FOB is An Exporting Metric, Not A Farmgate Benchmark

FOB price has become a popular metric for assessing whether a producer was paid fairly for their coffee, but what does the FOB (or free on board) price really tell you? We’ve unpacked this before, but we want to go deeper—we feel this conversation is getting ever more urgent as more and more often, we’re seeing FOB used as a shorthand for coffee price analysis in the specialty industry. While people seem to understand that a coffee’s FOB prices is not a perfect indicator of prices paid to producers, they still seem to see it as a good general ballpark indicator. The problem is, that simply isn’t true. Higher FOB prices not only don’t equal higher farmgate prices, they don’t even imply them—the only thing they indicate is the price paid to exporters, with the price paid to the farmer hidden inside. 

What Does FOB Really Measure?

FOB means free on board, the price of a coffee at export. This means it includes the price paid to the farmer (including local transport and milling costs) as well the amount the exporter is charging buyers who take control of the coffee as it’s loaded onto the vessel at the point of origin. 

In the case of companies who both export and import, this number is based on their exporting costs and desired profit margins—they set the FOB price. From there, they can sell the coffee at that FOB price and transfer it directly to a customer, or they can land it in a warehouse and sell it ex-warehouse (the price of the coffee as it leaves the warehouse, which includes farmgate, FOB, the cost of importing, warehousing, and desired margin), covering their costs and making their desired profit. 

Essentially, if buyers wanted to see higher FOB numbers, anyone who exports could theoretically raise those costs for the buyer, without having to raise prices paid to farmers to do so. For example, if we as an industry decided that we wanted to set a five-dollar floor price for FOB to ensure fairness to farmers, private exporters and companies who both import and export would theoretically be able to pocket the entire difference, since FOB only measures the price they set for their buyers. That’s not to imply that anyone would, or that any party is unscrupulous simply because their business model includes exporting. It’s only to note the intrinsic limitations of FOB as a corollary for farmgate price.

In our case, we hold exporting licenses in select locations but use them sparingly, the reason being that many producer organizations we partner with need the money they make exporting. We would never want to step on their toes and cut into their income as a means to pad our margins. In other regions, we use a third-party private exporter who has no role in the sourcing process. 

In either case, we don’t get to independently set the exporting price, and we don’t make money off that part of the supply chain. The coffee arrives, we land and store it in third-party warehouses, then we sell it ex-warehouse, the price of the coffee leaving the warehouse. Our margin has to be made in the ex-warehouse price, not the FOB price. In other words, our ex-warehouse price has to cover all the costs we incurred sourcing the coffee, buying it from the producer, coop, or association, paying them or a third party to export it, importing it, storing it, and selling it. So where other business models can make more money directly from a higher FOB with no margin going back to the farmer, FOB is just another cost we face along the supply chain. 

Key to note here is that there’s no one right way to run a business—making your margin and recouping your costs via FOB (in the producing country) over ex-warehouse (in the consuming country) is no worse, no better. It’s not inherently more ethical to run your business from a producing country or from a consuming country (although, in the regions where we have sourcing offices outside the US, we do feel we have the most positive impact by partnering with producer organizations who export rather than doing it ourselves). These differences in business model matter mostly when people use FOB prices as a shorthand for farmgate prices and fairness. 

FOB is inclusive of an exporter’s profit: that’s not a bad thing, it’s simply a thing that needs to be understood.

Why Rely on FOB?

It’s not hard to see why FOB is such an appealing metric for summarizing the fairness of a supply chain: it’s clear cut, recorded on a bill of lading (making it a number that can be verified), and it’s the metric the C market uses, so in that way, it makes sense as a benchmark. We wish it were as useful as it is convenient, since that would make everyone’s lives a lot easier. But for the reasons detailed above, it’s unfortunately not a corollary for farmgate. It’s crucial that the industry ask hard questions about pricing and pursue fairness at all costs, but to do that, we have to continue to push for real traceability. FOB just doesn’t have the ability to act as a proxy for that. 

What Should We Use Instead?

Instead of relying on FOB to simplify the complex subject of fair pricing, we should ask if the supply chains we’re participating in are traceable to the farm level. Do you have good reason to believe that the farmgate price was fair—and, if you were curious, could you find out the specifics? 

Ultimately, coffee pricing is complex, and even farmgate prices have to be informed by several layers of context including cost of living, cost of production, and geographic challenges. The best way to buy a coffee and be sure that it was sourced at a fiscally sustainable price is to develop trust with your sourcing partners and a solid understanding of how their various supply chains operate. Important things to make sure of are that your sourcing partner’s prices don’t connect to the C market (even C market plus premiums), that they meet the cost of production, and that they pay sustainable base rates, not just high quality premiums. 

Is Your Supply Chain Traceable to the Farm Level?

