Red Fox Coffee Merchants Origin & Shipment Update: Q4 2021

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Hello friends, coming to you with our final quarterly origin and shipment update of the year as we enter the home stretch of 2021. This report will cover some broad strokes and some details in all the origins in which we work, whether their coffee is on the water, heading to the mill, in harvest, or still looking towards its next flowering.  

To summarize, a key factor we’re continuing to see broad and escalating effects from this quarter is the global shipping crisis, which has continued to compound as the holiday season approaches and is not expected to resolve until Q1 2022 at the very soonest. On top of that, the C market has been driven up to levels not seen in a decade since frosts in Brazil drove down harvest estimates. Adding to reduced harvest outlooks in Brazil, Colombia suffered the dual factors of civil unrest and heavy rains leading to a much-reduced harvest, with those shortages putting added upward pressure on prices in Peru as large sourcing groups struggle to cover their contracts. The C market’s meteoric rise, while beneficial to producers, has created sourcing and quality challenges at the cooperative and producer association level across South America. At the nexus of the C market rise and the global shipping crisis we’ve seen another supply and demand issue heat up: labor shortages and space shortages leading to rising costs of doing business in the logistics sector, from ports to trucking to warehousing and beyond. More detail on all of this, in general and origin by origin, below. 

Logistics, Port, & Warehouse Updates 

We’re in constant conversation with logistics partners domestically and globally, and from what we and they are seeing, the global shipping logistics crisis is still deepening (and further jams expected as the holiday season approaches) with resolution not anticipated until at least Q1 of 2022. Capacity is still down on ships, at ports, and on trucks, labor shortages are a huge issue, and all costs are up. By all accounts, moving coffee from place to place in a timely fashion is as hard as it’s ever been. Below are some comments from some of our logistics and warehousing partners.

From Unishippers:

The most important domestic USA shipping news is that capacity is still very tight and carriers are struggling with staffing and moving all the cargo they are asked to. As a result, rates are climbing and carriers are being very assertive in charging for all the services they perform. This is expected to continue at least through the first quarter of 2022.

From Continental NJ Warehouse:

The amount of pallets that we ship out on a given day has doubled and we also see the carriers having a hard time keeping up with capacity. No matter how we plan it just seems like there is not enough time to complete everything, and when we do the carriers don’t show because of capacity issues, which leaves us in a bind because now we have a glut of pallets sitting on the floor taking up space, which limits our ability to prepare new pallets to complete orders. Warehouses and carriers are both having labor capacity issues—can’t hire enough people to get all the work done.

From DuPuy Houston Warehouse:

The ports have been extremely congested these past few weeks and it has caused delays on the containers being delivered. Standard freight shipping is the same, the carriers have been good about coming for their daily pickups.

From Continental Annex Warehouse:

  • Nearly 200,000 drivers did not come back in to the industry following the lifting of some pandemic and quarantine regulations. The shortage of drivers has created a major logjam at many terminals—the carriers do not have staff in the terminals and are short drivers so this will lead to (and we’ve already seen) increased transit times, damages and freight rates for some lanes have already tripled.
  • Some carriers have instituted embargoes and no longer accept freight into some of their own terminals while they attempt to clear the backup.
  • The driver situation goes all the way from the port down to local bus drivers—carriers are taking any driver with a clean record but we have seen that there is minimal training, they just throw them out there, often our check-in desk has to instruct them how to properly sign paperwork and handle the pro stickers, etc.
  • As for the Port, most ports are working about 3+ weeks behind at this point, so vessels are being held outside the port until the port can schedule the boats in for unloading. As a result of that backup, many goods are not being shipped since there are no empty vessels to go back out.
  • The same goes for rail—we have had rail shipments be rescheduled over 7 times because no driver to haul it, so since it doesn’t get brought to our location to unload, there are minimal empties available for new loads. Every delay compounds another aspect of the moving of freight and even though the delays have no real culprit and there is little we can do about it, the detention and demurrage structure of fees is still adhered to—so even though the port cannot give you an appointment to pick up your container for say 6 days, they still begin the count on the free time allowed.  
  • Ultimately every single company or service involved will have no choice but to review and hike their prices to survive and it is very likely that there will be multiple increases before this all clears out, then for the roaster-buyers, they must pay attention to the increase in transit time, particularly as the holiday seasons begin. If they have room, it would be very wise to get stock in their locations so delays create minimal disruptions and of course, they will have to increase their pricing structure.
  • We are directly across from the “receiving” end of the port and the boats keep coming, so we do not expect this to clear for several months.
  • SO longer transit times, much higher costs, longer delays for new inbound inventory, more damages/freight mistakes by carriers with unskilled employees… that’s where it is right now. I have been in this business a while and have never seen anything like this before.

From Volcafe: 

If anything, since the last couple of months, the situation has worsened. Domestic trucking rates are through the roof and capacity issues are becoming the norm. We have some warehouses that will email us a couple of days before containers are supposed to arrive at port saying they won’t be able to pick up before the last free day occurs. They are blaming this on slow turnaround times at the port, and fewer drivers on the road. The demand is high, but the supply of truckers and workers is low.

On the west coast vessels are sitting off the pier of Los Angeles/Long Beach and Oakland for as long as 2 weeks. They are taxiing on the water waiting for the longshoremen and the port to clear prior vessels. This is causing a dramatic increase on transit times going to the US West Coast.

Peru, Brazil and Indonesia are the 3 biggest problem areas right now. Container allocations and sea shipping lines not having a regular schedule is making it almost impossible to even ship out of those countries.

Supply, Demand, & The C Market 

Even as we’ve covered several aspects of how the global shipping crisis is affecting logistics, these complex dynamics have created interlinked supply and demand issues that we expect to see for months to come. Working backwards, diminished manpower in ports (specifically on the West Coast) has left vessels anchored off the docks for upwards of multiple months. This has led to decreased vessel availability from port of origin to certains destination ports as the vessel carrier lines themselves refuse to have their ships unavailable for months on end. Adding to the mess is a general lack of container availability in ports of origin as well, causing a huge cost increase as exporters battle with each other to get their coffees afloat. We are paying upwards of 50% more per container than we have in year’s past with the vessel carrier lines now holding all of the cards.  

Starting in July, we began seeing reports of poor weather in Brazil, the largest producing country of Arabica in the world. Crop estimates came out suggesting the total crop would only be 35 million bags, down from 50 million bags the year prior. During the same period, the Brazilian Real (currency) strengthened against the US dollar, increasing local production costs and adding even more upward pressure on coffee futures. The C market responded with a massive increase against the December 2021 trading month from 159.35 on 7/19 to 196.60 on 7/22. US green coffee stocks are also running low due to port congestion and supply chain disruptions, exacerbating the situation. The C Market held under $2.00/lb through September though immediately broke through that barrier on Friday, 10/1 closing at 204.05.  

The C Market has hit near 10 year highs, forcing us to ask how long it will last and to make necessary preparations. Are cost increases across the supply chain here to stay? As we’ve talked about extensively elsewhere, no one works outside the C market entirely, even as our focus has always been on paying prices that are consistent, based on clearly communicated standards, and typically do fall far above the C market especially during its long plunge over the last several years. With that said, when the price skyrockets for undifferentiated coffee, we still need to adjust our pricing to make sure those who benefit from our pricing during low C market years benefit equally during this spike. Considering all that, our acquisitions team made the decision to increase our base price across Peru entering the 2021 harvest. With Colombia in disarray, parchment prices in Peru soared to record levels beginning in June and continuing now as the harvest hits its downward slope.  Fortunately, we are well positioned with the coops/producer groups due to strong relationships developed over the years from our base in Lima. 

Aside from all the other logistics havoc Covid is causing, it also continues to cause crippling labor shortages at every step of the supply chain. We notice this most acutely at the mills and ports, but even from farmers directly where harvesting with smallholder farmers is often an extended familial procedure.

We’re seeing costs on the supply side increase across the board, which will equate to all roasters, including the largest ones, dealing with their own increased set of costs. While large companies like Starbucks that lock in contracts far in advance haven’t yet been hit by the price rises that smaller and leaner companies are already seeing, even they will eventually be affected by the increase in C market and coffee prices as a cost of goods. Looking at them as a case study, Starbucks’s share price is still sitting more than double where it was in March of 2020 and the company continues to exceed earnings forecasts. Once they reach the point where they need to pass on their increase in cost of goods to the consumer, earnings reports will show us how elastic their customers are, but one way or another, we expect that coffee consumers will see these costs increase even in the large specialty/high-end commodity tier through at least Q1 of 2022 with an impact on consumer prices through 2022. We’re hearing from buyers at larger-midsize companies we work with as well that price rises are either imminent or already happening. So while it may not be an ideal situation, we’re all in it together.  

Peru

Political instability was one of the hallmarks of Q3 in Peru, but Q4 is looking smoother. In July, the newly elected president, Pedro Castillo, was sworn in. The transition of the new government began with some early turbulence as it faced challenges to consolidate a cabinet of ministers. Due to political instability, the dollar rose against the national currency. Since the first presidential runoff in April 2021, the exchange rate increased by 13%. During this last month, it’s stabilized somewhat. As far as Covid, the vaccination plan has been successful with massive vaccination campaigns in the capital and other cities. Current estimates show over 9.3 million inhabitants fully vaccinated, about 28% of the population. 

