What does transparency mean for the price of coffee? What does FOB actually mean? And how high are the production costs of coffee? And what is Direct Trade?
It's absurd – on the consumer side, coffee is becoming more and more diverse – there's an ever-increasing selection, more roasters, new blends, new forms of presentation, new machines – while at the coffee origin, diversity is shrinking. For many producers, coffee production is no longer worthwhile. More and more producers are leaving the coffee business, switching to other products, or abandoning agriculture altogether.
Transparency = fair coffee prices?
In this context, the demand for fair prices is growing louder. But what is fair? What is just? Many coffee roasters see a first step in disclosing purchase prices. 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 terms of delivery, which can say something about the price paid for the coffee.
However, understanding these metrics is limited among the general public. That's why we invited Pascal Herzog, Head of Volcafe Select (2015-2019), to discuss these topics with him.
Consistently, transparency should be dared in both directions. If the producer dares the data striptease, and the trader does the same, then the roastery could also do it and show how their accounting is structured.
Pascal Herzog, May 2019
The result is a podcast that clarifies many questions, raises new ones, and holds coffee roasters accountable.
What is Direct Trade, FOB, and Production Costs?
Pascal Herzog has defined four terms for us and summarized them 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 transfer 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 is advisable.
COP – Cost of Production
- COP or Cost of Production. Production costs include all direct and indirect costs incurred on a coffee farm. Examples include wages (opportunity costs), land costs, fertilizers, machinery, seedlings, etc. Unfortunately, there is no standardized method for calculating COP. Accordingly, a direct comparison of data is difficult and sometimes even problematic. Only an individual perspective 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 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 directly traded coffee for the roaster.
And finally, a brief input on a topic we discuss in more detail in the podcast – it's about the "coyotes," or intermediaries. Pascal Herzog on this:
- Cut out the middle man: Here, the aim 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 optimally be. Local conditions must be taken into account, as well as the function of the individual links and their bargaining power.
Further reading/listening on the topic:
Podcast with Peter Lerch on Global Coffee Trade.
Podcast with Roger Wittwer and Peter Lerch on the coffee price collapse.
