Coffee brands: Mocha

One of the oldest established names in the coffee business is Mocha, a name found to this day in brands like Moca d’Or, where gold hints at excellence. There is also a type of chocolate called mocha that has some coffee in it.

Mocha is a port in Yemen, on the Arabian Peninsula. Yemen was the first country where Arabica coffee was brought from Ethiopia between 500 and 1,500. In Ethiopia it was, and is, a wild species, in Yemen it began to be cultivated and Mocha was the port from which the coffee was exported.

Yemen was invaded by the Ottoman Empire in 1517, which took control over coffee and banned its export. Dutch traders managed to obtain some plants that they took to a botanical garden in Holland in 1616, India and Sri Lanka in 1660, and Indonesia in 1690. At the beginning of the 18th century, the French brought coffee to the Caribbean and to the Island of Reunion, east of Madagascar. Reunion was called Bourbon back then, one of the varieties from Yemen. The other was Typica.

Coffee brands: Java

Java is one of the islands in the Indonesian archipelago, known as Dutch India in the days when the Dutch brought coffee to grow there. At first Arabica coffee, but when production was decimated by rust it was replaced by Robusta coffee from Congo in Central Africa and Liberica coffee from West Africa, which are more resistant to rust.

Some plantations continued to grow Arabica coffee in Java under conditions that allow the production of specialty coffee, which is the coffee known as Java. Since colonial times it was customary to make Java-Mocha blends.

Another inheritance from the colonial era is monsoon coffee, coffee that is left outdoors for up to 3 years, so that it develops a less acidic and mellow character, so that it resembles more the coffee that was drunk in Europe in the 17th and 18th centuries, when coffee took months or years to arrive by ship.

Some people used to call coffee in general Java, but nowadays it is not very common anymore. Java is now mostly associated with a computer language introduced in 1995, with a logo of a coffee-scented cup.

Coffee brands: Santos

The French who brought coffee to the Caribbean made Haiti the world’s leading coffee producer in the 18th century with plantations based on slave labour. When Haitian slaves rose up against the French in 1791 and made Haiti the first country freed from colonial power in the region, coffee production declined rapidly.

Other colonies in the Caribbean basin replaced Haiti as the main coffee-producing country. In 1830, the Caribbean produced 960 thousand bags, 38% of the world production of 2.5 million. By 1855 Brazil, where coffee arrived via the Dutch and French Guiana, assumed first place, never to leave it again. It produced an average of 2.7 million bags that year, 52% of the total. When at the end of the 19th century coffee production in Indonesia, India and Sri Lanka, the second largest region, collapsed due to coffee leaf rust, Brazil replaced that volume and came to produce 73% of the total of 17 million bags in 1900.

The main Brazilian port for export was and continues to be Santos. The plantations were in the interior of the country and in Santos were the commissioners, who were in charge of obtaining financing and clients and exporting the coffee. Because of the weight that Brazil had acquired in coffee, Brazil became synonymous with coffee and Santos the best-known brand, which to date is widely used for the different grades of coffee, such as Santos 2/3 screen 17/18 Fine Cup and Santos 3/4 screen 14–16 Good Cup.

After the “coffee crash” due to a large oversupply of Brazilian coffee in 1881, the Coffee Exchange of New York was founded in 1882, to facilitate the future trading of Brazilian coffee. The original contract was replaced by the Santos “S” contract. For mild coffees, the Mild “M” contract was added. In 1986 both contracts were replaced by the current “C” contract. In 1917 Brazil created its own futures market the Bolsa Oficial de Café (Official Coffee Exchange) in Santos, which was later established in the Palacio do Café, inaugurated in 1922, now a museum.

Coffee brands: Juan Valdez

Coffee production in the new world was in colonial times largely a plantation model, based on slave labour. A truly revolutionary change started at the beginning of the 20th century, when the Colombian government began to promote the cultivation of coffee by small producers. Producers struggled to sustain themselves in a market characterised by cyclical overproduction, high price volatility and the impact of the First World War. In order to organise themselves better, the Federación Nacional de Cafeteros (National Federation of Coffee Growers) FNC was founded in 1927, which soon received ample fiscal resources and formed the National Coffee Fund.

