Costa Rica Coffee Competition

What is the impact when competition for coffee micro-lots gets overheated?

Relatively new micro-mill in Tarrazu, Costa Rica
No, we’re not having a competition for Costa Rican coffee. But for both private and cooperative mills in many of Costa Rica’s growing regions, the competition for ripe cherry has become quite intense insuring an uptick in coffee prices, despite the ever-dipping NY Commodities Exchange. In the last three months futures contracts have gone from just above $2.00, dropping drastically to $1.40 this week, so it seems reasonable to expect that the coffee we buy would be dropping in price too, right? Wrong. Well, not altogether, as we sometimes pick up coffee from the spot market, and those prices are usually based on differentials above current market prices. But for the coffees we buy direct trade, a coffee’s price is directly tied to what people will pay for it, which in regions such as Costa Rica now stokes a thriving, not waning, local coffee market.
Traveling in Tarrazu last week, one micro-mill owner/producer asked my opinion on this very thing: With NY prices dropping, how come local prices continue to surge? His question was rhetorical, really, and he knows the answer first hand. He’s not talking about the price we pay for coffee, but rather the rising cost for him to buy coffee cherry from small-producers in the region. This particular mill relies on the the small profits made from processing other farmer’s coffees as part of their annual revenue. And right now, driven by the intersection of the predicted coffee availability and demand, local coffee prices continue to grow. The playing field is not entirely level either, with large cash advances offered to farmers from the multi-national mills creates a climate where micro-mills such as this one have a tough time competing.
“Cajuela” – used to measure coffee cherry volume on delivery
It might help for me to explain a little about how coffee changes hands in Costa Rica in order to better understand this. For the most part, coffee is bought and sold as whole cherry using volumetric quantities. This makes predicting the amount of green coffee that will be yielded a bit tricky, but not impossible. It starts with the “cajuela” – metal baskets/boxes used to determine both volume and the amount to pay the coffee pickers. Right now, the average price for discriminate picking is $3.00 per cajuela, last year it was about half that. ICAFE (Costa Rica Coffee Association – NGO who regulates the country’s coffee trade system) set a minimum of 800 COL, or about $1.20 per cajuela. But the demand for good selection is high, and discriminate picking means lower yield for the picker, and so paying more than double the minimum is necessary.
The cherry is then delivered to either local cooperatives, micro-mills, or private mills where it is purchased by “fanega”. Fanegas are large receiving chambers where coffee cherry is loaded up before being milled. They hold a standard volume, and it takes approximately 20 cajuelas to fill 1 fanega. The local cooperatives have to buy everything that is delivered, regardless of quality, though they pay less for lower quality coffees. Private mills reserve the right to refuse coffee, but most handle both first and subsequent qualities. Micro-mills tend to be more selective, and only those coffees with less than 3% green cherry and floaters make the cut for first qualities. Coffee cherry is assessed using a 1 liter graduated cylinder. They load the vial with both coffee and water and then simply account for the amount of cherry floating on top as a percentage of the whole. From this simple procedure a coffee’s value is determined upon delivery.
The 3 hectare Finca “Nancy” – processed at Helsar mill in West Valley 
In general, the mill owns the coffees they process and sell until export is final. This is unique to Costa Rica as most other countries see payment once a coffee has a contracted buyer. Costa Rican mills make a partial payment up front to farmers, and then a second payment is made once the coffee is sold and shipped, milling expenses, margins, taxes, etc are calculated and paid. A mill’s overhead is regulated by ICAFE, as is the minimum final price that has to be paid to farmers: this price is not determined until the end of harvest. So in effect, the miller carries all the risk, paying farmers based on speculation of what this final price will be, and not covering costs until the coffee is finally sold and exported.
We’ve supported the micro-mills through the years. Before this option,  small-holders delivered their cherry to coops or the larger mills – basically one big blending tank. The introduction of the micro-mill has offered farmers autonomy, and bolstered a demand for single farmer coffees/micro-lots. It has also created the most financially beneficial system for the farmer in that for the first time they are being rewarded with cash premiums for their best quality coffees, instead of indiscriminately delivering to the multi-nationals. Buyers are often caught up in the ideology around this system and the financial risks incurred by micro-mills are quickly diminished by the idea that we as buyers are “helping” farmers by simply buying thier coffee. But for the micros, poor speculation on where final coffee prices will land at the end of the season is the straw that breaks the camels back, as unlike their multi-national competition, they lack the insurance provided by international investors.
At the farm of a new mill-owner in the South, Chirripo
But demand for even the more basic Costa Rican coffee has become so great that some of these large mills are using relatively large cash payments as leverage to lure in higher volume from local farmers. The problem here is that they forego a second payment. Cash up-front is an attractive proposition – and no problem to produce from seemingly endless pockets of the multi-nationals – and we’re seeing many small producers opting for the lump sum in advance instead of waiting for the later compensation for quality they would get from the micro-mills. It’s a problem of power inequality,  small mills unable to shoulder the financial risk that multi-national-backed mills can. So many top quality coffees are sold to the heavy hitters, and unfortunately lost to a fate of being blended with lower quality coffees, losing all provenance in the process.
It isn’t all bad news. Yes, the price for coffee is going up in Costa Rica, at least for the upper tiers of quality. And while cash advances from larger mills leaves many micro-mills unable to compete with inflated initial pricing, there are still many small producers selling to the micros who are intent on producing coffees that command a premium for quality. Traveling in the south, in Tarrazu and Chirripo regions, we’ve seen new mills crop up, processing really nice coffees from their own farms as well as from surrounding small-holders. The thriving local market has also helped usher in a new generation of coffee farmers and millers too, an important factor of sustainability missing in many other growing regions. So we look to the current harvest with promise, and continue to pay a high premium for our coffees, knowing that the lion’s share of the above-margin-profit is returned to the farmers.   Last week I cupped about 100 samples, selecting 10 mircro-producers for our first container of coffee set to ship mid-March. Look for the first lots by the middle of April.
-Dan Wood  *** If you’d like to hear more about the divergence of local coffee markets from the NY Exchange, check out Tom’s podcast on Guatemala – Local Prices and Competition.