Insights

Pricing Insights from One Costa Rican Specialty Coffee Farm

Posted on 21st Nov 2016 08:55:00 in Transparency

In the last 18 months, TTC has provided insights using data from sources like the Cup of Excellence, Fair Trade Proof, and Coffee Review. We have also analyzed data that accumulate within the TTC platform, like quarterly SCRPI data and FOB prices for registered TTC Coffees. This Insight leverages proprietary pricing data provided by Diego Robelo from his family’s estate in Costa Rica. The sample covers 140 green coffee contracts from three consecutive harvests; 2013/14 through 2015/16.

The first thing we see in these data is the considerable year-to-year variability in prices paid for green specialty coffees. From 2013/14 to 2014/15, the weighted average FOB price fell by 6.3%; from $2.30 to $2.16. This reduction was compensated by a larger crop volume in that year (+22.0%). In the next harvest, the weighted average price rose by 7.3%; back to $2.31. However, this price increase occurred in a year when crop volume fell by 34.6%! All of this illuminates the challenges associated with managing vexing price and quantity dynamics on specialty coffee farms.


A simple regression model – which explains roughly 57 percent of the variance in FOB prices – produces additional insights about these pricing dynamics:


First, higher bean quality corresponds with higher prices. This farm sells coffees in several formats. Relative to the baseline group of Catadurra coffees, their two Estate coffees sell for premiums that average $0.34 (HB) and $0.42 (SHB) per green pound. More impressively, coffees sold as microlots had an average premium of $1.03! Farm reports shows that these price premiums correspond with processing that yields fewer bean defects.
 
Second, the year-to-year price differences in the raw data are less obvious after accounting for other factors. Here, it is critical to highlight the large effect that the Bolsa Price, or the commodity price, has on coffees that are not themselves commodities. This significant 0.629 coefficient is alarming when we see that associated commodity prices ranged from a low of $1.13 to a high of $2.60 during this brief window. Moving from the maximum to the minimum commodity price corresponds with an average price decrease of $0.92 per green pound! This is a very tough pill to swallow for a farm that is trying to cover current operational costs, while investing for a better, and higher-quality future. 


Another big driver of green prices is the quantity covered by each contract. On average, every one thousand pound increase leads to a one-half penny reduction in price. The quantities in the 140 contracts range from 50 to 123,750 pounds.[1] The estimated quantity effect means that moving from the minimum to the maximum corresponds with a price decrease of $0.68 per pound. Although the trade-off between price and quantity is expected, it also highlights the challenges associated with looking for the price premiums at the upper end of the specialty coffee market, where purchased quantities tend to be lower. In this respect, note that the microlot designation, which by itself corresponds with a premium of $1.03, is also associated with much lower quantities, just 2,240 pounds per contract on average.
 
While some will argue that it is problematic to generalize insights derived from a single farm in a single country, we would counter that we need more of these detailed observations to better understand green coffee pricing. This will help us figure out how pricing processes can be influenced so that specialty coffee growers can charge enough to cover costs, make investments and return meaningful surpluses to their families and communities. For these reasons, we are grateful to Diego for sharing these detailed pricing data with us and our followers.
[1] This estimated quantity effect is lower than the one reported in a prior analysis of Counter Culture’s transparency reports. Click here to read that TTC Insight.


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