- Paying more than the C price has been an essential characteristic of a third wave coffee roaster
- Specialty coffee’s fourth wave means as roasters commercialise, many need to pay less for green coffee
- Expanding into a larger market often means swapping higher margins for a higher sales volume
THE THIRD wave of coffee was born out of an appreciation for improving quality, transparency, and traceability across the supply chain. As such, paying more for coffee quickly became one of the market’s core principles.
Today, third-wave hcoffee roasters might pay anything from a small premium above the C price to record-breaking amounts. Last year’s Best of Panama auction saw a bid of just over $10,000 per kilogram for a washed Gesha.
However, as we enter the fourth wave – characterised by what many describe as the commercialisation of specialty coffee – should we expect this to continue?
As roasters grow and their supply chains become more robust, they can often reduce their supply costs by purchasing materials in bulk. This can include green coffee.
However, on the other hand, this means that maintaining high price premiums can be much more challenging to stomach when operating at a greater scale. This is because a “small” increase in price per pound is much more significant for a large-scale coffee roaster than it would be for a micro roaster.
For example, a $1.00 increase per pound for an entire container means that costs rise by tens of thousands of dollars. Conversely, the same increase for a single 60kg bag only totals around $132.
It’s also important to recognise that expansion costs money. Roasters need to be willing to invest in equipment and infrastructure that will ultimately lead to long-term profitability – and the benefits come when they have the capacity to start operating at scale, purchase in bulk, and reduce their per-unit costs.
Finally, we need to remember that the market for third-wave coffee roasters is limited. There are not an infinite amount of people interested in extremely high-scoring coffees which are incredibly expensive.
As such, in order to expand past a certain point, roasters have to enter larger markets which are more price-sensitive. In turn, they have to adjust their sourcing strategy to offer cheaper coffees for a different type of consumer.
Larger order volumes
However, the size of these marketplaces does mean that if you’re successful, your customer base can rapidly increase. This often means you begin sourcing coffee at exponentially higher volumes than smaller third-wave coffee roasters.
“The economies of scale are helpful for all sides,” says Howey Gill, head of coffee at Grind. “It’s more efficient to ship 1,000 containers on a boat than one, and no one needs to get hurt if you pay less per container in that situation.
“It’s also possible for producers to access these economies of scale in processing, dry milling, purchasing farm equipment… the list goes on.”
For farmers, larger order volumes also provide a number of benefits – even if they may come at the price of a lower unit cost.
Firstly, the volumes needed to expand into larger commercial markets makes it more likely a buyer will commit to receiving a large portion or even the entirety of their harvest – which massively streamlines sales while also removing the need to continue marketing their coffee.
Furthermore, large-scale roasters often purchase coffee from the same farms over and over again. If an established company continues to buy coffee (or commits to it) at significant volume, this scale offers a stability that is attractive to lenders – and can make it easier for farmers to secure financing.
At a time when finance is incredibly difficult to secure, this has arguably never been more valuable: it allows farmers to manage their finances more effectively between harvests, and generally adds liquidity to a system where capital is notoriously short in supply.
Nonetheless, some think this philosophy can be dangerous.
Spencer Turer is the vice president of Coffee Enterprises. He says: “If the roaster is doing direct trade or they have a relationship with the farm, then they know what the FOB or farm gate price is. If they’re increasing the quantity that they’re purchasing, the pricing shouldn’t change – the price is the price, that’s how much it costs to produce per pound of coffee.
“It’s not up to the buyer to assume price discounts based on volume, the producer is the one who will know their costs and the economy of scale and may offer discounts accordingly. There must be real cost savings at the farm and mill in order to reduce the prices when asked. The concept of economy of scale may be different in orders of magnitude between the roaster and the producer.”
Scaling producer impact
So, as more roasters scale and start potentially operating with lower per-unit costs at larger volumes, what does this mean for driving impact at origin?
A common argument is that many third-wave coffee roasters struggle to make an impact at the scale they operate.
“When I started as a roaster, I was sometimes buying just one 60kg bag of green coffee at a time,” Howey adds. “I didn’t know how much of my invoice was going to producers, and I’m sure the importers and other middle-people were taking more of that than they do now.”
It’s true that third-wave coffee roasters only represent a miniscule portion of the broader market. Having said that, they make a disproportionate amount of noise and have a considerable amount of influence over the rest of the industry.
Despite this, there is clearly a challenge in preserving social programmes and commitments to “improved” sourcing practices as roasters grow – whether that growth occurs organically or through acquisitions.
“Third-wave has been setting the standard of what is possible for a very long time now,” says Spencer. “As you change in size and scope, the third wave system may not be relevant based on all quantities, but the concepts are always going to be the same.”
“Just because you go from a small roaster to a big roaster, you don’t go from good to bad. If you’re a true third-wave roaster, whatever the definition is, you should be more concerned with the quality and the supply relationship. My hope is that it’s not squeezing the producers. Once you squeeze the producers, then you’re going to get what you pay for – which is lower-quality coffee.”
Howey, meanwhile, adds: “With the power that comes from buying more coffee comes the potential to do bad things, to pay people less, and keep the benefits of scale for yourself. But I honestly believe that growing the specialty market puts that power in the hands of people that really care about the whole chain, and not just their board.”
Altogether, this debate becomes increasingly pertinent as we enter the fourth wave of coffee – characterised by the commercialisation of specialty. As the market consolidates, and more roasters enter price-sensitive markets, the trick will be to scale other elements of ethical sourcing such as order volumes, equipment and infrastructure investment, and training and education at origin. So while the ultra-high prices of third-wave coffee may slowly become less and less common, this doesn’t necessarily have to spell bad news for farmers.
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