It’s not easy to find the right questions to ask in the push to ensure you’re paying fair prices. However, we think the most important question is this: is your supply chain traceable to the farm level? Whether or not you need specific pricing info to the producer or organization level for each coffee on your menu, could you get it if you wanted? Do you trust your sourcing partners to pay fair prices no matter how much the C market price fluctuates, or do you fear they’ll take advantage of its nadirs? Do you trust them to pay fair prices for all the coffee they buy, or do you fear they’ll only pay sustainable prices for the best of the best? Have you had these conversations with your sourcing partners? While it’s natural to want a shorthand to assess whether you’re buying fairly, FOB unfortunately can’t give you the essential information you need.

 

Interested in sourcing coffee with us? Reach out at info@redfoxcoffeemerchants.com. To learn more about our work, check out our journal and follow us on Instagram @redfoxcoffeemerchants, Twitter @redfoxcoffeeSpotify, and YouTube.  

Paying for Coffee: Santuario

In our previous series, Paying for Coffee: It’s Complicated, we talked about the various factors that underpin how we as a sourcing company buy coffee, as well as how to discuss it. While that series looked at the larger picture and laid crucial groundwork for the discussion, this is something we feel we—and the industry at large—need to go deeper on. This series will take a closer look at the details that underpin how we buy coffee in our major supply chains, each of which is unique. 

Santuario and Red Fox

Northern Peru-based cooperative Santuario is a great vantage point to look not just at what we pay for coffee but how we buy it, including the value we add to the supply chain and the value Santuario adds to their local community. We’ve been buying from them since they launched in 2017 and have been consistently inspired by their commitment to honesty and transparency, their dedication to education and growth, and their devotion to quality as a way to add real value to people’s lives. Clearly, their local coffee-growing community has been equally impressed, since their membership has grown to 400 members in just three years, up from 262 last year. 

Who They Are and What They Do

Santuario was born in 2017 when its small group of leaders left a corrupt organization they had become frustrated and disillusioned with. This experience led them to found Santuario, a coop whose core pillars are honesty, integrity, and making sure money gets back to the producers and works to uplift the entire community growing coffee, not a select few. 

Working with a mission to help smallholder producers get the best possible prices for coffee through quality improvement, Santuario is led by president Gonzalo Guevara Martinez, general manager and cupper Ismael Alarcón Mirez, warehouse manager Adan Martínez, and agronomist Enrique Palacios. Santuario offers agronomic assistance, sending individuals with agricultural experience and training to offer advice on soil fertility, cultivation techniques, harvesting, and post-harvest practices in order to improve quality. 

Their long-term goals include helping farmers renovate their farms with the best-tasting and most resilient coffee varieties, controlling pests and soil fertility through organic means, helping farmers navigate the effects of climate change, and helping scale improved drying practices as the coop grows. In addition to helping farmers access the specialty market, Santuario’s focus on long-term sustainability offers a path to consistent profitability for smallholders. 

Santuario’s home base is in Jaen, Cajamarca. They have members in the provinces of Jaen and San Ignacio and expanded into Cutervo this year. The lab is located in Jaen and the coffee is milled at Norandino in Piura, all in Northern Peru. 

What We Pay

FOB and Farmgate Pricing

While the numbers of what we pay only make up a small piece of the larger puzzle of sourcing with Santuario, they’re still an essential piece. As discussed in other Paying for Coffee pieces, the core of our sourcing strategy is setting clear, consistent standards for quality and pricing while creating price structures that incentivize quality production but never punish the more general quality tiers. Prices are a) never, ever connected to the C market price in any way, and b) they are very high to incentivize both quality production and sale to Red Fox over another potential buyer. We want producers who work with us to be able to produce great coffee and thrive from the relationship, and that’s what underpins our pricing. 

Santuario pays farmers for various quality tiers based on their own cupping and scoring, not ours. They pay from 520 to 550 soles per quintal of parchment for an 84 point coffee, 600 soles for a coffee that scores 85, and 650 for an 86 or higher. Santuario pays farmers 100% upfront almost immediately once they’ve cupped the coffee.

The FOB prices we pay Santuario are $2.40 for 84/85 and $2.75 for 86/87. 

Quality Score Farmgate FOB
84  520-550 soles per quintal parchment $2.40
85 600 soles per quintal parchment $2.40
86+ 650 soles per quintal parchment $2.75

Ex-Warehouse Pricing

As discussed in prior Paying for Coffee pieces, we then price in the costs of import, warehousing, and the sales process. Since we typically take full ownership of the coffees and sell them out of the third-party warehouses we carry our coffee in, rather than shipping them directly to a storage facility of a customer’s choosing, we price the coffee ex-warehouse, meaning the price as it comes out of the warehouse. 

