#83 | Assessing and Addressing Profitability Constraints from Smallholder Coffee Producers in Yepocapa, Guatemala | Expo Lectures 2019

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Hundreds of smallholder coffee farmers in Yepocapa, Guatemala have experienced leaf-rust, drought, volcanic eruptions, and price fluctuations over the last few years. Profitability is the main constraint these farmers face, in maintaining healthy households and addressing price issues and other shocks - much like many other smallholder coffee farmers around the world.

Since 2015, Taya Brown has been conducting a multi-phase evaluation of constraints to technology uptake and profitability as part of a World Coffee Research development project that implemented the Centroamericano hybrid to address leaf-rust and low productivity. During a similar timeframe, Ryan Chipman founded Yepocapa Coffee, a US-based coffee importing enterprise focused on improving quality and transparency by becoming a direct link between US roasters and a cooperative of Yepocapa farmers.

In today’s lecture, Taya shares a profitability analysis for one farmer group. Ryan builds on this to share how his business is learning to identify and address the various factors in profitability. Both present examples of site-specific scientific investigation, focused on participatory and farmer-centric methods, to identify profitability constraints and guide response efforts.

Special Thanks to Softengine Coffee One, Powered by SAP

This episode of the Expo 2019 Lectures podcast is supported by Softengine Coffee One, Powered by SAP. Built upon SAP's business-leading Enterprise Resource Planning solution, Softengine Coffee One is designed specifically to quickly and easily take your small-to-medium coffee company working at any point along the coffee chain to the next level of success. Learn more about Softengine Coffee One atsoftengine.com, with special pricing available for SCA Members. Softengine: the most intelligent way to grow your business.

Episode Table of Contents

0:00 Introduction
2:40 The results of the profitability analysis of the Eca Montellano Cooperative
22:42 Ryan Chipman’s work analyzing how San Pedrana Cooperative’s cost of living and size of production affect farmer profitability and risk
47:00 Audience Questions
59:00 Outro

Full Episode Transcript

0:00 Introduction

Heather Ward: Hello everyone! I’m Heather Ward, the SCA’s Senior Director of Content Strategy, and you’re listening to the SCA Podcast. Today’s episode is part of our Expo Lecture Series, dedicated to showcasing a curated selection of the extensive live lectures offered at our Specialty Coffee Expo. Check out the show notes for relevant links and a full transcript of today’s lecture.

This episode of the Expo 2019 Lectures podcast is supported by Softengine Coffee One, Powered by SAP. Built upon SAP’s business-leading Enterprise Resource Planning solution, Softengine Coffee One is designed to quickly and easily take your small-to-medium coffee company working at any point along the coffee chain to the next level of success. Learn more about Softengine Coffee One at softengine.com, with special pricing available for SCA Members. Softengine: the most intelligent way to grow your business.

The episode you’re about to hear was recorded live at the 2019 Specialty Coffee Expo in Boston. Don’t miss next year’s lecture series in Portland – find us on social media or sign up for our monthly newsletter to keep up-to-date with all our announcements, including ways to get involved in next year’s Expo and early-bird ticket release!

Hundreds of smallholder coffee farmers in Yepocapa, Guatemala have experienced leaf-rust, drought, volcanic eruptions, and price fluctuations over the last few years. Profitability is the main constraint these farmers face, in maintaining healthy households and addressing price issues and other shocks – much like many other smallholder coffee farmers around the world.

Also, I will jump in occasionally to help you follow along.

2:40 The results of the profitability analysis of the Eca Montellano Cooperative

Ryan Chipman: Good afternoon ladies and gentlemen. Thank you guys so much for coming. We’re really excited to be talking about profitability for some of the coffee farmers that we work with in Yepocapa, Guatemala and I’ll apologize in advance. I have a little bit of a speech impediment so there will be times where I’ll be stuttering but I’ll get through. It’ll be okay. I’ll introduce myself. My name is Ryan Chipman, and this is soon to be Dr. Taya Brown and we’re going to kind of be going back and forth a little bit during this presentation to talk about profitability for smallholder farmers and kind of their constraints in Yepocapa Guatemala. I’ll introduce myself first. Sorry, I already introduced myself. My name is Ryan Chipman. What’s funny is I kind of fell into the coffee world. I think a lot of you guys also kind of found yourself in coffee. It’s not like we go to school or like I studied coffee. I don’t necessarily think that’s a Major quite yet. It might be in Portland, but probably not unless, sorry, never mind. But yeah, I loved studying Community Development as a form of crime control or at least trying to bring down high levels of crime within some communities and I love this idea of Community Development. Before almost accepting a job for the Department of Justice. I decided to take a trip to Guatemala, and I met a couple on a bus that invited me to this community where they were needing an English teacher and kind of the story goes on and I was teaching English to these kids and realize that over 60% of the kids I was teaching English to their parents for coffee farmers. I got to know these parents really well and I realized that one of the biggest constraints that they had with coffee farming just wasn’t really that profitable of a career. So I kind of had this idea of like, where’s my place in this? How can I help and that’s kind of where we eventually started. What we’re doing now is Yepocapa coffee, which we’re working with this cooperative in Yepocapa called La Cooperative San Pedrana and a few other communities now helping create relationships between coffee roasters and the farmers there. I’ll let Taya introduce herself.

