Price premiums: Can specialty coffee roasters stay true to their promises?

coffee price premiums
  • In Colombia, less than 40% of coffee producers receive a sustainable income
  • Specialty coffee roasters have built their businesses on their ability to pay premiums
  • High arabica prices & soaring energy costs are putting their promises to the test

FOR DECADES, the coffee industry has struggled with a chronic inability to pay producers sustainable incomes.

Historically low prices determined by the C market means, in some origins such as Colombia, the percentage of coffee producers who receive a sustainable income is less than 40%.

This means the majority struggle to not only reinvest in their farms, but support their families. When the global price of coffee falls, it can even drive them below the poverty line, where they are unable to afford basic necessities, such as education and healthcare.

A point of differentiation and a source of great pride for the specialty coffee industry is its ability to pay premiums well above the C price and, in turn, provide producers with a truly sustainable income.

Many have built their companies on their commitment to pay “30-40% more than the market price”, while some even use Fairtrade as the base to show the extent of premiums.

With the price of arabica enjoying highs of $2 per pound and above for much of the last year, it could be assumed, then, that many farmers have been enjoying big paydays: premiums on top of a premium, if you like.

However, with roasters’ profit margins squeezed by soaring energy costs and unfavourable exchange rates, many are finding it difficult to stay true to their original commitments, most of which were made when coffee prices were at rock bottom.

Supply chain shocks

In 2019, the Covid-19 pandemic brought about the biggest value chain shock in recent history, affecting labour supply and internal logistics networks.

The supply and demand impacts exacerbated already volatile prices, with futures arabica coffee prices showing 83 consecutive days of excessive or moderate variability, according to an ICO report in May 2020.

Meanwhile, the US Bureau of Labor Statistics (BLS) shows the average price per pound of ground coffee in US cities rose from $4.17 in October 2019 to $5.79 in June 2022, representing a 38.8% jump.

Today, the situation isn’t much better. Russia’s invasion of Ukraine earlier this year has increased the costs of fertilisers, making production and import costs more expensive for farmers. And in Europe, increased demand, rising energy prices, and the strong dollar in comparison to the Euro are affecting profit margins for roasters.

“Coffee traded at $0.85 per pound in May 2019, the lowest level since 2004. At the end of the year, the price rose to $1.25,” Jordan Montgomery, a German roastery manager, told DW back in August.

“Severe frosts in Brazil, the world’s main producer, occurred in July 2021. Two hard nights pushed the price to $2.50. It reached $2.60 in July 2022, before retreating to $2.16 in August.

“These factors forced us to pass some of our costs on to our customers and accept lower margins for some products. The average increase over the past 12 months has been around 6%.”

With squeezed coffee margins, the ability to pay fair prices and farmer premiums has become less and less viable. Yet rather than passing on higher prices to customers, the solution for many roasters has been to jump ship and go in search of cheaper alternatives.

“[Colombian coffees] are completely out of the question,” a UK-based specialty roaster which has been operating since 2018, told Coffee Intelligence earlier this year.

“They’re just too expensive at the moment. The best alternative for us in terms of flavour profile and cost has been Mexico. We want to continue sourcing Colombian coffees, but how do you convince your customers to pay more?”

But for a side of the market that uses its close relationships with farmers to help promote its coffees, this is considered a bit of a cop out.

“It’s a huge shame – especially for coffee growers that had a direct relationship with roasters,” says Davide, a coffee expert and former trader from Colombia. “The most difficult thing about premiums is that supply chains are complex with many intermediaries. For smallholder farmers, those with less than 2 hectares, it is more difficult to export directly.

“They need a cooperative or have to sell to an intermediary. They then keep part of the premium.”

No Fairtrade

On the roaster end of the supply chain, inflation and the changing consumer trends present big risks.

Nobody wants to be the first to significantly raise prices for fear of losing customers. Yet at the same time they realise that sticking to premiums and profit sharing schemes without any price adjustment will hurt their bottom line. For some, it could spell ruin.

“What we’re seeing now with the inflationary crisis is a general concern for coffee consumption,” says Joel, a coffee procurement specialist.

He believes that the high-value sector, including the specialty coffee scene, will be affected and that some origins have seen increased differentials. “Some are becoming more and more niche,” Joel says. “Sustainability premiums have also seen a lot of pressure.”

A number of roasters have turned to the Fairtrade model for answers, which offers a more standardised framework for price premiums. It offers a Fairtrade Minimum Price to protect farmers from sudden price drops. But some believe it only offers half a solution.

“Fairtrade helps maintain living conditions,” says champion barista Nicole Battefeld-Montgomery, “but it often lacks the opportunity to reinvest and modernise the farms. It helps farmers when their crop is not top quality, but not when it is of high quality, as farmers are stuck with the contract and can’t get higher prices.”

In the last few weeks, there has been a glimmer of hope for roasters. For the first time since July, the arabica C price dropped below $2 per pound and dipped as low as $1.69 at the end of last month.

Gas prices are also showing some signs of recovering, which is likely to help ease some of the inflationary pressure.

But for specialty coffee roasters and the market in general, the revelation of their fragile promises to pay premiums will live long in the memory. Or at least until the next time prices fall.