Insights

From Transparency Reports to a Potential Transaction Guide for Specialty Coffee Purchases

Posted on 15th Aug 2017 16:17:36 in Coffee Market

From Transparency Reports to a Potential Transaction Guide for Specialty Coffee Purchases

 

Many people who follow specialty coffee markets are concerned about the inappropriate role that commodity price indices continue to play in negotiations for green specialty coffees:

 

“For coffee, we have the ICE New York “C” contract and the London Robusta contract that serve as proxies for the global supply and demand for Arabica and Robusta coffee, respectively. But both these contracts are financial instruments, not coffee per se. These financial instruments are used by professional coffee people (including some growers) to offset price risk but they are also used by professional investors who make a living from “buying low and selling high.” A Producer’s Perspective: Challenges across the Coffee Value Chain

 

The root problem is that these commodity indices do not represent true coffee valuations in the specialty segment because they do not account for the qualities and quantities of the coffees that are purchased:

 

“This [New York C price] price is derived from the supply and demand for all coffee in the world and assumes product homogeneity – i.e. that all coffees are the same. There are premiums for quality and other factors, but the base price is arbitrary for specialty coffees that have nothing to do with the other 99% of world coffee produced,” Wienhold said. “It would be like if Bordeaux wine pricing were set as Welch’s Grape Juice + X dollars/gallon.” Is a Direct Trade Collective the Best Model for Small Farmers?

 

Notwithstanding the validity of these concerns, it will be difficult to move away from using commodity prices as benchmarks if we cannot develop a valid alternative for the specialty coffee market.

 

In this spirit, this TTC Insight leverages the green pricing data presented in numerous transparency reports over the last three years. After bringing these data together, several simple tables show how these kinds of (historical) pricing data can be integrated into a powerful set of benchmarks for future specialty coffee negotiations.

 

753 Prices from Seventeen Transparency Reports

 

An extensive Internet search revealed eight roasters that published transparency reports in the 2014 to 2016 period. These reports provide specific price information about 753 specialty coffee contracts:

 

Published Transparency Reports

 

2014

2015

2016

Contracts*

49th Parallel Coffee Roasters

No

Yes

Yes

73

Barismo

No

Yes

Yes

24

Bird Rock Coffee Roasters

Yes

Yes

No

25

Counter Culture Coffee

Yes

Yes

Yes

373

Pact Coffee

Yes

Yes

Yes

136

Seattle Coffee Works

No

No

Yes

17

Temple Coffee Roasters

No

Yes

Yes

64

Tim Wendelboe

Yes

Yes

No

41

* We set aside twenty Geisha coffees, whose very high prices skew
the averages, and two unique coffees grown in India and Thailand.

 

These transparency reports provide information about prices paid (fob) for each coffee, as well as its country of origin. Two additional variables are covered less consistently: coffee quality and lot size.

 

Here is what the pricing data tell us …

 

Origin Matters. The majority of these coffees were grown in Central America, South America or Africa. The average prices paid in these regions ranged from a low of $4.02 (South America) to a high of $4.57 (Central America):

 

Coffee Origin

2014

2015

2016

Contracts

Average

Price (fob)

Differential

Central America

$5.87

$4.14

$4.59

337

$4.57

+$0.31

South America

$3.71

$4.22

$3.81

209

$4.02

-$0.24

Africa

$3.99

$4.15

$4.00

192

$4.05

-$0.20

Indonesia*

$3.23

$3.06

$2.94

15

$3.09

-$1.17

Total

$4.48

$4.14

$4.28

753

$4.25

-

* We are less confident about averages based on very small samples.

 

Quality Matters. We divided the sample into quartiles based on reported cupping scores. This shows that coffees with cupping scores above 88 have an average price of $6.07, which is roughly 85% higher than the average paid for coffees in the lowest quality quartile:

 

Cupping Scores

 

Contracts

Average

Price (fob)

Unknown

300

$3.78

Lowest Scores (80-85)

120

$3.29

2nd Lowest Scores (85-86)

78

$4.09

2nd Highest Scores (86.5-87.5)

99

$4.57

Highest Scores (88+)

141

$6.07

* Total sample divided into quartiles based on reported cupping scores.


Lot Size Matters. A similar breakdown based on lot sizes shows that smaller lots (of less than 1,064 pounds) fetch prices that are more than double those paid for lots of more than 9,789 pounds:

 

Lot Sizes

Contrats

Average

Price (fob)

Unknown

162

$4.66

Smallest Lots (<1064 lbs)

135

$6.54

2nd Smallest Lots (1064-3035 lbs)

144

$3.78

2nd Largest Lots (3036-9788 lbs)

151

$3.54

Largest lots (9789+ lbs)

146

$3.03

* Total sample divided into quartiles based on reported lot sizes.