Taya Brown: Hi. I guess it’s afternoon, right. Good afternoon. Yeah, so, my name is Taya Brown. I’m a PhD candidate in the Horticultural Sciences Department at Texas A&M University and how I came into coffee. I do sort of actually study coffee, but that’s not that common I think. So, I was really interested in food security issues and specifically working with smallholder coffee farmers and understanding how food security affects them and how they affect food security. Particularly interested in why some projects work and some projects don’t work. So, talking about development that comes into an area and wants to support farmers and for some reason, some projects really take off and do a great job and some projects kind of don’t and so I was really curious about what cultural issues, socio-economic context take place there and what makes some projects work and some not and then needs assessment in communities and understanding how to do that really well and then also impact assessment of projects. I think it’s really important that we’re evaluating the development that we’re doing to understand what the impact is and if it’s addressing the needs and maybe other needs come up as development takes place or things shift or change. So, sometimes we can build on projects by doing a little bit more differently, that kind of thing. So, that’s how I came into coffee. I’ve been able to work on a project that is in Yepocapa, Guatemala and just imagine going around to the other side of the Fuego volcano from where Antigua is and you’re in Yepocapa.

So, the project that I’ve been working on is called The Sustainable Income Through Coffee Farming Improvement Project. The idea was to help six cooperatives of smallholder coffee farmers overcome devastation, hi Dana, from coffee leaf rust disorder that really swept through the region in 2012 and 13 and this region was selected by ANACAFE because it was one of two that were worst affected by the coffee leaf rust disease and because it’s characterized by very smallholder farmers. So, the idea was to introduce the Centro Americano coffee hybrid to these farming communities, and this is a coffee plant that’s got resistance to Roya. It’s been bred for Roya resistance or coffee leaf rust disorder resistance and also a good production and supposed to have a good cup quality also. So, to be introduced to the communities to help them regain productivity after the diseases coming through. So, this is kind of looks like where the communities are located. This is a map of where the Centro Americano hybrids were or are concentrated per community and this is. a little sort of snapshot of what the communities look like.

So, we’ve got Montellano. It’s got 187 members. They are about 30 years old now and then San Pedrana which Ryan works closely with. They are 52 years old. So, you’ve got some that are younger some that have been around and formed for a long time and some that are a little bit closer into the actual town of the Yepocapa and some that are a little bit farther away.

So, the studies that I’ve been doing we can break them into two main or two phases. Phase 1, I went in just trying to understand what’s going on in the communities. You know, I’m not from there. Didn’t grow up growing coffee so I wanted the farmers to explain to me really where they are in space and time. So, where they are climate-wise. What goes on in the region climate-wise that affects coffee production and then also culturally where they are. In some cases, they’ve been around for a long time and they each deal with different issues.

So, we work through that in Phase 1 and then Phase 2 built off of that from issues that came out of Phase 1 or were identified in Phase 1. So, what we do is run focus groups, have interviews with the farmers, that’s what I do and get them to think about their obstacles or explain to me situations of different things that they’ve gone through in the past and what I get to do then is decipher that or analyze that to identifying the obstacles to coffee production in the region, obstacles to coffee sale in the region and then anything that is affected, the farmers’ perception or ability or interest to uptake the hybrids and then further down the line to understand how the hybrids are working for them. So, from Phase 1 these really sort of general topics that we discussed, obstacles in the region, these really kind of basic ideas came from the farmers’ description that their main constraint in the region across the board and in every community is profitability.

They don’t make enough money from their coffee sales to reinvest back into their coffee parcels. They don’t make enough to overcome when the coffee leaf rust came through and then we had a drought after that and then the volcano erupted after that. So, those are really, really tough. Farmers don’t have any kind of a base, savings and that kind of thing so that’s really, really hard. It’s hard for them to overcome, replant their parcels if coffee is damaged and things like that and it’s definitely not enough to sustain their families fully off of coffee. So, all the farmers talk about doing other things. They make tortillas or they have a little shop, or somebody drives a truck for somebody else. So, they all do these other things.

So, these issues led us to want to dig in more and understand profitability in more detail and that was a fairly difficult feat considering that these communities don’t keep records. They can’t give you details on what they spent or how much income they bring in. They don’t have record of that, that I can list and go through. So, in lieu of having anything concrete like that to use we had focus groups and we did three things. One was to create a representative farming family. So, that’s useful because whoever’s in the room is talking about this sort of hypothetical family. They’re not saying I do this in my family, this particular thing. They don’t have to put anyone on the spot. I just say one of you guys describe to me what a family would be like and so, it gets fun. They get to pick like, oh the family has eight members or 10 members or 12 members and most of them are on-site and four of them work in the coffee and one of them is in the city making an income that they send to the family and the other ones are kids that are trying to go to school. So, we make this representative family, whatever they feel represents their community and then we also make a representative coffee parcel. So, these are things you can see these three posters that are on the wall.

Heather Ward: Taya is showing a photo of a dozen Guatemalan farmers sat down on plastic chairs looking at a facilitator and the three wall charts behind him.

Taya Brown: So, that’s what that looks like. It’s literally something that’s on the wall and we write it out or we draw pictures or whatever it takes to paint this picture of what’s going on in the region and this is all directed by the farmers. Daniel who’s here in the audience. He’s got a cold, poor guy here visiting us in Boston. So, he runs the focus groups and gets the farmers to talk about stuff and writes everything on the board in front of us. So, we create a representative coffee parcel. So, we talk about how many plants are on that parcel what the unit of land is, fertilizer, costs of production, income coming from that parcel things like that and then we create a timeline of coffee management. So, we’re saying this farming family that we’ve created here does what on this representative coffee parcel throughout the year and that is where we talk about okay, so for instance right after harvest, what do you guys do? Oh, well we go in and we clean all the rows up. We get any kind of leaf litter out of there or whatever. We pull weeds. Okay. Well, how long would that take you on this parcel, and would you be paying somebody to do it or would you as the family member do it? Would the whole family do it? Does one person need to do it?

