Exploring the Cost of Sustainable Production, Part 1: Tactics and Output

By Vera Espindola

“Exploring the Cost of Sustainable Production,” the second in a series of Sustainability sessions during the 2016 SCAA Expo, was an opportunity to share updates and information about ongoing research on the economics of coffee production. A panel representing research partnerships presented their indicators, methodologies and early findings.

Presenter 1: Pascale Schuit | World Coffee Research / Union Hand Roasted Coffee

A summary of multiple studies, one of the main messages was that 78% of all coffee producers produce more than coffee only. Other findings discussed include:

  • Production and Cost of Production (COP) are closely related.
  • Good Agricultural Practices leads to an increase in yield often to a reduction in Cost of Production per unit but often increases COP per ha.
  • Low Cost of Production can reflect under investment in input use, therefore not desirable because it undermines long term sustainability
  • COP may vary between production systems due to different allocation of resources
  • Labor is a component that accounts for more than 80% of COP.

In order to have more efficiency in the chain, the topic should be brought to an industry issue when thinking about the demands which are made on the production side of the value chain, considering climate change mitigation and adaption as well as certification.

Presenter 2: Juan Nicolas Hernandez-Aguilera | Cornell University

Evaluated the environmental and socio-economic impacts of smallholder participation in the relationship coffee model and applied controlled experiments to understand how growers’ cooperation, trust-worthiness and risk behaviors affect product quality.

Within this topic there has been a clear underestimation and overestimation has been made. Firstly, the underestimation:

A wide array of studies have not been able to wholly estimate the costs of the time and labor invested, or only consider direct costs.

Labor may represent up to 58% – 67% of costs in Colombia where the average for Latin America is generally between 60-75%. Thereby it is important to indicate that many times the costs of family farm labor and/or cooperative work within the community is easily forgotten. Effective labor can therefore be a cost of opportunity.

The overestimation lies in the estimations that it covers the basic needs of producers as well as “rural development”. Further that macroeconomic variables are considered that are relatively exogenous to the coffee industry and that affect producers’ profitability: inflation and the exchange rate. An objective analysis is needed and should avoid these ambiguities: “rural development, “public goods and “monetary policy”.

Three case studies were presented from Honduras, Peru and Colombia.

In all cases variable costs are covered at the current price that producers receive

  • Total cash costs are covered by parchment (Peru and Honduras), allowing them to stay in business in the short-run
  • Out of pocket costs are almost covered by the Colombian producers, allowing them to cover some long-term costs such as depreciation

Two recommendations were made: 1) it is important to have baseline models as they can be useful to consider uncertain and risky scenarios, 2) Interactive tools can therefore also help to adapt the estimations to the particularities of each grower.

Presenter 3: Saurin Nanavati | Director | COSA

Different cost indicators were presented learned from the COSA experience.

Important for these type of studies is to segment the farmers.

One of the key questions that rised was how to stimulate smallholders to increase their yield and obtain ecological stability.

Different comments of the audience reflect the significance (e.g. real examples of farmers) of the issue and also worry of the industry; coffee farming in many countries (at first glance) isn’t an economic viable option (anymore).

Question remains is if it is possible to generate a “representative grower” taking into consideration all the type of variables presented in coffee farming as well mitigation of risk and market demands (including certification)?

One of the comments made by the panelists summarizes the way forward, this is an industry issue where behind these numbers are people. And as an industry we need to act.

During her master thesis ‘Development Economics’, Vera researched the value chain (value attribution) of snow peas as well as coffee. Since then she stayed in coffee, working for UTZ Certified, Dutch NGO. The UTZ program focuses on learning better farming methods to farmers, improve working conditions and take better care of the environment. Since Abril of 2016, Vera continued her professional path with the Secretary of Agriculture in Mexico (SAGARPA). SAGARPA initiated in October 2015 the Plan Integrado a la Atención del Café – Integrated Plan for the Care of Coffee. Currently as Sustainability and Shared Value Director for the Coffee and Cocoa Program, she focuses on connecting the national institutions as well as international efforts.