Coffee season in Peru is at its peak. The harvest is wrapping up in the north, the Selva Central, and parts of the south of the country, while the highest altitude farms in Cusco and Puno are at peak harvest. Our QC and logistics teams are in full swing. The lab crew in Lima cupped through 689 offer samples representing 6,800 bags of exportable coffee thus far, with new samples arriving in the lab each week. We milled our first lots in August, and our first container has already arrived. There are another 12 containers shipping or booked to ship in October.

We were unsure of what to expect on both the volume and the quality fronts as we headed into the 2021 season. Coffee prices in Peru have been on the rise since May, with producers accessing record high upfront prices for wet, unselected parchment. This purchasing system is very different from that of the producer organizations Red Fox works with, where coffees undergo a physical evaluation to make sure they are adequately dried and meet minimum yield requirements, and pricing is based on preset cup quality standards. Also, member producers receive a base payment upfront and receive a second payment at the end of the season once the coffee is sold. With such a competitive local market, we were unsure that producers would have the needed incentive to do all of the work that is required, from selective harvesting through to drying and storing coffee properly, to deliver quality coffee.

Heading into the season, we raised our base price across Peru so that producers would receive more than the local market even in this elevated year, but there was still a risk of producer attrition considering our expectations on the quality front and the fact that not all the payment would be upfront. The sourcing team spent the month of July on the road and we were able to visit nearly all of our supplier partners. During meetings with leadership and members, we reinforced our long-term commitment to these relationships and to ensuring a stable market year after year. For the most part, it felt like we were collectively on the same page, and the quality of the offer samples in the lab confirms that: 79% of the samples we’ve received thus far have been approved. There are certainly a small percentage of producers who are selling their coffee to the local market, but the overall volume delivered and quality of the coffee speaks to the commitment of the producers and groups we work with as well as the strength of the sourcing model. 

The ports in Peru have been among the hardest hit by the container shortages. In addition to the exorbitant increase in the cost of a shipping container, it is incredibly difficult to get bookings because the demand is so high: coffee is Peru’s number one agricultural export, and every exporter is trying to move their coffee at the same time. We have worked with our logistics partners to leverage their relationships with the shipping companies and are requesting bookings early and often (we made 59 separate booking requests to obtain bookings for our first 15 containers). While coffee is not moving as quickly or as smoothly as in previous years, it is moving, and our first container has already arrived.

As always our producer relationships are at the front of our minds. These middle-supply-chain challenges have an immediate impact on their lives; delayed shipments directly equate to delayed payments from us to the exporter and thus the producers themselves. On top of that, financing costs multiply for both producer groups and producers themselves as these late payments hang in limbo waiting for shipments to leave Ports of Callao and Paita. We use very strict physical protocols like water activity, GrainPro storage for parchment, physical location for parchment storage, and more, though needless to say delayed shipments are a risk on the quality front as well. We’re doing everything we possibly can to minimize these potential impacts on producers, associations, and quality. 

Colombia 

It’s been an arduous calendar year in Colombia, to say the least. Between the pandemic hitting new peaks, political decisions leading to nation-wide protests, 90+ day long port closures, and intense peak harvest season rains, almost everything has gone wrong. The FNC (Colombian Coffee Growers Federation) has entered all producing zones with astronomical prices for both wet, unselected parchment and dry parchment. Because of these high prices for any quality of coffee, strip picking has become the norm across the country, creating a very literal lack of supply of high quality coffee.  

After an early August field visit with Aleco, Red Fox quality analyst Fabian moved between Inzá and Nariño for the following seven weeks to complete selection on three full container loads that are now headed to port for shipment to Houston and New Jersey.  Our offerings will be in extremely limited supply through the season and sold at a premium dictated by the scenario noted above.

From our dry mill partner in Popayan, Frederic Boppe:

Supply: There is little coffee around, so we can’t yet confirm our estimates regarding the upcoming crop. Nevertheless, here is what we can highlight:

  • For the 21/22 crop, we need dry weather, but rains might directly affect the mid-crop (4/22 – 6/22) more than the main crop.
  • Our crop size estimate remains 12.55m bags, which is about 5% lower than the 20/21 crop. But, we’ve heard from producers that they expect reductions of about 15% in the southern regions of the country.
  • We’ve noticed that due to the high prices and producers’ need for liquidity, producers are picking coffee cherries earlier, which brings quality issues such as inconsistency in the cup, primarily a raw astringency.
  • The flow of coffee is relatively normal [with coffee moving from the producing regions into the dry mills at a regular pace—effectively, everyone is desperate to deliver ASAP with prices so high.]
  • In Nariño, harvest is finishing and we estimate a reduction of 35% of the production compared to last year. Quality has been affected by the high prices (less care in picking and post-harvest processes). Our work in the field with the producing communities is key, directly with producers, to train and share good practices. We’ll wait to estimate the forecast for the next crop until we see the flowering that will happen in October (delayed compared to 2020/2021).
  • In Huila, harvest is starting in the southern area and because of last month’s climate conditions, the harvest is not expected to be concentrated as usual and we will have a constant flow of deliveries up to January/February.

Weather: It has been one of the wettest and cloudiest Augusts in the last 10 years. This is not favorable for next year’s mid crop and is delaying the start of the main crop. As a continuation of last month, we are expecting an increase in rainfall between 10% and 60% during September. This is not expected to be favorable for crop potential as it makes the trees more vulnerable to pests and diseases.

Logistics: The logistics situation keeps worsening: lack of food grade containers, few spaces, cancellation of vessels, increases in freight costs, and more. We estimate that the shipment delay is between one and two months. We expect that things will go back to normal in the early months of 2022. Shipping lines don’t have enough containers to cover the needed bookings, which is causing late cancellations. Shipping lines are not adequately communicating the situation of low availability of containers, so pushing to get accurate information is becoming the heart of the work of our logistic team; we are obtaining bookings but they must be requested well in advance, and sometimes encounter changes in programming even when planned well in advance. Buenaventura, Cartagena and Santa Marta are all facing the same issues.

So far so good with Asorcafé in Inzá and your producers of El Tablon de Gomez in Nariño, the operation is running smoothly.

As we said, the above all comes directly from Popayan-based dry mill partner Frederic Boppe. 

Rwanda 

Harvest in Rwanda is all but finished with most of the country’s coffee having passed through dry milling by now. Overall, volume from this year’s harvest was down about 20% from last year, and prices were high. NAEB, Rwanda’s National Agricultural Export Development Board, set the minimum price for cherry at 243 FRw (Rwandese Franks, the local currency), but competition among washing stations and traders drove prices over 360 FRw, a new record. 

Next year’s crop is off to a promising start with the rainy season having begun in early September, triggering flowering for the next harvest. If current weather patterns continue and flowering can be sustained to full fruit, we can look forward to a good 2022 harvest.

While Rwanda saw a surge in Covid cases through the summer along with the re-introduction of restrictions and curfews in Kigali and other departments, cases have been dropping and restrictions have eased. In September, the country hit the target of fully vaccinating 10% of its population, with over 1 million people fully vaccinated, and was recently commended by the WHO for its vaccine rollout.

Moving coffee out of Rwanda this season has been beyond challenging. Containers are extremely limited and shipping lines are cancelling bookings left and right. In the past, relatively quick routes from Mombasa to the US east coast were widely available, but this year all ocean carriers are routing even East Coast-bound shipments through ports in Asia, due to the high demand for moving cargo in and out of Asian ports. This means longer routes with multiple transshipments and greater chances for cancelled bookings and missed connections in over-capacity ports. Certain shipping lines are holding all US-bound containers without any prior notice, others are instituting “no sail weeks” where all vessel departures for a given route are being cancelled for multiple weeks in a row. 

We are pushing tirelessly to get our beautiful Kanzu lots afloat in spite of these conditions, but the arrival and availability in the US for these lots is still unpredictable and will be later than in prior years.

Ecuador 

Much like what we saw last year in Ecuador, steady rains, overcast days, and increased humidity over the past nine months have considerably decreased expected volume. 

In Northwest Pichincha, this means that the harvest is a few weeks from its usual time period for our long-term partners Arnaud Causse, Hernán Zúñiga, and Andrés Dávalos, Mateo Patino, and Gilda Carrascal at 1600 Estate. Despite these environmental setbacks, we hope to start cupping offer samples soon and get coffees moving from Ecuador to the states during the next quarter.

On the Covid front, in late May President Guillermo Lasso announced a plan to vaccinate 9 million people in 100 days. The country successfully accomplished this goal of 9 million vaccinated people on July 31. With an adult population of nearly 12 million people, Ecuador is currently ahead of the US in percent of population vaccinated. Despite the high vaccination rate, masks are still required in all public spaces, outside and inside. Residents have even been asked to wear masks when driving alone in a car. New cases of Covid-19 are at their lowest since March 2020. 

From the current crop, we still have two 50kgs bags of washed Typica from Rocio Zamudio at Continental that arrived in early 2021. This lot is a great option for an East Coast customer looking to fill a small espresso slot.

Mexico 

The rainy season across Mexico the past few months has brought stronger rainfall than the last few years—nothing that will have a negative impact, but rather an indication for a stronger harvest overall, especially in Veracruz. Harvest will begin in early December at lower altitudes. 

