Friday, December 9, 2022

109. How does Artisan price their coffee? Is it related to the C market (ICE)?

Dec. 9, 2022
Artisan's founder, Ruth Ann Church, had the honor to join a panel yesterday, Dec.
Sustainable Sourcing Webinar, Dec. 8

8, organized by Bellwether, the innovative manufacturing company of roasting machines that any cafe owner can use. Owners of Bellwether roasters may opt-in to green coffee supplies from Bellwether also, and that's where Artisan and another importer, BeLift, come in. Both Artisan and BeLiftGreenBeans were guests on the webinar titled, "The Relationships and Realities Behind Sustainable Sourcing." 

Bellwether's chief coffee officer, Arno Holschuh, is also a celebrity in specialty coffee today. He was at Blue Bottle for five years and has leveraged his experience well into his current role of leading a cutting-edge coffee equipment/sourcing start-up. Holschuh moderated the panel starting with questions about the C Market. Here at Artisan, we found this question intriguing and wanted to share a bit more about how Artisan priced coffee in 2022, which was a watershed year in many ways for coffee.

What most people point to, and Holschuh was considering when he asked the question, is the high volatility of the C Market in 2021 - 2022. Coffee prices for internationally traded coffee went much higher than usual, and kept going up for many months, until recently, in October/November, prices went steeply down again.

In 2022, our prices were influenced by key factors like the NAEB farmgate price, and competition for cherry, but the core of our method rests on understanding cost of production. At Artisan, we have access to some of the best historical research on cost of production in Rwanda. For some time, the evidence from this research suggested farmers must receive at least 300 Rwf/kg cherry in order to make coffee farming worth their while. Some might say, 300 Rwanda franc (Rwf)/kg cherry was a "living income" farmgate price back in 2015 - 2016.

Fast forward six years and the 300 benchmark is no longer relevant. It needs to be updated for current real dollar value (i.e. currency exchange has changed), for general inflation and real cost increases, for example fertilizer and labor. Only considering the foreign exchange rate and inflation, the 300 in 2016 woud be estimated to be more like 400 Rwf/kg cherry. But there was an additional factor in 2022, that is increased competition for cherry. A low-production year in 2021 had created the first time in decades that big commercial buyers of coffee were paying double the NAEB farmgate price of 270 per kg cherry. 

In 2022, despite NAEB taking its cue and setting the farmgate price even higher at 420, the competition to buy cherry was fierce again and farmers won again. Cherry prices were easily at 700 Rwf/kg in Rusizi and 600 Rwf/kg in Gakenke. This is all good for farmers, of course, but it meant Artisan's pricing models, which focused on the 300 Rwanda franc benchmark were now outdated.

Without any solid research to reference for cost of production in this context, Artisan decided to take regional cherry prices as a proxy for farm costs and add cooperative costs to that number. To gauge the farm costs, Artisan required each of the five coops in our sourcing group to send copies of 10 farmer "fiche", the delivery document where every delivery of cherry is recorded. This document gives accurate evidence of the prices one farmer actually received. By averaging prices received by 10 farmers, one creates an "average price paid" for coffee cherry at each cooperative. We use this average cherry price as our baseline of cost of production for the farmer. 

Before 2021, we would never take the cherry price as representing farm costs. We still don't believe the cherry price is equal to cost of production, but we're pretty sure the cherry prices paid in 2021 and 2022 were above the farmer's cost of production, whereas prior to 2021 we had evidence and research that that was not the case.

Cooperative costs included salaries, fuel, security, maintenance. Adding these costs to the cost of cherry allowed us to estimate cost of production at the cooperative level. Once we had this data for one cooperative, it was easier to create the next four. This system of using 10 farmer cherry delivery documents to form the basis to understand total costs at the cooperative level became our new go-to model for price discovery in 2022.
Artisan captures data on COP cooperative level

We like this method of building to a coffee price by starting on the farm. While still involving lots of estimates, it is based on realities of farmers and considers the variation of the micro-markets within Rwanda. A one-size-fits-all price is going to harm some and undeservedly benefit others. Our "based on the fiche" price is more tightly tied to realities on the ground. While not based on the C directly, influence from the C is part of NAEB's farmgate price, and NAEB's farmgate price heavily influences the price that farmers actually receive. This means the C is indirectly affecting Artisan's price, also.

CLICK HERE to view the video of the entire webinar! We highly recommend it for the great comments from other panelists: Ivan Hartanto of BeLift Green Beans, Grayson Caldwell, Bellwether's head of sustainability and impact, and Gabriel Boscana, head of green coffee sourcing at Bellwether. 

IISD on the SCC webinar, Dec. 6
Coincidentally, two days before this Bellwether webinar Sustainable Coffee Challenge (SCC) produced a public meeting with a presentation from International Institute of Sustainable Development (IISD) on the coffee sector. Click here for the YouTube video. 
  • Start at minute 21:00 for the well articulated analysis of the importance of higher prices for coffee farmers and the goal of sustainability.
  • At min 31:06 the speakers pose a very interesting question, "why have we normalized high prices for sustainable products, and low prices for products with more negative impacts?"
  • At min 32:32 the speakers give a set of recommendations for all parties in the value chain to improve sustainability of the coffee sector.
Artisan supports the recommendations of the IISD and SCC speakers, while recognizing there is always more we can do. We are grateful to partners like Bellwether who are prepared to join us on the journey!