Monday, March 28, 2011

Direct Trade: Who Gets the Upside?

The relationship between Roasters and Importers in Developed Countries and Growers has received plenty of review and critique. I don't want to dig too deeply into the social and environmental aspects of this relationship, but want to focus on an interesting idea that deserves consideration.
As we all know we are in a time of high green coffee prices and one would think this condition would provide fantastic cover for growers, but hot markets fed to a certain degree by speculative interests, can crash quickly if demand falls short of supply once new plantings begin producing in a year or so. In an effort to protect growers from catastrophic price shocks various schemes have been devised to provide a price floor. This price guarantee acts as a sort of crop insurance for growers who still must produce enough crop to cover production costs and G&A with the threat of ruin hidden in every weather forecast.

The price run up can also present problems for growers who may have sold early in the year, only to see the value of what they contracted increase wildly as experienced this year. This condition may encourage some to hold coffee off the market this year in the hope of higher prices, but like tulips and real estate, when there are no buyers, there's no market.

What I'm proposing for consideration is for interested direct traders to not only set a minimum price, but provide an upside for the grower should prices increase, eliminating for the grower the opportunity cost of selling early. (Opportunity Cost is the price difference between what was paid to the farmer, and what the farmer could have sold for later in the year if prices go up) This mechanism would also encourage farmers to sell instead of holding coffee off the market by providing the real chance of further revenue and zero chance of losing revenue. For all involved this would also provide more transparency and information in determining the actual amount of coffee available in any year by flushing out coffee being held back, also dampening the likelihood of significant price moves throughout the year. Essentially this would provide extra grower income should prices rise, while reducing the likelihood of significant price changes through greater transparency.

Roasters and Importers are in a much better position to adjust to higher prices by passing real per pound costs onto wholesale customers than are producers who's costs fluctuate vastly per pound harvested depending on yield. While this sort of scheme is anathema to all capitalist theory, any price scheme already offends those sensibilities. The form and function of this upside pricing scheme is something best determined by individual roasters and importers but is completely reasonable when considered alongside all of the factors and benefits we quote in support for direct trade.
I"m curious whether any roasters and importers are already using some sort of mechanism to provide extra revenue, and would be happy to learn the details.
Food for thought.

1 comment:

  1. Bravo! Excellent post...could not agree with you more. I am presuming necessary quality differentials, incentives are implicit in this scenario involving direct traders.
    Also, it is helpful to identify and address grower community needs when establishing "upside" price models. We have been providing automatic roll-over micro-credit loans to a few of our growers to sustain these important relationships.

    Brooke McDonnell
    Equator Coffees & Teas

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