What Goes Into a Coffee’s Price?

As we move through a year of volatile, ultra-high C market prices shaking up global markets, we’ve seen occasions where roaster partners find coffees at lower prices than ours. We want to use that as an opportunity to talk about value as a gestalt rather than a dollar value. 

To be clear, we know that for roaster partners, if the balance sheet can’t fit an extra number of cents per pound, period, we get it. We all have that balance sheet, and we all navigate the challenges it presents to purchasing ethics. 

But, back to the original question, what goes into the price of a coffee from Red Fox?

Independence

The quickest answer is that we aren’t the specialty arm of a large multinational, nor do we have investors—we are an independent small company with a laser focus on ethics that are uninfluenced by outside entities. 

What that means is that in order for us to run, we have different needs in terms of meeting our costs than multinationals or those controlled by wealthy investors—we can’t run at a loss and maintain our purchasing ethics, much less our fiscal sustainability. Multinationals (or those who don’t feel a need to maintain purchasing ethics) can.

Overhead

The above brings us to our next point: overhead costs. As we’ve written about in the past, we don’t do our own warehousing, instead choosing to pay third party warehousing prices in order to maintain agility and ability to change where we warehouse as needed. This past year has been a great example of that as we’ve shifted weight into DuPuy Houston due to port disruptions on the West Coast. 

In terms of sourcing, the legwork involved in our sourcing strategies is very labor intensive compared to most larger companies. We don’t work with exporters and cherry-pick from their lots—we source directly at the association level, or in Oaxaca, at the neighborhood or family level. We don’t buy in bulk based on type samples, we taste lot by lot and do our own bulking and bespoke lot construction to best represent the unique flavors each producer brings to the table, even if their lot is too small to be sold at the Producer ID level. We are at the cupping table with producers and association leaders constantly through each harvest calibrating and literally doing the work together. Same goes for the milling process. It’s not the easy way, and it involves hard work and paying prices that make it worthwhile for every stage of the value chain. 

Logistics

As we’ve said before, quality logistics don’t come cheap, and they’re more essential to coffee quality and menu planning than ever. It costs more to move coffee than it ever has before, plain and simple. There are no shortcuts on the logistics front. Either you pay more, make more bookings, and communicate constantly to make sure things are going as planned, or your coffee will not land when you want it to at the quality level you want it to. Whether it’s moving coffee along sea routes less traveled, landing in warehouses we wouldn’t usually use as a first stop and then trucking overland, getting your coffee in faster isn’t always done through the obvious channels. That involves tons of planning and communications labor, and more than ever, the details at every level costs money. 

Paying for Labor

Whether you’re talking about ethics or quality, paying for labor is non-negotiable. As inflation soared over the last year, hitting those at the lowest income levels the hardest, producers were lucky to land a C market that finally rose to a level that would allow them to meet their costs and even make a profit. Unfortunately, that welcome shift had complex consequences—as large multinationals rushed to ensure their needs were met and producers rushed to make sure they could finally benefit from C market prices (often strip-picking their coffee before it ripened), a hypercompetitive market arose. Even within decades-plus relationships, buyers who wanted to make it worth producers’ while to work with them had to pay much higher prices. It’s not enough to pay well above C market in low market years—when prices are elevated, producers still need to benefit at the same level. Compare it to the minimum wage in the US: in markets that increase to a $15 minimum, it’s harder to attract and retain skilled workers at the minimum wage. What might have been an attractive price before might not remain an attractive price. It’s only fair that producers benefit equally from loyalty during high C markets as they do from low C markets. 

If Something Sounds too Good to be True, It Probably Is

With all that said, while it’s possible to move costs lower by paying lower wages throughout the value chain, selecting lots on a general basis rather than a specific one, buying through exporters rather than working with groups to get their coffee to export, moving coffee through traditional or less expensive channels that lend themselves to unpredictable arrival and quality, and existing as part of a large multinational or investor-run company, if something sounds too good to be true, it probably is. If what you’re hearing from a vendor sounds extremely different from what you’re hearing from other vendors, it’s a good time to start asking questions. Coffee is more expensive than ever, so when belts are tightening on expenses, it’s okay to ask as many questions as you want before making a decision.

To learn more about our work, check out our journal and follow us on Instagram @redfoxcoffeemerchants, Twitter @redfoxcoffeeSpotify, and YouTube.

What Forward Booking Looks Like for Us in 2022

As a shockingly volatile C market, local labor shortages, climate change, and high costs of business from the farm level up combine to roil global coffee markets, forward booking has never been more complex than it is in 2022. Our top priority is as it always has been: to deliver coffee exactly as promised in terms of quality, timing, customer experience, and consistency in the value our work at origin will deliver lot-over-lot and season-over-season. In 2022, how we do that has had to change substantially. This shift has been most dramatic in how we think of forward booking, a process already complex in itself because it necessitates matching projected acquisitions during harvest with real-world coffee supplies post-harvest. What’s making the process so complex, and how has our strategy changed to ensure we’re delivering what we promise?

