Rich Farmer, Poor Farmerโฏ
ย ย ย 5 Minutes Read
Alejandro Cadena
Co-founder and CEO
Coffee prices have been โฏtrading โฏabove โฏone โฏdollar/lb. โฏforโฏ mostโฏ of the last โฏfifteenโฏ years.โฏ When compared โฏto โฏprices seen duringโฏ the previous decade, coffee farmers have fared much better in the last few years than they did in the early 2000โs: โฏbetween 2002 and 2003 prices failed to rise above โฏ60 cents/lb. โฏSinceโฏ 2005, prices have remained aboveโฏ 1.00/lb, โฏand inโฏ May โฏof 2011 we reached โฏthe highest point in the last 18 years atโฏ $3.00/lb.โฏ The average โCโ price between 2002 and 2009 was $0.977/lb, while the average price between 2010 and September 30, 2018 was $1.59/lb.โฏ Additionally,โฏ between 2009 and 2015, the rust crisis drove physical differentials for most Latin American origins above 30 cents/lb, meaning the average price received by coffee growersโฏ during much of this time wereโฏ even higher than the โCโ price.โฏโฏ
To โฏexamine the profitability of coffee farming in Latin America more closely, โฏI โฏdecided to simulate the income โฏreceived โฏby farmers during the last 8 years, using the average โCโ price per year and comparing it with an average cost of production of USD 1.20/lb โฏFOB.โฏ Since no reliable figures exist regarding costs of production, I used the numbers Caravela calculated in 2017 using our internal cost of production simulation model.โฏ This model estimates costs of production using market prices of inputs needed (labour, fertilizers, etc.), plus assumptions about yields andโฏ labor productivity tailored to each country.โฏ The results of that model show us that in 2017 costs of production in the seven Latin American countries 1 โฏwhere we operate were between $1.20/lb โฏin Nicaragua and $1.80/lb โฏfor Ecuador (see graph below). ย ย
ย Given these numbers and taking into account inflation over this โฏeight-yearโฏ period, for simplicityโs sake I decided to use an average cost of
productionโฏof $1.20/lb FOBโฏ for the eight-year period.โฏ Using these basic assumptions, the graph below charts the profitability a farmer would have achieved every year since 2010.โฏ
ย
Profitability ranged between 53% in 2011 and -2% in 2018, whilst the average profit for the eight-year period was a very healthy 24%.โฏ Any business owner or shareholder receiving a 24% โฏaverage โฏnet profit marginโฏ over the course of eight years โฏwould be very happy. โฏSoโฏ why โฏis this profit margin insufficient for the vast majority of coffee growers in Latin America?โฏโฏ
It turns out that the majority of the worldโs coffee farmers are smallholders owning less than 1 hectare โฏof land, producingโฏ only anโฏaverage about 5 bags (60 kg) per ha โฏevery year โ or less.โฏ Unfortunately, coffee yields have โฏremained flat or evenโฏ decreasedโฏ over the last two decades in most coffee-producing countries, โฏexceptโฏ forโฏ Brazil and Vietnam (see graph below).โฏ
Instead of looking at profit margin, letโs examine the absolute โฏprofit โฏfor
threeโฏ different type ofโฏ small โฏcoffee farmers with different farms sizes and yields:โฏโฏ
As demonstrated in the table below, a small farmer with very low productivity (Farmer A) - even with a 24% net profit - would have madeโฏ a profit ofโฏ only $21 dollars a month, orโฏ $247โฏdollars a year. โฏAs you can imagine, with so little money remaining in their pocket at yearโs end, that farmer has scant left over to invest in his farm orโฏ improve โฏtheir familyโs quality of life.โฏโฏ Small farmers are barely subsisting, so itโs no wonder that their childrenโฏ are opting to seek out more viable alternatives in urban areas.โฏ The situation improves should that farmer be able to produce at least 15 bags per hectare (Farmer B), but it still is not enough.โฏโฏ
However, aโฏ coffee farmer with 3 hectares and decent โฏproductivityโฏ (Farmer C) would have made aโฏ $2,227-dollarโฏ profit at the end of the year.โฏ Although itโs still not a great profit, with this โฏsubstantially โฏlarger sum of money, a farmerโฏ would โฏbe able โฏto invest in their farm and/or โฏhis family.
Now, letโsโฏ calculate โฏthe price we would have to pay a farmer if we wanted him to achieve an annual profit of, letโs say 5,000 dollars. โฏAs you can see in the table below, the price needed for a small, low productivity farmer would have to be extremely highโฏ while the one in the middle group would also be quite high โ prices that the vast majority of coffee roasters would not be willing to pay for coffees scoring below 86 points; meanwhile the price paid to the medium-sized, highly productive farmer (Farmer C) would be in a more reasonable price range.โฏ โฏ โฏโฏ
Clearly, the main issue facing coffee farmers around the world is not related exclusively to prices โฏorโฏ profitability. There is a problem related toโฏ the scaleโฏ of most coffee farms around the world, and the lack of productivity suffered by most small farmers due to lack of capital and/or financing to purchase โฏinputs,โฏ compounded by the lack of knowledge regarding optimal coffee farm management.โฏ
Caravela has long recognizedโฏ that paying farmers high prices - especiallyโฏ for just a small fraction of what they produce - is not necessarily enough โฏto provideโฏ coffee growers with โฏeconomic โฏsustainability; that is why our model is built on threeโฏ basic pillarsโฏ which weโฏ believe โฏare key to creating a sustainable coffee industry:โฏโฏ
- Buying all their qualityโฏ coffeeโฏโ notโฏ just the highest-scoringโฏ microlotsโฏโ starting from 83 points,โฏ at differentiated premium prices according to quality,โฏ allowing producers to maximize their income, while incentivizing them to continue quality improvements.
- Developing long-term relationships with coffee roasters to reduce risk. Coffee trees take at least 3 years to start producing, and the investment is not recuperated until 5 or 6 years after planting; having good prices for 1 year is not sufficient.โฏ
- Providing โฏcupping feedback, โฏeducation and technical assistanceโฏ through our PECA program โฏto help coffee growers improve the โฏquality and quantity of their harvests, reduce phytosanitary risks, and better manage their farms, thereby reducing costs of production.โฏ
A roaster who wants to help secure the future of coffee must start by putting their money where their mouth is: reward producers with good prices for all their quality coffee and commit to long-term relationships with those quality-minded producers to ensure they have income stability. Growers then know that roasters can be more than just clients, they can be true business partners. We have witnessed how coffee producers with long-term, fixed-priced contracts with roasters have been able to focus on producing quality coffee consistently, improving their quality of life and investing their profits to buy more land, thereby increasing their farm size โ and income โ to sustainable levels.
ย ย โฏIn 2015,โฏ a few coffee โฏentitiesโฏ calculated โฏthe costโฏ of productionโฏ for smallholdersโฏ were around USD 1.10/lb . โจ
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