Ernesto Perez from APG coffees in Veracruz is seeing interest and competition already heating up from multinational traders and expecting prices to be significantly higher than last year, since many large buyers who got lower volumes out of Brazil and expect those conditions to persist through next year will look to Veracruz to secure coffees. 

Another condition he’s seeing is a national spot deficit for Mexican commercial roasters who recovered after pandemic slowdowns and see increased demand. They’re now trying to import from other countries to fill the gap and finding that challenging for the same shipping and importing challenges facing the world, so that demand will put a lot of pressure on local supply in the coming harvest. Balancing that, he does expect the harvest to be very good due to the biannual cycle, renovations coming to fruition, and the aforementioned strong rains.

Pepe Arguello from Finca Santa Cruz and Cafeco cooperative in Chiapas (who was going for his second dose of vaccine as he updated us) has also noted that the very strong rains this summer will produce a larger crop this year. One challenge he’s expecting is potential labor shortages in the harvest.  

In Mexico Covid news, the Delta variant has swept through Mexico as in the US. Just under 96.8 million vaccine doses have been administered in an almost nine-month-long vaccination rollout after more than 712,000 were given as of Sept. 21, health authorities reported. Almost 62.5 million adults—70% of the eligible population—have received at least one dose. Of that number, 42.2 million are fully vaccinated.

Ethiopia 

A very significant portion of our internal conversation turns to Ethiopia at this time of year as we begin preparations for the season just out on the horizon. Gathering accurate information is never easy this time of year as cards are often kept close to the chest on the supply side. Pricing has yet to be set with posturing a recurring theme.  

As we’re sure many of you are aware, the political situation continues to be tragically messy. Prime Minister Abiy appears to be bent on keeping peacekeepers out of the country, expelling a handful of top U.N. officials at the end of September. Aid trucks are not allowed into the Tigray region either. Violence has been triggered in producing regions, most specifically Jimma and Guji. Hopes of resolution may be nearer in Jimma than Guji. We wait for word from our contacts as to how this will play out as harvest kicks off in the next 5-6 weeks. There is also news of coffee trucks being hijacked en route to the Port of Djibouti.

From our trade partner Eden Kassahun in Addis Ababa:

For the general update, logistics issues continue to be a factor and security is another concern. I hope it will improve when the harvest is closer as many of them would be focused on collecting cherries—especially in Guji and Uraga areas.

While yields are up in Jimma we expect cherry prices to rise as well. Cyclically speaking, we expect a downturn in the southern harvests of Guji and Yirgacheffe. Cherry prices should soar in the more coveted regions as well. We await word from our strategic partners in Uraga, Haro Welabu, Hambela Wamena and Worka in the coming weeks as to what exactly to expect.  

Though we’ll be more diligent than ever in moving quickly in regards to selection, shipping, and logistics, we expect this may be the most difficult Ethiopia season on our record when it comes to shipping coffee. Our logistical strategy is now nearly in place and we are ready to push containers out to port as soon as possible come Q1 2022. We’ll have a strong Ethiopia update in place come January to help guide your expectations if not a supplement altogether prior to year end.  

In the meantime we currently (as of 9/30/21) have the following uncommitted Ethiopia SPOT positions:

The Annex, CA: 171 bags 

Dupuy Houston, TX: 143 bags 

Continental Terminals, NJ: 490 bags 

These coffees are in excellent condition. We recommend taking a second Ethiopian position if you’re looking to ensure Ethiopian stock through Q1 into early Q2.

Kenya

With the fly crop now concluded, our partners in Kenya are looking ahead to the imminent main crop. As always, we will look to act quickly on the earlier side of the season and move 2-3 full container loads in Q1 2022. 

From our trade partner Kennedy Keya in Nairobi:

Survival is the word! Covid, chaotic logistics, we don’t know what’s next, but we are fine in Nairobi.

The fly crop is coming to an end. It took longer for cherry to ripen and parchment to dry because it has been cold since May—this is our winter. Now, warm weather is returning with some light showers around Nairobi and coffee growing regions. We’re estimating a normal main crop of about 30,000 metric tons. We also expect good quality. Cherry picking will start towards the end of October in areas around Nairobi like Kiambu, Thika, and Muranga. Areas close to the mountain at higher elevation—Nyeri, Kirinyaga, and Embu—will start to pick cherry in November. We will have samples available in January for February shipment.

Logistics continue to be a challenge. It is becoming more difficult to find containers. When you find a vessel, space is an issue. Vessel sailing schedules are far apart. Some shipping lines that had weekly sailings out of Mombasa and Dar es salaam have cut down to only one sailing per month. And at times they decline to load exports citing lack of connecting vessels in Asia or the Middle East. We are adopting a wait and see attitude hoping to see normalcy return.

As we said, the above all comes directly from Nairobe-based trade partner Kennedy Keya.

Guatemala 

With good steady rains, our partners in Guatemala are looking forward to a larger harvest for the 2022 crop, but they’re also already expressing fears of another year with migrant labor shortages. “The problem will be when harvest comes along if there will be enough pickers and people to work at the farms,” said an exporter we work with closely. Last harvest, labor shortages were driven by travel restrictions put in place to help stop the spread of Covid while many migrant workers are staying home or seeking opportunities elsewhere. 

On that front, Guatemala, Central America’s biggest country with about 18 million residents, has posted nearly 480,000 coronavirus infections and more than 12,000 deaths, according to official data. As of early September, 1.3 million or about 7% of Guatemalans have been fully vaccinated. Although President Alejandro Giammattei proposed a series of measures including more restrictive sheltering in place and curfews to help stop the spread of Covid on September 2, their Congreso de la República refused to pass them. 

From the current crop, we currently have two Guatemala lots available: 16 bags from Felipe Martinez’s farm Los Arroyos in Huehuetenango warehoused in CA, and 20 bags from smallholders in the San Jose Poaquil community in Chimaltenango warehoused in NJ. 

Get in Touch

As always, if you have any questions, concerns, or thoughts, let us know. We’re here to help. 

Higher Base Rates, Flatter Pay Structures: How Pangoa & Ocumal Are Doing Things Different

Tailoring Payment Structures to the Needs of a Group

As we’ve discussed in pretty much every one of our previous pieces about paying for coffee, different groups negotiate their pricing structures with different needs and priorities in mind, and our job is to work with them to create a pricing structure tailored to those needs. Two great examples of groups whose needs are taking our pricing structures in new directions are Pangoa in Peru’s Selva Central and Ocumal in Northern Peru’s Amazonas region. 

Since the beginning, a core of our focus has been that the prices we pay based on cupping scores are transparent from the outset, and the premise of those structures has always been that as scores go up, the price rises, with the base price for the lowest-scoring tier being a sound price that won’t leave behind producers whose crops are clean, sweet, and bright, but maybe not as nuanced in their flavors. While that’s still the main locus we move from, growing our work with Pangoa and Ocumal has led us into a flatter structure with a higher base price and, in Pangoa’s case, only one tier. 

How We Got There

Pangoa  

Of all the groups we work with, perhaps none embodies the values of cooperativism better than Pangoa, so it’s no surprise they were the ones to lead us into exploring flatter pay structures as a way to increase pay for the group as a whole. 

Some background on this group: led by first-ever woman coop leader in Peru Esperanza Dionisio, we’ve worked together since 2017. Although the group has been around and beautifully managed since 1977, they went through major upheaval through the 80s as a guerilla group called the Shining Path caused massive socio-political upheaval for over a decade, cutting membership by half as families fled to bigger cities. When the political situation stabilized after Shining Path leader Abimael Guzman’s capture in 1992, coop membership also stabilized, now ranging from 680-700 active members registered per year and representing a tightly woven community of farmers. Their core focus on cooperativism helped them protect membership throughout the Covid-19 pandemic, delivering groceries to producers during the lockdown months and continuing to make sure members are safe. Various programs have helped members practice biodynamic farming, grow their own food and medicine, and skill-share. Specific programs help women develop alternate revenue streams and valuable skills. The group also has Education and Health Funds for member families. 

Understanding Pangoa’s core focus on cooperativism, it’s easy to see how this group was the one to lead us to a flatter pay structure of one tier only for all coffee that meets our base quality standard. The idea came up in conversations with Pangoa leadership in 2019. We love the coffee we get from them, and the producers who meet the Red Fox quality standards love the higher prices they receive from us, but because Pangoa has other core buyers who pay decent prices for coffees scoring in the low 80s, we weren’t able to catch as much of their volume as we would have liked. Leadership also wanted to encourage more producers to make the Red Fox price and quality jump so they could increase their earnings, and we decided together to increase the base price for all producers meeting our minimum quality standard (which represents the bulk of the coffee we buy from Pangoa anyway) and eliminate higher pricing tiers for higher scores, except in the case of truly exceptional coffees. 

Because we only implemented this new system just before Covid hit, it’s not yet possible for us to know how it’s worked out. Last year’s harvest was complicated by Covid restrictions (the coop couldn’t offer their typical service of agronomists who go farm to farm supporting producer needs, detailing prices, and encouraging delivery) so we received less volume, and this year we don’t yet know what final volumes look like, but the elevated C market and increased competition for green coffee across South America will likely mean we don’t net substantially more volume from Pangoa this year either. We do feel confident that it’ll go up in the future, but regardless we’ve seen that exploring a flatter pay structure with this group who so deeply believes in the cooperative as a value system rather than just a way of doing business has been an enriching lesson. 

