Month: March 2022

The political economy of the value of third wave coffee

Edward Fischer, in an article written in 2017*, tries to develop a theory on the creation of value through the symbolic means of production in international trade, as opposed to the creation of value and accumulation of capital through the material means of production, in the classical theory of Karl Marx. The material means of production generate use value, the symbolic means of production generate exchange value, that is what people are willing to pay for it. Let’s say this is about the political economy of the value of coffee from the third wave, combined with an anthropological approach, which applies to the case of coffee producers in western Guatemala. The data is from field studies conducted between 2011 and 2015.

To better understand the creation of value through symbols, in this case aesthetic, we can make a comparison with art. A painting is no more than a canvas with paint, materially speaking, with little use value (in the case of coffee one can at least drink it), but if it bears the signature of Pablo Picasso for example, suddenly it is worth millions for the value that is attributed to it by art lovers and collectors.

Coffee producers have the material means of production, land in the first place, with soils, climate and varieties, suitable for producing good quality coffee. Traders, roasters, coffee shop owners and baristas control the symbolic means of production, which generate most of the added value and the channels of distribution. Producers have benefited from the rise of the specialty coffee movement in the third wave, but most of the value is generated at the other end of the chain in consuming countries, of which producers share very little.

The transformation of Guatemalan coffee production

The growing demand for high quality coffees has profoundly transformed Guatemalan coffee growing. Historically, Guatemalan coffee has been grown near the coast, on large farms, many owned by descendants of German immigrants. The quality of the coffee at this point was above all Good Washed, Prime Washed and Extra Prime Washed or at best Semi-hard Bean, the type of coffee that was in demand in the first wave.

As the demand for high-quality coffee grew, production moved to the highlands, up from 1,300–1,400 meters above sea level, where smallholdings dominate, the vast majority of which are indigenous. In 1990 Strictly Hard Bean SHB coffee represented 30% of Guatemala’s exports, currently it is 80%. In those years, ANACAFÉ created brands for the coffee production areas, differentiating the cup profile of each of the 7 regions. Guatemala became a country of almost 100% specialty coffee production and the differentials changed from a discount to a premium.

The generation of value in coffee

The economic power in the value chain is in the hands of those who define what quality is and who manage to convince the consumer to pay more for that quality. The quality of coffee is to a certain extent subjective, because it depends on one’s taste, but “coffee artisans” have created a whole system to make it look more objective, measurable and scientific, such as the classification and cupping protocols of the Specialty Coffee Association SCA and the Q Grader certification. Many terms to describe the quality of coffee have been borrowed from the world of wine.

Sophisticated marketing has been created to sell the idea to the consumer. Apart from the quality of the coffee in the cup, they sell the origin from where it’s produced, even at the level of the farm (single estate coffee) and of the producer’s the family, the varietals they produce, the traditional way of processing, the beauty of the area where it is produced, etc. The preparation goes from a simple French press, via an expresso machine to nitrous infused cold brews. All to convince the consumer that they are consuming a unique product so that they are willing to pay 20–30 dollars per pound or 4 to 7.5 dollars per cup in a coffee shop.

Breaking down the value of third wave coffee

In his analysis, Fischer equates third-wave coffees to 85-cup micro lots or better and focuses in particular on the results obtained in the Cup of Excellence CoE. It is the type of coffee that we find in the Specialty Coffee Transactions Guide** and we will apply Fischer’s theory to those data. According to the guide, the median price paid in Guatemala was USD 2.75 / lb FOB over the 3 harvests from 2018/19 to 2020/21, for a median cup score of 85 points and a median lot size of 6,389 pounds.

Let’s start from a consumer price of USD 20 /lb (the lowest level mentioned by Fischer; offers starting from USD 15 /lb are currently found on the internet), to see how the value is distributed throughout the chain.

From USD 2.75 / lb FOB we subtract 40 cents for the processing and export of the coffee, twice the cost of a standard coffee, because of the size and type of process that micro lots of specialty coffees require. What remains is a price of USD 2.35 /lb for the producer, assuming that the intermediary does not cut out more, but wants to secure the producer as a supplier of high-quality coffee.

The average New York price in the 3 harvests was USD 1.18 / lb, which means that the producer receives a quality differential of +117, which is a good premium, when compared to the differential for SHB Guatemala, which ranged in those years from +28 to +70, with an average of +43.

