Poverty is pervasive amongst smallholder coffee producers because of persistently low and volatile commodity coffee prices. Unstable coffee prices (combined with volatile exchange rates) support a cycle of poverty for many producers and their families.

This is primarily caused by information asymmetry between buyers and sellers about the true value of coffee. Most prices for green coffee are pegged to the coffee futures commodity market, which is often the only price discovery accessible to producers. This is an inadequate price reference as it does not consider the quality of a farmer’s offering. Also, it is quoted in unfamiliar units, US cents per pound of green unroasted coffee. That is challenging to convert given volatile exchange rates and the fact that producers usually sell their coffee in a partially processed form so that multiple conversion and yields must also be calculated. There is an urgent need for a price discovery tool for producers, giving them better negotiating power.

To address this challenge, Azahar Coffee Company developed “A Sustainable Coffee Buyer’s Guide” in 2019. The Guide uses manually collected data, from field interviews, to track earnings and costs of production. These values inform socially conscious coffee buyers about prices required for farmers to achieve different levels of income explained by the Guide:

Poverty Prices

This is the price a farmer needs to earn, on average, an income at parity with the rural poverty line. This is not an aspirational price, nor one that should be embraced, for obvious reasons. It is meant to illustrate that some producers may not even be selling their coffee for a price that allows them to achieve the poverty line set by their government.

Legal Prices

This is the price a farmer needs to earn, on average, the equivalent of a national minimum wage for an independent contractor including an allowance to cover the most basic health care and pension plans. This price also assumes that the workers they hire can be compensated with a minimum wage for the days they work, as well as an allowance for the same basic benefits.

Living Prices

This is the price a farmer needs to earn, on average, a living income. This price also factors in living wages for the workers that are hired on each farm, rather than minimum wages. The Anker Research Institute, the leading authority on calculating living incomes, defines a living income as follows: “Earning a living income means that all income sources from a farming household are sufficient to afford a basic but decent cost of living for a family. It includes food for model diet, decent housing, other essential needs and unexpected events.”

Prosperous Prices

This is the price a farmer needs to earn, on average, a living wage for the number of days they work, plus an extra 20% for personal savings. This also assumes that the farmer’s adult family and friends get living wages for the days that they work on the farm (labor that is normally not accounted for). In this income goal, their wages are included in the cost of production, along with the labor of the other workers. At the same time, the non-labor costs of production are increased by 20%, so that the farmer can make new investments in the farm or save specifically for the business.

The Guide takes an income-based approach to pricing by using the following formula: Price per unit of coffee (p) is equal to the sum of the income goal (i) and the total cost of production (c) for a period, divided by the volume (v), or total units, produced over the same period. Using this methodology, the Guide aspires toward “A Prosperous Income” price paid to producers. The processed cost of production data is also compiled and shared with producers in a way that allows them to maximize efficiency.

At Azahar, the minimum price we aspire to pay producers in Colombia is the Legal Price. Factors like productivity, labor costs, and living expenses vary from year to year and region to region. This may affect our ability to maintain a consistent FOB price while supporting producers. If achieving your target price takes precedence over maintaining long-term supplier relationships, we can explore regions where we can meet your pricing goals while still paying Legal Price. We understand that these decisions can be complex, but our commitment to producer progress is unwavering.

You’re invited to explore coffeebuyers.org for valuable insights into pricing in Colombia and Mexico. To delve deeper you can subscribe to the Guide on coffeebuyers.org 

Want To Learn More About The Guide And How To Subscribe To It? Request A Call With Our Head Of Strategic Initiatives By Dropping A Line Here

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