Another thing the Colombian government did was decree in 1932 that all exported coffee had to bear the legend Café de Colombia or Producto de Colombia, which became a brand, competing with the fame of Brazilian coffee and the Santos brand. In 1958, FNC went a step further with an advertising campaign to promote the image of Colombian coffee among consumers, through a fictional character representing the coffee producer: Juan Valdez, with his mule Conchita, carrying coffee. Juan Valdez was not a coffee producer, but a Cuban actor named José Duval, later personified by Colombian painter and actor Carlos Sánchez. It was not until 2006 that FNC selected a real coffee producer as the face of Juan Valdez: Carlos Castañeda.

It was the first time that coffee from a country of origin was positioned as a brand. The campaign was designed by the advertising agency Doyle Dane Bernbach of the United States, to convince the American consumer that Colombian coffee has unique characteristics: climate, soil, altitude, varietals, way of harvesting and processing that give the good taste and aroma to Colombian coffee. The campaign was very successful, gaining a lot of recognition among consumers, who have since identified Colombia and Juan Valdez with high-quality coffee. This recognition allows Colombian coffee to be sold at a premium and is the reason why it has a differential of +4 on the New York futures market, while the other mild coffee-producing countries sell at level or even at a discount.

It also created controversy among other coffee origins that dispute the unique character of Colombian coffee and claim to produce very high-quality coffee as well. The Costa Rican ambassador to the United States made the joke “Juan Valdez drinks coffee from Costa Rica”, taken up as a slogan on t-shirts by Café Britt, which led to a legal dispute.

The image and power of the Juan Valdez brand is also used for Juan Valdez Café, a chain of coffee shops launched in 2002 by FNC. By 2020 the chain had 335 coffee shops in Colombia and 133 in 33 other countries.

Coffee brands: Regions and denomination of origin

Juan Valdez is a country brand; others go further to differentiate the origin in more geographical detail. Guatemala has been the first country to differentiate coffee production areas into regions with different profiles such as Highland Huehue (Huehuetenango), Rainforest Coban, etc. The aim is to show the consumer what impact varietals, microclimates, growing conditions and other factors have on the cup profile, flavour and aroma of coffee.

The regional profiles, with a good promotional campaign, become brands with differentiated prices, that is, premiums according to the preferences of the buyers. Before, different regions were already distinguished by their cup quality, such as Antigua Guatemala or Tarrazu Costa Rica, but without defining the profile of each region, thus adding value to coffee from all over the country.

If there is no regionalisation of the cup profiles of the entire country, one can do it by way of denomination of origin in which the specific characteristics of the coffee are defined in detail, which makes it different from other coffees, as they do with wines and spirits (Champagne, Cognac) and other products. The denomination of origin seal is protected, a guarantee of origin and quality. Café de Veracruz, Mexico and Café Marcala, Honduras, are among the first denominations of origin in coffee. One limitation of the denomination of origin is that the mark can only be used for coffee from that single origin and not in blends.

To differentiate oneself from the rest, one can go into more geographical detail, even at the community or farm level (estate coffee), with particular conditions, and at the producer level, due to the varietals they have and the way they grow and process coffee. This is mostly done for micro lots of specialty coffees.

To differentiate oneself in the market with the use of brands, it is important that the image and identity coincide. If there is inconsistency between the two, that is, if the flag does not hold the load, it does not work and all the money and effort that has been invested in creating the brand is wasted.

1) It seems that the government was inspired by the example of England, which tried to protect itself against competition from the German industry with the obligation to mark its products with “made in Germany”, appealing to the patriotism of the English. It was counterproductive, because “made in Germany” became a very strong brand, a guarantee of quality.

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The history of Coffee in Germany

The history of coffee in Germany dates back to the 17th century. In 1679–80 the first coffee shop in Hamburg was opened by a merchant from England, where coffee had been introduced in 1852, after Holland. A century later coffee had become very popular in Germany and there were coffee shops everywhere. Merchants from England supplied the north of the country, while the south was supplied by traders from Italy.

