In our last post, we took a deep dive into understanding the C Market: what it is, how it came to be, and how it functions to determine the global price of Arabica coffee.
One of the key takeaways from that post is understanding that when it comes to specialty coffee, the C price isn’t the price that farmers receive for their coffee, nor is it the price that buyers pay. While the C price acts as a useful benchmark or reference price to start, there are a number of other factors that must be considered—also called “differentials” as they make up the difference between the C price and the actual price—before we can determine the final price for coffee.
One of these metrics is the “FOB” price, and in this post, we’ll explore what the FOB price is and what it isn’t, and we’ll briefly touch on what price farmers actually receive for their coffee.
What does "FOB" mean?
The term “FOB” is an acronym that stands for “free-on-board.” FOB isn’t a term that’s unique to the coffee industry, but is actually one part of a set of 11 internationally recognized terms of sale which define the responsibilities of sellers and buyers. These terms are called “Incoterms” and are essentially rules that specify who is responsible for paying for and managing shipment, insurance, documentation, customs clearance, and other logistical activities.
When it comes to FOB, the seller—in this case, the coffee exporter—is responsible for storing coffee at warehouses, export packaging (putting coffee into bags), transport and delivery to ports, customs clearance (and the associated duties and taxes), and loading coffee onto ships—just to name the main ones.
The FOB price, then, is the price that buyer’s pay to a coffee exporter when the coffee is ready to be shipped out. That price includes the price of the coffee itself, plus the logistics costs that the exporter incurs for transporting and preparing the coffee for shipment.
It’s usually the case that coffee mills are the ones who are also operating as the exporting agent. When these mills receive coffee from farmers, they’re not receiving coffee in its “green” state that a roaster would receive; instead, farmers sell their coffee to mills when they are still in cherry or parchment (either wet or dry). The mill handles the final steps of processing the coffee: finishing the drying process if needed, removing the coffee from parchment, sorting for defects, density, and size, and performing final quality control assessments like cupping and scoring. These costs are also factored into the FOB price.
FOB vs Farmgate and the Problem of Exchange Rates
What’s important to note here is that since the FOB price is settled by the coffee exporter, it is not the price that the coffee farmers themselves receive for their coffee; that price is what is called the “farmgate” price. The farmgate price is buried inside of the FOB price, but uncovering what the farmgate price is can be tricky.
For Latin America, the farmgate price is, in general, around 70-80% of the FOB price. The other 20-30% is captured by the exporter, which is often the smallholder cooperative itself, and covers the above mentioned costs incurred in addition to fees that they would charge in order to make a profit.
However, there are other differentials that factor into farmgate pricing, such as organic and Fairtrade premiums, premiums for women-produced coffee, and quality premiums based on cup score. We’ll dig into this topic later in this series, but an earlier blogpost exploring the influence of country differentials with Peter Kettler, Fairtrade International’s Global Product Manager, provides some key insights.
An added layer of complexity has to do with the fact that the C Market, and the corresponding C price, trades in USD globally. While buyers pay in USD, farmers, on the other hand, receive money in their local currency. The correlation between what is being paid and what a farmer actually receives can vary significantly depending on the volatility of local currencies, making it more difficult to accurately determine farmgate pricing.
Stay tuned for the next edition of our C Market 101 series where we’ll take a look at some concrete examples and further unpack farmgate pricing!