To the FOB price we add 20 cents for transportation and terminal handling costs. We assign another 20 cents margin to the importer, more than 10 times the margin for standard coffees, assuming that he plays an important role in the chain to create the added value and because of the low volume of the lots. Fischer also mentions that, even when talking about direct trade, with close relations between the producer and the roaster, the latter still depends on the services of the traders.

So, the coffee reaches the roaster at a cost of USD 3.15 / lb. There is a 19% or USD 0.60 / lb weight loss from roasting. 15% VAT is deducted from the final price of USD 20 / lb to the consumer. What remains is a gross margin of USD 13–14 / lb for the roaster, more than two thirds of the final value of the coffee.

There is little that the producer do to influence on the percentage of the final value that he receives, even though he is the main actor in the material creation of specialty coffee, because in the rest of the chain cup quality can only go down if the coffee is not handled and processed properly. The producer will figure prominently in the promotion of the coffee, with photos of his farm and his family, information about the production area and all the details of the process, but it is the buyer who defines how much he gets paid for his coffee. The next harvest the buyer can decide to buy from another producer or he can handle blends of similar coffees from the same region or micro zone, to have more flexibility, reducing the influence of the producer even more.

Generate access to the added value

Fischer finds that access to added value varies greatly by type of producer. Taking as a reference the producers that have participated in the Cup of Excellence CoE during the years of the study, these are not very representative for their regions. Almost all of them are ladinos whereas the great majority are indigenous (76% of the producers in the study). The CoE producers are more likely to experiment with varieties and processing than micro-producers. The average land ownership of the producers participating in the CoE was 2.15 hectares. According to the IV Agricultural Census of INE (2003), 44.2% of producers own less than 1 manzana (0.7 ha) and 22.3% less than 2 manzanas (1.4 ha).

The participants in the CoE had Spanish as their mother tongue, had received some education at college level, were the first to use cell phones and the Internet, and many spoke at least some English and had some knowledge of the US market, in order to communicate with buyers and understand what messages they need to get across for marketing.

The average price paid to CoE growers was USD 4 / lb, while other producers in the same area and with the same varietals received an average of USD 1.25 / lb, when the New York price fluctuated between USD 1.13 and 1.46. per pound. The only benefit that the latter receive is that differentials for Guatemalan coffee in general have improved with the increased demand for high-quality coffee.

Of the samples that were collected to be cupped by ANACAFE, 50% had a cup of 85 or better, coffee that qualifies for buyers of third wave specialty coffees. But it is not enough to meet the cup quality requirements. According to Fischer, the data from his study show that the price to the producer depends more on the size of the farm and the “social capital” of the producer than on the results of blind tastings.

The producer needs to understand what the consumer is looking for and transmit these symbolic values through the merchant and the roaster, so that they generate added value with the consumer. If you belong to the 50% that have the conditions to produce coffee with a cup of 85 or better and the ability to transmit symbolic values, you get a much better price, but even then, you get only a small part of the added value at the end of the chain.

The micro and small producer lacks the resources to achieve this, their production scale allows them to perhaps improve their income a little, but they are not in a position to negotiate directly with the producer.

Here comes the role and value of the cooperative or association and of organizing events such as the Golden Cup organized by the Coordinadora de Pequeños Productores de América Latina y del Caribe CLAC and Fairtrade Africa, so that the smallest can also promote their product and be put in contact with buyers and thus gain better access to the added value that is generated with his or her product.

*Fischer, Edward, March 2017: Quality and Inequality: Taste, Value, and Power in the Third Wave Coffee Market. Max Planck Institute for the Study of Societies, Cologne. Discussion Paper 17/4.

**www.transactionguide.coffee

Beyco (powered by non-profit Progreso Foundation) is an independent blockchain platform that facilitates access to markets, access to finance and makes it easy to display sustainability efforts. Wherever you are in the coffee supply chain, we’re here to help you explore your options and take advantage of new technology. Get a free consult here.

The third wave and specialty coffee

The third wave is closely associated with specialty coffee, although the latter predates it by 20 years. Specialty coffee is a concept coined by Emma Knutsen in 1974. There is also talk of gourmet coffee, a high-quality coffee that is distinguished from standard coffees treated as commodities.

