Suppose a local coffee specialty filter coffee costs US $ 4.00 (110 hryvnia). But how much does it affect the value of green grain ?
The third wave requires better prices for better quality coffee. However, without knowing how much farmers have to spend to get a kilo of coffee and how these figures vary by country and method of production, it is difficult to see what truly “sustainable prices” are.
That’s why Caravela Coffee, as part of its PECA farmer education program, recently published a report on the cost of coffee production in six Latin American countries: Ecuador, Colombia, El Salvador, Guatemala, Nicaragua and Peru. To find out how much coffee actually costs, we spoke with Luis Guillermo Cortez, PECA Program Director.
View of a coffee plantation in Taraz, Costa Rica. Photo: Sunnie Tark
Understanding The Cost Of Coffee
The Caravela Coffee report states: “The sustainability of the coffee industry begins with understanding the costs of production and the variables that affect them.” Until we know this, sustainable development is impossible.
Louis says, “Most coffee producers don’t know exactly how much a kilo of coffee costs.”
The goal of Caravela Coffee is to develop an application based on this report to help farmers track their individual costs and plan their budget accordingly. But we already know what the average cost of coffee production in the six countries is, and what areas require the highest costs.
Cost calculation. Photo: Caravela Coffee
Administration + Harvesting + Remuneration (trimming, fertilization) + Production costs + Other costs (depreciation) + Landing / Repair
kg of green coffee per year
= Production cost per kg
What does this data indicate?
In order to organize the data, Caravela Coffee made three key assumptions:
- The farm size is 3 hectares, growing from 4,500 trees per hectare (Ecuador) to 5500 (Colombia). Louis says this is due to the fact that “3 hectares is the minimum required for survival; One hectare of land is not enough for a standard family. ”However, it should be noted that the cost per hectare (or pound) is always reduced as the farm area increases.
- Each farm conditionally produces 25-30 bags of coffee per hectare.
- Producers were expected to update 15% of their acreage annually.
Based on this data, Caravela Coffee calculated the costs nationally. Different farm designs and production methods mean that these costs may not exactly fit every farm (here’s the app and comes in handy). However, Louis says: “This study made the key assumptions to calculate the ideal amount of investment in a farm of this size for best results.”
Of course, there are some moments that will affect the model and that may change over time. Louis says: “Exchange rate fluctuations affect manufacturers when they pay in pounds. For example, in Colombia, one dollar was 3,000 pesos, but fell to 2,800 pesos. Thus, the total amount of money the producer receives is directly changed. ”
Other internal changes may also be affected. For example, Louis shares: “In El Salvador, the minimum wage at the rural and city levels is now the same. So, the situation has changed for the manufacturer. ”
The data provided by Caravela Coffee will be a useful starting point. However, it is important to understand that data is constantly updated and that everyone involved in the coffee industry – farmers, traders, roasters and more – should be aware of local changes and the impact they have.
With that in mind, it’s time to look at the conclusions Caravela Coffee has made.
Green coffee berries on a branch.
Results: How do costs differ across countries?
Let’s take a closer look at how costs vary across six countries:
Table 1: Total Value (USD) – 3 ha:
Payroll Summary: The “Harvesting” column calculates payments to seasonal mercenaries, while “Remuneration” refers to permanent employees. “Administration” also refers to remuneration and is equal to the minimum wage in the country.
There are striking differences between the six countries. Ecuador has the highest total cost of production and Nicaragua has the lowest. Labor costs (harvesting, administration and remuneration combined) explain most of the differences in costs. However, there are some differences.
El Salvador, for example, spends the least on labor, but most spends on repair. Nicaragua has the lowest cost overall, especially in terms of manpower, but it allocates a lot more to infrastructure – which will become even more apparent when we look at the cost sharing of interest.
This is due to the fact that the infrastructure includes drying rooms. In Nicaragua, farmers usually pay for every pound of coffee that goes to dry.
