Why the Commodity Market for Coffee is terrible. (More thoughts)
If you haven’t read my post from yesterday, give it a go. It’s a bit longer than usual but I hope it helps you understand part of the market and why it isn’t working.
There’s a question I never thought to ask but one that is staring us in the face: Why do we have a commodity market?
Imagine the below situation. It’s 150 years ago. There are two wheat producers: Pete and Bill. Pete lives in Oregon, not too far from the coast and traders who come up from California and the ports. Bill lives in Nebraska, far away from the populations that want to buy his wheat. Pete can meet with the buyers of his grain, he can connect with them, bargain over price, make quick deal, get things done. Bill doesn’t really get access to good buyers, he grows more than the local population need and the stuff he sells to traders at the railway junction to be shipped away, well, he has no idea if he is getting a good price or ripped off.
In comes Commodity Joe. He says, if Pete’s grain and Bill’s grain meet a certain standard of quality, then they should have the same price. All the sellers and all the buyers get to meet in one place - the commodity market - and find a price that works for them. Pete doesn’t have an advantage anymore and in fact Bill benefits from his product become a nameless-easy to move wheat.
So this was the point of the commodities market. To give access to people who couldn’t access the marketplace. Great idea. Only, what’s changed in 150 years?
Well nowadays, Bill or a farmer in Colombia or a farmer in Indonesia, can likely pick up a phone, write an email or send a text. They can connect with buyers anywhere in the world. The are connected. There are more exporter than ever in Colombia, Costa Rica, Ethiopia, etc. We don’t need a commodity market to get farmers access to market. The best part about the commodities system (at least for coffee) is broadly no longer necessary.
What do you think?
Why the Commodity Market for Coffee is terrible.
So, for years I’ve been posting about how low the Coffee Market has been. $1.00/lb of coffee or around 1.84 Euro/kg. Crazy low. I assumed when the market went up, I’d feel better about the world. But then another issue hit me.
Let me paint a picture that always caused me some confusion. In my past role, I sold coffee to roasters. Some years I would sell a lot from a particular farm and the roaster would love it. “Please get this again for me next year” they would say. Great! Relationship is building and we can facilitate this. In that role I was a little more hands off with the sourcing and a colleague would handle that. So, I send an email to the colleague asking to buy the same coffee again this year as we have a repeat customer. “I’m not sure if it will be possible to get this coffee again.” That response surprised me, but it happened quite a few times. I never fully understood why, until now.
You see, when the market is volatile, farmers won’t necessarily sell their coffee to the same exporter every year. If you’re conditioned to expect prices to change. You’re conditioned by the market to distrust the buyers of your coffee. Why then would you bring your coffee to the same exporter every time, the best thing you can do is constantly shop around?
Let’s get one thing straight. If my business can’t secure a farmers crop because some one else out there is offering a better deal; then great! Good for the producer, that’s a competitive market place. However, if what’s happened is that one person is offering a better price today, and ONLY today because the C-Market is high, well then, next year maybe the farmer hasn’t had a chance to invest in an ongoing relationship (the roaster can’t get the coffee again and moves on, works with someone else) and also they don’t have access to that high price again.
What I’m seeing now is that the Coffee Market doesn’t just rip off producers most of the time, when it goes up, it also damages the work of more sustainable, reliable, specialty buyers who want to invest in the same producer, who want to pay a fair price every year (not just this year).
Business expenses and why business tax makes little long term sense
This is a bit of a random blog post but something that has always bothered me about doing business. I’m in the process of kitting out an office and I’m thinking - should I spend $200 on a nice office chair or spend as little as possible.
Part of me thinks I should spend as much as I like. It’s a business expense, so why not. But that mentality is the very issue I want to address in this blog.