What’s going on with the C market?

On top of the global logistics crisis sending costs on a continuing upward climb since 2021, an array of climactic and geopolitical factors have set the C market on a wild ride since the summer. 

First, as we reported in our 2021 Q4 report, a slew of climate factors led to a melee for available coffee supplies in South America, driving the C market to levels not seen in over a decade. Devastating frosts in Brazil led the C market on a rapid climb, while heavy unseasonable rains in Colombia (coming on the heels of mass protests that halted the harvest and transport of coffee) drastically reduced supply there as well, compounding the issue. Coffee stocks in the global north continued to dwindle, and it looked as if nothing would interrupt the trend (as we reported on in our Q1 report) as forecasting for coffee availability remained (and remains) decimated. 

A rapid disruption occurred directly following the Russian invasion of Ukraine, creating a host of additional complexities (detailed in last quarter’s report). On the day of the Ukraine invasion, the market dropped nearly 10c and continued to drop from around $2.50/lb to $2.10/lb over the course of two weeks. Institutional investors became bearish overnight, fearing a further stressed global logistics crisis and a derailed global economy. Analysts feared that consumer spending would shrink even though supply side economics suggested coffee prices should continue to strengthen. 

At time of writing, coffee remains above $2.00 ($2.18 specifically), but below the $3.00 we and analysts expected going into Q1—however, that disparity comes with its own complexity. As all of the factors that would underpin a bullish C market in producing regions have continued or intensified (supply constraints coming from labor shortages, climate events, increased cost of production/transit, etc.), the lower C market price is out of sync with the prices local markets in producing regions are paying and the baselines that producers can expect for their actual coffee. So—as usual—the C market price both affects coffee prices holistically and is out of sync with their actuality.  

What is forward booking & why has it been so complex?

Forward booking, or forward contracting, can mean different things for different companies or industries. For us, forward booking is the process of allowing clients to enter into contracts on projected future coffee supplies, then matching them with a lot that meets their specifications at the agreed-upon price when the coffees come in. We typically do this at a reduced price compared to spot coffee (coffee we have on hand in the warehouse) since it allows us to buy coffee more accurately throughout the season, having a large portion of total coffee already matched with prospective buyers. For us, it’s a risk mitigation strategy that allows us to more fully support our supplier relationships. The more forward booked volume we have, the more coffee we can buy from producers without being concerned about having too much uncommitted inventory late into the sales cycle of any given origin

Where the process gets complicated is when coffee acquisitions become particularly competitive (due to elevated local prices from the largest actors for coffee at undifferentiated quality tiers) and prices make large jumps that cause uncertainty for both producers and consumers. If we’re buying coffees as they arrive into the cupping lab at origin and the prices change dramatically from week to week, how can we design contracts to account for that level of fluctuation? If we think prices might jump dramatically and producers may rush to strip-pick, depleting the supply in a given region, how can we sell coffee we aren’t sure we’ll have? 

How has our forward booking strategy changed?

If we aren’t sure we’re going to have a particular coffee quality tier, region, or quantity, or if we can’t project pricing accurately, we won’t forward book the coffee. In some minds, it’s better to sell the coffee first, then worry about delivery later. For us, we aren’t going to make promises we aren’t sure we can deliver on. This year, that’s meant that in some cases, origins or regions we’ve opened forward booking on in past years aren’t available to forward book because we’re making sure the details are worked out first, rather than simply prioritizing sales. 

In general, depending on calibration and relationships with roasters, we’re conservative in our estimation of costs, leaving room for us to reduce pricing if costs end up lower than expected—but, unfortunately, the reverse also needs to be true. With so much uncertainty, our goal is to craft relationships and contracts built on trust in our ability to source a specific quality and deliver against a specific timeline. Pricing, while critical to both roasters and us, is still secondary to that and requires the ability to have some variation based on market fluctuations and unpredictable freight cost.

What’s next?

There are some things we can’t project. We don’t know when the markets, both C and global, will stabilize. The climate is always an X factor we can’t control or predict. What we can say for sure is that we’ll always communicate with you and set clear, honest expectations rather than simply working to make a sale. If we aren’t forward booking a particular coffee at a particular time, it’s because we need to make sure we can deliver exactly as we promise. If you ever have a question or just want to talk, we’re always here, so get in touch. 

To learn more about our work, check out our journal and follow us on Instagram @redfoxcoffeemerchants, Twitter @redfoxcoffeeSpotify, and YouTube.