By Ashley Prentice
During SCAA Expo, two excellent sessions on the cost of sustainable coffee production were presented, but why is this topic important and relevant to our industry today? As Chad Trewick best explained it in his article, Why Learn About the Cost of Production (Read Here), “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 panel at Expo included a variety of value chain actors, three coffee producers from different countries and coffee roasters, which lead to insightful perspectives from different actors in the value chain.
Juan Luis Barrios, Coffee Producer from Guatemala, of Finca la Merced, initiated the panel breaking down specifically what comprised his costs and explaining variables that directly influenced them. Cost per hectare includes the costs of pruning, fertilizing and any activity related to maintaining a healthy farm, which are very labor intensive. This is in addition to the cost of administration and security personnel, demonstrating that labor can amount to over 60% of the total cost of producing coffee.
In Guatemala for instance, explained Juan Luis, the minimum wage goes up by law 5% every year, so on that side we are getting squeezed. On the other hand, climate change is a big issue as well, raising costs since the yields are reduced because of drought. For instance, this harvest, El Niño worsened the conversion rates and caused some black beans reducing overall yields. These are big challenges being faced by producers, getting squeezed with increasing costs and market prices that are low (below costs of production (CoP)) and highly volatile.
The owner of the farm Fazenda California in Brazil explained how CoP could be calculated in two ways: The cost per hectare and the cost per pound. Good Agricultural Practices lead to an increase in yield and often to a reduction in the CoP per pound but could often increases CoP per hectare. He emphasized on the importance of tracing back quality, productivity, and costs in order to better manage the causes that could help improve efficiency and profitability at the farm. However, there are causes that farmers cannot control, like weather. Brazil has suffered two extreme droughts, not even irrigation was enough, so yields have been much less in the past harvests. The costs per hectare has been the same, but costs per bag increases because productivity is less. This demonstrates how CoP varies from year to year and how climate change, El Niño, or Coffee Leaf Rust can affect yields and increase the amount of inputs, and therefore the cost of producing coffee.
Despite farmers’ efforts to be more efficient, using resources to the best of the ability, striving for more productivity and better quality, many variables continue to be out of their control. Additionally C Market Pricing and exchange rates which are highly volatile and out of the control of a farmer will directly impact their profitability. Volatility and risk are a big challenge for farmers.
With a Roaster and market perspective, Tracy Ging, Sales and Marketing Director at Volcafé Specialty suggested that Cost of production should not be the sole focus when speaking about sustainability in value chains and profitability, but also mitigating risk. During her time at S&D Coffee they partnered with groups of small producers to increase productivity and profitability, and focused on managing risk. Miriam Elizabeth Perez from Café Orgánico Marcala S.A (COMSA), Honduras comments, “We (producers) are always in risk and prices have been low for a couple of years.” For this reason It is essential to collaborate as a value chain, with importers and roasters on best ways to manage risk. Most farmers that just rely on the C market and do not have solid partnerships or risk mitigation tactics, soon realize that they are not profitable, and look to sell their farms.
The sustainability of the coffee industry is dependent on ensuring positive social, economic, and environmental conditions for coffee communities around the world. Buyers and farmers need to seek transparent partnerships, and explore methods and collaborative approaches to create sustainable value chains. Sustainable meaning that coffee, and good coffee, continues to be produced in the future because it is a viable business for all players in the chain. This involves economic incentives that impulse rural development, and ensure that younger generations are willing to continue to work in coffee.
Ashley is a third generation coffee producer from Guatemala with a Masters in Coffee Science and Economics. She is currently on the SCAA Sustainability council and working with small coffee farmers in Guatemala through the Rural Value Chains Project (RVCP) supported by USAID’s Feed the Future initiative.