Producer Toolkit: Price, Pt 2 - Discovering the true value of coffee

Filter Stories - Coffee Documentaries

This episode of the Coffee Producer Toolkit explores the transition from commodity-based pricing to specialty coffee value discovery. It pro

Key takeaways

• The C market price is driven by external factors like Brazilian harvests and does not reflect individual farmer quality.
• Farmers must include their own labor and family labor in production costs to avoid unintentionally subsidizing buyers.

Main topics

• Cost of production calculation
• Specialty coffee negotiation

Notable quotes

If you're not paying yourself, you are subsidizing the buyer.

Conclusion

Successful specialty coffee farming requires moving from a passive rec

Transcript preview

Speaker 1 (0:09) Welcome back to Filter Stories. I'm James Harper. And this is part two of our episode on price Speaker 4 (0:15) in the Coffee Producer Toolkit, a podcast series I'm making with my friend and fellow podcaster Lucia Solis to help coffee producers run more profitable farms. If you haven't heard part one yet, listen to that before you listen to this. Now, you'll remember in part one, we established that the C market is a very strange way to value a farmer's coffee. The C price, you know, it's shaped by harvest in Brazil, the value of the Brazilian real against the dollar. But a producer who's sitting in Costa Rica has the right to ask, what does any of this have to do with my coffee? A Costa Rican farmer has coffee to sell and there is a roaster on the other side who wants to buy it. And it should be up to the two of them to work out what the coffee is worth to each of their businesses. And so now we get practical. We help producers find what their coffee is really worth. The goal here is to help farmers find a price that sustains their business over the long term, even for the lowest grade coffees. And the first step in this process is obviously Speaker 1 (1:20) finding the floor. What does it actually cost you to produce coffee? Speaker 4 (1:23) Once Speaker 1 (1:24) you know that, then you add your profit margin on top. And of course, Speaker 4 (1:27) this sounds very obvious. Of course, any business needs to know its costs. And you might be tempted to think, well, aren't these farmers quite amateur to not know their cost of their business? If you live in the global north, that might be your first reaction. But I want to explain why, actually, it's rational. It's the best approach for many of these farmers to not have known the cost of production up until now. That was a smart thing to do. And I want to explain why. So let's imagine that you live in the countryside. And your house is surrounded by apple trees. You have hundreds of apple trees. Now throughout the year, you might prune them every now and then, add a little bit of fertilizer, and at harvest time, you pay a couple of people to help you pick. You get way more apples than your family can possibly eat, and so you sell some for cash. But those apple trees are not the focus of the country house. It is primarily a family home. It's where you grew up. It's where your brothers and your sisters, your aunts and uncles, they come and go. They all pitch in with the apples now and then, but one of them is a florist, another drives a taxi, and those apples are just a little bit of extra income. And in this context, you don't want to overcomplicate things with the apples. Keep it simple. They bring in some cash every year and everybody's happy. And years ago, when coffee prices were relatively higher, coffee brought in a very nice little bit of income. I've actually heard this many times from coffee producers who say, coffee put me through college. Now, calculating the cost of production in that world is completely pointless. Like, think about a hobby of yours. Maybe you knit and you sell some of your wares down at the local market. Are you really going to draw up a profit and loss statement and a cash flow statement? Of course you're not. I mean, it's ridiculous. Knitting is not the major point of your life. It's a little thing you do on the side to keep you rooted to a community. Same thing with coffee farming. Keep it simple. Pick the coffee, sell the coffee, make a bit of income, move on. But the coffee world is changing. The real price of coffee has been getting lower and lower these last 50 years. And so picture the farmer that we made this series for. They have inherited the 10 hectare farm they grew up on and they have a choice. They want to keep it, but the family can't keep absorbing losses at these low commodity prices. And so they're considering moving into specialty to make the farm pay for itself and hopefully even provide a living. That means treating it as a business for the first time. Specialty, it takes a lot more time, investment, and to make the right kind of decisions, a farmer has to understand their costs. So that is why it is only really rational for farmers to understand their cost of production when they begin thinking about professionalizing the coffee farm. Speaker 4 (4:08) And so, in this next section, we help farmers get a grip on their finances for the first time to work out what it really costs them to grow their coffee. Pressing play. Speaker 2 (4:22) So let's talk about how to actually price your coffee. So for this, you want to keep two numbers in your head. The first is your price floor, the least you can accept before you're actually working at a loss. And the second is how far above that floor you can climb. Because your goal here isn't just to, you know, be slightly above the floor. The point is to get as far above it as the market will let you. And in this section, we're going to talk about the floor, the minimum price you need for your coffee. Speaker 1 (4:51) Okay, so your price floor. It is basically, what Speaker 4 (4:54) does it cost you to produce your coffee? Because if you sell below this price, you are losing money and coffee farming will not be a long-term sustainable option for you. Speaker 2 (5:03) And I just want to make this point really quickly to producers that you're not wrong for never having worked out your cost of production before because you probably never needed to. If nobody's ever paid you based on what it costs to grow your