To simplify things a lot, if you have a company with a revenue of $100,000 and costs of $100,000. You make $0. You also pay $0 in taxes. So, let’s say you have a business with a revenue of $100,000 and costs of $85,000. You have profits of $15,000 which you could keep and pay taxes on. OR, you can find $15,000 of ‘legitimate’ business expenses to reduce your tax bill to as close to that zero mark. This isn’t how all businesses operate, but plenty of them do work with the mentality that they should try to have as a little taxable profit as possible.
Of course, with this in mind, you buy the expensive office chair. BUT, what happens when there’s a dip in your business, when somethings goes wrong, when a pandemic hits. Well, surprise surprise, you have no reserve of cash to use for the running of your business and then you have to turn to the government for a bailout.
I think this is a big issue. The world wants to encourage growth, but a sort of unsafe, unchecked, full on capitalist growth. Our systems don’t allow for us to say, set aside 10% of profits a year as a reserve that is untaxed. If you did that, businesses would start setting aside money for rainy days. Then when the financial crisis hits, when the next flu pandemic shuts us down, most businesses will have money to run themselves for awhile.
Just a thought that never stops rolling around in my head.
Using ‘we’ instead of ‘I’
I face this really interesting conundrum a lot of the time - do I use the word ‘we’ or ‘I’ to describe the work I am doing. In writing this, it sounds like nonsense, but this is really a problem I see in my work. In particular the work I am doing with Untitled Coffee. From the beginning I didn’t want people to think it was all just me doing everything. The truth is, after the coffee is sourced by importers and the artist creates the artworks, well everything else is done by me. The marketing, the label creation, the packaging, stickering, roasting, cupping, more roasting, weighing, logistics, all of it. So it’s really I not we. However, I have this deep struggle to decide if that’s how I want this to be seen or not. For instance in the latest release, it is my friend Sigurros’ artwork on display. That’s not ‘I’, that’s we. The coffees themselves were sourced by Community Coffees Rwanda and Sucafina respectively. That’s not ‘I’ that’s we.
In the end, I think that people want it to be ‘I’ because it is trust for me and who I am, what I’ve done and how I work that gives people confidence to try Untitled Coffee out. However, I’m just deeply uncomfortable with ‘I’. No grand conclusions here people, just me sharing me thoughts. Maybe you work somewhere were you should be using I and not we, maybe the other way around. It’s an important consideration that says a lot about how you want to work and how you want to be seen.
Good Hands in Coffee: Update
After far too long in development, Good Hands in Coffee is fully launched! I am so happy with it and it has been great to get a lot of positive feedback.
Never one to rest on my laurels, I want to expand the list to include a lot more consumer side charities and NGOs. For instance, the people at Well Grounded in the UK or Coffee and Tax in the US. There’s a lot more I can do to improve the site and so it will continue to grow and get better.
Good Hands in Coffee
I’m really excited to say that I just sent off some new work on the Good Hands in Coffee project to a web developer. If all goes well, in the coming weeks, this tiny list on my website will stand alone and have a lot more information. Information on what the charities and non-profits do, how much money they are earning and also where they are based. I really hope this all comes together because in essence I just want it to be easier than ever to find a charity/non-profit that supports the causes close to your heart.
To FOB or Not to FOB?
I’ve argued for and against sharing FOB pricing of green coffees. Let me explain a little more below.
As a roaster its interesting to see how much your importer is paying for their coffees. It gives you a deeper understanding of the market place, of what exporters and possibly farmers are receiving. However, it can be quite misleading. Take this example:
Joe Importer is offering a Colombian for $3/lb and they paid $2/lb for it from their export partner.
Fun Guy Trading is offering a Colombian for $3.50/lb and they paid $2/lb for it from their export partner.
On the face of it, Fun Guy Trading is making $0.50/lb more than Joe Importing. But is that really true? What if Fun Guy is based in New York and Joe in rural Kansas? What if Fun Guy offers a lot of support that Joe doesn’t. Bottom line, what are the costs of running their businesses, we do not know.