Among the authorities there was discontent because of the large amount of money paid to foreign merchants for coffee, and the true German was raised on beer, not coffee. Initially they tried to stop the coffee business with fines and jail, only the rich could drink it with a special license and buying from the government at exorbitant prices. The poor had to take substitutes made from barley, chicory and other ingredients.

Gradually the restrictions were lifted and coffee became the most popular drink in Germany. Today coffee in Germany with an average consumption of 152 litres per year has the highest consumer preference, more than beer (102 litres) and water (150 litres). 88% of people consume coffee daily.

Hamburg, Bremen and the Coffee Trade

The main German ports for coffee are Hamburg and Bremen. Hamburg is the second most important port for coffee in Europe, after Antwerp, Belgium. In the colonial era of the 19th century, Germany had colonies where coffee was first grown (Cameroon, Tanzania and Papua New Guinea) and the relationship with German emigrants who became coffee growers in many other producing countries has strengthened the relationship.

The coffee merchants in Hamburg and Bremen became multinationals like Neumann and Rothfos, which have an important weight in world trade, although it partly moved to Switzerland, where large trading houses have established their headquarters, but they continue to depend on ports such as Hamburg and Bremen for physical coffee handling.

Historically, coffee was exported in parchment and processed in the ports of consuming countries. Consumers roasted coffee at home, but at the end of the 19th century there was a demand to industrialize the process to supply the workers of the nascent industry in the cities. That is why there is a lot of expertise in coffee processing in cities like Hamburg, where to date there is a plant for reprocessing. The technology of processing coffee was also brought to the producing countries and to date companies such as Probat continue to have much prestige in machinery for roasting coffee.

It was in Germany that the first process of decaffeinating coffee was invented by the Kaffee Handels Aktiengesellschaft, Kaffee HAG, established in 1906 in Bremen. HAG continues as a brand, which is owned by Jacobs Douwe Egberts JDE since 2015.

It was in Hamburg that the technology of steaming coffee was developed in 1933, originally to make the coffee smoother for the consumer, but more recently to give Robusta coffee some acidity to increase the percentage of Robusta in blends, as it is cheaper. In Germany some brands sell 100% Robusta coffee.

Coffee industry and consumption

The European Union is the world’s largest coffee market, where more than 41 million bags are consumed. Germany stands out with 8.7 million bags, the third consumer country after the United States and Brazil. Germany is the leader in Europe in industrializing coffee with 31% of the total, followed by Italy with 29%. Italy produces more roasted and Germany produces more soluble coffee.

Production has grown 15% between 2016 and 2020 to 11.2 million bags of roasted and soluble coffee, of which 5.5 million are exported, mostly within Europe. In 2020, 2.6 million bags were imported, 50% from Italy.

In Western Europe, coffee consumption fell 2.5% in 2020, due to the impact of COVID-19, against an average growth of 1% in years prior to the pandemic.

Germany was an exception, growing 1.5% in 2020 and 0.4% in 2021, according to the Deutscher Kaffeeverband (German Coffee Association). As in other countries, out of home coffee consumption fell, but it was more than offset by the increase in at home consumption. In Germany 88% of coffee is consumed at home.

Of the 28–29 thousand coffee shops in 2018, the vast majority (97%) were traditional and independent cafés, many of which were more of a mix of coffee shop with pastry or other food service. In the segment of more than 2,200 specialist coffee shops, multinational chained players dominate with 84%. Coffee shops suffered a 43% drop in sales in 2020, due to the pandemic.

There are regional differences in terms of culture and preferences of the German population. There are still differences in standard of living between the old eastern part and the western part, which is the most prosperous part. From north to south the differences are above all cultural, the same from the big cities to rural Germany.