Ocumal

Ocumal’s situation was completely different: rather than coming from a place of relative stability and desired growth, they really needed a shift in how incentives were structured to get through the year. Some background on Ocumal: they’ve been around since 2016 and we’ve been working together since 2019, before which they sold all their coffee for much lower prices to a larger cooperative. Home to about 150 members high up in the Luya district of Peru’s densely forested Amazonas region, Ocumal was founded by Faimer Villar and Freddy Zuta Chavez with the goal of working communally to increase quality and build access to financially sound markets to help the community thrive. They offer dynamic support to members including training and technical assistance on organic production, Fair Trade criteria, harvest and post-harvest best practices, and marketing services. 

For Ocumal as a newer and less well-resourced group, they had sold their coffee at much lower prices before we started working together, so they were super happy with the two-tiered structure we had set out before this year. What changed this year was the incredible competitiveness of the green coffee landscape in Peru and the rest of South America with the C market jump and supply disruptions in Colombia and Brazil. In order to make it feasible for members to sell their coffee to Ocumal rather than to passing intermediaries representing multinationals (who arrive with cash in hand paying dramatically elevated prices compared to a normal year) Ocumal had to have extra incentive to offer members in order to make it possible for them to wait. Our goal with Ocumal wasn’t to reward or incentivize a particular type of differentiation, but just to help the group stay solvent through this tough year by raising their base price to a price on par with the high premiums for top scores in previous years and making sure that anyone who makes it to that base tier can stay loyal to the group through this year. While producers win when they can get a high price everywhere they turn, it’s still important to help cooperatives and associations remain solvent so that they can be there to support producers in years when the C market and local market prices are much lower, as we saw in the years leading up to 2020. 

The reason we place so much emphasis on high base prices no matter the surrounding circumstances is that in the case of every group, that’s the bulk of what they produce. Ocumal is no exception. Raising the base price and flattening out pricing nets the group more money as a whole. Next year if Ocumal wants to go back to a more tiered system, we will do that, and if this still works best for them, we can plan to do that. 

Pros & Cons on Both Sides

For producers, the obvious pro is that when base prices go up and premiums mostly go away for higher scoring tiers, the group makes more because most coffee producers, even in the specialty realm, produce the majority of their coffee in the 84/85 tier. Even if fewer dollars go toward premiums over this base, more money goes to more members, period. This is a pro for us too from an equity standpoint—we want to see more money go to producers.

Another pro for both us and associations is ease. Even though flatter pricing doesn’t change that we cup every individual lot rather than relying on type samples, it still allows us to focus on a simple pass/fail scoring system during the purchasing process. Those results are also easier for producer leaders to communicate outward within their organization and community and eases the confusion or resentment that can occur when a producer nets a premium one year but not the next based on quality (and often unrelated to how hard they worked in production). On our end, it also simplifies lot construction.    

On the one hand we have all those pros, but on the other hand, we have the question of whether one flat price for all Red Fox coffee levels would lead to producers not making the extra effort to get past the 84/85 point level, or to resentment from those who do work extra hard to produce higher scoring coffees. Coffees at 86+ level are a staple of specialty coffee, and we love them and want to incentivize their production where we can. 

While those pros and cons exist and factor into our thought processes, the main thing to acknowledge is that some groups want a flatter pricing structure, but some have no interest in one. In Oaxaca where we mostly work with small decentralized groups (often extended families or neighborhoods) without formal leadership structures, we’ve seen that as long as base prices are high enough to make coffee production a valuable trade, some love the friendly competition of getting premiums for higher cup scores, while some prefer for everyone in the group to make the same amount if their coffee meets our base quality standard. In these cases, our shared goals with Pangoa and Ocumal’s specific needs this year led us to a shift in how we pay for coffee with those groups. The key isn’t any one structure, it’s letting groups’ needs lead the way to an incentive structure they like and benefit from. 

Producer Groups’ Needs Should Lead the Way on Pricing Structures 

As pricing and competition dynamics shift and change from year to year, it’s important to approach producer groups with the energy of carrying over the dedication and investment from prior years but being sensitive to their changing needs. Just like we as people have different needs for the incentives that motivate us, and just like our working relationships work best when we have a say in how our needs are met, sourcing relationships should also be built and maintained in acknowledgement of producers’ and associations’ changing needs over time. As we continue to grow and develop relationships with a diverse array of producer associations and cooperatives, our work is to let their needs inform the shared incentives we create together. 

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

Decentralization & Community in Oaxaca Coffee Sourcing

What makes Oaxaca unique? 

The Oaxaca sourcing landscape is uniquely decentralized, presenting both challenges and opportunities for us as a sourcing company and for the communities and families we work with. Our starting point in Mexico, it’s where we decided to build our Mexico HQ and expand our work to be on the ground year-round. Where our work in other key origins like Peru or Colombia involves the central supply chain links of producer associations acting as organizers of far-flung groups of smallholder producers, the sourcing landscape in Oaxaca is different, centering small communities or even individual families working together to put out superb coffee, leading us to take a larger role at the center of the supply chain. 

As we continue to deepen our work in Mexico, we look at why Oaxaca is so different. Why aren’t associations or cooperatives as integral of a structure there as they are in so many other parts of Latin America or even Mexico? What, if any, structures function in place of them? Are there any benefits to this decentralized sourcing structure? How does this change the work we do as a sourcing company?

2021: A perfect case study

The 2021 Mexico harvest and shipping has been an ideal showcase for the situation in Oaxaca: not just the immense quality of coffee they can produce, but also how the decentralized sourcing structures there change the nature of our work and escalate our workload. 

For a frame of reference, compare our most recent season out of Peru to our current Mexico season. Out of Mexico as a whole, we’re shipping about two-thirds as many bags as we did out of Peru in the most recent 2020 season. This Mexico volume is nearly double what we did last year, but it’s still substantially smaller than our latest Peru season. As far as groups go, in Peru last fall we worked with a total of 15 producer associations versus about nine, much smaller groups in Oaxaca this season.

So with a smaller volume and about half as many different groups in the mix, you might expect Oaxaca to be substantially less work than Peru—not so. Even though we’re processing less coffee, our workload is substantially larger. The difference is in the details: the sourcing steps that fall under our purview specifically in Oaxaca that are taken care of by producer associations in Peru. 

What’s the difference?

While our sourcing work is still very hands-on in Peru, there’s a ton of organizational work producer associations take care of before the coffee even reaches us. Prior to the coffee’s harvest, many associations help producers with agronomic assistance, including needs like seedlings and fertilizer. Once producers’ coffee is harvested, associations manage all the receiving and intake work, pulling samples, calculating yields based on delivered volume, and collating information about the producer, lot size, varieties, etc to hand off to sourcing companies. They also make advance payments to producers at that stage and take control of selling the coffee. By the time the coffee gets to us, the association has often done a prescreen as well as filtering out defects, prepping samples, and packaging them in a way that conveys all the information we need. Where we step in is cupping the coffee, making the selection, coordinating all the logistics of getting the coffee from the field to the dry mill, overseeing the milling and exporting, and then selling it. 

In Oaxaca, we step in much, much earlier in this process. Rather than associations or cooperatives, we work with producers in key communities who voluntarily act as point of contact for their community, coordinating details and acting as a go-between. For example, in San Pedro Yosotatu, Madelina López López takes the lead, or in Miramar, Cecilio Perez fills this role. Whereas in a coop or association this is usually a paid position in an official business organization, in the decentralized groups of Oaxaca it’s just someone with seniority and experience who wants the producers in their community to be able to access Red Fox prices (as opposed to coyote or local prices) without necessarily having the same level of experience. It’s far from the organizational structure of a formal association, although hopefully it will move in that direction over time as the communities build confidence in their product and supply chains. 

These leads communicate near-constantly with the Mexico sourcing team throughout the season. Through them, we figure out convenient times for producers to bring their coffee down to us, or when we can send a truck to pick it up. We then take full possession of the coffee in the way the association or cooperative would. We receive the coffee at the dry mill, something an association would usually do, and we weigh the coffee, peel the samples, project the yields, and work hard to keep track of all the producer information to guarantee total traceability. All of that detail, and the risk of taking the coffee into our possession at an earlier stage of the screening process, falls under our purview rather than that of an association. 

Once the coffee gets to the lab for intake, roasting, and cupping, we also see key differences in the workload each offer sample constitutes: while in Peru we receive many offer samples that represent very little volume (sometimes just one bag of parchment), we see this in Oaxaca on a even smaller scale. In these instances Oaxaca is even more work than Peru not just because the samples themselves represent less coffee, but also because we get a field sample (which the producer sends from their house to see if we are interested in the coffee), and then a second sample for the same coffee when it arrives at the warehouse in Oaxaca—meaning those offers are all processed into the lab, roasted, and cupped twice at the offer stage. 

We do have certain trade partners we work with for specific services including help coordinating transport, financing, and milling in certain regions. It’s very different than working with producer associations, because for the most part we pay for these services to be done on our behalf. But, moving forward, we plan to continue to work on a smaller scale and figure out these pieces ourselves. 