How long does it take? Do you need a tool? What kind of products do you need during that time? And so, we’re always able to relate that back to this one unit of land. So, it gives us some something that we can compare amongst the different Community communities. We’re talking about, you know costs and income and labor that are going to this one unit of land and then we talk about income and break up the harvest season too.

So, in the end from the profitability study from these exercises. I just described we get data on a cost-of-living the cost of coffee production and the income from coffee and one important thing that we talk to the farmers about is what would be a low or a poor of sort of reasonable or expected sort of common and a high price that the farmers have experienced within the last 10 years. This is something that they’ve actually experienced So, within the last ten years was the lowest price that you’ve been paid and what’s kind of a price that you generally would expect to pay or to be paid and that would be sort of acceptable and what’s the best price you’ve experienced and then we do the same for production and that gives us enough data to enter into this Monte Carlo simulation into a program a program called Scimitar and what that does is it runs all those numbers and it runs simulations of 500 iterations of a year of coffee production in the region and so I’m going to describe to you what this one Community Eca Montellano. I’m going to describe to you what the data looks like coming from that.

Heather Ward: Taya has a chart titled “Stop Light Charts” with red, yellow, and green columns. Taya’s charts get quite complicated. So, I recommend pausing this podcast here, finding the slides for this lecture on the SCA website and pressing play again.

Taya Brown: So, this is what it looks like. On this chart on the left, you see probabilities. And so, if you’re looking at yellow you’re looking at the probability that in any given year in that Community, the farmers will make an income that’s between zero and their cost of living. If there’s green on the chart here that means that that’s their probability of making an income that’s above their cost of living and if you see red that’s the probability of making an income that’s below zero or they will be essentially be losing money to produce coffee and in this program we can set our floor and our ceiling. In this case, the floor is zero just so anything below that and they’re losing money and anything above that they’re not losing money and then we set our ceiling at the cost of living. So, in this case, in this community we’re talking about on average the farmers have 12 cuerdas of lands and we were referencing one unit. So, this number that you see here is 1/12 of the cost of living in that community to be relatable to talking about 1/12 of their coffee production or their land planted coffee.

So, what this is telling you on the left there. You can see that in this community in any given year they have zero chance of making above their cost of living and they have also a zero chance of losing money in coffee production. That’s on the left, right and that is without calculating in a dollar amount for the time that the farmers spend working in their own land, in their own coffee production. And then on the right, we put a dollar amount to the amount of time they spend, and we added that into their costs and so you can see that that changes the situation and now they have about a 50/50 chance any given year of losing money producing coffee. I told you that all the farmers say that they do other things to make a living, right? So, that’s the tortillas and the truck driving and that stuff. So, this is a snapshot of what it looks like with their other income in here. So, it starts to make sense why they’re doing these other jobs and why they’re not focusing just on coffee.

So, in this case on the left, you see that they have about a 60% chance of making an income that’s above their cost of living any given year. That’s without putting a dollar amount and calculating in the amount of time that they spend in their own coffee production and then on the right, you see where we’ve actually calculated a dollar amount to their own efforts. So, once we have all of that data into the program, the real data what’s going on in the communities we can start to play with the numbers a little bit. So, on the left, that is the bar from the first graph. So, we’re back to just talking about income from coffee and so that’s where they have that 100% chance of being between 0 and their cost of living and just to the right of that where it says with hybrids that is considering a 30% higher production across the board.

So, we did the hybrids that are planted in the region now aren’t mature enough to know exactly how they’re going to perform in the end. But the literature breeders tell us that we should expect that those hybrids will produce about 30% more. So, that’s where that comes from. The farmers are also seeing that the hybrids need an extra fertilizer application. So, the cost of one extra fertilizer application is included in that also and then in the middle there we call that bar the volcano because the farmers in some of the communities this year estimated that they lost about 40% of their production from the volcanic eruption. So, that’s where that came from, but that could be anything that reduces production by 40% drought, storm, coffee leaf rust disorder, anything like that. So, you see there that they’re back to having almost 100% chance of being between zero and their cost of living and starting to run a chance of being below zero or losing money or paying to produce their coffee and then to the right of that is a bar that’s showing you what higher prices would look like.

In this region, the farmers have two ways of selling their coffee. So, they sell the other to a coyote which is the guy that drives around in a pickup truck and buys coffee in cherry, in sacks and pays cash on the day of sale and then the other way is through a contractor which makes a contract with the community sometimes with individuals, usually with the community and they will decide on a quantity that they’ll purchase and the farmers will decide to be able to provide that quantity, but they don’t set a price. So, they set a price at the end of the season, so farmers don’t necessarily know what they’re going to receive throughout the season as they’re bringing their coffee and then they wait for a long time to be paid also after that and then in the end, they’re not making that much. So. they’re making more than the coyotes but not that much and so these are the two methods of sale in the region and we just added 20% higher prices to both of those. This community sells about 60% to contractor, 40% to the coyotes.

