March 28, 2022, Jos Algra
The political economy of the value of third wave coffee
Edward Fischer, in an article written in 2017*, tries to develop a theory on the creation of value through the symbolic means of production in international trade, as opposed to the creation of value and accumulation of capital through the material means of production, in the classical theory of Karl Marx. The material means of production generate use value, the symbolic means of production generate exchange value, that is what people are willing to pay for it. Let’s say this is about the political economy of the value of coffee from the third wave, combined with an anthropological approach, which applies to the case of coffee producers in western Guatemala. The data is from field studies conducted between 2011 and 2015.
To better understand the creation of value through symbols, in this case aesthetic, we can make a comparison with art. A painting is no more than a canvas with paint, materially speaking, with little use value (in the case of coffee one can at least drink it), but if it bears the signature of Pablo Picasso for example, suddenly it is worth millions for the value that is attributed to it by art lovers and collectors.
Coffee producers have the material means of production, land in the first place, with soils, climate and varieties, suitable for producing good quality coffee. Traders, roasters, coffee shop owners and baristas control the symbolic means of production, which generate most of the added value and the channels of distribution. Producers have benefited from the rise of the specialty coffee movement in the third wave, but most of the value is generated at the other end of the chain in consuming countries, of which producers share very little.
The transformation of Guatemalan coffee production
The growing demand for high quality coffees has profoundly transformed Guatemalan coffee growing. Historically, Guatemalan coffee has been grown near the coast, on large farms, many owned by descendants of German immigrants. The quality of the coffee at this point was above all Good Washed, Prime Washed and Extra Prime Washed or at best Semi-hard Bean, the type of coffee that was in demand in the first wave.
As the demand for high-quality coffee grew, production moved to the highlands, up from 1,300–1,400 meters above sea level, where smallholdings dominate, the vast majority of which are indigenous. In 1990 Strictly Hard Bean SHB coffee represented 30% of Guatemala’s exports, currently it is 80%. In those years, ANACAFÉ created brands for the coffee production areas, differentiating the cup profile of each of the 7 regions. Guatemala became a country of almost 100% specialty coffee production and the differentials changed from a discount to a premium.
The generation of value in coffee
The economic power in the value chain is in the hands of those who define what quality is and who manage to convince the consumer to pay more for that quality. The quality of coffee is to a certain extent subjective, because it depends on one’s taste, but “coffee artisans” have created a whole system to make it look more objective, measurable and scientific, such as the classification and cupping protocols of the Specialty Coffee Association SCA and the Q Grader certification. Many terms to describe the quality of coffee have been borrowed from the world of wine.
Sophisticated marketing has been created to sell the idea to the consumer. Apart from the quality of the coffee in the cup, they sell the origin from where it’s produced, even at the level of the farm (single estate coffee) and of the producer’s the family, the varietals they produce, the traditional way of processing, the beauty of the area where it is produced, etc. The preparation goes from a simple French press, via an expresso machine to nitrous infused cold brews. All to convince the consumer that they are consuming a unique product so that they are willing to pay 20–30 dollars per pound or 4 to 7.5 dollars per cup in a coffee shop.
Breaking down the value of third wave coffee
In his analysis, Fischer equates third-wave coffees to 85-cup micro lots or better and focuses in particular on the results obtained in the Cup of Excellence CoE. It is the type of coffee that we find in the Specialty Coffee Transactions Guide** and we will apply Fischer’s theory to those data. According to the guide, the median price paid in Guatemala was USD 2.75 / lb FOB over the 3 harvests from 2018/19 to 2020/21, for a median cup score of 85 points and a median lot size of 6,389 pounds.
Let’s start from a consumer price of USD 20 /lb (the lowest level mentioned by Fischer; offers starting from USD 15 /lb are currently found on the internet), to see how the value is distributed throughout the chain.
From USD 2.75 / lb FOB we subtract 40 cents for the processing and export of the coffee, twice the cost of a standard coffee, because of the size and type of process that micro lots of specialty coffees require. What remains is a price of USD 2.35 /lb for the producer, assuming that the intermediary does not cut out more, but wants to secure the producer as a supplier of high-quality coffee.