In the 1980s in the United States, a small group of roasters began to experiment with new types of coffee and lighter roasts to bring out more of the nuances in flavours and aromas, which are lost in the dark roast. It became a movement that quickly spread to many countries in Europe, Asia and Oceania.

The movement developed fairs such as SCA (formerly the Specialty Coffee Association of America SCAA, founded in 1982, and SCAE, its equal in Europe), where buyers and producers meet and quality competitions are held, such as the Cup of Excellence, and competitions of baristas, who turn their profession into an art, beyond cappuccinos.

Originally specialty coffee was defined as coffee with a cup of 80 or better. This narrow definition is rarely used now, not only because an 80 cup is no longer considered as that special, but also because it is not only about the cup quality of the coffee.

The concept of the third wave was launched by Trish Rothgeb in 2002, although Timothy Castle had already used it in an article in 1999. The concept is in analogy with the 3 waves that are distinguished in the history of feminism. Really, until the third wave, analysts began to talk about the first and second waves, analysing history backwards.

Rothgeb, is originally from the San Francisco Bay area, where the second wave with Peet’s Coffee was born. She works as a barista and roaster and was the first female certified Q grader (created in 1996). When she left for Norway some 20 years ago, to roast coffee at a business run by the first world champion barista, she was surprised that young baristas worked much more seriously and intensely with coffee quality than in California. Rothgeb’s way of roasting coffee, less dark roast to rescue the nuances that characterize each coffee, intrigued the Norwegian community.

The second wave highlighted the countries of origin and the different types of coffee they produce, unlike the first wave with blends of standard qualities. The third wave goes further at the farm and producer level. Against the 80–84 rate capsules of large roasters like Nespresso and Keurig Dr. Pepper, the third wave focuses more on the attributes of coffees, often cup 85 and better, and on the artisanal process of small roasters who treat good coffee like good wine.

To understand what is special about a high-quality coffee, you have to understand the entire process, from production to how you prepare and drink the coffee. It is not only about the coffee itself, but also about the people who produce it and the conditions in which they produce. To the traceability of the coffee is added the interest in the transparency and sustainability of the process.

The micro-level approach has disadvantages: the focus is almost exclusively on washed arabica coffees, leaving Robusta aside, within the washed arabica coffees the finest coffees are sought, there is no room for low-lying producers, microlots can be very attractive for individual producers, but they are not an answer for the sector, this coffee is expensive and consumers are mostly white people with a good income and time to seek these experiences. Minorities hardly participate in this movement.

The fourth wave: science, inclusivity or scale?

With the fourth wave begins the controversy in the analysis of trends in the coffee industry with the focus on waves. Does it exist? And if there is, what is it? The fourth wave, if it exists, is still developing and it is difficult to define the characteristics of a process that has not crystallized well yet. There are different versions of what the fourth wave is, which have in common to overcome the disadvantages of the third wave.

Fourth wave 1

According to some analysts, the fourth wave is defined by a more scientific and less romantic approach. The aim is to understand in greater depth the different processes that coffee goes through from production to consumption and to measure and control them. The hours of fermentation, with or without oxygen, how it influences the cup profile. Analyse the chemical composition of coffee, how acidity, aroma, flavour, etc. differ. State-of-the-art technology in roasting, software to control roasting in detail and synchronize remote roasting between supplier and roaster. Recyclable and biodegradable packaging to reduce the environmental footprint. COVID-19, with the closure of many businesses and the boom in online sales, is accelerating the development of this new wave.

It is about instilling in the consumer a much deeper knowledge about coffee, the region where it comes from, the type of process, the cup profile and other important factors to make a decision about which coffee to drink. The information can be provided for example by means of a QR code on the packaging.

Fourth wave 2

A very different analysis of what is being developed in the fourth wave is the focus on inclusiveness. If the third wave is dominated by a limited group of privileged people, the fourth wave wants to make the world of good coffee accessible to everyone, from the producer to the consumer, and all the professionals involved in the process, regardless of origin, race or ethnicity, gender, sexual orientation, etc.