Financing is one of the most challenging parts of this system both for us and for producers. When working with associations in other parts of the world, they pay producers an advance when they deliver their coffee; when the coffee ships, we work with finance partners to pay the association the full sum and they send the difference to the producers. In Oaxaca, we’ve used specific trade partners to help with this part of the process where we can, and coordinated third party services where needed. In general, the gap between when we take possession of the coffee and when the coffee ships is about two to eight weeks, but many of Oaxaca’s producers have been mistreated in the past by larger organizations making promises that they would pay later (as we’ll get into below), and many don’t have the ability to wait that long, even once we’ve built that trust. This is a tricky piece of the puzzle, one which we’re still working to find the perfect solution. 

Why is Oaxaca like this?

The reason Oaxaca’s larger cooperative structures either dissolved or were abandoned by producers is primarily mismanagement on the part of the cooperatives there. What emerged from that dynamic was a push by producers to find trustworthy buyers directly, and eventually to find higher prices for their coffee within that model.  

Interestingly, the idea of coffee cooperatives organizing and selling under a certified model (using certifications like organic and Fair Trade to get higher prices) actually started in Oaxaca in the ‘80s. Over time, a small number of those coops grew to the point of overstretching, selling at prices only a tiny bit higher than what coyotes (coffee buyers who will pay on the spot, although typically around the C market rate—not the best rate a producer can get for high-quality coffee) were paying and not paying producers reliably, leaving little incentive for producers to sell to the cooperative rather than getting paid on the spot by coyotes. Mismanagement on the part of the coops has hit the trust of the producers, who prefer not to form cooperatives and don’t want to wait for results and pay in the future. Our first transactions with new producers will usually involve them offering us a small amount of coffee to establish the relationship and see if we’re trustworthy or not, trust we’re working hard to earn back over time. 

Our ever-expanding sourcing work in Oaxaca has been part of a large push by producers in the last five or six years to find buyers directly and get higher prices for their coffee. National quality competitions as well as regional competitions held by Red Fox have helped bring more attention to their coffee as a specialty product, as well as increased producer confidence that their coffee is valuable and should be treated as such. Mexico also has a very developed specialty cafe scene, which helped provide a local roasting market that was able to go out and buy coffee, which helped change the dynamic between producers and buyers. So all those factors led to producers looking for buyers like us: ones who would pay high prices for their coffee, pay exactly as we say we will, and provide consistency year after year. 

Rebuilding that broken trust has been the hardest part of our work. There have been so many buyers over the years making promises of high prices, but the issues have been in the delivery. That’s why financing is such an important piece of the puzzle: more than anywhere else, Oaxaca’s producers are incredibly sensitive to the idea of trusting buyers to pay them later. As we’ve lived up to our word year over year, we’re starting to see that trust increase, which is incredibly rewarding and has caused producers to bring their family, friends, and neighbors into the fold. That’s why we see the level of voluntary community organization we see: the communities we work with have been waiting for an honest buyer who treats their product properly, and we’ve worked hard to be that buyer. 

Are there any benefits to Oaxaca’s producers? What are the downsides?

While the associations we work with in Peru are the best of their kind, independence does have some upsides to it. Being part of an association or cooperative can mean that a portion of the money you make goes to the group or leadership rather than just you. Associations or coops can have corruption at the leadership level, and/or they can fail to pay or keep their promises, as we see in the reasons why these producers abandoned their local coops to begin with.  As free agents, producers we work with are 100% free to express their disagreements and seek solutions that feel appropriate to them, rather than needing to answer to a board or leadership structure. 

On the other hand, the positives of working with a well-run organization can’t be overstated: producers in these structures receive sales security, agronomic and technical assistance, state support to create new marketing chains, support from field technicians or engineers, purchase of low-cost fertilizers, revolving funds to benefit the plots, etc. In general, their risk is lower inside of an organizational structure.

Are there any benefits for Red Fox? What are the downsides?

While this system presents a lot of challenges for us, the greatest benefit for us is that it’s fully transparent. In other regions like Peru we have ways of verifying exactly how much producers are getting paid and we feel confident in those systems, but it’s not the same as literally doing every step of it ourselves. It’s also been a huge learning experience for us—there’s a huge value to learning and understanding exactly how much happens before we even get samples, and how much value that hard word adds. 

In terms of downsides, there’s obviously a lot of extra work that goes into every step of the process. Our risk, just like that of producers, is higher without the central structures of associations. One of the challenges of working with these small, informal groups is that they can easily disintegrate and put at risk the agreements that we have reached for the harvest season. One benefit of the people in the middle of the supply chain is that everyone’s good at something. Banks are great at providing financing, agronomists are great at agronomic consulting, etc. Everyone plays a valuable role. In the case of Mexico, many of these small, loose groups may eventually grow into more formal structures. Until then, we’re happy to be in the middle of it all, appreciating the work that goes into every step. 

 

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

Prudencio of Valle Inca, Peru on Building Trust & Community

Prudencio (Jose Prudencio Saenz Vargas) is the widely respected leader of Valle Inca in Cusco, Peru, one of our largest and most important relationships in the world. A Calca native, Prudencio grew up on a coffee farm, studied agronomy, and then went on to work as a bank loan officer before running Valle Inca—fiscal experience of critical importance to Valle Inca and the surrounding community, most of whom are smallholders averaging just 2-3 hectares each. His extreme quality focus has always been key to the group’s success. He helped Valle Inca producers move from drying coffee on plastic mats to raised beds, worked to improve drying, fermentation, and storage practices, and was the first producing partner of ours to implement GrainPro in storing parchment. He meets farmers where they are in the isolated reaches of Yanatile and Lares and works with them to produce the best coffee they possibly can for the best price they can get. What follows is a conversation with Prudencio, aired originally on the Foxhole and edited for clarity and brevity. 

Aleco: Hello and welcome to the Foxhole. Aleco Chigounis here with Ali Newcomb. Today we have one of our most special guests: our good friend José Prudencio Vargas Sáez, from Calca, Cusco. He is the leader of the Valle Inca group, which, while still being a relatively small and new group, has become the largest Red Fox sourcing partner by volume in the world. We have grown with Prudencio from 40 bags the first year, to almost 12 containers that were made last year and from there they will continue to grow. 

Welcome Prudencio! It’s a pleasure to have you here. 

Prudencio: Thank you.

Aleco: Can you tell us a little bit about how you started the Valle Inca group?

Prudencio: Yes. My name is José Prudencio Vargas Sáez, I am the son of a coffee producer, from the community Laco Llavero in the district of Yanatile, province of Calca, region of Cusco, Peru. I’ve been in the coffee industry my entire life. I was born on a coffee farm named Tomas Huato in Laco Llavero. Later I studied agriculture in a Salesian school. Coffee is my life. It’s my life, it’s my world, it’s what I do, and it makes me feel good. All of my family are coffee producers. There are coffee producers in my community that have really suffered from low prices in the past and been totally abandoned when prices were low. All of that is what inspired me to start Valle Inca.

Aleco: What year did you start the association? 

Prudencio: In the year 2015 and in our first year we sold just 20 quintals of coffee to Red Fox. It’s been six years since Valle Inca started taking form, but four since we had full legal status.

Aleco: How many producers did you start with?

Prudencio: We started with just five producers in the Yanatile Valley. Among them, we have Mr. Agustin Ccasa, Juan Jose, Eddy Robles, and other coffee producers that didn’t really believe in an organization like this at the beginning. Just like any other startup, there’s not much credibility early on. But by 2017, we were working with 50 coffee producers. In 2018, we worked with about 127 producers. And currently we are working with 260 coffee producers.

Aleco: That is incredible, Prudencio—congratulations!

Ali: How was the process for you, because you were a loan officer at Agrobanco (agrarian bank) before that, no?

Prudencio: Yes.

Ali: You were working with the coffee producers then but making agricultural loans. And from there, you went on to start Valle Inca.

Prudencio: Yes, that’s right. The thing is that I have been involved in agriculture my entire life. Beginning with where I was born, where I went to school, and leading up to the moment that I worked with Agrobanco making loans to coffee producers. It’s a different world and very helpful experience, and in parallel I was working with the organization that is now Valle Inca, but with a small amount of coffee. The financial experience has helped a lot. 

Ali: What have been some of the challenges? You started with only 20 quintals your first year and just five coffee producers, and now you have grown to a large organization, exporting a lot of coffee—more than 15 containers per year. What challenges have you faced in that process?

Prudencio: The main challenges are, paying a sustainable price to the coffee producer, obtaining high quality coffee, and being able to reach new coffee producers. And to fstablish equity so the producer, the intermediary, and the consumer are happy: that is the challenge that Valle Inca set out to achieve. 

But the biggest challenge in Peru is always getting fair prices for the producers. The next one, is the quality. That for us, is very important. The quality is very important, to look for, to research more. Find more producers, to understand the altitudes, the varieties, the genetics. Coffee is its own world, a world that millions of families depend on. All of that is the work we do. 

Ali: Regarding quality, I think we all recognize that you have been very successful, and just a moment before this meeting we drank a spectacular coffee from Combapata. 

Prudencio: I am drinking a coffee from Alto de Cedruyoc, from Emilio Gutierrez. It’s early coffee from the 2021 harvest.

Aleco: Very good.

Ali: Prudencio, I know Valle Inca plays a big role in the community, more than just buying coffee. Can you tell us a little bit about that role and how this has played a part in facing the pandemic?