So, across the board, we just added 20% to that and that’s what that looks like. So, they start to have a chance of making an income that’s between or that’s above their cost of living in that case and then the best case on this board is where we see both higher prices and higher production and there’s an interesting thing that happens in the program that shows where the combination of those two is greater than the sum of just higher prices or higher production. So that’s interesting. There’s a compound effect happening there and then these are those exact same scenarios, but where we’ve calculated in again the dollar amount for the farmers’ own time spent in their coffee production.

So again, that’s the bar that was on the right in the first slide and then we have the scenario with hybrid. So, higher production you can see that the situation does get better. There’s a lot more yellow on that board or in that bar and then in the middle, the volcano where they’ve lost forty percent of production really if you calculate it in their own time. This is just considering their time to be stable, right? But really in a case where the volcano has erupted, or a storm is come through there probably spending more time and maybe also even more on production or things like that. So, the program isn’t calculating that in.

It’s also not calculating in the fact that from year to year…So, a year after something like a volcano eruption or an outbreak of coffee leaf rust disease, you’re probably still having low production a year or two or three after that. Then, you know see the scenario with higher prices still is better than the one that’s all the way on the left. Then the best one on the board is the higher prices and higher production combination.

So, the conclusions of this profitability is a significant constraint in this community. It’s really restricts what the farmers are able to do of their own accord. It restricts their ability to innovate and be able to sort of do anything different? So it’s a real problem and then believe that a multi-faceted approach is best as you can see that addressing both production and price are important or that the combination is the best case and I don’t have an answer for how to address the equivalent daily wages but to look this gets at the fact that we talk about things like cost of production, but we have to consider all the way to cost of living.

So, if we’re really going to make an impact in communities where we’re doing development, we have to think about these larger-scale things, not just what’s the bare minimum cost of production and often case the cost of production goes up when we’re asking them to do all the things that it takes to produce a specialty coffee.

So, in a case where the farmers are trying to switch now to picking better coffee. They have to consider that that takes a lot more time. So, they’re having to pay their pickers differently and restructure that so that starts to get at that and just that we need to think about this even farther and sort of greater than then we are in a lot of cases and then being able to address shocks also as they happen, especially in this region with the volcano.

22:42 Ryan Chipman’s work analyzing how San Pedrana Cooperative’s cost of living and size of production affect farmer profitability and risk

Taya Brown: So, Ryan’s going to talk to you about his work with the Coperativa San Pedrana. They’re one of the communities that’s been a part of my studies so that’s interesting. I was working there for a couple of years and then met Ryan who had also been working there for a couple of years and we’ve been sort of, you know crossing paths in the night kind of thing and then met and so now we’re working together to use some of the kinds of numbers that I just showed you in his business strategy and giving him some kind of goals and ways to steer a conversation with the farmer. So, he’ll explain what he does in more detail.

Ryan Chipman: Thank you, Taya. Okay, so I’ve been working with La Coperativa San Pedrana for about 4 years almost into our fifth year. They are a Cooperative of about 140 farmers, and they’ve got some farmers that only produce that only harvest like 40 to 50 quintales or 100 pound bags of cherries upwards to 400 quintales. For the most part, in terms of their scale of production there are smallholder farmers. Sorry, excuse me, and kind of one of the things that we saw when we got there, one of the obstacles that we saw was definitely profitability, but it was also lack of opportunity that they didn’t necessarily have a means to bring about a change or a resolve for themselves. So, whether they pick their cherries really ripe whether they picked it entirely green, they would oftentimes receive the same price and so the only avenue for them to kind of like dodge this bullet was to reduce their costs. So, what reducing their costs looked like prior to receiving their export was cutting costs on fertilizers, cutting costs on time spending in their fields and maintaining these plants. Sadly, over years of time their plants became more susceptible to disease, leaf rust, production numbers went down and so it began to really affect these farmers.

So, here I kind of came on board and during early 2015 and really wanted to find a way to build relationships with buyers in a way that could actually incentivize their quality so that instead of this spiral system down to low productivity to being more prone to disease and low quality and low prices that we could actually begin to incentivize positive change that would increase quality, increase production. Help, potentially or theoretically at least, help the farmers to be less prone to diseases like leaf rust and the byproduct of that not only honoring farmers with better prices, but then offering a better quality product to roasters, So, that’s been our objective. We also realize it was a two-way relationship. When we started their quality was at a 78 or 79 over half what was picked was picked really green or under-ripe and so there wasn’t really much of a habit or a cognitive understanding of what quality coffee looked like or not much understanding of what the other side of the supply chain looked like as well.

So, over the last four years. We’ve really been working with them on processing maturation, varietal selection, plant health and all of these other factors that go into what we consider to be specialty coffee. What’s been amazing is due to the relationships that we’ve been able to build with roasters that understand that we’re in this progress of development or this sort of like gradual development and actually there’s a few roasters here today so it’s kind of cool. Thank you guys. We’ve been able to raise these cupping scores from small-plot farmers, from smallholder farmers from the 78 to 79s we saw four years ago. So, we’ve got 84 to 86s this year and maybe an 87 on the table. So, I love sharing that because I want to give them the credit behind the improvement that they did. I also want to give credit to the roasters that have backed us in this sort of support.

And the cool part is which this is where I’m going to begin to criticize myself. So, it’s funny because even though we’ve been able to pay these better prices. The question is: has it actually helped these farmers be profitable? So, really what I want to talk about is what is profitability and let’s have a bit more of an in-depth conversation on profitability because even though it’s really cool to say that we’re paying them more to what extent and how much is it helping is really kind of the questions that we want to begin to ask. Taya spent a lot of time really diving into those questions and meeting with the farmers and collecting this data to be able to do that sort of presentation I guess.