What’s more, we don’t even know if the two farmers in this hypothetical situation are being paid the same. That depends on the exporter. Maybe Joe Importer is buying from an exporter who charges a lot for their work and the farmer is receiving $1.25/lb. Maybe Fun Guy is buying from a large estate that exports itself and so in affect is paying the farmer the full $2/lb.
I heard a really interesting story of a cacao exporter who was accused of having high margins and buyers were put off. When more light was shone on the situation, it turned out they were sourcing from really remote regions, offering a service to cacao growers that was super beneficial to them, but also expensive to run. It looked like the exporter was taking a big cut, but actually, their cost of business was also very high.
Sadly, like a lot of things in coffee, the FOB price points towards bigger truths but does not give us full transparency. However, that doesn’t mean it’s not useful. It doesn’t mean we shouldn’t be moving in that direction.
A roaster I work with recently added a new Environment Temperature probe to their roasting machine. They didn’t have the insights it provides before, but now they do. They still don’t have a perfect probe in the perfect location to tell them everything they ever need to know about roasting. But they do know more than they did a few weeks ago. The FOB price is like that. It’s a new tool that is moving us closer to truths and transparency. But it is not there yet.
For some other interesting takes on this check these out: https://perfectdailygrind.com/2020/04/coffee-pricing-why-we-need-to-know-farmgate-and-not-just-fob/
Thoughts on Chinese Coffee
Some of you reading this may be aware that I majored in Chinese at University. It’s a skill of mine that I actually rarely put to use. However, all my language, history and political learnings about China have given me certain insights. The one that always stands out to me when I think of coffee is the idea of food security.
Ask yourself, have you ever seen Chinese rice in a supermarket? The answer - unless you are reading this from Mainland China - is no. China places a high priority on food security and there is a certain level of national pride related to Chinese products also. For these reasons you cannot export rice out of China. Why this is important for coffee, is that the rise in Chinese coffee production is actually being driven and promoted by the rise in Chinese consumption of coffee. While many roasters are getting excited about China as a future origin of purchase, I would not be surprised if a lot of the best Chinese coffee is consumed within the country and never graces the cupping tables of Western importers.
Just a thought.
I took part in a community panel discussion about careers in coffee today. It was really great to hear from all these attendees that the best part of working in coffee was community.
Do you feel connected to your community? Maybe you‘re swamped with work or just busy stuck watching TV waiting for furlough to end. Connect. You never know what might come out of connecting with your community. Can’t recommend it enough, no matter what industry you are in.
Lockdowns and Partial Lockdowns
We are entering this new stage of COVID-19, where everything is up for grabs again. Normality was just about to resume when it was cancelled for any range of different new policies. As we stumble towards new solutions, I can’t help but be frustrated by the lack of clarity and the doubt this all creates.
I see friends, former colleagues and myself, all trying to ‘entrepreneur’ our way out of this problem. I know people who’ve come up with genius, all be it small, projects that have made tens of thousands for them. It’s also been my personality reality to see projects closed and particular jobs dissapear in thin air.
Untitled Coffee has been a great success and a good way to focus my energy in the last few weeks. However, to take it to the next level I really need further development. Watch this space.
My Kickstarter project is fully funded. Now I have to really see it come to life. I’m kicking myself (pun intended) that I didn’t start this second part of the process earlier: buying stickers, getting the bags together, etc. When that’s also terrible logic, the whole purpose of Kickstarter is to limit your risk so that you will not go buy all the parts of your project before it is funded.
In any case, thanks to everyone who backed this. I hope it becomes a lively project and goes on for years to come and isn’t just a one off!
It has been 6 days since I launched on Kickstarter and I am now over 80% funded. It’s been great to see so much support and from so many people I haven’t spoken to for a long time. Thanks for all your support.
It’s pretty normal to complain about your boss. Recently I’ve wanted to complain about my own boss - me. The trouble is, when you run your own schedule, whether you do a good job or not it’s pretty easy to be self critical. I’ve got a lot to learn about managing my own time, so this is definitely a topic I will revisit in the future.