As part of that equation, we assume full risk for the coffees we buy, committing to their quality and honoring that commitment even if delivered quality is lower than expected. Because we do actually buy the coffees, store them, and sell them rather than simply coordinating sales between customers and vendors, we have to price in the potentially unpredictable costs of third-party warehousing (for instance, if a particular coffee doesn’t sell promptly, we will pay to carry it in the warehouse until it does sell). While that is both a risk and a cost, it’s well worth it in order to be able to support producers and smaller customers at a higher level, buying and selling in quantities that wouldn’t be possible if we didn’t make that commitment. We assume this risk in order to add value to the supply chain, expedite logistics, and strengthen producer relationships.

How We Buy

Sampling and Communication

Warehouse manager Adan Martinez Aguila is in charge of collection and sampling. Some producers take samples to the coop, but most deliver full bags directly and the Santuario team takes a sample of their lots. Their cupping team then does a preliminary sensory evaluation, where Ismael and his team cup the samples and screen for general cleanliness. They then send us samples every 15 to 18 days throughout the harvest, depending on the volume they approve. 

The coop pays producers right away no matter what, then communicates quality results at the end of the harvest. They take ownership of finding a buyer for the coffee. 

Lot Construction and Allocation

After signal detection cupping, we separate out certain producers for producer ID lots. For blends, we craft bespoke lots intended to highlight particular families and communities of neighbors, and subregions that deserve recognition. While many lots are ultra-high quality and large enough to separate, most Santuario members are smallholders, and it doesn’t always make sense to have hundreds of single-farmer lots on a menu. That’s why our lot allocation process has to be so painstaking: these coffees are incredible, and the range of profiles from neighborhood to neighborhood is distinct. It’s crucial to us that we represent these coffees in the truest possible light. So, they all go through the same rigorous QC process and lot construction is extremely intentional.

Logistics and Shipping

We purchase Santuario’s coffee FOB, but while that means they take responsibility for transportation costs within Peru (from their storage center to the dry mill and the dry mill to the port), we coordinate a lot of the transportation and milling details. 

Logistics are somewhat less complex for Santuario than the more geographically-challenging South, but they’re still critical to get just right. The first challenge is that Jaen is incredibly humid, so storing the coffee in GrainPro and getting it to the port of Paita in Piura on the northern coast as fast as possible is mission critical.

We often coordinate the truck itself, since we’re typically bringing coffees from different coops in Jaen and San Ignacio. We’re also heavily involved once the coffee arrives at the dry mill: we supervise the milling and loading of the container, and work with Santuario’s logistics team on documentation.

Support We Offer

In terms of producer support, the central type we offer in Santuario, as in every origin we work in, is in paying the highest possible prices and letting producers lead their own development projects. While this approach runs counter to the narrative of offering several programs for producer advancement, we want to recognize that producers and groups know their business better than we do—they know where they need to invest their money. We honor that by communicating clear quality standards, living by those standards, and then paying the money they earn directly to them for their chosen expenditures, rather than paying less and offering more auxiliary services. Many studies in the nonprofit sector validate this approach.

Support Santuario Offers

Santuario offers extensive technical field assistance, sharing agricultural experience and training to offer advice on soil fertility, cultivation techniques, harvesting, and post-harvest practices in order to improve quality. They have two agronomists covering 26 base communities who visit each community monthly during the off season to provide training. During the harvest, agronomists make visits to individual producers since farmers are too busy during that time to attend community training. Normally, they visit producers who have had quality issues and need to make improvements, the most common issue being proper drying in the humid climate. 

They’re helping producers build parabolic dryers, partially financed using Fair Trade premiums. They’ve also been working on a free fertilizer program for producers to enrich their soil, since organic coffee cultivation often means farmers don’t use inputs to boost productivity and are left with drastically different output year to year. Some of the base groups are interested in starting nurseries with trees for reforestation; Santuario will be supporting them with seedlings and materials to build nurseries. 

Longer term, they want to help farmers renovate their farms with varieties that balance quality and resilience (specifically Caturra, Pacamara, and Bourbon), use organic best practices to deter pests and improve soil fertility, help farmers navigate the effects of climate change, and help scale improved drying practices as the coop grows. They combine a laser focus on conservation with access to specialty coffee markets in order to promote farming careers that make sense long-term for the smallholders that make up the coop. 

 

Paying for Coffee—It’s Complicated

Each supply chain is unique, facing a singular combination of production costs, climate challenges, transit barriers, political issues, and scale factors. That’s why we feel it’s important to go deeper than looking at price alone: all of these factors matter when looking at the strength of a supply chain. 

Santuario’s leadership left the organization they worked with prior due to corruption and they started Santuario with the impetus of that experience rooting them in values of honesty and integrity as core to the uplift of their communities. They’re extremely focused on getting money back to the producers and making their shared work fiscally and environmentally sustainable, and that’s key to their incredible coffee. Along with the concrete support they bring to their community, these ideals are central to their work and the value they bring to the supply chain. We’re happy to work with them and share those ideals. 

Interested in sourcing coffee with us? Reach out at info@redfoxcoffeemerchants.com

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