Price transparency: How we deal with the topic of coffee prices

So let’s take a look:

1. How are coffee prices actually formed and how is coffee traded?
2. What factors influence the price of coffee in purchasing and how expensive does a coffee actually have to be?
3. How does Coffee Circle buy coffee?
4. How are our coffee prices calculated? An example calculation based on the „Limu“.
5. We pay high prices for high quality. What does that mean?

To answer this, it is important to mention that many terms exist around this question that are neither protected or not clearly and uniformly defined. These include terms such as the world market price, FOB price, direct trade, specialty coffee, and many others.

In general, coffee prices – as with other markets – are determined by supply and demand. The key factor here is the world market price for coffee, the so-called „C-market“ price.

The world market price is a reference point that comes from the international coffee exchange. Simply put, it is an average price for all coffees traded worldwide, e.g. the Arabica variety, regardless of quality, country of origin and production costs. In other words, this price includes both coffees that are harvested efficiently and mechanically on highly productive coffee plantations in Brazil and coffees from African countries that largely consist of smallholder structures where coffee is harvested by hand.

There are two major trading centers for coffee. Arabica is traded on the coffee exchange in New York and Robusta on the exchange in London.

It is mainly large coffee roasters (e.g. Nestlé, JDE) and traders who buy for coffee roasters worldwide that trade on the exchange. Their first priority is to obtain the lowest possible price for a minimally defined coffee quality so that the coffee roasters can produce their coffee as cheaply as possible. The taste does not play an important role here. Coffees of this type are usually roasted very dark in order to „over-roast“ the sometimes poor taste, which is then called „roasted aromas“. Blends are also popular, which consist of a mix of inferior coffees that are enriched with some good coffee so that the product tastes reasonably acceptable. We are talking here exclusively about so-called „commercial coffees“, i.e. coffees from well-known brands that you can find mainly in supermarkets.

On the stock exchange, a distinction is made between a few so-called „baskets“, which roughly represent the largest flavor samples. They differ according to coffee variety (Arabica, Robusta), processing and origin. The best known are „Colombian Milds“, which is a blend of washed coffees from Colombia, Kenya and Tanzania, or „Brazil naturals“, which is a blend of sun-dried coffees from Brazil, Ethiopia and Paraguay. As you can see, the names have little to do with the contents of the baskets. The third large basket is called „Other Milds“ and, simply put, comprises the rest of the world’s Arabica coffees.

This results in a more or less meaningful reference price for producers worldwide. Around 90 % of coffee is traded in this way.

The remaining 10 % is traded outside the stock exchange. And this is where specialty coffee comes into play. For specialty coffee roasters and retailers, the focus is not on the price when purchasing, it is on the taste and quality of the coffee. This makes it possible to make special geographical growing regions and coffees with particular taste profiles accessible to consumers. Furthermore, specialty coffee follows the philosophy of paying attention to quality as well as social aspects and sustainability at all stages of the value chain. But beware, „specialty coffee“ is not a protected term and is increasingly being used by large coffee roasters. The same applies to the term „direct trade“ in this context. Direct trade is very often not direct trade, just as fair trade does not always mean fair trade. But that is a different issue.

The issue of fair prices for high quality plays a central role for us.

The world market price is not a valid comparative value from which to derive fair payment or fair trade. It neither reflects the actual quality nor whether producers are paid fairly. This is why the coffee exchange and the world market price play a minor role for us. They merely give farmers an indication of what they could receive for their coffee if they were to offer their coffee there.

We trade coffee differently, we trade directly to really ensure fairness and sustainability. This means that we want to delve deeper into the price composition in the country of origin and better understand how coffee is traded in the individual countries. The country and local conditions play a major role here, as producers in Brazil live and work differently to those in Ethiopia and have different agricultural conditions, yields and production costs.

Basically, we want to ensure that we pay prices to our partners that are higher than their production costs in the respective country of origin. This is a key problem in the traditional exchange coffee trade. It is not ensured that the sales prices actually cover the production costs. In times of low market prices, coffee producers suffer deficits.

The coffee farmers grow their coffee in the natural forest gardens, harvest the cherries by hand when they are ripe and sell them to a „washing station“ (processing station), where the cherries are prepared and dried. The washing station may belong to a cooperative or to private operators. From the washing station, the coffee is transported to the capital Addis Ababa, where it is hulled, sorted and prepared for export. The costs for this service are paid by the operator of the washing station. From there, it is transported to the port and loaded onto a container ship. At the time the coffee cherries are purchased, the producers are paid in cash for their cherries. To finance this, the operators of the washing stations take out loans from local banks. This means that financing costs in the form of interest are incurred from the time the cherries are purchased until the coffee is loaded onto a container ship. The costs incurred by the washing station operators up to this point should be covered by the „free on board“ price (FOB price), which is the main basis for the purchase price of green coffee.

