Why Learn About the Cost of Production?

chad1By Chad Trewick, Reciprocafé, LLC

The coffee industry—and not only the specialty sector, although we lead the charge—is gradually realizing the future threats to its raw material supply, green coffee. Rising cost of production eroding earning potential, increasing competition from alternative economic activities, and market price volatility are all weakening our value chain due to the great risks they represent for farmer profitability.

The cost of production, put simply, is the
 sum of all of the inputs that combine to result 
in coffee for a farmer to sell: labor, fertilizers, transportation, milling, etc. What is included
 in these figures varies greatly. This variability 
in methodologies, input costs, and conditions 
in different producing regions contributes 
to the inability to make comparisons across countries, regions, or even neighboring farms. Furthermore, the complexity of the data leads to misunderstandings about the cost of production and lack of trust in the information that does exist.

The coffee community has indicated repeatedly in SCAA membership surveys that sustainability tops the list of reasons they belong to SCAA. To support that, SCAA’s Sustainability Council has made it one of our top priorities to learn about the underlying economics of coffee production at the farm level. Any evolution of our industry’s purchasing practices, and how coffee is commercialized both at origin and in consuming countries, has to start with a clear understanding of this very complex equation, which varies from country to country, region to region, and farm to farm.

We have started with a review of the information that is currently available about coffee production economics. We have studies from Colombia, Guatemala, Peru, and Uganda, and more are coming in as we raise awareness about our work. While these documents vary greatly in their methodologies and the variables included in their analyses of production economics, we feel it is important to begin by assessing the status of current information on the topic with a literature review.

The literature review will yield a couple of outputs. Perhaps the most important will be to influence and inform a more formal study of coffee production economics that World Coffee Research (WCR) is undertaking later this year. Representatives from the SCAA Sustainability Council are in regular contact with the advisor to this study, who is helping to guide our literature review, ensuring that we understand the elements of each study and can evaluate them adequately. Furthermore, our group will serve as an industry sounding board throughout the development of WCR’s study, to ensure that a myriad of perspectives and priorities from the industry are incorporated.

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Another output of our literature review is that we will share the information we gather with SCAA membership. We have not yet determined the best way for us to properly disseminate this valuable information once we have synthesized the data, but we will identify common denominators among the studies that we can share. As a council, we feel that it is important to start the process of elevating our industry’s dialogue on the topic, so that future green coffee buyers will be able to consider the true economic costs associated with coffee production as they make their purchases, and companies can work to evolve their assumed cost structure.

Something we wish to be transparent about is that we may uncover that coffee alone cannot always provide a sustainable livelihood for the average smallholder. This is one hypothesis 
that may be supported by an increased understanding of the underlying economics of coffee production. That is to say, we anticipate the research may reveal that the cultivation
of small plots of land dedicated to coffee production alone cannot support a dignified livelihood, and diverse income sources may be required to help bridge that gap. Put simply,
the commercial prices that could potentially
be required upon further understanding of production economics might be unrealistic for our businesses and for our industry. This is a harsh premise that is catching the attention 
of NGOs working in coffee, as they increase 
the prioritization they place on income diversification tactics. If this lack of smallholder viability surfaces from our broader study, we hope decision-makers in our industry will encourage diversification among smallholder farmers as a means of strengthening their partnerships.

Our preliminary review has exposed that cost of production is highly correlated to labor costs. Coffee is an agricultural product grown in countries where it is known that exploitive or even forced labor was an inherent part of the agricultural system historically. We do not live in those times anymore, and to ensure that the production of our raw material remains viable, we see it as our responsibility as an industry to elevate the livelihoods of farmworkers by collecting data that will bring to light the real costs associated with paying a minimum living wage and complying with social security regulations. Coffee is a luxury (though it is a necessity for many!), but it is not food; and
even as a luxury, it generally pays poorly on the producer side. We have an opportunity—and are compelled—to work toward a more equitable distribution of the wealth coffee can generate as a crop and as a product.

This will be an enlightening journey for our industry. It is one we are eager to embark upon collaboratively with stakeholders throughout our value chain in order to secure access to differentiated and high-quality beans. We enter into this work fully aware that we will learn about new opportunities to evolve our business models and purchasing strategies. And we do this to support the growing sentiment that there is a pressing need to elevate the value of green coffee so that the people who work to produce it can lead dignified lives. In so many ways, this is an effort to strive for dignified livelihoods throughout our entire value chain—from producer to retailer and all of us in between.

It is our commitment as the Sustainability Council that we will broadcast frequent status updates about this work to our membership so that we are all learning about these important topics together. We invite members from our global community to contribute to this process by sharing with us studies on coffee production economics. Please send them to sustainability@scaa.org.

chadChad Trewick has
 long been a champion 
of responsible sourc
ing. He’s spent his 
years in the specialty 
coffee industry building bridges between 
wide ranging stakeholders, from coffee 
farm to cupping room 
to boardroom. His focus (and personal mission) is to maintain access to quality while strengthening the entire value chain, ensuring scalable, mutually-beneficial relationships. After more than two decades working primarily on the roaster side in the specialty coffee industry, plus time spent gaining a deeper understanding of the financial side of the coffee market, Chad formed Reciprocafé, LLC, a consultancy service that prioritizes shared value and measured and meaningful coffee value chain work and support. Trewick has been a volunteer with SCAA for 20 years. He supports industry efforts toward knowledge about and understanding of our product
and its value chain. He is the SCAA’s board of directors liaison to the organization’s Sustainability Council, and he also sits on the board’s Audit Committee.