The following article discusses the differences between specialty and commercial coffee and why specialty coffee is more expensive. The article then explores the Brazilian coffee market, and the three patterns of trade there: direct trade, cooperatives, and other intermediaries. The article highlights the challenges faced by small coffee producers who are poorly paid because consumers often do not have the option to buy coffee from small farms. A conclusion is made that there is a need for more efficient ways to break the existing barriers holding direct trade behind, and proposes a way to improve the situation.
TLDR / Summary:
- Specialty and commercial coffee: specialty coffee is unique at small batch level, while commercial coffee is usually a mix of several types and sources of lower quality, with unknown traces of its origin.
- Specialty coffee is not necessarily more expensive to produce than commercial coffee and can be produced from any coffee tree with proper care and a good location.
- Small coffee farmers are not incentivised to produce high-quality coffee because they can sell it only at a low price to local dealers.
- Traders blend lower-quality coffee with better-quality coffee to maximize profits, resulting in a homogenized coffee market lacking unique regional flavors.
- Three patterns of trade in Brazil: direct trade, cooperatives, and other intermediaries. Intermediates represents between 60% to 80% of the traded coffee (the majority).
- Direct trade, where most specialty coffee is traded, is the best for both the farmers, roasters and consumers, yet represents the smallest traded volume. We believe it’s scarcity is a major factor to their high prices.
- There is a need for more efficient ways to break existing barriers and increase direct trade.
- One solution we propose is to leverage group buying to bootstrap relationships between roasters and farms.
A look at the coffee markets
Coffee can be broadly defined in two categories: “Specialty Coffee” and “Commercial Coffee“.
Commercial coffee is usually a mix of several coffee types and sources, of lower quality, and traces to its origin are usually lost or unknown. They tend taste the same after a process of making it “homogeneous”. Most coffee sold on supermarket shelves falls into this category.
Specialty coffee, on the other hand, is usually unique at small batch level, differing in taste complexities even within the same farm.
There is also a huge price difference between these categories. In Europe, as of this writing (2023), commercial coffee can be found for as low as 13 euros per kilogram, while specialty coffee varies from 40 euros up to 150 euros (or more) per kilogram.
Specialty coffee isn’t necessarily 4-10 times more expensive to produce than commercial coffee. Proper care and a good location can make any coffee tree produce specialty coffee. While good care incurs more cost, it’s not a 10x factor.
The quality ultimately depends on the post-harvest process, with each mistake reducing its quality further.
So if the production cost is not the major factor, how do we explain the high prices of specialty coffee?
A macro look
Let’s have a look at the major markets for coffee. Does the stock market trade specialty coffee? The answer is no. Only commercial coffee is traded and available in the form of future contracts in the stock market, but less than 1% of global coffee production is traded through this venue. The majority is sold through physical markets and closed deals by intermediaries. So, let’s dive deeper there.
Brazilian Market
We will now look specifically at the Brazilian coffee market, which is the biggest producer of coffee in the world. In general, we can see the following 3 patterns:
Direct trade: Direct trade models in Brazil are becoming increasingly popular, particularly for specialty coffee. According to the Brazilian Specialty Coffee Association (BSCA), as of 2020, around 10% of Brazil’s specialty coffee exports were sold through direct trade, up from 3-4% in previous years. Direct trade models in Brazil typically involve small-scale producers who are able to negotiate prices and quality requirements directly with foreign buyers, often with a focus on traceability and sustainability.
Cooperatives: Cooperatives play an important role in Brazil’s coffee sector, particularly for small-scale producers. According to the Brazilian Coffee Exporters Council (CECAFÉ), as of 2020, around 10-12% of Brazil’s coffee exports were sold through cooperatives. These cooperatives are typically organized by small to medium-scale producers who pool their resources and coffee crops together to gain bargaining power in the market. The cooperative can then negotiate prices and contracts on behalf of its members, as well as provide technical assistance, training, and other services to improve production and quality.
Other intermediaries: While statistics may vary a lot across different sources, all sources we looked at point to between 60-85% of coffee exports still being traded through other intermediaries such as exporters, traders, and roasters.
