The Economics of Coffee: Understanding Profitability at Farm Level - 25 Magazine: Issue 3
As Avance–the Specialty Coffee Association’s inaugural sustainability conference and first ever event at origin–drew to a close in Guatemala City in October, delegates were asked to indicate what area they most prioritized among coffee’s value chain. More than 90% of participants stood next to the sign reading “farmer profitability.”
CHAD TREWICK introduces the main discussion points in the SCA’s Farm Profitability Report in Issue 3 of 25 Magazine.
When delegates voted with their feet, they confirmed what many of us have advocated for some time: the coffee industry cannot ignore a risk to production on a global scale.
In a bid to better understand the economics of coffee production at farm level, the SCA commissioned a review of studies of coffee production costs in 2016. Introduced at Avance and available to download now at sca.coffee, the report highlights that the economics of coffee growing is not as clear cut as other industries. It identified some interesting points for discussion including:
Green Coffee Values Do Not Support Farmer Livelihoods
The SCA Farm Profitability Report suggests that the most economically viable, long term scenario for many farmers is to produce green coffee at a cost of less than $2.50 per pound. However, as an industry we often do not assign this value to coffee at scale, especially when the comparatively low commodity price for coffee is taken into consideration. In Mesoamerica, for example, Promecafé notes that average export values of green coffee struggle to reach $1.70 per pound.
As a result, with recent commodity market levels hovering between $1.30–$1.40 per pound, the SCA report observed that producing coffee alone is not adequate to support a dignified livelihood in the smallholder sector.
High-Productivity is Not Always the Answer to Increased Farmer Profitability
Some of the research reviewed suggests that high-productivity and intensive farming husbandry is not the answer for all farmers who produce coffee. These methods can, in fact, increase production costs and outstrip the net income and earning opportunity for producers – especially when depressed market prices are considered. While increased productivity translates to greater efficiencies, lower costs and higher net incomes in many industries, this is not always the case in coffee farming. Each farm will have an ideal investment-to-productivity ratio that results in a balance between yield, cost of production, and profitability.
Factoring in Equivalent Daily Wage
It is critical to consider familial labor, which often goes unpaid, into the cost to produce coffee by applying a value to those work hours. As a result, an emergent theme in the literature review was the consideration of the equivalent daily wage (EDW) in coffee. Where opportunities exist, the earning potential of a family member working on a small farm should be compared against the opportunity cost working as a salaried employee elsewhere.
The EDW is determined through a series of complex evaluations of various conditions, values for coffee, competing livelihood opportunities, and other relevant indicators. We believe that understanding the EDW is critical to understanding whether coffee production can support a family’s livelihood, particularly in the smallholder sector. By leveraging enhanced data that supports this concept, we will gain greater understanding of the effectiveness and importance of income diversification among smallholders.
Feedback From Producers
The literature review synthesized the results of a collection of independently executed studies on production costs and profitability conducted over the past decade. While the report was commissioned by the SCA, none of the studies considered were in any way sponsored by the Association.
Following the release of the report, we heard from many of our friends and colleagues in the producer community. Many were concerned that the results of the review sent a message to coffee producers that attempting to increase yields was pointless or that farming coffee was simply not worth it economically.
It is important to point out that neither the study nor the SCA advocates in favor of low-input, low-yield, poverty-dependent coffee farming the way it was discussed in the report. However we do consider it important to explore all themes and conditions related to farmer profitability. This is particularly important because the studies in the report show mixed results on the relationship between increasing yields and higher profitability. While that strategy works for some farmers and in some circumstances, in others higher yields are accompanied by higher costs, and those costs aren’t always well understood or compensated.
We have seen throughout our industry examples of effective, low-risk ways to increase incomes by increasing productivity efficiently, and as we learn more, as evidenced in this report, we understand that achieving profitability is not something that we can oversimplify with broad recommendations.
The Path to Understanding Farmer Profitability
The learning presented by this literature review, and the lack of rigorous research on the topic, galvanizes the SCA Sustainability Center’s belief that further research on this issue must be prioritized to garner deeper understanding within our industry. We hope this enhanced understanding begins to influence commercial behaviors towards a more resilient supply chain.
The differences among the studies reviewed tell us we must influence the identification of a set of key performance indicators (KPIs), definitions, and variables to guide future research efforts aiming to understand production economics for coffee farmers. We need this information in the terms and units of measure we use as an industry. We know we must collaborate with researchers, origin organizations, NGOs, and other supporting entities to develop a consistent set of parameters to guide these research efforts. Only when studies and results can easily be compared to one another will they bolster our industry’s collective understanding and add to dialogue around costs of production and farmer prosperity.
When the SCA Sustainability Center released this report, we heard from diverse value chain actors on this topic – both supportive and critical – and we are so grateful that people are paying attention to and feel passionate about this topic. We are committed to engaging in challenging dialogue meant to elevate our collective understanding. If you have any questions about this work stream or about anything related to SCA’s Sustainability Center, please email them to sustainability@sca.coffee.
CHAD TREWICK is Founder of Reciprocafé, LLC and Vice Chair of the SCA’s Sustainability Advisory Council.
Read the Report
The Specialty Coffee Association Farm Profitability Report is available to members to download on sca.coffee/available-research-members.