A Study on Costs of Production in Latin America
11 Minute read
By Alejandro Cadena
Co-founder and CEO
The majority of small-holder coffee farmers in the world do not know or even fully understand their costs of production. For decades, small-scale farmers have been price takers, accepting whatever price they get paid for the beans they produce.
From 1962 until 1989, the price of coffee was “subsidized” due to a quota system established in the International Coffee Agreement (ICA), which effectively put minimum prices on green coffee. The minimum price established for Colombian UGQ coffee in 1989 prior to when the ICA ended was USD 1.20/lb; the Agreement ended in that year and so for the past thirty years most growers across the world have had to sell their coffee at the market price, usually tied to the ‘C-Market’. In the years since the end of the ICA quota system, market coffee prices have been quite volatile, with periods below what the industry believes are the costs of production.
But do we really know how much it costs to produce a pound or kilo of green coffee? Unfortunately, the answer is no. Although there have been numerous studies done on the subject, the reality is that it is quite complex to calculate costs of production at the farm-level due to a few factors.
Given the vicious cycle that most small-holder farmers are subject to, we believe that if coffee growers knew their costs of production, farmers would better understand their business and make informed decisions about what to do on their farms, including whether to continue growing coffee.
For Caravela, it is also important to know the costs of production in each country where we source coffee as it provides us with an objective way to determine the FOB prices that we sell coffee and therefore guarantee a minimum level of profitability for our farmer partners.
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