VALUE CHAIN GLOSSARY
Some of the terms used in the coffee supply-chain are frequently misunderstood, even to those within the industry. Here is our attempt to define them as clearly as possible.
We have also added additional information to contextualise how we interact with these terms and concepts as a roastery, and what they mean to us.
C-Price:
is the trading price of Arabica at the Intercontinental Exchange (ICE). The ICE is a major commodities exchange based in New York City. As it is with many commodities, the C price is theoretically defined by supply and demand. If there is a scarcity of coffee, the price will generally go up, for example, but if the price goes too high, the demand will reduce. In reality, the ‘C’ is also influenced by speculation and futures trading. The price changes every minute, and has nothing to do with coffee quality or the cost of production for farmers. In recent years low ‘C’ prices (well below costs of production) have had devastating consequences for coffee farmers. As of 08.10.2020, the price is 1.09USD/Lb.
Conventionally, the C price has influenced all coffee prices, even specialty and premium coffees. Often importers and buyers pay premiums on top of the C-price, or calculate their prices in relation to it (we paid six times the C price for this lot, etc.). Certified Fair Trade and Fairtrade minimum prices are calculated relative to the ‘C’.
While all the coffees we buy at Vote are well above the C price, we’d like to move away from this benchmark entirely. Measuring our coffee prices against a fundamentally unfair standard isn’t helpful, nor does it give us an idea of how we can contribute to sustainable incomes and livelihoods for producers. We’re glad to see that many buyers (exporters, importers and roasteries) are doing rigorous research to help provide producers with the income they need to sustain, progress and profit from their work.
EXW / Ex-warehouse Price / Ex Works
This refers to the price paid for the coffee when it leaves the storage warehouse. This is the price that we, as a roastery, pay for green coffee, minus overland logistics. The EXW incorporates the FOB price, costs of international shipping, insurance, warehousing, financing and the margin taken by the importing company.
The role of the importer is very important to us here. As a small roastery, we do not yet have the financial or logistical capacity to buy coffee directly from producers or exporters, and we rely on importers to arrange the complicated and sometimes risky task of moving coffee across the world, checking it for quality, and storing it safely.
We rely on trusted importers who have formed relationships with producers to source coffees. We cannot afford to pay for a large volume of coffee in one sum, so importers offer us financing to pay for coffee as we use it over the course of several months. Importers (and their insurance companies) often take responsibility for potential damage and quality deterioration during shipping, so that the burden of risk is not placed on producers or roasteries.
FOB/ Free on Board/ Freight on Board:
This is an international commerce term that gets used frequently, but not everyone knows what it actually means.
Free on Board means that the seller (usually an exporter, sometimes an exporter/producer) is responsible for delivering the coffee onto the ship at the country of origin. Once the coffee is on the ship the buyer (usually an importer, sometimes a roastery) will arrange and pay for shipping, insurance, customs, etc. Thus the FOB price refers to the total amount that has been paid for a coffee at the point when it leaves the country of origin. This includes the money paid to farmers for cherries; to producers for processing; and to exporters for milling, preparation, transport, and export fees. The FOB price (typically stated in USD/Lb) has become one of the primary figures used to show how money is distributed along the coffee value chain.
The good thing about sharing FOB pricing is that these figures are usually correct, and often publicly available. ICAFE, the Costa Rica Coffee Institute, publishes the FOB prices for all Costa Rican lots every year and regulates that at least 78.1% of FOB prices must be returned to producers. Knowing FOB prices allows roasteries to understand exactly what proportion of the money they spend on coffee is returning to countries of origin.
The very significant limitation, however, is that FOB prices do not tell us how much of that money is being paid to coffee producers. There is a common misconception that the FOB price accurately reflects what producers are receiving, when, in reality the producer’s proportion can vary widely. Some countries, such as Ethiopia, have very high administrative costs which increase FOB but not producer’s incomes. Kenyan coffees have a great reputation for quality, which means that traders and exporters can market impressive coffees to international buyers without fairly distributing that money back to producers.
In recent years we’ve seen a largely positive trend of roasteries sharing their FOB prices, as we’ve done on our website. It is often still difficult to dig deeper and how FOB value is distributed between exporters and producers, but some of partners, such as Algrano, provide us a full price break down. Mustefa Abakeno, the producer of Trailblazing Zelelam and the Community Coffee lot, registered as an exporter in 2019. This means that he has greater control over the distribution process and is able to retain more value from his coffees.
Farmgate:
Farmgate prices are the price paid to the farmer. Some producers sell whole cherries to cooperatives or washing stations and other farmers process their own cherries into parchment (coffee that has been processed at a wet-mill, but not hulled for export). Farmgate prices can mean the price for cherry or sorted parchment.
Farmgate prices can be difficult to obtain: coffee passes through so many hands once it leaves the producer. Other complicating issues are that producers will often sell cherries to a formal cooperative and a less formal group, or that producers are often paid for the parchment after defect sorting, rather than the total volume they deliver. For this reason, we’ve only published Farmgate prices on our website when we can be certain of their accuracy. Falcon Specialty, for example, have an intimate knowledge of coffee production in Peru, where they operate their own exporting company, but find it difficult to attain accurate farmgate prices in some other countries.
Despite these complications, Farmgate prices are the one of the most powerful measures we have to understand how much producers are receiving for a coffee. Excitingly, some organisations are now using Blockchain technology to trace coffee back along the value chain, hopefully giving us more transparency and credibility all the way back to producers.
The above glossary is based on the following definitions and resources: