shipping

Transparency is hard

“No one is crying for the poor Napa Valley vineyard owner,” said Peter W. Roberts, speaking at the Transparent Trade Coffee Colloquium in Hamburg late last month. Peter is a professor at the Goizueta Business School, Emory University and he began his academic career investigating the wine market, which he says functions well. 

“Markets work best when there is a lot of information, and a lot of opportunity,” Peter explained. “A vineyard owner can deliver their grapes to the back door of a winemaker, then walk around to the front door to find out how much their wine sells for,” he explained. As a result, “Napa Valley vineyard owners are paid well. Coffee farmers are not.” 

Several industry veterans attended the colloquium, including Peter Dupont of Coffee Collective, Geoff Watts of Intelligencia and Mark Dundon of Seven Seeds Coffee. All agreed that after 20 years working in this business, little has changed for coffee producers. They still struggle to make a living, they work at the mercy of the market, and they remain at the bottom of the supply chain, with no power to change their situation. 

Part of the solution is to increase the amount of information available, or in other words, increase transparency. “Get roasters to origin. Get farmers to places where coffee is sold,” Peter W. Roberts suggested. And, when this is not possible (and it rarely is), those of us working in green coffee purchasing need to be the conduit of information, providing negotiating power to producers, the kind enjoyed by Napa Valley vineyard owners.

Sounds easy enough. So why is it so hard? 
 

The barriers to transparency in a long and complicated supply chain are many, but we have to try anyway. 

The barriers to transparency in a long and complicated supply chain are many, but we have to try anyway. 

BARRIERS TO TRANSPARENCY: Business and competition

The first and most obvious obstacle is business. Sharing sensitive financial data makes us uncomfortable as it could negatively impact our bottom line. Will customers complain when they see the margin we earn for our labor? Will our competitors use that information to steal our precious coffees by offering producers slightly more than we pay? 

These are valid concerns and highly probable scenarios. The only defense against them is trust, the kind of comes from long term and mutually beneficial relationships. Customers must trust the work we do and the value we add. Producers must trust us to come back to buy the coffee year after year, which would make it less attractive to sell at a higher price to a one-off buyer. We must also welcome the competition and pay higher prices, trusting our customers, and their customers, will be willing to pay extra too. 
 

BARRIERS TO TRANSPARENCY: Which number do we share?

Percentage above… 
You may have seen claims like “we pay an average of 20% above,” “twice the market price,” or some other multiplication of the C-Price. This is an easy way to contextualize the high prices paid for specialty coffee, and we admit to doing something similar ourselves. But it is a fundamentally flawed comparison because, as most in the specialty industry would agree, the commodities market is a flawed system. 

FOB
The most common number shared by specialty coffee companies who practice transparency is the FOB. This stands for Free On Board and it represents the price paid by the importer to get the coffee out of the country. Consider it the moment the crane carries the container of coffee from the dock to the ship.   

The reason the FOB is the most commonly shared number is because it is the number those of us working in the markets know and can verify. As importers, this is the price CCS pays for the coffee, and we can prove it with our purchase contracts. 

The problem with the FOB is that it says little about how much the producer was paid. Included in the FOB price are many additional costs, such as milling, storage and transportation. There may also be an exporter’s fee, which covers their work in sourcing the coffees, supporting and training the teams that cup these coffees, possibly paying agronomists who advise the producers. Often it includes origin country taxes and insurance. 

Return to Origin (RTO)
Based on the FOB, several roasters have begun publishing percentage they call Return to Origin, or RTO. This is the FOB as a percentage of the final cost of roasted coffee. A 20% RTO means that 20% of the final price of that roasted coffee was paid to people in the country where that coffee was cultivated. 

This is an interesting initiative, and hats off to the roasters who use it. However, the risk of publishing the RTO as a percentage is that a higher percentage looks better, it suggests more money in the pockets of people at origin, but that isn’t always true. It really depends on the final price of the roasted coffee; 10% of a high-priced coffee might mean more money than 20% of a cheaper coffee.  

FOT
Free on Truck (FOT) is the amount paid when the coffee is transferred to a truck for transport, and it is hard to know if this was paid to a producer, or another actor along the supply chain. FOT might be paid to a farmer, but it is more likely it was paid to a washing station, dry mill or exporter who must then transport the coffee to port.

Farm Gate
A more accurate reflection of what a farmer earned is called the Farm Gate price. This is the price paid the moment the coffee was transferred from the hands of the producer. Once again we encounter problems with this figure. 

Firstly, the Farm Gate  price is almost never the price paid for green coffee, as producers usually deliver cherries or parchment. Calculating the price paid for green coffee based on the Farm Gate is complicated by a number of different factors, all of which impact the amount of green coffee derived from the delivery. Even when the producer is delivering dry parchment, coffee in its final state before milling, there is no easy equation to calculate the amount of green coffee purchased. This depends on the yield factor, which is the amount of green coffee produced after waste from parchment and any impurities like stones and sticks is discarded. As you can imagine, the yield factor can vary from lot to lot. 

Each step in processing coffees carries with it loss and risk. The loss is in the form of cascara, pulp, humidity and parchment. The risk is that something goes wrong during processing that could impact the quality of the coffee, lowering its value. The more loss and risk a producer carries, the more they are paid for the product they deliver. This makes it almost impossible to compare a Farm Gate price paid to a producer in Colombia, who processed their own coffee and sold it as dry parchment, to a Farm Gate price paid to a producer in Ethiopia, who sold fresh cherries to a washing station. 

Similarly, it is difficult to compare these numbers without understanding the cost of production in each origin. And imagine the producer delivered their coffee over a series of weeks, with differing yield factors, price fluctuations and changing currency valuations. 

The calculations get complicated.
 

LACK OF CONTEXT

The biggest obstacle to transparency is context. A single number can not communicate the long and complicated supply chain of coffee, and the costs associated with delivering it. Nor can it account for variations in cost of production, cost of living, currency fluctuations or volumes produced.    

There are efforts to improve this. Colombian coffee exporters, Azahar, presented data to those gathered in Hamburg from their own study into providing their producers with a living wage. Working with 100 farms in three departments in Colombia, they determined three price points for a carga (125kg) of parchment, which is how most Colombian producers sell their coffee. The three price points indicated the price Azahar needed to pay in order to:

  1. Meet the poverty line 
  2. Meet the minimum wage in Colombia
  3. Meet the minimum wage, plus enough extra to reinvest in developing the farm.

The fourth column, which contained only question marks, asked “How can we do better?”

This data goes a long way to contextualize the Farm Gate price, and is a great potential model for other companies buying green coffee. However, for now, its scope is limited. 


MARKETING TRANSPARENCY

“Transparency is not marketing,” Peter Dupont noted, “but we do need to market these numbers better.” 

Our customers do not have time to investigate the supply chain of every product they buy, they need at-a-glance information in order to make their purchase decision. This is something Fair Trade understands well

More importantly, consumers need to believe transparency matters.
 

No profit in transparency, yet

Operating transparently requires an enormous amount of work. It means asking everyone in the supply chain to keep and share detailed financial documents, which need to be understood, analyzed, distilled, then formatted, packaged and communicated to customers. It means research into local economies to provide context for these numbers. 

It is difficult for small specialty coffee companies to justify the additional expense unless the customer is willing to pay for it.

This is the crucial link in the transparency chain. We must convince customers to demand transparency, even if they don’t have the time to analyze and understand the data we provide them. “Ultimately, no one will choose to pay producers more for coffee,” Peter W. Roberts said, “the market has to force it.” 

For transparency to make business sense, we need to convince consumers to ask:

1. "How much was the farmer paid?"
and
2. "Is that enough for them to live?" 

If enough consumers ask, everyone in the supply chain will make it a priority to find the answers.
 

Share what you have

The overwhelming agreement in the few days spent in Hamburg was that transparency can’t wait until we have perfect data.

“We have to start somewhere,” Peter Dupont added, “then push the conversation forward,” even if that means we start with the FOB.

Professor Peter W. Roberts is working on research to strengthen transparency in specialty coffee, but even he noted “we can’t ask you to share data you don’t have.” 

This is the reason the research to create a Data Backed Transaction Guide for the Specialty Coffee Market will begin with the FOB. It is an imperfect number, but it is the one we all have and can verify. The hope is that the breadth of the data in this pilot study will be robust enough to encourage further research into producing better numbers. 
 

TRANSPARENCY AT CCS

Transparency is one of our core values, and yet we have struggled, as have so many companies in specialty coffee, with all of the above issues. In the past we have shared the FOB of the coffees we buy with our customers, but we have not published them for fear of misrepresenting what the farmer is earning for that coffee. 

We have been pushing for better data, from our producers and from our partners. We are trying to contextualize the prices paid for specialty coffee with the cost of producing such high quality. We have an initiative to source better data and create a methodology for people at origin to do this on a regular basis. Plus, we will be data donors for the Data Backed Transaction Guide mentioned above. 

And, from today, in the spirit of the Hamburg colloquium, we will start with what we have. Below you will find the FOB of all coffees we have purchased so far in 2018. You can also find them on the origins pages on our website. We will do this for all coffees we purchase from now on. 
 

FOB of CCS Selection, 2018

Kenya
Ethiopia
Colombia
Guatemala


CONTEXT

The FOB represents the price we pay our export partners at origin. To calculate the cost we charge to roasters, we add the following:  

  1. Financing and logistics, on average USD $0.3/lb
    (USD $0.4/lb for inland coffees such as Burundi).
    We work with financing partners as we are an independent sourcing company without the capital to finance coffee. Logistics covers shipping, insurance and other costs to transport coffee from ports at origin to our warehouses located in Oslo, Hamburg, New Jersey and Oakland. This price is only for full containers. When we ship smaller quantities of coffee, like from Panama for example, financing and logistics costs are much higher. 
  2. Our markup to cover our costs.
    The markup varies, depending on the FOB, volumes purchased, and the need to remain competitive in the market. For example, we take a lower margin on our most expensive coffees. On average, in 2018, our markup is 20%.  

So the equation for all origins, except Burundi, looks something like this:

Price to roasters per pound = (FOB + US$0.3) x 1.2
Price to roasters per kilo = (FOB + US$0.66) x 1.2

The equation for Burundi looks something like this:

Price to roasters per pound = (FOB + US$0.4) x 1.2
Price to roasters per kilo = (FOB + US$0.88) x 1.2

Please remember, these are averages. 
 

Push the conversation forward

“It’s not necessary to go from zero to one hundred in the first try,” said Meredith Taylor, Sustainability Manager for at Counter Culture. Their first transparency report included data on twelve coffee contracts. Now they publish details on over 300

Publishing the FOB of all coffees purchased in 2018 is, perhaps, starting at five. Meanwhile we, and many of our colleagues in the industry, are working towards delivering one hundred. 

Do you want to be part of the conversation about transparency in coffee? Share your thoughts below, and join the Transparency in Coffee Facebook Group

Maritime regulations could increase shipping costs in 2020

The International Maritime Organization (IMO) has set new regulations for the shipping industry that take effect January 1, 2020.  The new regulation will reduce the limit of sulphur emissions from 3,5% down to 0,5%.  

This is a drastic reduction which is estimated to save hundreds of thousands of lives each year. The pollution from container ships, cruise ships, and other large vessels is greatly attributed to the bunker fuel they use. Bunker fuel is essentially the leftovers after the more valuable fuels like gasoline and diesel are refined out of raw oil. The fuel is often solid and needs to be warmed before being burned, resulting in a raw exhaust that pollutes not only the air, but also the port areas where these ships dock.

The new regulations will have a positive effect on the environment, but they also present challenges to the shipping industry. To meet the new emission standards, the ships will need to use different versions of low sulphur fuels, the kind many people use to fuel their cars and SUVs. The demand from the shipping industry will compete directly with current demand for clean burning diesel for personal and commercial vehicles.

Another challenge is the refining capacity. Demand for these cleaner fuels is likely to skyrocket in 2020, but the refining industry is unlikely to have the infrastructure to deal with that demand in place so soon. Key ports in the US and Europe may have access to the cleaner fuels, but secondary ports around the globe, like those used by Specialty Coffee Industry, may not. 
 

How will this affect Specialty Coffee? 

The short answer is cost. 

The cost of clean, low sulphur fuel is almost double that of the Bunker fuel that is currently used. That price differentiation could increase even more during the first part of 2020 as demand for cleaner fuel suddenly spikes. Shipping costs will rise as that price increase is passed along to customers. 


Speed reduction 

The IMO is also proposing a speed reduction of ships by 10-20% in order reduce emissions. That means coffee will spend more time on the sea, and more time at port waiting for those ships to arrive to collect it. This could potentially impact the quality of the coffee, and the window of time we have to roast and sell it. 
 

Geographically dependent products

If the cost of shipping increases as significantly as expected, the manufacturing industry will likely move production that has been outsourced, to China and other countries, back to the markets where the manufactured products are consumed. 

This is not an option for coffee. The ideal climatic conditions for growing coffee are found in countries around the equator, while its consumers are overwhelmingly in the Northern Hemisphere, with emphasis on the north! Our industry doesn’t have the option of moving production to another part of the world, so we are entirely reliant on shipping to bring our product to market. 

The coffee industry will be dependent on shipping no matter the price, but the pain may be temporary. The initial price increases could come down over time as supply comes closer to meeting demand. However this could take several years. 
 

Planning for the IMO

So what can we do in the meantime? Plan ahead! We can offer some alternatives that can help hedge costs against the rise of shipping costs.  


1. Forward planning

Planning your future buying with our sales team for 2019 and 2020 can help. By buying ahead we can lock in pricing with our suppliers to offset future increases.  

2. Refrigerated transport

Reefer containers are available from several of our origins, we just need some time to book them (see the paragraph above). Your sales person can help organise this. 

3. Freezing coffee

CCS also offers frozen storage in the US and the EU. Buying ahead and freezing coffee, either at one of our warehouses or locally at your own local facility, can mean that you are roasting a cheaper supply while the rest of the market is paying for more expensive shipping. That will keep you competitive.

reefer1.jpg


Keeping you informed

We are always working to keep our clients informed of changes in the market.  Please contact our sales team to discuss your future planning, and subscribe to our newsletter for more updates.   

Refrigerated Containers for Ethiopian Coffee

Innovation in Shipping

Our visit to Ethiopia a few weeks back was only my second time at origin. I expected to be inundated with information pertaining to all aspects of coffee production. After all, everything you are experiencing at that time and place is the precursor to the longevity and quality of the coffee, more so than during any other time in a coffee’s life cycle. If things are out of sorts at origin, the coffee is unlikely to express what it is capable of. It’s heavy stuff.

On top of this, I had just started a new position in Buying, QC & Sample Management at the Collaborative Coffee Source. That makes me the link between the producer’s hard work and the coffee community yearning for long lasting quality beans. My focus on this trip was to understand what is being done and what could be done better next time around. Altering fermentation times? Thinner layers on the drying bed? More selective picking? All seemed to be common suggestions that are given to producers and are absolutely key to improving quality and longevity! But perhaps the most interesting thing I learned during the trip was an innovation I’d never heard of: refrigerated containers.

Heleanna Georgalis of Moplaco Trading has been using these "reefer containers" for one customer for a few years now, and her customer speaks very highly of the results. Coming from George Howell Coffee, famous for pioneering the freezing of green coffee, I’m well aware of the positive and lasting effects that climate control provides. As you can imagine, I was excited and astonished to learn that refrigerated containers exist.

Moplaco Trading, Addis Ababa

Moplaco Trading, Addis Ababa

Reefer Containers - How Do They Work?

Coffee harvested and processed in Ethiopia will make its way to the Port of Djibouti, located about 400km away on the shores of the Red Sea. There the coffees are transferred into a reefer container and stored at 18°C (64°F) and 60% humidity for the remainder of its (often) month-long journey across the ocean. Nitrogen, oxygen, carbon dioxide levels are also regularly checked to ensure proper storage.

The pallets are loaded in and arranged with air space between the coffee and the wall, while air is circulated throughout the container to prevent pockets. Refer to the graphic below (courtesy of www.cma-cgm.com):

reefercontainerdiagram.png


How Much Does It Cost?

For the time being, only 40 foot containers are available to be refrigerated (the standard size is 20 foot). Why is this? Well, since 2000, the number of companies moving reefer container ships has dropped by 60%, so availability is very low. Companies who purchase reefer ships need twenty years to recover the initial cost, versus two years for a normal container ship.

But, there is hope. One company, Seatrade Reefer Containers, continues to purchase and use reefer containers in their fleet. Due to the slower  delivery times of container ships over the last few years, shipments (from all goods industries) are getting to their destination well after their intended arrival dates. Late shipments have translated into more food spoilage. Seatrade hopes these delays in container delivery will cause an increased need for reefer containers, and a resulting increase in their availability. But for now, they are still a cost to consider carefully.

This means there are two options:

  1. Find a way to fill a 40 foot container. This either means purchasing large volumes, or sharing containers with other buyers.
  2. Move a container below maximum capacity. Of course, this is a more expensive option as the cost is spread out over a smaller volume.

Costs fluctuate, but the breakdown at the time of writing is this: if a normal 20 foot container costs around $900 to move from Ethiopia to your nearest port, the cost is 2.1 cents per pound. A max capacity 40 foot reefer container, over the same distance, would cost around $2,900, or 3.4 cents per pound. A 40 foot reefer container, filled to half capacity, then would then cost 6.8 cents per pound.

Does refrigerated shipping provide enough value to justify this additional expense? Could you make the money back by having your 88-point Ethiopian coffee hold up for two extra months? Being cost conscious is entirely necessary for a business to be sustainable so your budget may not lend itself to this kind of transit. However, for around ten dollars more per 60 kilo bag, it may be a wise investment not having to discard bad roasts of tired coffee.


Logistical Considerations

To arrange reefer containers for your coffee we'll need some advanced notice. As mentioned, containers are currently limited in quantity and require a bit extra planning. However we think it's worth the extra effort. For now we are offering reefer containers from Ethiopia and we hope to add more origins in the near future.

Please contact me if you have questions! I am excited by the potential of this shipping innovation and keen to discuss how reefer containers might work for you.

Matt