As a rule of thumb, the smaller business is, the more it is vulnerable to all kinds of trouble that can hit the market. And the coffee market isn't an exception. According to Fairtrade data, 80% of coffee in the world is made by 25 million small farmers. Despite that, all of them are vulnerable to economic difficulties that happen because of the instability of the global coffee price (known as the C price).
This price is shaped by international supply and demand and is also hardly influenced by the approximate future price of coffee-based financial derivatives. Simply put, that system is pretty complex.
How does it affect small farmers exactly? And what all of this does have to do with specialty coffee?
How C price affect coffee farmers?
The C price often serves as a reference for price negotiations with farmers. In Columbia, for example, the FNC (National Coffee Growers’ Federation) buys all the coffee brought to it according to the C price. The vast majority of other buyers setting the price at some amount or percentage above the FNC's price for parchment coffee.
Sounds fair, right? So what's the problem? The thing is farmer's production costs are not connected in any way with dynamic changes of C price, which for producers result in very small profits from selling their crops.
In fact, even a tiny fluctuation in C price can put a farmer's welfare into the danger zone. This is especially true for small farms, because, first of all, they are largely affected by currency exchange rates — C price is always set in USD.
In addition to this problem, small farmers just can't hedge like the rest of the supply chain actors with their large finances and huge experience do. The ICE signs a coffee future contract at 17,000 kilos (37,500 pounds) of green coffee — an unrealistic amount of yearly production for most small coffee farmers. It's just out of their league. And at the same time, financial instability prevents them from investing in better farm infrastructure which would help with the amount and quality of produced coffee.
A system that will allow small farmers who don't work with specialty coffee to hedge against C price fluctuations would really help them, but sadly it doesn't exist yet.
The disconnection between efficient and specialty markets
Efficient market — the one where all information about a product or a share is accessible to everyone, so the prices are always "fair" because anyone can check the real cost of things. The problem is that the specialty market can't be efficient by definition, because available supplies and customer's demand hugely affect the prices.
An efficient market needs either the product to be homogenous or the market itself to have clear differences and quality levels between products. This is okay for "basic goods" (commercial-grade coffee, for example) because they are interchangeable with other products of the same type and basically become uniform across producers.
But specialty coffee is not uniform, it is not interchangeable, and it's not a basic good by any means. The most valuable part of specialty coffee is its sensory characteristics, which is pretty hard to clearly class and compare. International Trade Centre's info suggests that specialty coffee is 10% of world coffee production, so it also can be considered pretty rare and can't be easily compared with any form of commodity-grade coffee. It's just too non-uniform.
And on top of that, there is no truly objective way to estimate the sensory characteristic of cup quality in a numerical way, so it's pretty hard to use them to enforce supply contracts.
This harms farmers in the first place but also hurts the specialty coffee market as a whole: the prices, based on physical quality and country of origin, not high enough to justify the production of specialty-grade coffee, even if it can be priced with premiums a lot higher than one's that settled by commodities trading houses when it's sold to specialty roasters.
Who benefits from an efficient market?
Both selling in an efficient market and selling into a non-efficient (specialty market, for example) has their risks. Working with an efficient market unhedged means that farmers must sometimes weather the storm of price fluctuations and take some losses. Working with a non-efficient market can lead to a situation where farmers can't sell their products at all.
So is there a way to find a better solution?
With different prices for each product based on the customer's demand and its unique features, better and more consistent prices for high-quality coffee can be achieved. But constant access to dedicated buyers is also needed, which sometimes can be a problem.
Selling their products by themselves can be much more profitable for farmers than traditional channels tied to the commodity, but all responsibility for the losses also would be on them. If the cost of coffee produced by farmers doesn't tie to C price and most specialty roasters also don't use C price to determine their prices, why must the farmer's income be bounded to it? Set starting price at the amount which the consumers are willing to pay for the product and go backward on the supply chain to the starting point — the farmers — make much more sense.
The direct chain supply structure approach becomes a trend in several coffee-making countries, but, of course, this is a decision each farmer must make for themselves. The main point is that farmers should have the opportunity to make such a decision.
The more farmers know about the global economic structure used for trade the coffee they produce, the more opportunities to make their own decisions that can benefit their livelihood are presented for them.
We as a global coffee industry should try to learn more about the international economics of the coffee trade because it is much more complicated than, for example, pineapples. Stability and fairness for all people involved in the industry must be our number one priority and in the current state of things, small farmers are the ones who need help the most.
After all, if there would be no farmers, there would be no coffee.