So, really kind of the four factors that I want to talk about today behind profitability is cost of production, prices received, production volume, and cost of living. A lot of times when you’re talking about profitability we’re talking about cost of production, cost of production, cost of production and then every once in a while, we’ll kind of talk on how that relates to the prices that they’re receiving. But I really think that those two are very important. But I also think that the last two are just is equally important and they’re not often included in these conversations. So, I would love to include these last two values or last two factors in our profitability conversation as well.

Okay. So, first, let’s talk about cost of production. I’ve seen some documents out there that says like cost of production in the world is US$1.40 a pound. That might be a cool average but cost production in Brazil is just different than cost of production in Guatemala and we also know like cost production in Antigua which is another 10 or 20 miles away it’s just different than the cost of production in Yepocapa. We also understand that there’s both fixed and variable costs. Representation of a fixed cost is a farmer paying a worker to pick coffee cherries. Oftentimes it’s between 50 and 70 quetzales per 100 pound bag what they’ll pick. That’s a fixed cost per bag of coffee whereas there’s variable costs, they’ll invest money into fertilizer or invest time into the fields working the land or de-shading the trees, but they really don’t know what that’s going to calculate out to until the production is already finished. So, sometimes it might be a high production cost or a low production cost depending upon their production, but also unexpected costs. There was a volcano eruption this year and. June of 2018 and the ash-covered just all of these plants and so the next day they had to go out and remove ash from these plants in order for the plants to photosynthesize.

And so that was an additional cost that farmers didn’t really realize or just that farmers don’t normally have to have to take on but be due to these sort of unexpected costs that happen or leaf rust. And then also specialty coffee production. I’ll talk about this a little bit later, but it’s definitely a lot more expensive to produce specially grade coffee.

Not just on the farming side. I mean, I think about plant health but also on harvesting side, but also on the processing side. The process and then getting the coffee’s converted from parchment into green coffee as well the dry milling side. This number that have provided – I’m going to be talking about it more on the next slide, but I basically went around to ask the farmers: What is your cost of production? This isn’t talking about processing. This is just more on the farming aspect in their fields. And a lot of them began to kind of tell me around this US$1.10 / US$1.25 sort of number. So just kind of for hearsay we’re going to use this number as a cost of production specifically for our area.

Heather Ward: Ryan is showing a table on screen titled, “Pricing.” It shows the three prices the Cooperativa San Pedrana receives and how that translates to profits or losses for the cooperative at the end of the day. The three prices are the C market price at US$1.05 per pound of green coffee. The Fairtrade price at US$1.40 per pound of green coffee and the Yepocapa Coffee Value, i.e. the specialty differentiated price, which is US$2.24 per pound of green.

Ryan Chipman: Okay, so this is a kind of a big chart. and I’m going to walk you through it real fast. So here I have on the top side. I have represented the three different coffee markets that are now accessible to low Cooperativa San Pedrana. The First Market is your C market value and in January of 2019 that was at $1.05.

But oftentimes, when we talk about profitability we talk about FOB values, right? But the question is, there is something that’s really important to note. Is that oftentimes that’s not necessarily what the smallholder farmers are receiving. And so it’s really important that we get to know the logistics of how things work in order to kind of come up with what are the what prices are the farmers actually receiving when they are depositing their cherries at a Cooperative or in and how that structure works. So, we’re kind of able to go from the FOB value and kind of calculate it back down into the actual price that farmers are paid in hand.

And so what I’ve done for these two – for both the C market value and the Fair Trade value – is I’ve added eight cents per pound that goes towards dry milling costs and transportation costs also ANACAFE taxes to export. And then dividing that number by one point two nine which a hundred and twenty-nine pounds of parchment is equivalent to a hundred pounds of green coffee.

And so that kind of gives us under the C market value that gives us a 75 cents per pound or 563 quetzales, which is a price point in which a lot of cooperatives actually receive this sort of price point for their coffee, which is connected to the C market value if they’re selling it at that price point. And when you deduct kind of the cost of processing the cherries into parchment we find that cooperatives want to try and pay their farmers the best price that they can because they’re cooperative and so they try to reduce their costs. And so here they’re only paying themselves like the workers at the wet mill and all the machinery. They’re only allotting three cents per pound or 22 quetzales per hundred-pound bag in order to cover those costs of production or processing and then that enables the farmers at this point to receive a 114 quetzals per bag of cherries. Or 15 cents per pound If you kind of equivalate out into American currency, and then using that same sort of idea of what the farmers have communicated to us of cost of production, we find that at the C market value based upon with the prices with the farmers will receive at the street market value.

This is often selling to Cayotes. They’re actually losing money. And so, the only way that they don’t lose money is by trying to reduce their costs. And we’ve what we talked about before, reducing costs isn’t a sustainable model oftentimes. It’ll courage more Leaf rust more disease their production will go down which will make them more susceptible to not being profitable and lower quality.

So that’s not something that we want to encourage of lowering their costs refer to other lowering their costs. Right? And so, this is kind of a sad scenario. That’s relatively true for a lot of smallholder farmers that they’re losing money farming for an entire year. Sorry. My mom gets really dry when I’m talking.

Okay, so the next values Fair Trade coffee? In January, they typically add 20 cents on to the B value, but they actually make sure that the cost for fully wash coffee connect cannot actually go down below a dollar forty. So that is our minimum So based upon that minimum price that’s a Fair Trade value.