Table 2: Cost allocation
Based on the above data, Caravela Coffee has estimated the cost of producing one pound (0.45 kg) of coffee. But keep in mind that this is the average cost of the most ordinary (commercial) coffee. Louis says that spashalti, like the coffee Caravela Coffee works with, is usually more expensive.
This is due to the increase in the salaries of the collectors (due to the fact that the selective collection is more complicated and takes more time), a large investment in the station for customs treatment, drying and much more.
Table 3: Cost (USD / Pound)
As we can see, there is a significant difference in the cost of production, even in those geographically located countries.
How you can put the data into practice
First of all, these data indicate the need for an individual approach to each country. The “steady price” in Ecuador is not the same as the steady price in Nicaragua. Shipping costs in El Salvador are different from shipping costs in neighboring Guatemala.
So what have we learned about each country?
Colombia: About a third of spending is on administration, and a third is on labor during harvesting, which means that labor shortages or changes in workers’ rights can have a significant impact here. Repair costs are slightly below average.
Ecuador : Administration is the largest cost of Ecuador, in a country where production costs are already quite high. (US $ 1.91 / lb, significantly exceeding US market price of ¢ 110.72, as of July 16, 2018.)
Nicaragua : One of the few countries where coffee production costs less than the international market (barely) is less expensive to administer, but infrastructure is more expensive. Supplies make up most of the budget, but in real terms are relatively inexpensive.
Peru : 40% is the largest cost item in this country; of all the countries studied, only Ecuador spends more on it in real terms, no other country allocates such a large percentage of its budget.
Guatemala : Another relatively expensive country, harvesting labor accounts for less than one percent of their costs. However, the amount in real terms is only slightly lower than its neighbors.
El Salvador : The country’s relatively cheap coffee maker still invests heavily in administration. However, labor costs during the harvest period are low and repair costs are relatively high.
Ripe berries are dried on raised beds. Photo: Sunnie Tark
But this is not enough to understand how much it costs. We need to understand why and how it affects quality, profitability and sustainability.
- The cost of labor
Louis says, “In coffee, more than 70% of the total cost of production goes to pay.” And about 28% of them are administrative labor costs.
This means that the cost of labor is directly related to the profitability of the Latin American coffee farm. And most often, this factor is beyond the control of manufacturers.
Luis says, “In Ecuador, the labor force is much more expensive than in Nicaragua, because of the lower minimum wage in Nicaragua.” And in Colombia? “The cost of labor is high because of the high cost of legal services and insurance.”
Luis adds, “Over the last five years or so, the cost of labor has increased significantly.” This is because the younger generation is generally less interested in farm work, instead of looking for more lucrative jobs in the city. This in turn causes labor shortages and increases costs.
Colombia Ecuador Nicaragua Peru Guatemala El Salvador
Schedule of the structure of labor costs in 6 different countries (Pay – Administration). Labor costs are directly related to the crop and make up almost 50% of the total cost of production on the coffee farm, and if you combine labor and administration, the figure can reach 80% of the total cost of production. Photo: Caravela Coffee
- Repair and fertilizer
Considering the wage bill, which is almost 70% of the total cost, only 30% of the budget is left to the producers to do the rest on the farm. Louis says they include: “Fertilizers, costs for combating plant diseases, utilities, transportation, etc.”
But it can have alarming consequences. Luis explains: “This means that if coffee prices fall, producers will stop fertilizing. With such a limited budget, there are few options left to cut costs. They cannot favor fertilizers over the salary they have to pay to seasonal workers or, say, provide for their own family.
“This puts a lot of risk on next year,” Louis emphasizes. Reducing fertilizers will negatively affect yields, resulting in lower earnings. In turn, this will mean even less money for fertilizers.
