As interest grows around how value is conveyed along the coffee supply chain, more consumers expect brands to provide fair compensation to producers.
As such, many roasters add “Freight-On-Board” (FOB) prices to their transparency report. FOB price is the standard reporting metric for assessing whether a producer was paid fairly for their coffee.
However, it may not be a perfect indicator as it often only shows the price paid to exporters, with the farmer’s profit hidden inside. This has encouraged many within the coffee industry to adopt more transparent practices and find an additional metric to ensure producers are paid fairly.
Read on to find out more about FOB pricing and the alternatives that can assess the sustainability of coffee prices.
What is FOB pricing?
Usually, coffee passes through numerous participants of the supply chain, and each step adds to its cost. However, each producing country has a different supply chain model.
For instance, coffee may come directly from a producer to a miller, who is also the exporter. Or, it may come from a cooperative instead.
As coffee is bound for export irrespective of its supply chain model, FOB is used as a benchmark value to help create an accurate price comparison.
Essentially, FOB is the price buyers pay to the exporter once the coffee is ready to leave the shipping dock.
FOB price includes the price of the coffee and covers all costs incurred while preparing it for shipment. This includes everything from warehousing to intermediary fees and the exporter’s profit margin.
Under FOB, the seller – specifically, the coffee exporter – assumes full responsibility for the coffee until it is on the shipping vessel.
In other words, the exporter manages every step before shipment, including green coffee storage, transportation to port, and customs clearance.
Furthermore, FOB is one of the eleven “International Commerce Terms” or “Incoterms” established by the International Chamber of Commerce. These define the responsibilities, costs, and risks of buyers and sellers involved in the global coffee trade.
How does FOB differ from farmgate?
FOB price indicates the amount of money that goes back to all participants of the supply chain at origin. However, it may not be a true reflection of the actual prices received by coffee producers.
The payment to farmers at point of sale is known as “farmgate” price, and it is often hidden in the FOB price.
The farmgate price refers to the amount farmers are paid for their coffee.
Transparency and fairness are important topics in the coffee sector. Therefore, discrepancies between FOB price and the true value paid to producers has motivated roasters to use “farmgate” price as an additional metric.
Unfortunately, uncovering farmgate price is not easy. As coffee changes hands multiple times, tracing it back to the farm can be a challenge.
Those involved in the supply chain, including exporters, importers, millers, and cooperatives, will have to provide pricing information. However, some businesses may feel disclosing that information is too risky.
Further complicating the matter is the fact that coffee price is influenced by the market price – specifically the C price determined in the C market.
Transactions of coffee contracts during unfavourable market conditions may translate into lower incomes for producers.
Also, coffee contracts are traded globally in US dollars, but producers at origin often receive payment in their local currency. Therefore, instability in exchange rates can make it more difficult to calculate actual farmgate prices.
In addition to the C price, farmgate price can also be affected by premiums such as organic and Fairtrade, women-produced coffee, and quality based on cup score.
Is FOB pricing the best approach?
FOB price helps compare origin versus non-origin supply chain costs, and compares one supply chain to another.
However, a large criticism of FOB price is that it can be misleading about fairness. For instance, a high FOB price does not necessarily guarantee a high farmgate price.
In fact, a coffee guide published by the International Trade Centre shows producing regions have different transmission ratios of value from FOB to farmgate.
For example, Brazil and Vietnam have a ratio of up to 90%, meaning producers receive 90% of FOB price, while Ethiopia has a rate lower than 50%.
This difference could be due to factors such as the number of participants in the supply change, or the infrastructure of a country.
To explain, poor road infrastructure at origin affects farmers’ pay as FOB is used to pay for the higher production and transportation cost.
Therefore, drawing conclusions purely from price points may not be sufficient. To determine how prices can truly be sustainable for producers, it is vital to contextualise the data.
Asking questions and having conversations with sourcing partners allows a deeper understanding of FOB and farmgate numbers.
For correct pricing, more information regarding farmers’ living and production costs, and value chain operations are needed.
The Specialty Coffee Association (SCA) Transaction Guide is an alternative reference to help buyers and producers make informed decisions. The guide breaks down prices, pricing structure based on lot size, quality, volume, and countries of origin.
Equally helpful for promoting supply chain transparency and traceability is the platform iFinca, as it helps verify prices at the farm level. In addition, iFinca bridges the information gap and connects you to the farmers behind your cup of coffee.
Ultimately, combining data and context can help clarify what is happening at origin. Pricing is complex and requires effort from everyone along the value chain to get it right.
An estimated 125 million people worldwide depend on coffee for an income. Therefore, it is essential to make positive contributions to the livelihood of producers and the sustainability of the industry as a whole.
Most importantly, there must be a balance between social and environmental sustainability in order to meet consumers’ ever-evolving expectations.
This can include clear traceability throughout the supply chain, and the use of recyclable packaging materials.
At MTPak Coffee, we offer a range of eco-friendly packing options for the coffee sector. Our recyclable, compostable and biodegradable options help reduce the environmental impact of packaging while showcasing a roaster’s commitment to sustainability.