A lot has changed over the last couple of years in coffee, giving us more to catch up on than is often easily digestible. One dynamic that has so far slipped through but is relied on more heavily in consumer messaging around sustainability is the price of speciality and its relationship to Fairtrade.
It’s not uncommon to find many cafes and baristas sharing the reasoning that one way speciality is better than commodity and/or certified coffee is that it pays more than the Fairtrade price. However, much like the Direct Trade discussion, this can be ambiguous and is less commonly audited, especially by a non-interested party. Up until now though, it’s never come up as a discussion point, so why raise it? As prices have changed so dramatically over the last couple of years, it’s a good time to revisit the messaging.
At DRWakefield we have been instrumental in all the certifications in the UK; Fairtrade, Organic and Rainforest – introducing the latter to the UK in 2003, and we are extremely proud of this. We are also Pioneer Members of the SCAE in the UK with Simon serving as the first-ever National Coordinator. This comes through our understanding that farmers need to sell all their coffee to be profitable and not just one sector, so we are well placed to understand the interplay between the different markets, and how they shift as business changes around the world.
We can skip through the obvious misunderstanding that the price paid in the café is the price paid for the coffee. The easy sum of converting the base price for green Fairtrade coffee with the price per kg in a café of course glosses over the costs and profits in between to give a much higher price but is also fairly noticeable as an error. Harder to see for many though are the actual variations in green pricing, especially when a certain amount of vagueness is leading to a sale, giving less reason to disambiguate that myth for the customer.
Fairtrade is often thought of as a baseline price – 160c/lb FOB, or more precisely, 140c/lb plus a 20 cent social premium for washed arabica. The last few years have seen a consistently declining market (the NYC) and Fairtrade aims to alleviate some of the issues around that by setting a bottoming-out point of 140cents. This means if the market goes below that, Fairtrade transactions do not, and are sold at no lower than that price. However, and crucially for marketers out there, that price is not fixed. It is a bottoming out price only, which means when the market rises, as it has done significantly over the past couple of years, the price of Fairtrade also rises. The premium stays.
So far so simple, right? But what this means, is that the marketing message of speciality commanding double, triple, or more than the price of Fairtrade is less likely to be true, and so should not be used as a marketing message in cafes and roasteries as a catchall statement. It’s easy to fixate on the 140c/lb figure, then apply it directly to the FOB price of the coffee you just bought and make a comparison.
If you have been buying a coffee at 300c/lb FOB whilst the market was below the minimum, then it’s convenient to think the price is at least double that of FT. In reality, it’s just under double at closer to 90%. Add 100 c/lb to both figures and it drops to closer to 55%. There is the same monetary difference, but expressed as a percentage, as prices go up the percentage goes down.
The Covid market saw a rise in the super-premium coffees as roasteries sold a bigger proportion directly to consumers (at the cost of volume sales to wholesale, it should be noted) and margins therefore increased. These coffees still command strong prices today, and with some coffees topping the 1000c/lb mark they will maintain that. The ‘premium commercial’ coffees which make up a large portion of menus have definitely been affected by that percentage relationship.
Let’s look at a couple of examples. Regardless of how a roastery buys the coffee, unless they are truly direct, the real mechanisms that matter will be the terms the importer bought them under.
In 2018, I bought 5 different coffees for my roastery.
- A volume line that is for my price-sensitive commercial customers. Always bought on a diff, in line with market conditions.
- I buy a similar grade for my certified line; same grades, same volume, but FT certified.
- I also buy an FT offering for filter. I set the criteria of 84+ for that, and the coffee is often bought on a diff.
- My ‘house’ offering is a more direct relationship. I have visited the farm for a number of years and have a good relationship with the farmer and forward contract each year, specifying 84+ too.
- The fifth coffee is a ‘highlight’ coffee I buy spot from a selection of the top coffees freshest when I need them. This is often only a couple of bags, and the emphasis is on the quality of the cup or the uniqueness of profile. These are mainly outright
Before we dive into the detail, it is worth mentioning that I will fix a couple of points to demonstrate better the mechanisms at work. Like all businesses, there is a mix of methodologies and variables across currency, exchange rates and potentially bulk buying discounts as well as the market. You can read more about the effects some of these dynamics have here. I’ll assume that currency is the same throughout and minimise everything else. Shipping/Handling covers taxes, insurance, financing, and margin for the importer.