Colombia Ecuador Nicaragua Peru Guatemala El Salvador
Allocation of costs in each country (Remuneration – Production costs – Equipment – Administration – Other costs – Repair). Labor and administration costs are the highest costs, while the rest of the budget is split between repair, equipment, supplies, and other third-party costs. Photo: Caravela Coffee
Profitability for profit and expense: the bleak news for manufacturers.
Louis says that once manufacturers find out about their costs, they will be able to calculate their profit and profitability using this equation:
Profitability = sales revenue – cost x 100
(A more detailed explanation can be found in the Caravela Coffee blog, while in another post the company provides tips on tracking and recording these costs.)
The price of coffee fluctuates over time, making it difficult to accurately calculate profits for each country. However, on June 11, 2018, the international market price (Price C) closed at ,10 117.10 per pound.
In Ecuador, where the cost of production is $ 1.91 / lb, a farmer who will be paid at a C price will suffer a loss of -38.7%. Nicaragua has a slightly lower production cost of $ 1.05 / pound, so profitability here is 11.4%. In Peru, this figure drops to -8.6%, in Guatemala -16.4%, Colombia -1.7%, and El Salvador -8.6%.
In other words, most countries are not able to make a plus if they are paid at the market price. And Louis estimates that farmers need at least 30% of their income to survive and be able to pay for basic things like education, nutrition and health care.
When Caravela Coffee compared the market price to the cost of production in 2017, they noticed serious farm and farm levies of 3 and 1 hectares. The market price is below the cost of production in almost all six countries, which threatens the sustainability of the industry.
Colombia Ecuador Nicaragua Peru Guatemala El Salvador
Production cost for farms for 3 and 1 hectares of farms compared to international coffee prices. Photo: Caravela Coffee
What will this data mean to you?
Whether you are a farmer, roaster, barista or consumer, this research is very relevant.
- Farmers …
With Caravela Coffee, you can easily record your expenses. Louis says he will help manage the farm in terms of budgeting and resource allocation. Given that you only get paid once or three times a year, you understand how important it is for a successful harvest next year.
Moreover, it will help you evaluate the productivity of your farm. In turn, you can allocate resources to the most profitable areas, which will lead to increased productivity and profitability in general.
Finally, the survey gives you an idea of how much you need to sell your coffee in order to work according to the sustainability criteria.
A worker works at a wash station, measuring how many berries were harvested that day. Photo: Sunnie Tark
- Fryers, Buyers & Consumers …
This study touches you too. Luis says, “Now, we have an idea of how much coffee costs on three hectares… so industry representatives have to decide how much they can pay for farm work.”
He recommends that, if, for example, in Colombia, production costs $ 15,000 on 3 acres, the farmer will need to get at least $ 20,000 for coffee. (This figure is relevant for commercial coffee. The cost will require more money.)
In addition, Luis emphasizes that buyers need to understand the importance of having the right resources at the right time. We know that resources may be less of a priority for the farmer when there is a lack of funds, and we know that this is risky.
“If the manufacturer does not take care of protection against certain diseases or pests at the beginning of the production period, plantings will be severely damaged during most of the production period,” says Louis.
He adds, “Market research can be helpful in attracting resources to help farmers invest more in their business.” This, in turn, will increase productivity – which will benefit the entire industry.
Coffee in kamex, which can be found in many coffee shops; there is often a big difference between the prices paid by consumers and the money that manufacturers receive.
“If you ask any farmer in Latin America if they are going to retire, no one will say yes. Because they don’t have enough money for coffee. The price of coffee should be added to the total cost of production so that farmers can prepare. ”
In order for the coffee supply chain to become fairer, industry representatives must first turn their attention to coffee shops… where inequality is clearly evident. Where is most of the money from coffee held? It never gets to the producers. ”
So what can we, as part of the coffee industry, do today to ensure the sustainability of the coffee industry? How can we cooperate?
I think we all know the answer.
By: Sunni Tark All quotes are translated by Spanish.
Note: This article was sponsored by Caravela Coffee .
Translation: Anna Polstiankina.