No 30

How is Price Transferred to Colombian Coffee Growers?

February, 2016

WHAT'S BEHIND

How is Price Transferred to Colombian Coffee Growers?

Domestic price of standard Colombian coffee depends on the behavior of three market variables: the price in the New York Stock Exchange, the Colombian coffee quality premium and the peso-dollar exchange rate.

In calculation of the domestic price that producers receive for their coffee, the Colombian Coffee Growers Federation (FNC) has always been seen as a model of transparency not only in Colombia, but in many coffee-producing countries, in addition to the so-called Purchase Guarantee, the public service most valued by farmers, which guarantees them the best base price in the market.

Firstly, setting the price does not depend on the FNC, which publishes it daily, nor on the cooperatives that buy and pay the coffee to farmers in cash through purchase points near their farms. The purchase price for dry parchment coffee load in Colombian pesos depends on the behavior of three market variables:

  • The price in the New York Stock Exchange.
  • The quality premium recognized to Colombian coffee.
  • The exchange rate of Colombian peso against the dollar.

The price of the C contract in the New York Stock Exchange is the global reference price of washed Arabica coffees. These prices are volatile and respond not only to supply and demand factors, but to activities of speculating agents in the financial markets. This is the main indicator of the coffee price worldwide.

The quality premium recognizes the quality, reputation and relative availability of Colombian coffee against other origins.

From the addition of these two variables is subtracted the so-called “coffee contribution,” of 6 cents per pound, which serves to finance public goods and services that have given Colombian coffee growing its competitive advantage in the global industry.

Scientific research and technological development, including development of varieties resistant to such diseases as rust, by the National Coffee Research Center (Cenicafé); technical assistance provided by the Extension Service, the main vehicle to transfer knowledge to producers; the Purchase Guarantee; activities of commercial promotion and search for new markets, which help the producer climb the value chain, and promotion and defense of the Colombian origin are some of the public goods and services financed thanks to the coffee contribution.

To the addition of the international price and the quality premium, minus the coffee contribution, the peso-dollar daily closing exchange rate in the local currency market is applied.

Finally, logistical and financial costs, which are those necessary for coffee receipt, threshing, storage and export costs, are subtracted.

This translates into a daily reference domestic price or published base price, benefiting producers, since other exporters must recognize an equal or higher price to be competitive.

According to historical records, when a purchase point of cooperatives has had to close its doors, the purchase price in the zone of influence has fallen between 20% and 40%, which confirms the importance of a guaranteed base price.

Significant premiums for specialty coffees

This occurs in the case of domestic price recognized to standard coffee. But in the case of added-value or specialty coffees (including sustainable ones), higher quality premiums are recognized and paid by buyers themselves, who are willing to recognize producers’ commitment and additional effort towards quality.

Examples include quality premiums recognized to the so-called “microlots”, which are exceptional high-quality and limited-edition coffees, or coffees that win important competitions, such as Cup of Excellence, and then are auctioned at very competitive prices for the producers.

Between January and October 2015, thanks to its commercial work of high added value, the FNC paid to producers quality premiums worth $6.38 million (1$ = 2,667 COP), of which about $1.88 million corresponded to specialty coffee premiums (including microlots) and social premiums paid to coffee growers with farms certified under fair trade initiatives. The average value of the additional premium paid for each load of specialty coffee was 4% of standard price.

Transferring to producers, both of standard and specialty coffee, the best possible price is not only one of the major differential attributes of Colombian coffee, but part of its mission to work for the welfare of coffee growers, including improving their profitability.

And sharing with members of the 100% Colombian Coffee Program this x-ray photograph of prices transferred to producers will enable them to have more present and clearer the differentiated values of Café de Colombia in the face of their own consumers and trading partners.

 


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