coffee, if you've only ever been paid what the C market said your coffee was worth. And again, as we've already said that a lot of that was driven by Brazil and external factors that you could never control. You could have spent all of this time keeping meticulous records, writing everything down, filling up notebooks and spreadsheets, but it wouldn't have mattered if the buyers were just going to come and say, hey, I'm going to pay you what the C market says your coffee is worth. So doing all of that work wouldn't have changed anything about your price. So why would you do all of that extra work? There is a reason why a lot of producers have never bothered to do this exercise. All of that time would have been time that wouldn't have been compensated. But what we're talking about now is there is, in 2026, a new opportunity to reach different markets where this stuff matters. And what I've noticed is that a lot of producers are not prepared for this, are not prepared with a good answer. In specialty coffee, we're in a world of one-on-one relationships with buyers. Social media and technology has shortened that gap. A lot more buyers are visiting farms. And they're willing to have that conversation. They're willing to go to the places, meet the people, and negotiate around price. And if you can't tell them what your cost of production is, if you can't tell them what margin you need to make, then you're missing out on an opportunity to get a higher price. So the reason you need to know your cost of production is that that allows you to better negotiate with your buyers so that you can set your price floor, your minimum. Speaker 1 (6:48) Yes. Now, there are tools to help you figure out your cost of production if you haven't done it before. There are cost of production calculators, accounting templates, frameworks built specifically for coffee. Many of them are free. We'll Speaker 4 (7:00) link some of them in the show notes. But what we want to do here in this section is share a couple of places where you're probably going to struggle. the Speaker 1 (7:07) common pitfalls that a lot of producers are going to fall into as they try and do this for the first time. For example, we spoke to one producer, Carla Bosa from El Salvador. Speaker 1 (7:25) You heard from Carla in the previous episodes, but to remind you, her farm is about 70 hectares in El Salvador. And despite being a relatively large farm, for decades, nobody had ever calculated the cost of production for the exact same reason that Lucia, you just gave. For a very long time, it didn't matter because when Carla's grandparents set up the farm, the sea price was good enough that it covered the cost of growing coffee. There was a boom. People were buying land, expanding coffee production. Then the coffee price started getting lower and lower. And then by the time Carla and her sisters, their grandchildren, come into the business, they want to earn premiums over the sea price. They decide to get into specialty coffee. But that involved more investment. So to get a handle on what was actually feasible, they had to figure out the cost of production. Speaker 3 (8:23) For Speaker 2 (8:24) Carla, one of the biggest challenges in this whole exercise was trying to draw the line between family expenses and farm expenses. In Carla's case, her sister bought a moisture meter with her own money. Technically, that's a farm expense, but it wasn't recorded as one. Speaker 3 (8:45) And the issue Speaker 2 (8:53) applies to labor as well. Speaker 1 (8:58) So, Carla's father lives on the coffee farm. And they struggled as a family to figure out how much of his time should count towards coffee production. Speaker 3 (9:08) When many Speaker 2 (9:13) employees are your kids or your siblings, it's complicated to know how to calculate what to pay for their time. And you might be tempted not to include it. But we really think you must. For example, Lalo, the agronomist from the first episode, he strongly recommends that you do this too. Speaker 1 (9:37) Lalo argues that you have to count the labor time that goes into producing your coffee. So, for example, if a lot of that labor is done by a cousin for free because she lives next door to the farm, record those hours. Speaker 4 (9:50) You can put that cost as zero cost because it's free, but it's important that you record the time. Speaker 2 (9:56) Right, because even if it's Speaker 4 (9:57) a Speaker 2 (9:57) zero expense today, if that cousin goes away or someone else moves away, you may have to pay someone for that labor at some point. Speaker 1 (10:04) That's why it's important to know how much the farm is being subsidized by free family labor. Speaker 2 (10:09) Now, another producer who went on this journey to calculate her farm costs was Julia Ortega. We heard from her in a previous episode as well. She has a seven hectare farm in Mexico. And one of the big lessons for her was don't forget to include your own time. Speaker 3 (10:30) Julia Speaker 2 (10:31) mentioned that in Latino culture, you often value your own time very low, and Julia herself is very aware of that. She sometimes asks herself, is all my work really paying for itself? Speaker 2 (10:50) She jokes that if all she cared about was money, she definitely wouldn't be in coffee. That's a joke, but it's also a deeply serious point. If you're not paying yourself, you are subsidizing the buyer. You're working for free so that someone else can make more profit on your coffee. And everyone else along the supply chain does pay themselves. And they add that cost to the price they sell to their buyers. And you should too. Otherwise, you're the only one not paying for your own time while everybody else is. Speaker 1 (11:25) And so, when you do the analysis of your cost of productions, don't forget to include your own labor. Speaker 2 (11:32) Getting to the bottom of your production costs can get complicated. Separating family expenses from farm expenses can get a little bit murky. Putting a value on your own time can be difficult. It can be uncomfortable. And it can feel overwhelming. And that's okay. Speaker 3 (11:51) Both Speaker 2 (11:52) Julia and Carla worked with professional accountants to help them figure this out. And you can too. Speaker 1 (11:58) All right, Lucia,