In the first table, you can see because the market is below 135 c/lb, the FT minimum is in effect and protecting the price for the coffee compared to the commercial price.
The 86+ coffee is considerably more than the commercial AND the FT commercial, but no surprises there. Both 84+ coffees are the same, but the FT premium is guaranteeing an amount going back to the cooperative through an audited trail, whilst for the relationship coffee we are operating on trust. FT operates on FOB, not Farmgate pricing, so slices can come out depending on the structure of the cooperative, and if they have their own ability to process, market or even export the coffee.
Broadly speaking, although prices have risen for a couple of reasons, the relationship in price differences has not changed that much, and the additional percentage difference between commercial FT and 86+ speciality remains loosely at 95% extra. There is however a difference between FOB And FCA, with FOB representing a rounded 95% uplift, and FCA a lesser 75%; looking at the 84+FT coffee instead of the commercial, the differences are closer to 55%FOB or 45%FCA.
Cup score is still providing a difference in price, but there is more to FT than just one grade, and that reflects in a varying degree of uplift.
Now, what happens if we take those understandings and apply a market level change? No shipping changes, no local market changes, we’ll look at that later.
What we can see here, is that in a low market similar to that in 2020 (scenario 4), the FT safety net works quite well, preserving a minimum amount of money back to the exporter. The outright price of the 86+ speciality farmer maintains that 95% better pricing structure (FOB) over commercial FT and has grown in difference from the speciality FT.
In a higher market though, similar to that in 2021, (scenario 5) that difference rapidly disappears. The actual difference drops to 50c/lb – still a good improvement, but percentage-wise, this drops to just over a 30% improvement from 75% FCA, or loosely 50% from 95%.
Pulling this all together, and applying a more up to date (Jan 2022) dynamic produces a scenario a bit more like this. Offer levels have risen -costs in origin are up and of course in some countries supply is down and you can read how that affects things here, and although ideally a rising market would be countered by a lowering diff, this often isn’t the case. Shipping and handling is up as we have seen a lot in the news, and continue to see around the world. Although not accounting for inflation, the market is still at levels not seen for a number of years.
What this shows is not uncommon, data is fluid and often complicated. It’s not new to acknowledge that figures can be made to represent almost any message you want if you pick and choose the right ones. With an ever-broadening market of options scoring over 80 points SCA as the definition of speciality coffee, there is plenty to pick and choose from there too.
Messaging (and how to avoid greenwashing)
Under current circumstances the likelihood we are paying many times the FT price is very likely untrue unless we are buying coffee that is at the pricier end of speciality. Maybe we bought forward and the dynamic was true at the time, maybe not. The key things we need to ask ourselves is where am I doing the comparison, is that relevant to my customer, does that fit with the expectations they have and have I made it clear?
If I want to maximise the differences, then, of course, picking my top-end coffee and comparing it with a commercial Fairtrade will give me the most pleasing figure, but a large number of Fairtrade coffees sold comfortably fall into the 84+ range that we prefer to think of as speciality.
By picking unequal coffees to draw our comparisons with we leave ourselves wide open to the suggestion we are just greenwashing. This is similar to buying a decertified coffee but still trying to rely on the produced conditions to access the certified market.
The key acknowledgement is that Fairtrade is not just about protecting a minimum price, but about paying an audited premium that is applied to the coffee whatever the score or grade. In reducing the message that speciality is only worth it because it pays more than FT then it means we are overlooking the benefits and opportunities of the Fairtrade system, and perhaps even don’t understand the benefits of the coffee we are actually buying. The benefits of Fairtrade extend far beyond price, including supporting co-operatives to produce speciality coffee through initiatives like Golden Cup, and opening up the carbon credit market to members.
There is a myriad of ways to buy, sell, and be sustainable in the coffee industry, and both certified, speciality, and even commodity play their part. More on that another time though.