The cost structure differs from country to country, which makes it difficult to define a „minimum FOB“ or „fair price“. In principle, it is clear that it is hardly possible to define a globally uniform „fair“ price.

Once the green coffee has left the port of export, costs are incurred for transportation to Hamburg, insurance, customs clearance, quality control on arrival and storage in the bulk warehouse. We also take over the financing (interest) for the coffee from the port of export. The coffee is then delivered to our roasting plant in Berlin by a forwarding agent. This incurs costs for roasting, including energy, rent, machines, personnel, packaging and shipping. And, like all coffee roasters, we are obliged to pay the coffee tax of €2.19 per kg of roasted coffee to customs. At Coffee Circle, we have set ourselves high standards, which we have defined in the following purchasing criteria. In this way, we try to improve the coffee value chain for our partner producers and inspire others to do the same.

Therefor we take a look at the work of our „Head of Coffee“ Hannes. In most coffee-growing countries, there is a coffee harvest once a year. In many cases, such as in Ethiopia, we visit our partners during or after the harvest, taste the fresh coffees and select the best ones. If we are unable to visit our partners directly after the harvest, they send us coffee samples by post, which we roast and taste in the roastery.

Let’s take a look at our „Limu“ variety as an example. We have been sourcing the green coffee behind Limu from the „Kenissa“ cooperative in Ethiopia for several years. Long-term relationships are important to the cooperatives for sustainable development, as they have reliable buyers in us who pay high prices.

Every year after the harvest, we sample all of Kenissa’s so-called „coffee lots“. A „lot“ is a defined quantity of coffee. In Ethiopia, this is 150 sacks of coffee, each weighing 60 kg. A cooperative like Kenissa produces several lots in the course of a coffee harvest. We select our favorite lots from these and negotiate the price.

Price negotiations in Ethiopia are conducted by the „coffee unions“, an elected umbrella organization of several cooperatives that are responsible for exports. As a rule, the Union sets a price based on the cost of the current harvest. As a specialty coffee roaster, we are in the role of „price taker“ and accept the bid if we like the quality.

Here you will find an overview of our single origin coffees, transparently with the detailed information on the purchase of the 2023 harvest that is important to us.

The information so far shows you how complex the topic of purchasing is. For us, coffee prices are made up of the following criteria:

• Quality of the coffee
• Costs in the supply chain
• Coffee tax
• Burn-in during roasting
• Costs incurred in production
• Costs incurred in logistics and marketing

Here is the calculation example using the „Limu“:

The FOB price of Limu last year was $4.00/lb. This is the price that we pay directly to the exporter at origin. 90 % of the FOB price goes to the cooperative, while the Union receives 10 % for its export service. The costs from the port of export (FOB) to the final storage of the green coffee in the large warehouse in Hamburg, including financing costs, are around $0.80/lb. One lb = 1 British pound = 0.453592 kg.

The $4.80/lb translates into a price of $10.58/kg per kilogram. At an exchange rate of approx. €1.05 per $, which we had when the green coffee contract was drawn up, $10.58 = €10.08 per kg of green coffee. Like all coffee, our Limu loses about 15 % moisture during the roasting process, the so-called burn-in. This means that we need 1.15 kg of green coffee to obtain 1 kg of roasted coffee. This results in a price of €11.59 per kg of unpackaged roasted coffee.

To this must be added €2.19 coffee tax, which every roaster in Germany has to pay, as described above. Our running costs in the roastery for renting space, wages and energy costs total approx. €2.00 per kg of roasted coffee. This does not take into account the investment in the roaster and other machines for the sake of simplicity.

Our interim calculation is therefore: €11.59 + €2.19 + €2.00 = €15.78 per kilogram of roasted coffee.

This is followed by the cost of packaging, which is made up of €0.40 per bag and €0.80 for filling. A pre-packed 1 kg bag therefore costs €15.78 + €0.40 + €0.80 = €16.98. Added to this are the costs for our warehouse in Berlin, logistics and shipping of approx. €10, so that the price per finished bag of Limu, including shipping to our customers, is approx. €26.98.

This does not yet include the costs for the salaries of colleagues who do not directly roast, pack or ship the coffee. The costs for office rent and marketing are also not included, although these are very low at 4 % of our turnover, as are the general costs that are necessary to run a company.

For us, paying high prices means ensuring economic sustainability in our coffee value chains, which is not possible through traditional coffee trading on the stock exchange.

For us, it means offering our customers very good quality and exceptional coffees at a price that allows us to reward our partner producers and other partners involved for their work and risk.

With our model of investing an additional €1 per kg in coffee communities in the countries where the coffee is grown, we are also living up to our claim of supporting social change and ensuring environmental sustainability.