to set prices due to the absence of data on costs of production.
The absence of a benchmark can lead to a race to the bottom as producers strive to remain competitive.

2. Specialty Coffee Transaction Guide

Widely known in the specialised segment of the industry, the Specialty Coffee Transaction Guide (SCTG) is an annual report that analyzes over 50,000 coffee contracts of roughly 100 coffee importers, exporters and roasters globally to set benchmarks for differentiated coffees. The report provides key data on median specialty coffee prices according to their qualities and lot sizes across varying producing regions. It also has data over the past three years, providing reference to both coffee buyers and sellers in price discovery.

The SCTG is not a pricing model in itself as the organisation doesn’t trade coffee nor interfere in setting prices. However, it is a tool that can be used by varying actors in the industry to understand the ongoing prices for certain qualities, origins and lot sizes, and consider them in their pricing decisions. The tool’s limitation is the lack of differentiation between farm gate and FOB prices. As the data is based on FOB prices, producers who don’t have a full picture of the transport and export costs are not able to translate these benchmarks.

Opportunities

An alternative and more relevant benchmark set on real data.
Facilitates understanding of price trends and differentiated prices amongst different qualities, lot sizes and origins.

Challenges

Data is based on the FOB incoterm and can only be fully used by producers with a full overview of transport and exporting costs.

References

https://www.fairtrade.net/about/how-fairtrade-works
If the market price is higher than US$ 1.40/lb, the FT price will be the market price + the FT premium.
Tellman, B., Gray, L. C., & Bacon, C. M. (2011). Not Fair Enough: Historic and Institutional Barriers to Fair Trade Coffee in El Salvador. Journal of Latin American Geography, 10(2), 107–127. http://www.jstor.org/stable/23209587
Jaffee, D. (2007). Brewing justice: Fairtrade coffee, sustainability, and survival. Berkeley: University of California Press.
https://sca.coffee/sca-news/25/issue-14/profit-sharing-towards-a-just-and-stable-future-for-coffee-growers
https://ankerresearchinstitute.org/
https://www.living-income.com/measurement-living-income
https://bellwethercoffee.com/blog/verified-living-income-a-new-green-coffee-pricing-model-for-sustainable-sourcing/

The section "Transparent Profit and Equal Profit" of this article has been updated on May 16th 2022.

This article was written by Sunghee Tark. She is the co-founder & Chief Executive Officer of Bean Voyage, a feminist organisation that provides smallholder womxn coffee producers with training on sustainable coffee production and access to markets. Bean Voyage is the Grand Prize Winner of the Facebook Social Entrepreneurship Award 2018, UN Youth Report's 50 Gaming Changing Plan and also Emma Watson's Gender Equality Scholarship.

Sunghee is responsible for market outreach, programming and strategic planning. She is an SCA's LEAD Scholar, Re:co Fellow, SOCAP Fellow, Byron Fellow, and Davis Scholar. Previously, she led organisations working on youth empowerment, early childhood education, and human rights. She holds an MSc in Public Policy and a B.A. in Economics.

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Pricing Series: Six Initiatives to Make Coffee Prices Break Free From the C-Market

The invisible hand of the c-market