What does transparency mean for coffee prices? What does FOB actually mean? How high are the production costs for coffee? And what is direct trade?
It is absurd—on the consumer side, coffee is becoming increasingly diverse—there is more and more choice, more roasters, new blends, new forms of preparation, new machines—while at the coffee origin, diversity is dwindling. For many producers, coffee production is no longer worthwhile. More and more producers are leaving the coffee business, switching to other products, or turning their backs on agriculture entirely.
Transparency = fair coffee prices?
In this context, the demand for fair prices is becoming increasingly vocal. But what is fair? What is just? Many coffee roasters see the disclosure of purchase prices as a first step. 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, that can say something about the price paid for the coffee.
However, the understanding of these figures is limited for the vast majority. That is why we invited Pascal Herzog, Head of Volcafe Select (2015-2019), to talk about these topics with him.
Logically, one should dare to have transparency in both directions. If the producer dares to do a data striptease and the trader does the same, then the roastery could also do it and show what their accounting is composed of.
Pascal Herzog, May 2019
The result is a podcast that clarifies many questions, raises new ones, and holds coffee roasters accountable.
What are direct trade, FOB, and production costs?
Pascal Herzog has defined four terms for us and summarized them briefly and concisely.
FOB – Free on Board
- FOB or Free on Board is a clearly defined contractual clause (Incoterm 2010). The clause states that all costs and risks pass to the buyer as soon as 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 suggests itself.
COP – Cost of Production
- COP or Cost of Production. The 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 approach 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 the direct communication between the roaster and the coffee farmer, or the responsible cooperative. In general, this can help to increase transparency within the supply chain. Most coffee suppliers today offer to ship, finance, import, and finally deliver the directly traded coffee for the roaster.
And last but not least, a brief input on a topic that we discuss in more detail in the podcast—it is about the “coyotes,” or middlemen. Pascal Herzog on this:
- Cut out the middle man: The aim here is to keep supply chains as short as possible. In my opinion, it must be assessed on a case-by-case basis how long a supply chain should ideally be. The local conditions must be taken into consideration, as well as the function of the individual links and their bargaining power.
Read/listen more on the topic:
Podcast with Peter Lerch on the global coffee trade.
Podcast with Roger Wittwer and Peter Lerch on the price decline in coffee.