For the purposes of consumption statistics, the country is divided into 4 regions: North, South, East and West. The differences are relative in terms of the percentage of preference for the type of coffee and the way it is prepared. For large roasters it is above all a matter of distribution of the different presentations, for small roasters it is a matter of specialising, according to local taste or according to the market segment.

Certain characteristics are general for the entire country, such as the importance of discount supermarkets, which expresses the awareness that the German consumer has in terms of prices, among others, of coffee. However, this is changing if we look at the trends in the big categories. The biggest growth is in the most expensive coffees: whole bean, capsules and extract blends for Ready To Drink.

They also indicate a change in culture, individual units (pods and capsules are put together in statistics) and RTD means a more individualized consumption, different from filter coffee where everyone drinks the same thing at the same time. However, coffee in pods represents only 14% in Germany, which is little compared to 32% in France, 31% in the Netherlands and 27% in Belgium, which led this market segment in the European Union in 2018, according to data. of the European Coffee Federation.

Differentiated coffee

The specialty coffee market is the fastest growing segment in the European and German market. The growing interest is shown above all in the growth of specialized local coffee shops and roasters, but the big roasted coffee merchants and brands are also increasingly making inroads into the world of “boutique coffee”, coffee of origin, etc.

All the big trade houses work with specialty coffees, often with a specialized company, others are independent, specializing in high-quality coffees. There are also companies specialised in certain origins and even linked to particular producers, such as EthioCo (Ethiopia and other countries), Santorkai Handel Papenhagen (Kenya), Jasaquntu (Colombia), PachaMama (Peru) and Méambar (Honduras).

12% of the coffee consumed in Germany is certified coffee. Germany was the first country to introduce organic certification in the 1960s with coffee from Finca Berlin from Mexico bearing the Demeter seal (biodynamic certification). Germany is now home to many organic certifiers and IFOAM Organics International, the umbrella organisation of the organic movement.

The organic produce market in Europe was €41 billion at retail level in 2018, 42% of the world total. The German market is the largest with €11 billion at retail level, 27% of the European total, 5.3% of those for food products. It is followed by France (€9.1 billion) and Italy (€3.5 billion). In percentage Denmark comes first, with 11.5%, followed by Switzerland (9.9%, Sweden (9.6%) and Austria (8.9%).

In Germany in 2019, sales of organic coffee grew 14% in volume and represented 4.3% of consumption. According to a 2019 study, about 26% of German consumers prefer organic over conventional coffee and 78% are willing to spend more for it. Apart from Peru and Honduras, which are the main suppliers, Germany also imports a lot of organic coffee from Ethiopia. The seal with the largest volume is that of Rainforest (merged with Utz Certified), it is estimated that half of the certified coffee in Germany, equivalent to about 600 thousand bags of green coffee, 6% of total consumption.

Germany is the second largest market for Fairtrade sales, after the United States. Fairtrade certified sales grew 42% between 2016 and 2020 to 550 thousand bags, of which 73% double certified Fairtrade and organic, according to data from FLOCERT. It represents 5% of coffee consumption in Germany. 34% of consumers say they consume organic and/or Fairtrade coffee daily and another 13% several times a week.

This means that the competition in this market segment is very strong and the premium that the consumer pays for certified coffee is limited.

Conclusions

It can be concluded that Germany plays an important role in the world of coffee and is the leading country in Europe in coffee trade, production and consumption, supplying many other countries in Europe with green, roasted and soluble coffee.

Coffee is the consumer’s preferred beverage in Germany, more than beer and water, and 88% of consumers drink it daily. Coffee is mostly consumed at home and discount supermarkets play an important role with their own brands. Consumers are very price conscious and margins are slim.

However, consumption habits are changing. Sales of premium coffees are growing in their market share: certified coffee, specialty coffees, specialised coffee shops, whole beans, capsules, RTD, all grow more than consumption in general. This opens up opportunities to improve sales conditions for suppliers whose coffee fits into these segments and there is a growing number of small roasters and coffee shops selling coffee at a high premium.