We’re able to do the same calculations to bring that cost down to the Cherry value and we find that they are able to cover their cost of production and they’re able to make a little bit of profit and so we could theoretically say that it is profitable, right? Until we go into our next slides. And then lastly this is that average F will be the value that we pay as Yepocapa coffee for their specialty grade coffee and so we’ve been working with these Farmers talking about these different values like health plant varietal maturation farming practices and processing, right? And instead of the eight cents per pound that goes towards dry Milling taxes and transportation.

We’ve actually bumped up that value to 15 cents per pound to show that it’s actually more expensive because of the value is higher, they actually pay more taxes and on the processing side, we do special preparation for our part 4. To get our coffees from parchment and a green coffee and that’s at a higher cost as well.

So, considering that extra cost the approximate value is down to a dollar 61 per pound or $1200 per Keen Tile. And then we also bumped up our wet will cost the San Pedrana was able to hire more workers this year to make sure that the coffees were being processed. Well fermented in separate tanks with systems of traceability that meant more time, and which also means more money.

And so, we also doubled that cost. From the on the kid Sally side of things 241 get Sally’s per hundred-pound bag of cherries or five cents a pound. And then we’re also able to look at then deducting that we come to a cherry value of 246 Gonzalez or 33 cents a pound and we’re able to see some I also increased my cost of production.

I also ask the farmers. Okay considering that you’re spending more money on inputs compost more time in your field and. Paying your workers in a different way to ensure each to incentivize quality. What is that cost look like to you and a lot of them have told me a minimum of a hundred and sixty-five Catholicism.

So that value can actually be more than that. That’s just kind of a minimum number. And so, with that calculations were able to come to. That they’re able to make clothes just under three times more profit than selling kind of in the sort of traditional Fair Trade model or this is that’s kind of a price that they traditionally received from their exporter.

But the real question is just because that might be more does that help them be profitable? And it really also depends on production volume.

Heather Ward: Ryan is showing a table titled ‘production volume’. It shows three types of farmers. Farmer A is the smallest, producing only 50 pounds of cherry. Farmer B is larger, producing 100 pounds of cherry. And Farmer C is the largest, producing 400 pounds of cherry. It suggests that the largest farmer, Farmer C, has the potential to earn the most profit when prices are high but also stands to make the biggest losses when prices are low.

Ryan Chipman: And so, I have three representative farmers. Farmer A, Farmer B, Farmer C, all producing different amounts of coffee. The farmer A produces 50 quintales. I’ll use that word a lot, I apologize. A quintal is a hundred-pound bag of coffee cherries. Farmer B kind of is our average farmer within luck with Eva San Pedro Anna. They produce a hundred bags of coffee cherries and farmer see will produce 400 bags of coffee cherries. And that’s kind of one of our larger farmers, but there’s obviously farmers that can produce 20,000 or 50,000 things like that, too, we just we don’t have the capacity to work with farmers that large at the moment with loss and Madonna and if we look at the C market value, they’re losing money.

And what’s interesting is the farmer that has the largest production is actually losing the most amount of money and we’ve seen this in Yepocapa as well like really large production farms will actually go out of business because it’s one thing to lose a dollar – let’s just say a dollar per pound – times 10 pounds. But it’s a whole other thing to lose a dollar per pound times 50,000 pounds.

It’s like, holy cow. How do I come back from that? A lot of times large production farms when they receive really low prices and they find out that their costs of production was actually higher than what they received. They can’t… they’re susceptible to go bankrupt and we see that here we find with the Fair Trade value, which is really great.

I do really appreciate that. They set a minimum price to ensure relatively that the farmers can at least lose money farming that they’re at least making a small portion of money, which I think is really great that they do have that minimum price, especially since we’ve seen our C market value just tank this year, right?

And then lastly kind of the Yepocapa coffee value, We see that Farmer A the lower value of volume, he’s not necessarily making all that much, making $550 annual profit. And what we know, and we haven’t done the study with [inaudible] and we don’t know what the actual cost of living is in Yepocapa, but we would assume that that’s not enough and so even with the better prices for farmers that are only producing 50 quintales of coffee cherries, it’s probably not enough to cover their cost of living. And so, what we do find though, but Farmer B in Pharmacy probably has a better shot at receiving prices that can potentially once again, we don’t have an answer to that but can potentially receive a price point that can meet their cost of living.

And then also it’s really interesting to… I want to talk about percentage of influence because it’s one thing to give good prices. But if I’m only buying .002% of their coffee at a great price what significance is that? It’s really low significance. And so, this is kind of a neat history of Yepocapa coffee and what we bought when we started in 2015-2016.

We only have enough money and we just yeah, we’re just kind of starting and we bought four bags of coffee and looking at the difference between what we bought and their production. We actually were only able to buy .02% of their annual production. So even though we were able to pay a US$2.49 for be price for that coffee we rest assured basically say that that didn’t make much of a difference at all. But then it kind of as years went on where we’re able to improve the quality of the coffees amongst these farmer groups were also able to build more relationships with coffee roasters that got on board. And with that our second year we were able to buy a container and that made a 17.1% influence. And the farmers begin to notice. Oh, wow, if I’m willing to put in the work, to invest more to produce a higher grade quality coffee, there’s a possibility for me to obtain better prices, which wasn’t an option before. Our third and fourth year just got really just better, like more farmers got on board and more roasters are willing to partner with us in this vision.