As we can see, “other intermediaries” take up the majority of the share.
Most small farmers, on the other side, operates at an extremely small margin and receive the least in the whole supply chain, which makes them prone to accepting a low price at certain sale, rather than a higher price but uncertain sale, because they need the payment for “survival” immediately. Small farmers usually can’t afford to “wait” too long for a better buyer, and usually sell directly to their local trader or cooperative, which to say the least, not always reward them with a good price.
Direct trade is by far the best for both the farmer as well as the roaster and consumers, yet it has still the smallest traded volume.
The status-quo
Many small coffee farmers lack the incentive to produce high-quality coffee because they don’t have a good paying buyer: they usually sell to local dealers at a guaranteed, but low price.
Because they don’t have well paying buyers that demand high-quality coffee, it doesn’t make sense for them to invest more in their coffee if they risk being paid a bad price in the end anyways.
After coffee is bough by a local dealer, traders often blend lower-quality coffee with better-quality coffee to maximize profits, resulting in a homogenised coffee that lacks unique regional flavours.
We think that everyone should have the chance to try the original flavours and experiences a cup of coffee can bring, while farmers and well paying buyers (roasters) should be able establish new relationships more easily.
The paradox is that small coffee producers aren’t able to get the best value for their product because consumers often don’t even have the option to buy coffee from small farms. This is because most coffee is sold through large-scale commercial channels, which may not prioritize traceability, transparency, or fair prices for small-scale farmers
Some small to medium roasters are taking the matters into their own hands by taking the initiative to fly to Brazil and pick farms for direct trade to increase transparency and pay fairer prices, but this approach is expensive and risky for them.
As a result, many small farmers continue to be poorly paid and we need more efficient ways to break the existing barriers holding direct trade behind. We believe it is possible to drive Specialty Coffee prices to a much more accessible level, while at the same time paying better prices to small farmers.
What about all those certificate labels?
While a few certificates did help taking a step forward, transparency is still lacking and these certifications are out of reach from the majority of small farmers due high cost of implementation as well as the lack of incentive as explained above.
The truth is, based on our experience, these certifications didn’t fundamentally change the situation.
Instead of wondering, we should be able to see the impact of our choices as consumers, as well as drive changes through our buying choices.
The way forward to making a real change, in our opinion, is making a closer connection to the coffee you’re buying with a more fair and transparent system, through a more direct consumer-to-producer relationship. As we’ve seen, making it easier to establish these new relationships is key to unlocking a better coffee market for everyone.
We believe, we need less certifications and big traders, but more granular consumer connection to roasters and farmers. The consumer should be able to judge, create and control demand through more buying options, instead of centralised certifiers or big traders doing it through monopoly.
How to increase the share of direct trade?
No good solution has been found for today’s unfair coffee supply chain – even for commercial coffee, the ones putting down hard work are still the least rewarded, while middlemen captures almost all the value.
Direct trade is the closest to the ideal, so what holds back this kind of trade when compared to others, and how to fundamentally improve the status-quo ?
Chicken-Egg problem.
Besides the market challenges already mentioned, it is very difficult to reach such goals without some economy of scale: sending anything less than one coffee container overseas is usually economically unsustainable long term. Sending less than one coffee container raises the cost per kilo drastically.
The transport becomes too expensive for buyers (usually roasters), while sending a whole container is usually way more than a small to medium roaster might need or has demand for.
A possible solution
The leads to the basis of our project, named Crowdtainer.
The idea is simple: create a system of collective order / group buying, in order to solve the minimum volume thresholds. Multiple campaigns can then be easily created. We use as an input the number of people that joined a campaign as a reliable signal of interest.
If there is enough people that joined a campaign, because the system is transparent, the service or product provider can be confident about going ahead and accepting the collective orders in a binding contract.
Otherwise, if the campaign fails, participants simply withdraw their prepared payments. The service provider (in our case the roaster or importer) on the other hand doesn’t take a financial hit from a big investment that didn’t go as planned due a lack of demand.