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The price of specialty coffees & Fairtrade and organic certification

In an August 2020 report, an analysis is made of how the double Fairtrade organic certification influences the price of specialty coffees, based on data from the 2016/17 to 2018/19 harvests. The average New York price fell in those 3 seasons from an average of 1.40 to 1.01 USD/lb.

Of all the contracts in the 3 cycles, 26% have some certification and 13% of the contracts are FTO certified coffee, which represent 27% of the volume. Only Fairtrade coffee has a set minimum price and FTO has the highest minimum price at 1.90 USD/lb, including premiums.

The average FTO certified lot size was 27 thousand pounds, twice the size of non-certified coffees. The unweighted average price for FTO was 2.51 USD/lb versus 3.55 USD/lb for non-certified coffees, but the weighted average FTO price was 2.41 USD/lb versus a weighted average of 2.17 USD/lb for non-certified coffees.

Non-certified coffees get better prices for lots less than 40 thousand pounds and higher cup scores (84+). FTO generates a better price for lots of a whole container and cup 80–84, in addition to the guarantee of the minimum price of 1.90 in a market where the reference price fell from 1.40 to 1.01 USD/lb.

Specialty coffees & COVID-19

The impact of COVID-19 was first noted in a 5% drop in the number of contracts in 2019/20, possibly due to buyers’ fear of losing market with the closure of specialty coffee shops with high-quality coffee, but also because of the uncertainty regarding the offers. However, volume was down just 0.6% as average lot size was up 24% to 24,125 pounds.

Total value fell 1.9% to 309 million dollars. Cup quality (average 84.75 before, 84.51 after) and prices were practically the same. In the same range of 1.90–3.50 USD/lb, the average price fell from 2.60 to 2.54 USD/lb.

The volume of coffee with cup 80–84 rose 17.1% and that with cup 84+ fell 20.4%. There was a marked difference between Europe and the United States & Canada. In Europe the 80–84 cup rose 41.5% in volume and the 84+ cup fell 7.5%, in the United States & Canada the percentages were +12.5% for 80–84 and -29.1% for 84+.

One major change was the pricing. Before the pandemic, 75.7% of contracts had a fixed price, well above the price of the New York futures market, especially for coffee with a score of 84+. This advantage turned into a disadvantage when the pandemic began and it was possible to take advantage of the increase in both the New York price and the differentials for washed arabica, which normally go in the opposite direction, as we pointed out in The differential — Part 2.

75.7% was sold at a fixed price, thus not taking advantage of the double increase in the New York price and spreads from February 2020. The number of spread contracts with 80–84 cup rose sharply to 53.6% and the average size in this segment rose 30.6%. 58.3% of the contracts with the 80–84 ratio are certified against 19.1% with the 85+ ratio. This segment took more advantage of the price increase, which rose on average 0.14 USD/lb compared to before the pandemic.

Data for this analysis cuts to September 2020 and includes relatively little coffee from countries whose harvest begins in April-May. In order to assess the impact of COVID-19, the data from the 2020/21 cycle must be analysed.

In the last harvest, the number of contracts fell 6%, but the volume 37% and the value 22%, while the number of organizations that provided data rose from 90 to 103.

Specialty coffee and prices per country

The fourth edition of the guide also presents price data by continent (Africa, Asia, Central America & Mexico and South America), but it seems less relevant, because in the averages mix many things get mixed and the analysis is lost. Thus, in South America (median cup 85, batch 5,942 lbs and price 2.50) the extremes of Ecuador (cup 87, batch 772 lbs and price 4.75) meet with Brazil (cup 83, batch 35,965, price 1.60, which seems to be the minimum price Conventional Fairtrade for washed coffee). In Asia (cup 84, lot 29,762 lbs, price 2.40) East Timor and Papua New Guinea dominate (cup 83 / 84, both lot 39,684, which is the largest sample size, and price 1.90, which seems to be the Fairtrade minimum price organic).

More interesting then to do the analysis at the country level. The average price ranges from 1.60 for Brazil to 7.50 for Panama (average size 608 lbs, the smallest) and an average cup of 82 for Nicaragua, up to 87 for Ecuador. Given the variability in price, cup and size by country, a formula is applied to correct the price per cup and size to the data for the last 3 years. The result is a correction of the price by country, which allows comparing the countries, which is presented in the following graph:

Conclusions

In their conclusions, the authors state that with these data, buyers and sellers can calculate how much a coffee should cost. Thus, a container of 40 thousand pounds or more of coffee from El Salvador with a score of 83 has a reference price of 2 USD/lb (average price in 2020/21 for that size and cup), plus an adjustment of 8 cents for El Salvador. 2.08 USD/lb. In the same way, a batch of 2 thousand pounds of 87 cup coffee that has an average price of 3.70 USD/lb in 2020/21, should have a discount of 6 cents for Guatemala and have a reference price of 3.64 USD/lb.

Here the guide missed its target. Presenting price references per cup and lot size is very useful, but believing that a reference price can be calculated statistically with a correction by country is far-fetched. For this, important factors are missing, such as the buyer-seller relationship, consistency in quality and service, the attributes that the coffee has (cup profile is more than just a score), the history of the people behind the coffee, traceability and many more.

These are not so easy to quantify, but it is worth collecting information of that type in future editions. In a way, it is already mentioned in the topics that are to be examined in the future and that include other quantitative and qualitative variables that influence the price.

For the next edition with the data for the 2021/22 harvest, it will be necessary to consider when the coffee is harvested and sold, because as of July 2021 the price on the New York futures market began to rally to up to 260 cents in February 2022. Where the harvest begins in April — May, a lot of coffee will have already been sold before the price increase and those who took the most advantage of the high prices will have been those who sold between November 2021 and February 2022, which is the main harvest time in the northern hemisphere.

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April 11, 2022, Jos Algra

The guide

Since 2018, the Specialty Coffee Transaction Guide has been published every year, under the coordination of researchers from Emory University in the United States. It started with 21 producers, cooperatives, exporters, importers and roasters, reporting for the 2016/17 and 2017/18 harvests, 5–6 thousand contracts with more than 70 million pounds (550 thousand bags of 60 kg), 170 million dollars and an average price of 2.34 per season, when the New York price averaged 1.29 USD/lb.

Three years later, the number of donors has grown to more than 100, who have reported for the last 3 cycles an average of 19 thousand contracts, 395 million pounds (2.9 million bags) and a value of almost 800 million dollars per harvest.

It represents less than 2% of world production, 7% of the Washed Arabica output and there are many specialty coffee buyers missing, including several multinationals, but it is very useful as a reference for those who operate in the specialty coffee market when they are negotiating the price. The initiators of this initiative hope in this way to contribute to greater equity and economic sustainability in the supply chain of differentiated coffees. We saw in the blog of March 28 (The waves — Part 3) that there is a lot of inequality in the negotiation of the price and the distribution of the added value of specialty coffees.

Apart from the 4 annual reports, 2 special reports have been published: One on the relationship between the price for specialty coffees and the certification of Fairtrade and organic certified coffee — published in August 2020 — and another on the impact of COVID-19 on training of the price of specialty coffees — published in March 2021.

Prices are at FOB origin level in dollars, the impact of fluctuations in the exchange rate on the price to the producer are not considered. The harvest goes from October to September. All coffees are washed Arabica.

Coffee price and cup quality

One of the most interesting information in the guide is the relationship between quality and price. For this, the cup score is graded in 6 categories, ranging from cup 80–82 to 88 and better, plus a group with no cup score. By cup category, the median price (the value in the middle of the 2 extremes) and the range are determined, eliminating the 25% of the lowest prices and the 25% of the highest prices.

The first table presents a summary of the average prices by cup score range during the 5 cycles covered by the reports (the reports themselves present data of the last 3 seasons). Most of the contracts are at a fixed price, but we also calculate what quality differential results when compared to the average price on the New York futures market, which ranged from 1.01 to 1.42 USD/lb, with an average of 1.23 USD/lb in the 5 years.

To be economically sustainable for a grower, let’s say you need a price of at least USD 2/lb or a quality differential of +50 or better. Values ​​that met those criteria were marked with dark green, those that came close with light green. The starting point is that the quality of all coffees can be improved, from the selection of varieties, growing techniques and post-harvest handling, to obtain a better price with a higher cup score.

It is clear how the price rises according to the cup quality, from a median price of 1.57 for cup 80–82, up to 5.11 USD/lb for cup 88 or better, with a minimum of 1.34 to a maximum of 8.16 USD/lb. The median differential increases from +34 to +388.

The table also shows that there is a wide range between the lower and higher prices and that even with a cup of 80–82 you can get close to the goals of 2 USD/lb or +50. A better cup on itself does not guarantee the best price, the higher end prices for a cupping score are above the lower end prices for coffee with a better cup.

This means that quality is important, but not enough to get the best price. You also have to know how to sell — marketing, relationships with buyers, traceability and other factors are important to achieve a price that allows economic sustainability. This aspect is not highlighted in the guide. The cup score seems to be a more objective criterion, although defining quality is also somewhat arbitrary as we saw in the March 28 blog. A rating of the relationship between producer / seller and buyer could be included in the data or a separate survey could be undertaken.

Coffee price and microlots

The guide also presents data on the relation between the lot size of a contract and the price. As with the cup quality score, a summary table over the last 5 seasons was made of prices by volume range, ranging from 40,000 pounds (a full container load) to less than 1,000 pounds, with the averages summarized in the table, and applying the same economic sustainability criteria.

It is observed that the smaller the lot size, the better the price. The median price rises from USD 1.82 for a full container to USD 4.06/lb for lots of a thousand pounds or less, with a low of USD 1.45 to a high of USD 5.83/lb on average over the 5 seasons. The median differential increases from +61 to +285.

Crossing the cup score with the lot size, based on the data of the last 3 harvests, it is observed that lots of 40 thousand pounds or more, with cup score 82–84, fetch a price close to the target, with an average of 1.89 USD/lb, but a 84 cup or better is needed to top it (USD 2.20/lb for a 84–85 cup).

Most contracts are for lots of less than a full container. The cost of producing, processing, selecting, marketing and exporting high-quality microlots is high and requires many years of investment. The result is uncertain, the weather conditions can be adverse and, most importantly, it is above all the buyer who decides if he meets the quality and how much to pay. He can reject the coffee or buy it one year and the following year prefer another supplier.

Studies have shown that many producers end up frustrated if their coffee is rejected, after they have made many efforts to produce the best quality coffee*. A programme to produce high-quality microlots can be an incentive to improve the quality of coffee in general and result in better prices for all, but it can also divide the organisation between producers who have the conditions to produce very high-quality coffee and those who do not.

For medium and large organizations with microlot of this type of coffee, they generally represent a small percentage of the coffee that they process and market. Setting aside the best qualities for microlots can be detrimental to the consistency of the quality of the rest of the coffee.

*See for example Michael Sheridan of Catholic Relief Services about a project to produce microlots in Cenfrocafé, Peru: The social impact of microlots. A Counter Culture Coffee case study. April 2012.

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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

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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.

The ‘waves’ in the coffee industry trends

The concept of “waves” was mentioned in the February 16th blog. In the analysis of the coffee market, this concept is widely used to describe changes in trends in the market and coffee consumption. This is important to understand what factors cause changes in consumption and in the coffee market, as well as to know where the next trend is going. But first a brief prehistory.

Coffee was introduced from Ethiopia via Yemen to Europe in the 17th century, mostly through coffee shops. Later it became popular and people began to prepare coffee at home. Back then, parchment coffee was imported, the processing plants were in the ports of consuming countries, and the coffee was roasted at home. If you want to know more about how the coffee business came to be in 17th century Amsterdam, read The Coffee Trader by David Liss.

In the 18th century, Haiti and other countries of the Caribbean basin were the main producers of coffee, along with Ceylon (Sri Lanka) and Indonesia, before the first place passed to Brazil, never to leave it.

In the 19th century with industrialization process, coffee roasting began to be industrialized too, in order to supply factory workers, and the first brands emerged. Mobile roasters followed troops on war campaigns, before soluble or instant coffee was introduced.

The first wave: the coffee industry is born

With the rise of the coffee industry, the first wave began. The first brands were local and had to convince the consumer that coffee was not bad for health, a discussion that continues to this day. Several of those brands exist to this day, having migrated from company to company. Vacuum canned coffee was introduced, so it could be stored for a long time, without going rancid, and sold in stores instead of having to be roasted on the spot.

The 2 world wars and the great depression of the 1930s had a profound impact on the consumption and production side of coffee. In the 1950s, coffee consumption rebounded, the demobilized military had become large consumers of coffee, and with the reconstruction of the economies, consumption grew in general.

The type of coffee varies by region and country, much Robusta in southern Europe, more Arabica in northern Europe and North America, but within those markets the type of coffee was fairly uniform. Generally speaking, people drank a blend of coffee, black, hot and bitter. The way it was prepared wasn’t that important.

Local and regional brands became national and a continuous consolidation process started in the coffee industry, which to date has left 10 roasters that roast 35% of all the coffee in the world. Coffee became a commodity, the second in value after oil, the quantity was more important than the quality. The emphasis was on the innovation of processing, packaging, and marketing of coffee, not on the coffee as such and on the quality.

Initially the coffee was considered to be “good to the last drop” (a phrase from former President Theodore Roosevelt, used by the Maxwell House brand), but gradually the quality began to decline. An increasingly lighter roast, to reduce weight loss, an increasingly rare coffee (“Is it tea or coffee? If it’s coffee, I prefer tea”) and increasing use of Robusta (read the previous blog The differential — 2nd part , to see how the mix changed).

Especially young people lost interest in drinking coffee, switched to coke and other drinks, a whole generation of consumers was being lost. Per capita consumption in the United States fell from 8.6 kg in 1946, when it was at its highest point, to 4–4.5 kg from the mid-1970s onwards. The consumption of soft drinks increased fivefold in the same period of time.

For those who want to know more about the history of coffee, I recommend reading the book that Mark Pendergrast published 20 years ago, Uncommon Grounds.

The second wave: Coffee shops, lattés and baristas

The erosion of quality and the drop in coffee consumption provoked a reaction. In 1966 a Dutch immigrant opened Peet’s Coffee in Berkeley, California. He began roasting quality coffee, giving it a darker roast and serving a stronger cup of coffee. He also began to train young people in the art of coffee, teaching how to cup and how to prepare coffee. The barista was born.

In the early 1970s, a number of coffee shops such as Starbucks followed Peet’s example. They had in common the dark roast, espresso type, but later with a lot of milk. In fact, those coffee shops today sell more milk than coffee. That is why Stefano Ponte talks about the latté revolution. They also began to experiment with flavours and then iced coffees, to make them more attractive to young people and thus recover it as consumers.

There was more interest in the origin of coffee and many single origin coffees instead of pure blends without knowing where they came from. The best quality Arabica coffee dominated, although critics were of the opinion why so much emphasis on quality if it is lost in such a dark roast.

It is not only the sale of coffee that these coffee shops offer. It is an experience and a place to meet other people (in the case of Peet’s it started with the hippies). There is talk of the third place, after home and work or the study centre. It helped a lot that coffee shops started offering free internet.

From small local coffee shops, they gradually developed into large chains with coffee shops all over North America, which later conquered the world, spreading out to the other continents. Starbucks grew to 32,660 coffee shops in 2020 all over the world. In Europe it took time for the chains to conquer their space, because there was already a wide culture of coffee shops, which were more adapted to local customs and tastes than the big chains.

The exception was the United Kingdom where coffee consumption was very low, just over 2 kg per capita, and 80% soluble coffee. Fertile ground for coffee shops offering cappuccinos, a new experience, a place to meet friends and free internet.

In the next blog more about specialty coffee, the third, the fourth and the fifth wave.

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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.