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What Good is a Bad Guarantee?

In the last post, we talked a lot about the history of coffee production in Colombia through the lens of San Agustin, Huila, a municipality and department with long-established roots in coffee production.

From there, we discussed the Federacion Nacional de Cafeteros (FNC)— a national organization aimed broadly at marketing Colombian coffee and supporting the well-being of Colombian coffee farmers. In many ways, this initiative has been positive for producers, however, an argument could be made that the efforts of this organism have begun to stagnate and are not able to quickly adapt to the abysmal market price nor to adequately support coffee producers changing needs.

Here, in Part 2 of our Reimagining Colombia series, we dive into that most vital point for all coffee producers — price, and a fair one. If you haven’t read Part 1, I encourage you to go back and take a look!

The Fixed Price Guarantee

One of the Federacion’s main initiatives has been their Fixed Price Guarantee for producers. In essence, the idea is that there is always a guaranteed price — set at the regional level, on a daily basis — for producers when they bring their coffees to buying points such as co-ops. Passing through any town in a coffee producing zone, you’ll see white boards hanging on the walls outside of buying points advertising the daily prices paid for coffee, and these prices are those set by the FNC. By the FNC’s own count, there are 36 cooperatives and 541 points of purchase included in this system.

A board inside a buying point displaying prices in August

The theory is that this Fixed Price will stop producers from being preyed on by buyers who might try to negotiate or haggle or even force producers to sell for much less than these set prices. In the words of the Federacion: “This service assures Colombian coffee producers that at the moment to sale the coffee (sic), he/she will always find a buyer that is willing to pay a market price without taking advantage of the small coffee grower's condition.”

But the question here is -- does the Fixed Price in its current instantiation actually protect the economic well-being and sustainability of coffee producers?

As this price is set per carga (125kg of parchment coffee), this is aimed at producers who are processing and drying their coffee themselves. This is something that makes Colombia special— you’ll see beneficios (wet mills) with depulpers and secaderos (drying stations) with raised beds dotted all over the hills in places like Huila.

In other coffee producing countries in the Americas, this isn’t always guaranteed. In fact, across Central America, it’s very common to find farmers who harvest and sell cherry to intermediaries and are not set up to personally process their own coffee. Of course, prices paid in cherry are abysmally low and most of the people who buy in this way are known as “coyotes” who prey on producers' lack of resources.

In Colombia, the instance of intermediaries buying cherry is much lower, and this may indeed by due to the fact that with a guaranteed price and the informational infrastructure provided by the FNC, producers have been empowered to get to the point of selling coffee in its pre-milled state.

It should be stated, however, that there are still people who sell coffee verde or wet, in Colombia. This isn't a small instance either -- the market in San Agustin on Sundays is packed from 6AM with producers and buyers shouting and clamouring to buy. In general, the price for this de-pulped but undried coffee is typically 50% of the set price for parchment coffee but in instances like this, bidding wars can drive the price up or down. These intermediary buyers then transport the wet coffee to drying beds where they'll finish the process before returning them to buying points to collect the price per carga.

So while the Fixed Price and the work of the FNC has helped to create an ecosystem where there aren't as rampant examples of predatory purchasing the continued existence of intermediaries and growers selling wet reveals a deeper problem— the Fixed Price is low enough that the time and money invested into drying coffee is considered not worth it to many growers.

Bags filled with cafe verde or wet coffee, having just been bought in the San Agustin market by intermediaries

How much is this Fixed Price?

This guarantee is starting to look a little underwhelming, so let's talk about how it's created and what it actually is.

The fixed price is set in relationship to the C market and therefore is not a significant amount, given that we have officially been in a coffee price crisis for years now. As the FNC describes it, they take the closing New York Stock Exchange price for Arabica coffee and then translate these into Colombian pesos per carga, with a small premium included.

Taking October 14th as an example the, they took 3 prices from the market:

94.85 USCent/lb

98.45 USCent/lb

100.75 USCent/lb

And converted this to 800,000 pesos for 125kg of parchment coffee. All of the prices per department are thus close to this number. Continuing with Huila, they had it marked at 798,750 pesos per carga.

We can do a little math to further clarify what that actually means.

First, let's translate 798,750 pesos to USD. (A side note that the Colombian peso, as with many countries in the Global South, is a volatile currency, so pegging exchange rates is always a moving target).

Also on October 14, Bloomberg Markets had 1USD equivalent to $3,432.57 pesos, so if we divide the price per carga by this exchange price we arrive at $233.30USD for 125kg of parchment coffee.

798,750 pesos / $3,423.57 = $233.30USD/carga

Next, we need to turn parchment coffee into exportable green coffee. This is another thing that’s hard to peg exactly as it depends on the coffee in question, but about 20% weight loss is in the range. So that would give us about 100kg of exportable green coffee for $233.30USD.

125kg x .80 = 100kg green coffee

Now let's get kilos into pounds as coffee is traded in the North America in pounds. We multiply 100kg by 2.204 to arrive at 220.40lbs

100 x 2.204 = 220.40lbs

And now we can arrive at a price per lb by dividing this quantity by the price per carga of $233.30, leaving us with a price of.....$0.94cents/lb.

220.40 / 233.30 = ~.94cents/lb

As stated, there are some variables here (and I'm not a math whiz, so feel free to correct me) but we can feel pretty good to say that a Colombian producer who brought their coffee in to a buying point at the Fixed Price guaranteed on October 14th 2019 received $233USD for one carga of parchment or ~.94cents/lb.

The market price is still therefore even higher than this number, looking at the three prices above. And this is is because there will be associated milling and transport costs to get this coffee purchased in parchment to part before the market price comes into effect.

This deep dive is only illustrative of something we already have established -- the Fixed Price Guarantee is NOT enough.

For better illustration, parchment coffee that is being hand picked for defects to ensure the yield per carga remains high

Listening To Producers

Even without this math, we could find out how this price is considered locally if we simply listen to the testimony of coffee producers themselves.

For example, Hamilton Molano of Planadas, Tolima, explained to me last year that the cost of production at his (famous) family farm Finca Las Pulgas fell in the range of 750,000 pesos per carga. The Ortega-Gomez family in San Agustin placed this number this year more around 800,000 pesos per carga. This is their cost of production to fertilize, treat diseases, harvest, and care for the farm — what is not included here is their costs of living, food, shelter, cars, gas, and of course saving for the future.

In other words -- A fixed price of 800,000 would be considered only slightly above breaking even at the best of times.

(Side note: Cost of production is a big topic right now and considered difficult by many to pinpoint exactly, however, it's fair to say that there are producers who have at least a ballpark idea of what their basic costs are)

The fixed price guarantee, at this point is guaranteeing producers nothing more than money in to replace money out. Several farms have told me that because many producers aren’t taking close accounting of just how much it costs to survive, they may not be aware that this price is not satisfactory. However, if they do, it is still the prevailing option available to producers across the country -- as we saw in Part 1 as well, 98% of all producers are selling at these numbers.

While the FNC created this fixed price guarantee to ensure producer sustainability and security, it seems today that this system itself is offering neither of these benefits to producers. The Fixed Price Guarantee has become something of a trap

Where do we go from here?

Thankfully, there is movement. We’ve seen the advent of private buying points run by exporters who seek to prioritize not only quality-based but also relationship-based buying that can offer much more to producers in the way of sustainability and security.

We’ll investigate these further in Part 3 of Reimagining Colombia Coffee - Alternative Models!

In the meantime, let's get something going in the comments.

What are you thoughts on the Fixed Price Guarantee and how do you think it should be addressed?

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