So my Kickstarter for Untitled Coffee is live. Please back this if you can; I need all the support I can get. Taking these steps feels really vulnerable if I’m honest, but I’m glad it’s happening.
Today or Tomorrow...
I will launch my Kickstarter for Untitled Coffee. It’s funny how despite all my experience in business and working with coffee, it is really scary to do something on your own terms. When you work for someone else, I find that you can rationalise rejection easier. “If people don’t like the product, well it wasn’t mine to begin with.” However, when we start our own projects, the rejection that is totally normal in business feels more scary: “what if no one, literally no one buys this?”
Well, what if? Then you file the project into a corner, see what you can learn from the experience and move on.
I really hope that Untitled Coffee is a huge success. It’s a project I’ve wanted to do for a long time. There’s love, time and money invested already in this. But if it fails, then at least I know I showed up, I shipped my product, I took a risk. No rain, no flowers.
If you want to be part of making Untitled Coffee a success, please check it out on Kickstarter.
You don’t have to do it alone, in fact, STOP doing it alone!
There’s this modern trope I see a lot. People really look up to entrepreneurs. The world glamourises start ups, new things and novelty like never before. One of the side affects of this is that we all see the faults in the businesses we work with or for and say to ourselves - “If I did that, I’d do it better” or “If only I was in charge it would be different”.
Maybe you’re right. Maybe you are the one person who can solve this problem. Or maybe, you’re ignoring the 10,000 other people who share your common goal and in trying to it alone you are weakening the chances of real success. Whether your goal might be tackling injustice, inequality or just offering a product that you think is missing; you are more likely to do good work if you do it with other people.
Working with people is messy. Working with people isn’t straight forward. Working with others requires compromise, listening and humbling oneself. However, working with like minded people to achieve a similar goal is a lot more likely and plausible than trying to change the world by yourself.
We benefit from a broken system
I think it’s really important to come to terms with the truth that many of us in the coffee industry benefit from a broken system. The commodity market provides a price basis for all coffee. Even the microlots you buy, because if the C-Market were at $3.50/lb, your microlot would cost two or three times as much as it does now. Whether we like it or not, our businesses are in some ways benefiting from the fact that the commodity market is telling the world that coffee is cheap.
How we see others?
Cashless payments brought on by the COVID pandemic have really got me thinking about how we see ourselves and how we see others. You see, with the advent of more and more cashless systems, we are excluding people from our businesses and our cafes. “Really?” you might ask. Well consider Luckin Coffee in China. It’s cafes are (to my understanding) fully cashless. According to a 2017 World Bank Report 225 million Chinese adults are unbanked. In other words, Luckin in totally comfortable with excluding around 15-16% of the total Chinese population. You see, when we move into a cashless world we subtly force people to bank in the way we want. Or we exclude them from the world we are building. We create division.
These thoughts make me wonder how we see others. Do I pity those who are unbanked? Do I want to help them get a bank account? Do I have the right to pass judgement on how they live or choose to live? The answer really is I don’t have a say over their life. While having a bank account might give real benefits, we can’t force people to live in the manner we deem right. And all of these subtle changes we make are forcing people into a way of living we have chosen and they possibly have not.
My First Cherry
This is the first coffee cherry I ever got to try. It was also my first time in a producing country and while the harvest was already over, I was able to run around Fazenda Sertao in Minas Gerais, Brazil, and find this one red cherry. If you’ve spent years drinking coffee, talking about coffee and looking at pictures of coffee cherries, well to actually try one is a very special moment. It tasted sweet, kind of like a garden pea, and what surprised me was how little fruit there is. It’s just a thin layer of fruit or mucilage and then the parchment and beans themselves fill most of the space. This was a special moment and I wanted to use this blog space to explain the history behind this picture.