Prudencio: As you said, Valle Inca is not just an organization that buys and sells coffee. Our goal is to find a sustainable future for the community. We work to be calm and coordinated in our decision making, and that was key during the pandemic to maintain trust and support the community. At Valle Inca we keep our word. We fulfilled everything we committed to and focused our resources on producer needs. If someone needs a loan, we have to find a way to do it, whether we have the resources or not to support them in their hardest moments. Now we have to look after health issues, social effects. For example, right now we’re working to get psychologists for the producers, so they can improve their mental health and quality of life. We’re also responsible for finding a good price for them, to offer them that stability. In turn, they do the best work they can offer. 

That all helped us a lot through the pandemic. 2020 was a very difficult year, but as a collective I have to thank Red Fox, and your clients for the donation you made to us. It all adds up. Here in Peru, we were lucky to be able to look for help from the municipalities and NGOs to help all the producers: with staple goods, mainly to cover the food needs. At the moment, we are working full force disseminating information to gain the producers’ trust, and to improve their trust in the clients and the entire chain.

Aleco: What would you say have been the main achievements of the cooperative since you started?

Prudencio: Of course, when we started in 2015, Valle Inca sold 20 quintals, and never in our lives could we have imagined selling 5,000-6,000 quintals of coffee per year. Every year we set a goal, evaluating, analyzing, and measuring production factors and risks. The biggest achievements have been growing and selling more coffee, and selling coffee that was of a high quality, for the consumer, for everyone really. We want coffee we are all happy with. That’s the goal. We’re also proud of working on the social aspects, the collaborative association that we manage. To gain producers’ trust and always keep our word with them. 

Ali: That’s a great answer. Prudencio, I wanted to ask you this, because you are one of the people who does this the best. What is the key to having a good relationship and communication with the producers?

Prudencio: In summary: trust. The trust that exists between us and the producers. At the end of the day, we are a family, we are the Valle Inca family. That the workers at Valle Inca can feel at home, that they can feel that we are siblings, someone they can count on to share their weaknesses or their sad stories, everything: trust. A resounding trust like with Red Fox—just like we can trust Aleco not just to keep his word but to let us know if there’s a mistake we’re making, that’s part of trust with the producers as well, what mistakes are we making, and how we can improve, and all that. In that way we can all build  trust. That is the key to building an association. And of course, to keep our word.

Ali: Well, I love working with you. All of that work shows in how everything flows and you do an incredible job as a team, with the producers as well as with your employees, and with Red Fox, because you are always very direct, you are very transparent, and you make things flow very well.

Aleco: Yes, the communication has always been open and direct with you. That is fundamental, to be able to have a good relationship in this industry.

Prudencio: It’s very important. For example, in the beginning, we are very thankful to Red Fox because if Red Fox didn’t exist, Valle Inca wouldn’t exist either, and if there weren’t coffee producers, Red Fox wouldn’t exist either. Inca Valley is on the producer side, and all of us, we all fill a gap in this supply chain. What we have to do is improve every day, to increase the production area of ​​the producers, and continue to improve the genetics in the coffee in Peru. That is the main goal. We also have the goal of winning international competitions, national competitions, to continue being a transparent company, and to sell quality coffee.

Aleco: Excellent, Prudencio! Do you have any questions for us?

Prudencio: First of all, I want to thank Aleco for the trust, because when I started Valle Inca, we were very young. We were young and we didn’t know exactly what to do at every turn, and maybe we made mistakes, but we learned from that. Thanks to Red Fox for helping us out all these years. And for being an institution that we trust fully, because you’ve helped us grow, and have helped a lot of other businesses grow and organizations and cooperatives in Peru, in Puno, in Cusco, Cajamarca, and other places in the world. I would like to ask you if you are happy working with Valle Inca?

Aleco: Truly Prudencio, it is my pleasure completely … well, ours. We both made mistakes in the beginning. I wasn’t as young as you were. But just like you, learning to manage a business. It has been a great experience. There is a line, where you can see how much Valle Inca has grown, and how much Red Fox has grown. And they are parallel. And truly I feel like you and I, we have grown together in this, but it’s not only Aleco at Red Fox, as you know better than anyone, with Ali, with Carina, managing everything there. We both have very strong teams, and having this partnership has been a great pleasure for me. I am more than happy, let me tell you.

Prudencio: Thank you, thank you Aleco, for all your trust, I want to celebrate your team, it is exceptional, and it is very important, there you have Carina, Ali, Aleco, some others that I know, Jajaira, who helps us so much, with our exports and more. We have to keep going forward, continue supporting the producers. Everyone, keep drinking Valle Inca coffee, Cusco coffee, and Peruvian coffee. Thank you!

Aleco: To you!

Ali: Thank you very much Prudencio. It’s always a pleasure talking to you, and I am very thankful for your trust, and for being here, and being able to share with everyone.

Prudencio: Of course, thank you.

Aleco: Ok Prudencio, I’ll see you soon, in June for sure.

Prudencio: Thank you, thank you!

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

Global Shipping Challenges & Planning Ahead for the Balance of 2021

Greetings from the cockpit in Oaxaca. As I’m sure many of you are now aware, the world is in the throes of a global shipping quandary. The main culprits are a physical container shortage and congested, understaffed ports across the world leading to containers left sitting at port docks. Fewer ships are running on transit lines as well, and each of these issues is further compounding the others at every step of the transit process. 

In the case of the West Coast we are seeing availability for pick up at The Annex from arrival to port of Oakland up from roughly 10-12 days to closer to 20. Ports of New Jersey, Houston and Charleston are moving at a more efficient pace, though slightly slower than pre-pandemic times. New container construction costs themselves have risen as much as 60%, and containers already in circulation are also moving slower for all the above reasons: delays leaving port, passing through interim ports, and being emptied and sent back. All of that has pushed shipping rates to recent highs—highs that we unfortunately expect to last through the year and beyond. 

We continue to place large emphasis on the work we do in the logistical center of the supply chain. We’re well aware that a tremendous measure of our value to you, our clients, is in delivering fresh coffee in the timeliest manner. We’re only as good as our last arrival into port from each and every producing origin we work in. We want you to know that our logistics crew are constantly exploring the quickest avenues to each of the warehouses we currently allocate coffee to in North America and abroad. In many instances, we are rerouting containers through different ports, or, in the case of Mexico, moving coffee by land to avoid delays and ensure your coffee’s integrity on arrival. These changes are critical for us to deliver the freshest coffee possible. 

Please feel free to reach out to me or your Red Fox rep directly with any questions or for more details—we’re here to support you in any way we can. We’re happy to talk through what this means for you specifically or more generally. 

Cheers,

Aleco

 

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

Ernesto Perez of Coatepec on Veracruz History & Mexico’s New Generation

We were lucky to get a chance to talk with Coatepec Veracruz-based producer, wet mill manager and community leader Ernesto Perez. A younger farmer who took over the family farm and mill just three years back, he’s working to guide community production into high quality specialty, tweak processing, focus on microlots, and help those around him get the best prices their work. He expanded his own wet mill at Finca Fatima into APG Coffee, a micro wet mill for the community that also offers agronomic consulting for other farmers to help rebuild soils and increase quality. Below is our conversation, lightly edited for clarity.

Aleco: Greetings from Mexico! I’m in Mexico City at the moment, Adam is in Oaxaca, and our good friend Ernesto Perez is in Veracruz.

Ernesto is an amazing coffee producer and also leader of the group APG in Coatepec, Veracruz. He’s delivering some of the most exciting coffees we’ve seen over the last couple of years. 

Joining me in Oaxaca is Adam McClellan, who runs the Mexico operation for us. He’s been down there for a couple of months now with his family and will be through the season, as will I. Lots of good things in store for all of you throughout the season as we get into shipping season. But most importantly, let’s turn it over to Adam and Ernesto and see what’s happening in Veracruz. Welcome, guys.

Ernesto: Thank you.

Adam: Thanks Aleco and thank you Ernesto for joining us. Last year was our first year buying your coffees, Ernesto, and we had a really great response in the marketplace. A lot of roasters are eagerly anticipating more coffees from you this year and asking about them again. 

As you know, Veracruz is a newer region for us—I started traveling there about three years ago and we worked with another coop on the other side of Veracruz. Last year was my first year coming to Coatepec, and I was so impressed with your operation, your vision. To me, Veracruz is really interesting, very different from the other producing regions we work in in Mexico. I’m so excited to taste some of your coffees this year and I know that you’re wrapping up harvests now.

Would you be able to start by telling us a little bit about the history of Veracruz coffee production? 

Ernesto: Thank you, Adam. Let me start by saying what I know about the history of Veracruz coffee. As many people know, no one knows for sure which was the first state where coffee was produced in Mexico. Many say it was in Oaxaca and many say it was in Chiapas and Veracruz. But we’re definitely one of the first states that had coffee in Mexico, and right now we’re one of the three most important states in coffee production in Mexico as a country. I think we produce around 30% of the coffee from Mexico.

Being one of the leading states in coffee production in Mexico, there have been many ups and downs in our history of producing coffee. Lots of big companies have been involved in coffee in Veracruz for many, many years. We’ve always been known for having good coffees, but I think the specialty coffee culture in Veracruz, like the third wave of coffee, never really landed deeply in Veracruz. I think it was because there’s many, many big companies and the culture is not picking coffee correctly. And there’s a lot of things that were really hard for me to change when I started running the family farm and working with the community on quality.