Workers in the cafe deserve a minimum wage that allows them to live a decent life. Women must have the same opportunities as men and a safe work environment, both at origin (women’s coffee) and in the producing countries. Discrimination against people of colour occurs in many places and the promoters of the fourth wave identify a lot with the Black Lives Matter movement.

Instead of being passive consumers who adapt to industry standards, they seek ways to actively involve the consumers to contribute their own experiences, step by step, to create a new consumer culture. Coffee businesses interact with the communities in which they are embedded, to adapt to local needs and preferences. It may involve using more affordable cafes to accommodate the purchasing power of the local population.

Fourth wave 3

A third analysis of what is unfolding with the fourth wave emphasizes another weakness of the third wave: lack of scale. If you want to transform the industry, create a solution for millions of producers and workers, and reach millions of consumers, so that they change their attitude towards coffee, some economy of scale is needed.

It somewhat contradicts the first analysis with a growing scientific approach. Over sophistication alienates the common consumer. What has to be done is to rescue the good of the third wave and bring special coffee to the masses, “democratize” the consumption of good coffee and not only in consuming countries, but also in producing countries, so that the standard of the industry becomes quality coffee.

To achieve this, it is necessary to leave the “ghetto” of the snobs and make the promotion of specialty coffees more commercial to attract more consumers. An example is iced coffee and Ready to Drink coffee, which can pull consumers of soft drinks and energy drinks (a segment lost in the first wave) towards the consumption of good coffee.

Third wave roasters and coffee shops can invest in growing their businesses, to reach more customers. Big brands can launch quality coffee lines at affordable prices for the general public.

Producers will be able to benefit more from increasing the marketing of quality coffees than from selling small volumes of very high-quality coffees from a few producers. For that they need to invest in quality and organize themselves to create economies of scale and be able to supply the demand.

The fifth wave: excellence

On the fourth wave there is no consensus if it exists and what it is, but Allegra World Coffee Portal has already launched the fifth wave concept, which looks a bit like a fusion of the first and third versions of the fourth wave and combines elements of the other waves.

It’s not just limited to coffee. These are very ambitious and commercial business models of constant innovation, seeking excellence, quality on a larger scale than the third wave, taking advantage of advances in technology. It interacts with each consumer to find out their preferences, creating market niches. It could be a third wave artisan roaster investing in technology and in growing the business through a chain of “boutique” coffee shops. It can be a large brand creating a new product designed for a specific segment of consumers.

Some already announce the sixth wave that would have a focus on the connectivity between producer and consumer, an exchange mediated by the roaster. In this way the consumer gains an understanding of how production and the supply chain work, a personalized product can be offered and the basis for true sustainability is created. Sounds good, we’ll see.

The waves and the future

The analysis of trends in the coffee industry using the concept of waves has its value, but also its limitations. To begin with, it applies to the Western world and particularly the United States, it is not necessarily representative for the rest of the world. Then, the analysis has a bias towards coffee shops, since the second wave, while the largest amount of coffee is consumed at home.

There is no hierarchy between the waves, they exist in parallel and none have ended, but deficiencies in a trend give rise to changes that can eventually generate a new trend or wave. On the first three waves there is more or less consensus, but as for the fourth and fifth there is not even consensus if they exist, much less what they consist of, largely because we are in the midst of a process that has not crystallized well yet.

The important thing about the analysis is that it shows that the coffee industry is in constant movement and that one has to keep track of the changes in order to know the best way to participate in the market and get the most out of it. The second wave has shown that it is possible to get out of the corset of supplying coffee as a commodity and sell a product that is distinguished by its quality. The third wave has generated interest in the entire process, from the producer to the consumer, in the people behind the coffee and in sustainability, in order to offer a quality product in the future as well.

The challenge is to expand these advances to the general public and generate a response for producers that allows them to live a decent life and offer a perspective for the new generation. For that, it is necessary that one actively participate in shaping the fourth / fifth wave, directly with clients and collectively, advocating for greater transparency and sustainability in the business, in exchange for a quality product. The waves are not events that just happen to us, they are movements in which we participate and that we can help shape.

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Beyco (powered by non-profit Progreso Foundation) is an independent blockchain platform that facilitates access to markets, access to finance and makes it easy to display sustainability efforts. Wherever you are in the coffee supply chain, we’re here to help you explore your options and take advantage of new technology. Get a free consult here.