The average New York price in the 3 harvests was USD 1.18 / lb, which means that the producer receives a quality differential of +117, which is a good premium, when compared to the differential for SHB Guatemala, which ranged in those years from +28 to +70, with an average of +43.
To the FOB price we add 20 cents for transportation and terminal handling costs. We assign another 20 cents margin to the importer, more than 10 times the margin for standard coffees, assuming that he plays an important role in the chain to create the added value and because of the low volume of the lots. Fischer also mentions that, even when talking about direct trade, with close relations between the producer and the roaster, the latter still depends on the services of the traders.
So, the coffee reaches the roaster at a cost of USD 3.15 / lb. There is a 19% or USD 0.60 / lb weight loss from roasting. 15% VAT is deducted from the final price of USD 20 / lb to the consumer. What remains is a gross margin of USD 13–14 / lb for the roaster, more than two thirds of the final value of the coffee.
There is little that the producer do to influence on the percentage of the final value that he receives, even though he is the main actor in the material creation of specialty coffee, because in the rest of the chain cup quality can only go down if the coffee is not handled and processed properly. The producer will figure prominently in the promotion of the coffee, with photos of his farm and his family, information about the production area and all the details of the process, but it is the buyer who defines how much he gets paid for his coffee. The next harvest the buyer can decide to buy from another producer or he can handle blends of similar coffees from the same region or micro zone, to have more flexibility, reducing the influence of the producer even more.
Generate access to the added value
Fischer finds that access to added value varies greatly by type of producer. Taking as a reference the producers that have participated in the Cup of Excellence CoE during the years of the study, these are not very representative for their regions. Almost all of them are ladinos whereas the great majority are indigenous (76% of the producers in the study). The CoE producers are more likely to experiment with varieties and processing than micro-producers. The average land ownership of the producers participating in the CoE was 2.15 hectares. According to the IV Agricultural Census of INE (2003), 44.2% of producers own less than 1 manzana (0.7 ha) and 22.3% less than 2 manzanas (1.4 ha).
The participants in the CoE had Spanish as their mother tongue, had received some education at college level, were the first to use cell phones and the Internet, and many spoke at least some English and had some knowledge of the US market, in order to communicate with buyers and understand what messages they need to get across for marketing.
The average price paid to CoE growers was USD 4 / lb, while other producers in the same area and with the same varietals received an average of USD 1.25 / lb, when the New York price fluctuated between USD 1.13 and 1.46. per pound. The only benefit that the latter receive is that differentials for Guatemalan coffee in general have improved with the increased demand for high-quality coffee.
Of the samples that were collected to be cupped by ANACAFE, 50% had a cup of 85 or better, coffee that qualifies for buyers of third wave specialty coffees. But it is not enough to meet the cup quality requirements. According to Fischer, the data from his study show that the price to the producer depends more on the size of the farm and the “social capital” of the producer than on the results of blind tastings.
The producer needs to understand what the consumer is looking for and transmit these symbolic values through the merchant and the roaster, so that they generate added value with the consumer. If you belong to the 50% that have the conditions to produce coffee with a cup of 85 or better and the ability to transmit symbolic values, you get a much better price, but even then, you get only a small part of the added value at the end of the chain.
The micro and small producer lacks the resources to achieve this, their production scale allows them to perhaps improve their income a little, but they are not in a position to negotiate directly with the producer.
Here comes the role and value of the cooperative or association and of organizing events such as the Golden Cup organized by the Coordinadora de Pequeños Productores de América Latina y del Caribe CLAC and Fairtrade Africa, so that the smallest can also promote their product and be put in contact with buyers and thus gain better access to the added value that is generated with his or her product.
*Fischer, Edward, March 2017: Quality and Inequality: Taste, Value, and Power in the Third Wave Coffee Market. Max Planck Institute for the Study of Societies, Cologne. Discussion Paper 17/4.
Beyco (powered by non-profit Progreso Foundation) is an independent blockchain platform that facilitates access to markets, access to finance and makes it easy to display sustainability efforts. Wherever you are in the coffee supply chain, we’re here to help you explore your options and take advantage of new technology. Get a free consult here.