So, that’s kind of an overview of Veracruz. As you know, Veracruz is one of the highest latitudes where coffee is produced on this side of the world. We are located right next to the Gulf of Mexico, so the weather is more humid and cold in Veracruz. I think the latitude and the side of the country where we are located really helps the quality, the weather and the microclimate create the flavor that’s unique to Coatepec. It’s always super cold and misty here during the harvest season, so that’s kind of why we can grow top specialty coffees at 1200 meters above sea level.

I’m really excited to be able to explain more about Veracruz coffee, so people can come, visit, and get engaged in our coffee culture. 

Adam: Can you tell us a little about your farm and your family? I know your family’s farm is Finca Fatima, and then you also run APG Coffee, but did your family start with just farming coffee before they moved into production and things?

Ernesto: So my great grandfather, he was from Spain. He came to Veracruz because he knew how to speak English very well, so he got hired by a company, called Arbuckle Brothers in the US, and he worked as an exporter and a cupper. His history goes back to the 19th century. So, he was in coffee many, many years ago. His name was Antonio Perez Galvan, so that’s why APG is called APG.

He was the first member of our family involved in coffee, so there’s a lot of history. My grandfather didn’t really export coffee, he was dedicated to producing machinery for coffee. He built a wet mill, and that is the wet mill that I’m currently using. It was where he took his clients to show the machinery, like his exhibition room.

Later, my father started exporting coffee in the 1990s. I think it was when SCAA was founded. So Ted Lingle, who was the founder of the SCAA, came to Veracruz a couple of times. My father got awarded first place a couple of times during the 1990s. Despite that, he decided to quit coffee because there was a lot of risk, because he was more into the commodity market. So many bad things happened in those years, and he decided that it was a lot of risk and he didn’t like the business.

So he rented the mill to another company and basically, no one was really using the mill correctly. That’s when I came in and I decided to make major changes. It was not many years ago really. I’ve been working in coffee for three years now. I went to college in the US. I worked in a company in the US for a couple of years, and I decided that my passion was not working in an office. So I decided to get deeply into coffee. I got my Q graders license. I traveled to El Salvador and I got my Q processing license with Emilio Lopez.

Then I traveled here in Mexico to visit Finca Chelin and Victor Lopez in Oaxaca to learn more about coffee processing, like fermentations and things like that. And then I came back to Veracruz with a really good perspective of what specialty coffee production looks like. I made some changes to the mill to modernize it so that I could use it to lead my company to what I saw as an opportunity, which was having full traceability of coffees, truly bringing that flavor of this region and developing the flavors correctly, the sweetness and all the fruit notes that we can find in coffees in Veracruz through processing coffee with longer periods of time, longer fermentations, longer drying times, and keeping everything fully traceable.

So that’s my approach and where I see the future of coffee. That’s the vision that I have currently in APG. I want to keep growing and positioning Veracruz coffee in many places of the world again. 

Adam: Awesome, thank you. I also want to mention for anybody listening that maybe didn’t realize, what I think is interesting and different about the production model in Veracruz compared to other states in Mexico or most of Latin America is that coffee cherries are traded to wet mills rather than coffee in parchment. You drive through the Veracruz coffee country and there’s really, really large cherry processing wet mills that are owned by many different companies. Maybe some of them are cooperatively owned. But, farmers will harvest and bring down their cherry daily. It’s unique to Oaxaca and Chiapas that are two main producing regions in Mexico, where farmers are individually processing on their farms and producing parchment and selling dry parchment to mills or coops, or directly.

Do you think that model helped you make big leaps in quality development pretty quickly, that you’re able to control processing from the point of cherry delivery? And I was also wondering, how do you select which farmers you’re going to be buying from? Do they approach you, or do you seek them out? How does that work?

Ernesto: Well, after all these years, we’re really excited about coffee, because when we started the prices were low and not many people were really investing in the farms. So there’s not many players left in farming here in Veracruz. We decided to invest in our farm, and it was not many years ago. I mean, it was just a property that used to have coffee many years ago, but my father renewed the farm with new varieties, with quality varietals. And that’s when I began to know other farmers, which we’re now more than just friends, we’re kind of like family. Like, for example, [name][13:09] from Finca Las Venturas, he’s a very good friend of my family. We work with other farmers that have that vision of producing high quality coffees. And their farms are located in the highest altitudes possible that have good varietals of coffee, that now don’t just have forgotten farms.

So that’s kind of how I select the farmers that I work with. I don’t call them my farmers, we’re really partners in this deal, because it wouldn’t be possible to do this without them. It’s really teamwork, what we’re doing in Veracruz.

And I think processing coffee from the cherry to the green bean, it really helps you control and standardize the quality of the product. Because many, many things can happen throughout the process that can affect quality.

We begin by knowing where the coffee comes from. We analyze the cherry and assess the quality of what we’re receiving at the mill, what percentage of ripes and unripes we have. We use technology to sort this coffee, to store it correctly, and to mill it and prepare it for export correctly. Our approach allows us to sell coffees that have a longer shelf-life. We’re also extending drying times a lot, more than most of the companies in Mexico do. We simulate drying temperature as if we were drying with the sun or under the shade. And fermentation for us is something that has existed in Veracruz for many years. We didn’t have the machines to remove mucilage before, so it would take 48 hours before to ferment coffees and get rid of the honey, the mucilage. Now, we still do the complete 48 hour fermentations, which I think creates more sweetness and a more balanced and round flavor in the cup. So, those are the factors we can control in the cherries, and I think it’s a good aggregate value for the product.

Adam: Can you talk more about your drying practices? Are you using mechanical dryers or raised beds? I know you mentioned the climate in Veracruz makes the drying one of the more challenging aspects of production there. I’d love to know more about how you’re managing all that. 

Ernesto: Well, one of the good things about Veracruz is that our seasonality is very predictable every year. The months of December, January, and February are usually extremely humid and cold. There’s always rain, and there’s always high humidity levels and high and low temperatures. So it’s really almost impossible to dry coffees with the sunlight during these months and we have to adapt to what we have.

So we use mainly mechanical dryers for the washed coffees that we process from December to February. And we always wait until March and April to process the natural and honey process coffees because we have a lot more sunlight and higher temperatures during those months. We even have to use shade to protect the coffees from the high temperatures in those months. The drastic change between the winter and spring months made us look at what we have and use technology to process all different types of coffees correctly for their needs.

Adam: Awesome, thank you. How many different producers are you working with in the region for your company, APG Coffees?

Ernesto: Of course we work with Finca Fatima, which is a farm. My neighbor, she won Cup of Excellence last year as well from her farm Finca Consolapan. We work with Jose Cienfuegos from Las Trincheras Farm. He won Cup of Excellence too. And we work with three or four other producers that are new, that we’re going to share samples with you this year. I think they have a lot to offer to the market.

So we’re currently a group of seven producers, and our approach for next year is to start growing our relationships with small farmers in higher altitude regions in order to have an economic impact on smallholder farmers. 

Aleco: That’s great. I’m just absolutely intrigued with the Mexican coffee industry right now, and specifically seeing the evolution of the industry, to see the coffee culture in the country. I think the cafe culture in Mexico City, and I’m sure elsewhere, is really bar none in producing countries. It’s really special to see what people are doing with roasting and coffee and just the general hospitality experience that they give to people.

 And there are folks like you, and we have other friends in other parts of producing regions in the country, younger generations that are kind of like the new face of the coffee industry here. Because as you said, the coffee industry was very commoditized for a long time, and also maybe an afterthought for the government in a lot of ways. But to see folks like you is really promising.

But it makes me wonder that there must be a whole new competitive landscape out there, even for you to buy cherry, to process coffees, to trade coffee locally. I’m curious what you’re seeing on that front, and what your take is in general?

Ernesto: Well, this year we had a 40% smaller harvest than last year in general, so coffee prices were super high this year compared to last year. It was much more competitive because there’s many companies that need coffee from Veracruz. But, since we work with committed partners, we didn’t have an issue with buying cherries, because, I mean, it was part of our shared plan. We are growing together, so it’s their investment. It’s not just an opportunity of the moment, we’re trying to truly build partnerships with companies like you, that you can find roasters that really appreciate the quality that we’re offering.

So as far as the cherry and the price, that’s what I don’t like about coffee — that some years we have a lot, some years we don’t have much, but it’s part of the agricultural business. That’s how it is.

Adam: What percentage of those coffees are you selling nationally? I think we’re both really interested in the national market in Mexico, and I think in some ways some of our biggest competitors here are our local roasters, which both of us think is super cool. We don’t see that in other origins. There is this whole young generation of Mexico that’s really excited about coffee because of the local roasters and the coffee bars and things like that all over the country. How does that play into your vision for selling coffee?

Ernesto: Well, that’s kind of the reason why our model has worked to improve the economic activities on the farm, because we provide immediate liquidity to the farmers. There’s a lot of people that are really into specialty coffee in Mexico, like a lot of specialty coffee bars. And there’s a lot of new, trendy things, many people getting into the specialty coffee market. But they all finance their own coffee production. They buy small quantities of coffee, and they don’t buy the inventories that they’re going to use throughout the year. So, basically the farmers have to finance these small coffee shops, and that doesn’t really work for them.

So, I really like that we’re growing, like our culture is growing, but I don’t like that the last priority of the market is to provide the financial liquidity for the farmers, which is where everything comes from. So it’s very delicate. That’s kind of my perspective of the market right now.

