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May, 2019

Self-Sustainability in Coffee Production: A producer approach to competitiveness

Current literature about coffee production sustainability or coffee cost comparison between producing countries only focus on direct costs and does not differentiate between different types of Arabica and Robusta coffees.  More importantly, it is written from the perspective of non-producers – often agronomists or researchers at the service of the roasting and trading industry or producing country government bodies concerned about the sustainability of small growers in a highly volatile market.  Indeed, sustainability is critical, yet it is used today mainly as a marketing tool. The purpose is to lure the consumer into consuming a cup of coffee not only for its aroma, body or subtle acidity but also for its level of sustainability.  Sustainability becomes a marketing tool, a major coffee attribute as relevant as taste.

Moreover, research and costly coffee investigations, whether done through government bodies such as boards and federations or international Non-Governmental Organizations on behalf of consumer governments, may carry a noble concept of sustainability.  However, such initiatives address social and political issues at the expense of the financial ones.  We always hear the main politicians in the producing countries ironically underlining the fact that while a cup of coffee costs $5 in a famous café, hardly 3 cents return to the producers, or how little of the total billions of $ of the global coffee industry comes back to the producing country.  We are yet to see any concrete actions from these producing counties’ agricultural ministries or coffee boards to pragmatically deal with this serious issue.

Proposed Strategy

My producer approach is to focus on the financial sustainability of the efficient producer who can achieve high yields at an efficient cost of production and who can market all his farm coffee – washed, unwashed and under-graded – at optimum prices. This business-oriented producer approach thrives on cost-competitiveness and anintegrated, traceablemarketing strategy that promote coffee by terroir or growth habitat and genetic material.  For this, three actions are required:

  1. Use the efficient coffee producer as a reference in his country taking into account the micro-climate and type of coffee produced.  Efficiency is calculated using the production yield per Ha and the cost of production parameters.
  • Determine the self-sustainable cost of coffee production through the continuous traceability of costs and activities of the efficient coffee producer, eventually satisfying both concerned consumers and politicians.
  • Fix a minimum referential price to neutralize the market volatility, thus paving the road to the financial self-sustainability of the efficient producer.

Financial self-sustainability first entails defining the margin per Ha a producer needs to earn to make profit, compete with other cropsthat can grow in the same micro-climate, and meet the requirements to produce and market the optimum Robusta quality in terms of investment and know-how.  

The self-sustainable margin is at the core of sustainability, and yet we do not hear it mentioned at all while trying to compute the fair production cost of coffee.  

Usually in case of a Robusta producer, the main competitors are cocoa and palm trees that generally grow under the same micro-climate. Therefore, the margin per Ha for coffee has to be compared to cocoa or palm trees or whatever crop that can grow and be marketable in a national and regional context. In my micro-climate, organic banana is an option as well.   

The second concept of self-sustainability, that I do not find mentioned anywhere either, is the working capital needed before a coffee farm is productive, which is between 2 and 2.5 years minimum. You do not plant a tree and it starts producing the next day. The money invested for 2+ years is depreciated for 10 years as fixed assets depreciation and amortized for 20 years as biological assets amortization.  

The table on page 4 illustrates the two concepts of sustainability with its three main components based on my experience in Ecuador: (1) sustainable profit, (2) indirect costs, and (3) direct costs.   

Sustainable profit

  • The sustainable profit per Ha is a minimum of $3,000/Haas long term loans tailored to agriculture are very scarse.
  • The target yield per Ha is an average of 90qq/ha or 4.08 MT/ha during a repetitive “4 Years”  Conilon cycle.
  • The corresponding efficient producer sustainable profit becomes $735/MT (3,000$/4.08) or aprox. 33c/lb. 

Indirect costs

  • $20,000/Ha is the approximate cost of a precision Robusta coffee initial investment including the cost of land, the drip and ferti irrigation infrastructure and the biological and fixed assets in our actual Ecuadorian environment.  
  • With a target profit of $3000, the agriculture entrepreneur will recuperate his investment in 6 to 8 years. A total of $21,000 (3000×7) is the approximate valorization of a precision agriculture Ha.
  • The annual amortization and depreciation cost or the indirect cost of producing coffee for the efficient producer (it would be more for the less efficient producer) is estimated at 13 c/lb. or 289 $/MT.

Direct costs

  • The direct cost of producing washed Robusta coffee is about $1550/MT.  However, it varies from country to country and depends on the type of Robusta produced (washed or unwashed).  
  • An efficient producer of unwashed Robusta can have a direct cost close to $1000/MT. In my case, I focus my production and marketing strategy on washed Robusta meaning that my costs may be slightly inflated especially that I produce in a relatively high cost country, Ecuador. 
  • Fertilizing and Harvesting, 7 and 10% of the total self-sustainable costs, are the main variable costs to be constantly monitored, while administrative fixed costs at 8% of total cost can be optimized with the size of farm under management. 

As seen in this example, we have not started producing coffee and yet in the case of Robusta, we already estimate that Sustainable Profit + Indirect costs are about $1,000/MT or 45c/lb. And again, we rarely consider these fundamental components of coffee production as what counts is monitoring carefully the direct cost of producing coffee in different countries focusing on currencies, labor costs and agricultural inputs. 

To sum up this analysis, we can estimate the total cost of production of the efficient unwashed Robusta producer at about $2000/MT while the efficient washed producer should be around $2500/MT.  This is the cost of the efficient producers with high yields and not all of us can achieve these yields.  It is also possible to trim costs through mechanization of harvesting (not yet available for Robusta), reduction of newcomers in an oversupplied market (meaning trimming the indirect costs) or, as a last recourse, decrease the producer financial sustainable gross margin in case of coffee plethora!

Conclusion

The main purpose of this essay is to identify pragmatic financial solutions to coffee producers through the concept of self-sustainability rather than resorting to paternalistic and political fixes.

It is essential to constantly monitor the cost of the efficient producer in a competitive and traceable market, making the sustainable profit and indirect cost at the heart of cost production together with direct cost.  This helps the inefficient producers reach sustainability through political and private initiatives inspired by the self-sustainability approach and establish a minimum sustainable coffee price based on type of coffee, micro-climate and terroir. Sustainability becomes concrete and achievable and not a marketing trick to please the conscience of some well-to-do consumers or the political ambitions of charismatic government employees.

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