 

 

A (Preliminary) Transaction Guide for Specialty Coffee Purchases

 

After setting aside coffees that did not report cupping scores or lot sizes, we create a single table that provides data-driven pricing guidance for future specialty coffee negotiations:

 

Guidelines for Future Specialty Coffee Negotiations

Contracts

Average

Price (fob)

Lowest Scores (80-85)

 

 

  Smallest Lots (<1064 lbs)

23

$4.64

  2nd Smallest Lots (1064-3035 lbs)

20

$3.42

  2nd Largest Lots (3036-9788 lbs)

21

$3.00

  Largest lots (9789+ lbs)

55

$2.77

 

 

 

2nd Lowest Scores (85-86)

 

 

  Smallest Lots (<1064 lbs)*

10

$7.55

  2nd Smallest Lots (1064-3035 lbs) *

4

$3.36

  2nd Largest Lots (3036-9788 lbs) *

15

$3.08

  Largest lots (9789+ lbs)

28

$3.10

 

 

 

2nd Highest Scores (86.5-87.5)

 

 

  Smallest Lots (<1064 lbs)

32

$6.14

  2nd Smallest Lots (1064-3035 lbs) *

14

$4.13

  2nd Largest Lots (3036-9788 lbs) *

16

$3.86

  Largest lots (9789+ lbs)

27

$3.28

 

 

 

Highest Scores (88+)

 

 

  Smallest Lots (<1064 lbs)

47

$8.51

  2nd Smallest Lots (1064-3035 lbs)

23

$4.00

  2nd Largest Lots (3036-9788 lbs)

29

$3.90

  Largest lots (9789+ lbs) *

10

$3.68

* We are less confident about averages that are based on very small samples.

 

The sixteen cells in this table are quite sensible and consistent with the belief that “multi-tiered pricing is the single most important means of commercially developing the specialty coffee industry (Show Me the Money).” Within each of the four quality bands, average prices fall as lot sizes increase. Within each of the four quantity bands, average prices rise as cupping scores go up.

 

How might this kind of pricing table initiate more sensible negotiations for green specialty coffees? Consider the following three scenarios that relate to coffees of different quality, grown in different places, and purchased at different quantities:

 

Scenario

Current Approach

Alternative Approach

I am looking to buy/sell 10,000 pounds of coffee that was cupped at (roughly) 87 and grown in Guatemala.

Begin the negotiation at $1.27 (the July average of the ICO Commodity Price Index*).

Begin the negotiation at $3.28 plus Central America premium of $0.31; or $3.49.

I am looking to buy/sell 1,000 pounds of coffee that was cupped at (roughly) 90 and grown in Rwanda.

Begin the negotiation at $1.27 (the July average of the ICO Commodity Price Index*).

Begin the negotiation at $8.51 minus Africa discount of $0.20; or $8.31.

I am looking to buy/sell a container of coffee that was cupped at (roughly) 82 and grown in Brazil.

Begin the negotiation at $1.27 (the July average of the ICO Commodity Price Index*).

Begin the negotiation at $2.77 minus South America discount of $0.24; or $2.53.

* See www.ico.org/prices/p1-July2017.pdf.

 

Whereas the current reliance on commodity price indices imposes the same starting point for these three negotiations, a pricing table based on recent specialty coffee market transactions (appropriately) assigns very different starting points depending on a coffee’s quality, quantity and origin.

 

Looking Ahead

 

Many central players in specialty coffee markets want to move away from buying green specialty coffees based on current commodity price indices, so that quality, quantity and origin conditions can be recognized and rewarded. Making this happen requires a broader commitment to collect, aggregate and disseminate more relevant pricing information based on more recent specialty coffee purchases.

 

We therefore close this TTC Insight by proposing that this kind of Transaction Guide becomes more powerful if its averages are based on recent contract data from 20-30 (or more) roasters and 5-10 (or more) importers.[1] It becomes more relevant if these price data donors agree to provide comparable information about cupping scores and lot sizes for all coffees.[2] Finally, it becomes more useful if these price data donors also work to provide concise commentaries for other buyers and sellers who want to use the Guide to ground more appropriate specialty coffee price negotiations.

 

Researchers here at TTC stand ready to support these kinds of efforts …



[1] Note how the tables in this TTC Insight do not disclose any specific information from any one coffee contract. Therefore, price data donors should be able to work with a trusted data partner under conditions governed by simple non-disclosure agreements.

[2] Price data donors might also agree to provide and incorporate other variables that might (or should) systematically influence specialty coffee prices.


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