Adam: What would you want roasters, especially small ones who are just buying five to 15 bags of APG’s coffees, to know about how you produce coffee and the challenges you face? It must be exciting to see coffees with your name or Cienfuegos’s name on a bag in some of the top roasteries in the country? I mean, you’ve only been in this three years, and you’re already touching the top tier of the market, and we’re super excited to represent your coffees. So what are some things you want to communicate directly?

Ernesto: One thing I really want them to know is that although we don’t have many certifications, one of the things that make Veracruz coffee very special and very hard at the farm level is that we we really focus on conserving the forests that we have, all the ecosystems that we have.

I think this is something super special in Mexico. We, or most of our farms, produce all shade grown coffees. So this is a challenge of having a small production one year and a big production in the next year. But we are really aware of where we’re going in the future, and all this effort is to keep having healthy coffee production in the future, to preserve a stable environment and conserve our microclimates and stable weather. So whenever they buy a bag of coffee from us, I think they should feel that they’re really helping conserve the ecosystems here in Mexico.

Aleco: That’s fantastic. Adam and I were out in Pluma de Oaxaca, so a very different region. But I was really blown away at seeing how forested that area was and how healthy the trees were, too. I was a little surprised. I didn’t think that was necessarily how it was going to be, and really as good of shade as I’ve seen anywhere in Latin America. Very special.

Ernesto: Yeah. Sometimes it seems like you’re in Africa, in the forest. It’s incredible.

Aleco: Yeah, a little bit like Ethiopia.

Adam: Would you be able to talk a little bit about where you’re currently at in the harvest, and where the labor of the harvest comes from? Is it mostly local, or not necessarily?

Ernesto: It’s very interesting. Many people that live in Veracruz or used to live in Veracruz, they go to Mexico City for a part of the year and work in finding jobs in Mexico City. And throughout the harvest season they come back to Veracruz, and they love picking coffee. It’s a whole experience for them to come and pick coffee. But the good part of Mexico is that they have the chance to go work somewhere else throughout the rest of the year. It’s a good side of coffee production in Mexico.

About the harvest, we’re wrapping up the harvest now. I think most of our washed coffees are already done, and we’re working on the natural and special process lots, like all the crazy fermentations and honeys as well as the natural lots right now. I think these coffees that come at the end of the harvest are really special in flavor, because they went through all this time of cold weather. So I think they’re the most interesting coffees that come up.

Adam: We just have one more question. Lot separation and producer transparency is important to higher end roasters—is that something your mill is taking care of? Tell us a little bit more about how you separate lots and maintain traceability?

Ernesto: One of the major changes I’ve made in my mill is that before, producers just delivered the coffee and you would just throw the cherries into a place where everything gets mixed. Now, we’re separating every single entry of coffee by producer. We process, we ferment independently, and we dry independently, and we store the coffee independently. Every single lot has what variety it is, what time of the year it was harvested. And I think we’re doing a tremendous job at keeping traceability fully intact. It’s one of the things that is the most important for me, being traceable, fully traceable.

Adam: Excellent. Thank you so much. We, really, really value your partnership, and, for me, on a personal level, I think your vision and your execution is incredibly inspiring. I’m looking forward to tasting the coffees this year. I know that we have a lot of roasters excited for them. 

Aleco: Thank you, Ernesto. I echo Adam’s sentiments entirely. It’s a pleasure to work with you.

Ernesto: Thank you very much. And thanks to all the roasters that support this operation.

 

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

Paying for Coffee: Guadalupe Miramar

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. 

Miramar and Red Fox

Guadalupe Miramar is where it all started for us: our sourcing in Mexico began here. One thing that’s special about this relationship is that it’s not one relationship with a cooperative or person, it’s with the whole community as individuals and families. There are other buyers who work in the region now, but our relationships and consistency have allowed us to maintain the trust we worked to build over the years in an area where many were jaded by past experiences with exploitative buyers and corrupt associations. 

Miramar is very different from other associations we’ve written about in previous Paying for Coffee pieces. An informal group of 15 to 20 farmers, we’ve worked with many of them for a few years through a different organization, but this past growing season they formed a new loose association around organizer Cecilio Perez Vasquez. Mexico Sourcing and Sales Lead Adam McClellan first met Cecilio in 2013 when he was acting president of another association in the region. They kept in touch and Adam continued visiting every year, so we were excited to deepen our sourcing in the communities of the Mixteca and Santa Maria Yucuhiti when Miramar formed. 

We’ve focused the Paying for Coffee series on a diverse array of our Latin American supply chains to illustrate how support and deep sourcing look different from place to place and group to group. Miramar is the newest association we’re writing about this way, and it’s also the least formal. Whereas other pieces have focused on the community support different organizations provide (and our role in that), the role Miramar plays as an organization is intrinsically different at this stage. That makes them a perfect place to look deeper at not just what we pay, but how we buy in Oaxaca—the location of our new HQ and a place where we see our future. 

The Place 

Geographically, Guadalupe Miramar is within the Santa Maria Yucuhiti municipality and sits high up on a south/western facing mountain slope. The town is at 1600 masl and farms are located above the town up to 1900 masl and below down to 1100 masl. The coffee we buy is from 1400 masl and above. Miramar is located within the Mixteca zone in the mountainous west of the state of Oaxaca. Mixteca is the name of both the primary indigenous group and the local primary language in Miramar and surrounding communities in Yucuhiti.

What We Pay

FOB and Farmgate Pricing

While the numbers of what we pay only make up a small piece of the larger sourcing puzzle, they’re still an essential component. 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. 

In the case of Miramar, we’re working with a lot of people who would generally otherwise be selling to coyotes, buyers who collect bulk coffee in parchment for a flat lower price rather than pricing based on quality (they then then sell it to exporters). Coffees we don’t buy either flow into this market or, more rarely, stay in country to be roasted, sold, and consumed locally, a market that continues to grow and provide more stability for farmers.  

The farmgate and FOB prices we pay to Miramar, as well as the local price farmers would have received from coyotes, are below. 

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

Cupping, Communication, and Lot Construction

Where many other groups we’ve worked with have internal systems for quality control and analysis, we handle these parts of the process with Miramar. After peak harvest, Cecilio collects samples from each farmer and sends them to the Red Fox office in Oaxaca city, the capital of the state. The farmers’ samples represent what they have in their house at the time including an estimated weight, and we prescreen based on these samples, cupping and scoring everything they send.

We send Cecilio results and he brings everything that scored 84+ down to the warehouse in Oaxaca city, a six hour drive from Miramar. Once we have the full lot in the warehouse, we pull another sample to confirm that water activity and moisture meet our specifications and that the cup quality is consistent. We haven’t yet had situations where the coffee passed the prescreening and didn’t ultimately get purchased, but it’s important for us to make sure.

Even though Miramar’s farmers are smallholders averaging just two hectares each, we cup each individual producer’s coffee separately via signal detection cupping so that we can a) pay up for additional quality and b) carefully build lots that best represent the producers’ individual labor even when their coffees aren’t being sold as single farmer lots. We buy as much of their coffee as possible to support their work at all tiers and help build up and maintain quality standards and best practices over time. The vast majority of their coffees cup out at around 84-85 points and we carefully arrange them into community lots that represent each farmer’s work as best as possible.

We typically meet with Miramar’s farmers at least two times before the samples are delivered to us. Usually, we plan to meet face-to-face to discuss cupping results, but this year that conversation coincided with the pandemic and stay-at-home order, so we had to manage all communication over phone, text, and email.

Payment and Financing 

Liquidity is something many smallholder farmers lack, so being transparent and flexible with payment schedules and offering customizable options can make a big difference. We work with one of our local exporter/dry mill partners to provide financing (delivering a first payment for parchment upon collection) and parchment transport to the dry mill. The group can decide if they want to use this option and receive slightly less money on the second and final payment, or organize their own transport and wait to get paid the whole amount once the coffee ships.

Support

As we said before, support looks different with this new and informal group than in many of our other relationships—they’re still determining what their organization looks like and what kind of help would be most effective for them, and as always, we’re taking their lead. 

The central type of support we offer in Miramar, as in every origin we work in, is in paying the highest possible prices and letting this group lead their own development projects. We honor the fact that producers are the ones who know their business best 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 slightly less and offering auxiliary services. Many studies in the nonprofit sector validate this approach.

As far as meeting other needs as this group develops, our team offers experience and support where we can. We discussed drying and processing techniques with Miramar members in order to increase awareness of moisture and water activity parameters and cup quality. When a lot of the farmers needed to replant recently, they asked our opinions on which varieties might be a good fit for their operations, and we helped advise them. We also coordinate with the dry mill and exporter when to send a truck to help the farmers bring down their coffee and see if any pre-payments or financing are needed. 

Logistics and Shipping

Once the warehouse samples have been approved, the Red Fox logistics and quality control teams work with the exporter to secure a shipping date and get the coffees milled to spec. Once the coffee is milled and bagged in Oaxaca, it travels about five to six more hours to the port of Veracruz or eight to ten hours to Manzanillo.

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. 

Guadalupe Miramar is a great place to look because they’re so small and new. Their needs and support systems are so different than their slightly larger counterparts in other subregions. We hope to be there as part of the structure helping them grow organically over time, and we expect great things from them as they do.

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.  

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.