We’re able to buy 27% and then this year we’re looking probably around 45%. Those numbers aren’t final for are this last year’s harvest.

So, it’s interesting to look at profitability. Um that if I’m going to make a claim as a business to say that I’m helping to make coffee farming sustainable for smallholder farmers, I also have to look at what percentage of influence I’m having on their entire production. There’s also a lot of constraints or influences to volume of production. There’s included one that’s positive so that it’s not just negative conversation, but first, like climate change that really it’s very difficult with all of the changes in in the climate just different variables happen and farmers have to constantly learn and adapt according to the climate lie for us there have been years where.

Since 2012 where Farmers have lost up to 80% some years, but I know farmers that are traditionally losing 50% of their production. And so that’s huge and then natural disasters like whether that be storms or whether that be the eruption that happened.

That’s also going to lower production then there’s also a phenomenon and coffee – that I don’t really understand but Taya does – but that there’s just high and low years in coffee production in the plant itself. Some years the plant will give a lot more, some years, it’ll give less. And that’s agronomy 101 that I don’t understand. But what I do know is that when you invest into this plant health, you invest in the better farming practices in the way that you take care of the soil or the shade and just all of these other factors that it does give better production. And so fine like for me as an importer, I want to buy coffee in a way that incentivizes this positive growth, positive plant health, and better farming practices.

And lastly, cost of living. I really think …something I’m really passionate about is I really want to think of profitability with cost-of-living factored in. If farmers only make a hundred dollars profit annually and that’s not enough for them to live. I don’t think that’s profitable at all. And so, I really think it’s important that we do this type of studies so we can learn what is the cost of living for people like Yepocapa, or in Antigua or in Brazil so that we can begin to set sort of price points based upon production volumes that we can see coffee farming actually be profitable, not only meet their cost of living but offer something that’s a bit higher than that, which would be great. Like I said, it differs from country and region. Giving them a price point that covers their cost of living also enables them to reinvest back in their plants because then they know if I reinvest back in my plants, it will raise my quality, it will raise my production and I can have a better profit than next year. A lot of these Farmers have big vision and I want to partner with their vision.

And then enabling a living wage. I think one thing that really inspires me is when I asked coffee farmers, why do you want to be profitable or what are your dreams? And a lot of the times it’s I want to give my children a sustainable career or profitable career once I die or it’s I want to be able to afford education for my kids. And that’s just something I was like, oh my goodness, it really hits me, and I want to partner with them in that too. So, kind of the takeaways that I see us having a bigger vision for what profitability looks like and investing and partnering alongside farmers to find to incentivize their quality at the farm level so that coffee farming can be more profitable.

Basically like I really want the industry to have more of a holistic approach and an understanding of profitability. It’s not just about price, and that’s about cost of farming. It also includes cost of living and size of production.

I also love the fact it’s been amazing meeting Taya. I’m very spontaneous and not very like scientific. And Taya is just like very focused and very scientific and so listens a lot of fun for us to partner together and to really realize that we can evaluate we can conduct studies to find real information to see am I actually being effective as an importer to help make coffee farming profitable for the farmers that I’m working with and she can actually do studies like that to give me feedback to be a better importer to better work with these farmers to better understand their plant health to better understand what obstacles they’re facing. And if I can be empowered with that information, I can make more informed decisions and I can potentially, hopefully, be a better importer supplier of coffees and then even offered better quality coffees to the roasters that we’re partnering with as well.

So yeah, I’ll let Taya take it from here.

Taya Brown: Let’s see if I can wrap this up. I think yeah, just from my point of view. If I was going to leave you guys with anything, it’s the importance of understanding what’s going on at the site or at that particular region where the coffee is coming from. We can make sort of general claims about things about the way coffee plants should be functioning or varieties or cup profiles of entire countries, or you know, there’s all kinds of stuff that gets thrown around. But when you get down to it, what matters is what’s going on right there at the site where the coffees from coming from, where the coffee is being produced and you know, like Ryan was saying, he went from Yepocapa to Antigua to Brazil, which is a big jump, but what Ryan is saying is that that you know, we see that even among the communities… I work with five different communities in even amongst a community some prices are a little bit different. Because of the altitudinal range across the region coffees are coming in earlier in some cases and later in other cases. And the ones that come in earlier are coming in during the time when it’s still raining and that causes problems to processing that some of the other communities that are in a little bit higher regions in the same area aren’t facing.

So even just within this one region, just one small area of Guatemala, we see a lot of variability. In the studies that we’ve been able to do there have allowed us to look at that a little bit further. So, to understand what’s going on in each area and look at that in more detail. So, if I was going to leave you with anything, I think it’s really important that we understand what’s going on in that context that is context-specific. If we’re talking about profitability we’re going talk about some of these other kinds of issues. And so, what we’re continuing to do in the region is build on the studies that we have already done. So, I showed you that in phase one we cast this really wide net and collected a lot of information about all kinds of stuff, the full history of coffee production for the farming communities, and then we narrowed into profitability and started looking at that in more detail. And in looking at that now we are digging literally into soils and doing some soil studies looking at plant nutrition and soil fertility and the management that the farmers are doing and working that into profitability if we’re going to be able to give these farmers really good recommendations about what they need to do to bring their quality up and to be a little bit more profitable, we need to be able to give them those details.

So that’s what we’re doing now, so you all can stay tuned for more work to begin to be done and more information to come out of Yepocapa. Just for my part I have to thank my many funders and supporters and Daniel Dubón who’s here who’s helped me run all of my studies in Guatemala and what they and my advisor Leonardo Lombardini was also here.

