Insights

Effective Grower Share versus Return to Origin?

Posted on 9th Sep 2016 10:28:58 in Transparency

We've been thinking over here on the term on the TTC website EGS. Any possibility to change this to something else? Using FOB pricing as EGS is missing the truth here, since it is including the exporter margin. Laura Perry, 49th Parallel, personal correspondence

Transparent Trade Coffee (TTC) is a place where specialty coffee consumers and direct trade roasters come together to share information and insights about the economic treatment of coffee growers. In one critical part of the TTC platform, committed specialty coffee roasters provide information that allows consumers to know exactly how much the grower was paid for his/her green coffee. In this regard, the TTC website emphasizes two key numbers: the FOB prices that are paid for green specialty coffees, and a calculated ratio that we have been calling the Effective Grower Share:


                                      


In the last several months, several TTC Roasters have suggested that this term is misleading because it implies that all of the green FOB price goes to the grower. In reality, FOB prices are paid to exporters, who might be growers, cooperatives that supports growers, or some other third party. More importantly, these FOB prices must pay for a lot more than the coffee itself.

To provide a more robust platform to address the many issues related to pricing transparency, we are proposing a practical shift at TTC. While continuing to collect and report consistent and comparable information on green FOB prices, we will replace the term Effective Grower Share with Return to Origin (RTO). This addresses some of the concerns about the appropriate interpretation of this ratio, while leveraging recent efforts by the folks at Temple Coffee Roasters, who developed the RTO language.
Starting with Green FOB Prices

The commodity market price for coffee is expressed in terms of FOB, as is the Fair Trade Organization's minimum price. It is the generally accepted measure to talk about coffee prices. Counter Culture
The green FOB price represents the standard for communicating prices paid for green specialty coffees. This is evidenced by the fact that all of the roasters who currently release Transparency Reports document green FOB prices: 


      

 


Where is the Confusion?


This [FOB] price can create some confusion, as it is neither the true price paid to the farmer nor the true price paid by the roaster, but instead represents a point somewhere in between. Counter Culture

The problem is not with the FOB number itself, but with its interpretation. Many committed specialty coffee market stakeholders are concerned that people assume that the coffee grower gets all of the reported green FOB price. However, the following graphics from 49th Parallel and Tim Wendelboe illustrate that this is not the case:


                      


                           


 


These breakdowns confirm that, in addition to the funds that pay the growers for their coffees, a number of other bills are paid out of the green FOB price. These include:


                                            


Not Effective Grower Share, but Return to Origin
Return to Origin, or RTO, represents the percentage of a coffee retail sale that goes back to the coffee supply chain at its origin.Temple

To ensure that the pricing data that we work with are interpreted appropriately, we are going to begin using the RTO label when presenting (and discussing) the relationships between green and roasted coffee prices. According to Temple's website, RTO is calculated based on the relationship between green FOB coffee prices and the retail prices for the corresponding roasted coffees. In fact, the RTO calculation is virtually identical to the one that produces Effective Grower Shares on the TTC website. However, Temple's interpretation of this ratio is more appropriate, as RTO represents the best approximation of the share of a coffee's retail price that goes back to individuals and organizations working at origin.

As more specialty coffee roasters share more information about green FOB prices, we will develop and communicate a more robust set of prices and pricing benchmarks to consumers, roasters and growers of specialty coffee. With this change in language, we will also facilitate analyses and conversations about the various economic paths that connect farm gates to shipping containers. In fact, the change to the RTO language serves as a permanent reminder that the true economic treatment of coffee growers depends on the contributions and compensations of a range of in-country actors, which vary greatly across coffee-growing regions and countries. As these additional analyses complement our presentation of patterns and trends in green FOB prices, we will be in a better position to offer a data-driven account of the full economic treatment of specialty coffee growers. 


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