- When coffee prices are high, farmers will often sell higher volumes of wet parchment
- Farmers need access to capital to protect against market volatility
- A stable and healthy supply chain relies on both external support and the freedom to make decisions
IMAGINE YOU are a roaster. Each week, the same customer comes into your roastery and buys a bag of coffee. Then, one week, he comes in and offers to pay the same price he usually does, but this time he just wants the green, unroasted beans. What would you do?
This is the simple analogy Onyx Coffee Importers CEO, Edwin Martinez, uses to explain to roasters why, when coffee prices are high, producers often start selling more fresh cherry or partially processed (wet) parchment to off-takers.
They can get the same price they normally would for the coffee, but without the labour-intensive process of fermenting, drying, cleaning, and storing the beans first.
However, while this may appear like the most logical move, it’s not always as easy as it seems.
The problems with selling wet parchment
For producers, coffee processing can be seen in one of two ways.
On the one hand, it demands great effort from the producers themselves, requiring significant time and resources to achieve the right results. However, by doing so, they can often add substantial value to the harvested coffee cherries, improving their quality and, in turn, the prices they receive for them.
When dealing with lower quality beans, this only becomes clearer. For example, on some coffee estates in India, an increasingly popular practice is to add orange to a fermentation tank full of robusta beans and sell the coffee at a premium.
If a farmer sells their coffee unprocessed or partially processed, the only stages of production over which they have control are cultivation and harvesting.
Here, they can ensure they are adhering to practices that will give them a high-quality product that off-takers will be happy to buy – but the cherry price is not highly differentiated along quality lines.
When this happens, cherries of varying quality often all receive similar, if not the same, price. The result is that the farmer has no real control over their earning potential, while limited numbers of off-takers and oblique farmgate prices tend to exacerbate the issue.
‘Farmers might end up worse off’
Volatility is an inescapable reality of the coffee market coffee included. But the extent to which volatile prices affect those within the industry depends largely on access to capital.
Every economic, social, and environmental factor that influences the price of coffee is monitored by traders to ensure they anticipate change before directing their resources to where it is most profitable.
When conditions are adverse, they can use the same resources to make decisions that will soften the effects of detrimental market activity and minimise their profit loss. Known as hedging, this is usually done through buying stock elsewhere or storing physical stock.
The reason traders can hedge is because they have access to capital. But understanding that the same rules apply to producers as traders is fundamental.
In other words, there needs to be capital in the hands of farmers because they are the most vulnerable to price changes. Otherwise they may feel cornered and make rash decisions, without weighing up the consequences.
For example, Edwin, whose family have owned and run a farm in northwest Guatemala since 1957, says that producers will often put in a great deal of extra work to process their coffees, even if it means that they only earn a tiny increase on the raw cherry price.
“Most small to mid-sized farm will just do the work as long as there is an increased return of any kind at all,” he says. “It is what most of the world who works at or owns a small business does.”
However, this is often with little consideration of the market’s volatile nature. As Karl Wienhold, author of Cheap Coffee, comments, “If all prices are relative to the base, the farmers might end up worse off after doing more work if prices fall.”
Stability for all
Ensuring coffee farmers have agency is an essential aspect of a healthy and equitable supply chain. This includes giving them the freedom to make decisions that will improve their livelihoods – which may include selling more wet parchment when coffee prices are high.
However, this doesn’t mean relinquishing full responsibility. Risks related to fluctuating prices can be mitigated through various means, including crop diversification initiatives, investment in technology, and the provision of on-the-ground education to help farmers manage their capital.
If they can protect themselves from downturns, it will help tackle the worst effects of climate change, improve overall quality, bring more unique coffees to consumers, and help to stabilise coffee prices.
After all, stability for farmers provides stability for the market – and a more level playing field for all.