Contextualizing Farm Gate Pricing in a Volatile Market
The Farm Gate Price
Farm Gate prices received by coffee producers in Peru receive approximately $0.30 USD less than the stated FOB (Free on board) price.
Although statements like the one above are in high demand for traceability and transparency reports, definitive numbers lead us to engage in a broader discussion as to why contextualizing farm gate pricing in a volatile market has become extremely important to consider.
The farm gate price paid to a producer is often generalized as the amount of money paid directly to a producer. The price is often used as a point of reference for coffee buyers to attempt to provide customers a level of price transparency that can help clarify and communicate the financial investment buyers make with a producer. Many buyers seek to ensure their purchases are ethical and priced fairly. Yet in an increasingly volatile coffee market, there is growing acknowledgment and concern for the need to contextualize the farm gate pricing paid to farmers with the hopes of providing a more accurate and meaningful interpretation.
What is the Farm Gate Price in Peru?
This article was almost shelved due to the complexity of the subject matter. Even within a week of writing this article, in the northern regions of Peru, the internal market price paid for 70 kilos of parchment went from S.800-850 to S.750-780 due to a slight decrease in the NY “C” price. For those reading this newsletter in the United States, stating a farm gate price measured using kilos, soles, and parchment adds challenges for proper conversions from parchment to green coffee weight, soles to dollars, and kilos to pounds, in addition to understanding the internal inflation within Peru and perhaps the different costs of living between Jaen, Lima, and the small producing villages in remote mountainous regions of Cajamarca and Cuzco.
What is a Fair Farm Gate Price?
Many would agree a fair price paid for coffee would allow producers to cover the cost of production with additional profits to maintain or improve one’s quality of life. Are there ethical lines to be drawn for determining if a price is fair for a particular scenario in such a dynamic market? If there are ethical lines to be drawn, who should be holding the pen when drawing these lines? Will the producer be the one who decides what is fair, or will it be a coffee buyer or surveyor collecting KPIs to determine it?
Asking what the current farm gate price is for a cooperative or producer organization can be a very difficult question to answer and may unintentionally result in a greater misunderstanding and oversimplification of how complex and uniquely positioned financial transactions are and how they are determined from one producer to another, or from one cooperative to another.
The Domestic Market Price
The domestic market price is what a producer will see on the street. The street price is what is paid by private collection sites or coffee cooperatives. As of last week, April 11th, the estimated domestic market price ranged between S/800 ($216 USD) and S/850 ($229 USD) for 70kg bags of parchment coffee, depending on yield and cup quality.
70kilos (154 lbs) - 30% processing loss = 108 lbs ‘oro’ for S/850 $229.00 USD (average higher-range paid) = This equates to $2.12 USD/lbs. for export-ready green coffee.
As of today, April 20th, the estimated domestic market price has decreased this week due to a lower NY ‘C’ market price. The price paid for 70kilo parchment bags ranges between S/750 ($202.54 USD) to S/780 ($210.65 USD)
70kilos (154 lbs) – 30% processing loss = 108 lbs ‘oro’ for S/780 ($210.65) (average higher-range paid) =This equates to $1.95 USD/ lbs. for export-ready green coffee
Domestic Market Price vs. Farm Gate Price
The domestic market price is essentially the farm gate price, with a final price determined after the coffee has been received by a collection agency or cooperative that has physically graded the coffee delivered. Moisture, debris, and defects are very important factors because the price is determined by weight, in addition to the physical grading. Weight of water, parchment shell, debris, and some defects are discounted upon payment, reaching nearly 30% of the product weight delivered from the farm. The payment ranges stated above (S/750 – S/780 reflect the application of these physical conditions of the coffee.
How Does Moisture Percentage Impact Farm Gate Price?
If a farmer delivers coffee at a higher moisture content, the coffee will weigh a heavier amount, but this extra water weight is a factor in price adjustments. Collection stations measure the moisture percentage and calculate the price paid for a particular moisture range. If coffee parchment lacks sufficient drying time (i.e., coffee arrives at 18%), they will apply an additional percentage of discount for payment, as the dry mill will need to finish the drying process requiring extra time, labor, and space at a facility.
The second weight to consider is the weight of outer parchment removed from the coffee bean. The weight of parchment shells averages 18% to 22% of the overall weight of the coffee being delivered.
Lastly, defects such as full black beans, sticks, rocks, and other debris usually calculate an additional 4-5% of the overall weight of coffee delivered by the farmer to the collection facility.
How Do Quality Incentives Impact Farm Gate Pricing?
Lower quality coffees in the current market are receiving nearly the same price for specialty grades from the 2021 harvest season. As the Algrano Market Trend Review for 2022 mentions, “this eliminated the relevance of the dominant factor that incentivizes producers to grow specialty coffee over commodity: price premiums.” (Algrano Market Trends Review 2022, p. 16).
Producers leverage their decision to sell coffee based on market conditions and other personal factors. Many smallholders can store parchment on their farm for several months and choose to deliver it to a receiving station or cooperative when it deems to be the most advantageous. The context of an individual producer’s circumstance will guide and determine what an acceptable price will be for that producer.
Providing a farm gate price that might blanket multiple smallholder producing organizations and cooperatives is a difficult task and one that may not be appropriate to establish in a transparency or traceability report, as the price stated for one cooperative may be sufficient and fair, yet may not be considered fair to another.
As coffee producers continue to face rising production costs, inflation, and climate change, we continue to adjust the conversation on how to best support and strengthen the financial opportunities for coffee producers. Crop diversification, carbon sequestration, and continuing educational opportunities remain a key for further financial stability.
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