47:00 Audience Questions

Taya Brown: So, if anyone has anybody have any questions?

Heather Ward: An audience member is asking whether Taya and Ryan experienced any problems introducing the Centro Americano hybrids to these cooperatives and were there any costs to adopting these hybrids?

Taya Brown: So, I’m I was not a part actually of the introduction of the hybrids. I was brought in to evaluate the project. So literally what my dissertation is about is the constraints to uptake of those hybrids and in some cases there was a little bit of information that could have been.

Either I don’t know how if you could say you could share it better, but there was information in the farmers didn’t fully understand and so that’s been one issue, but there are a lot of farmers have to have. Taking them and planted them and they have good production. You know, that they’re liking what they look like in the field.

One of the things that we’re starting to dig into is this issue that they made the for the hybrids may take more fertilizer to produce at the levels that were expecting them to make the claims to be more profitable and coming from the smallholder standpoint. That’s a hard thing to just pivot and be able to do.

So that’s where the support that we’re able to give and if Ryan’s able to start developing markets that can purchase the coffee if the farmers know that they have that to look forward to there’s more incentive and motivation to actually. Bite the bullet and pay the cost and do the extra fertilization and we’ll be able to track that and show the farmers what kind of impact that’s making it.

So, this is where the longer-term situation gets to be more beneficial for everyone. You have more information over time. But yeah, so, you know information is a big one and then the benefits that the hybrids have to like, you know cop quality initially. Wasn’t something still isn’t something that makes a big difference for the farmers.

They start gabbing more direct markets that will be able to pay them more for the different qualities that starts to make a difference right and the situation starts to change their so, I’m not sure if I answered your question, but okay.

Heather Ward: The same audience member is asking what percentage of farmers didn’t adopt the Centro Americano hybrid variety.

Taya Brown: That’s really hard to say. It was the hybrids were there was a bunch of plans that were given, you know, somebody showed up and said we want to give you guys plants. So, the farmers that had space that they could renovate said how much space that they had, and the plants were delivered based off of that the area that they had available.

So, it was done through the Cooperative structure. It wasn’t like we had 400 farmers and then. 200 of them did 200 didn’t you know, so yeah.

Heather Ward: An audience member is asking about the coffee prices used in the analyses.

Taya Brown: Yeah, so the crucial thing in there was that the farmers told us what they had experienced within the last 10 years as far as low prices sort of common expected prices and high prices and based off of that that goes into the program and is run. So, we do that for production and price. And that’s what fluctuates right, and the other cost would stay the same in that case and we know that there is a fluctuation there right as productivity goes up your prices.

Are your costs might go up to you know, and. This is an example. This is a place to start and a program that we could use to show something that was visual that would make sense. And this is information that we share back with the farmers do so. This is in a form that sort of simple to grasp and understand and we show how the as the context changes that probability of being profitable to that certain extent changes.

Heather Ward: An audience member is asking whether the farmers grow crops other than coffee to earn an income.

Taya Brown: That happens. What I’ve seen specifically is farmers start doing something else. So, the plant something else on their coffee parcels. So we’ve got some wood. There’s like some cedar trees in that area go for quite a bit of money. With everything going on, I know a few farmers that have just planted around the perimeter of their parcels, those wood bearing trees and that kind of thing. Some really do a really amazing job of interspersing fruit trees in their parcels. That’s not necessarily something they sell but you know, they eat them themselves and do sell some percentage of it. And there’s honey in the region and that’s another thing that we’re looking at, also for longer-term is doing some diversification with these farmers with things like honey that have been produced in the region for a long time.

And now we have a small group of farmers that produce honey, but more could produce honey. And if we can sell it then we can start to incentivize more of that and that just helps bring in another form of income that’s not as depending on the same exact factors as coffee. So, you have more stability and profitability.

Heather Ward: An audience member is asking how the farmers learned to produce higher quality coffee.

Taya Brown: I would say it’s more of a case of them figuring out how to do it. Then like a human rights issue that we’re trying to push a trickle-down. You know, they’re just realizing like oh if I’m going to ask people to pick things differently, I would have to pay them differently to pick them differently.

And this is one of the things that we’re helping them work out and this is where having relationships with toasters that have experience of seeing this kind of thing done where people have done development in communities and they’ve seen what works then we can come in and help these farmers with some ideas of something that we know has worked in the past and they can kind of tweak it. Instead of them trying something and having to change at the next year and changing the next year for like 5 years until they figure out something that works, right?

Yeah.

Heather Ward: An audience member is asking whether the farmers can grow fruit on their land to earn additional income and whether that would be enough to convince them not to send one of their family members to the cities in search of work.

Taya Brown: So that’s kind of the low hanging fruit, right? If there’s a market for something in the area they can plant it, or they have the cultural history of growing that or eating it then that’s something that they can do.

Can you answer that if they if it would keep them from doing… I mean, it’s a family effort. It’s different than the way we do things here in the US. In general, in Yepocapa, it’s a family effort. So, you’re sort of diversifying in that way. So maybe like maybe they actually need to have two people working on the farm or of the time and doing less, you know, chopping wood for the neighbor, whatever.

Ryan Chipman: And from all that I know that is relative to that, they really have a desire to find opportunities to make their careers sustainable in Yepocapa rather than having to leave. Almost truthfully, almost half of the land in whatever I’m familiar with is abandoned. Back in 2001 when the C market dropped, farmers realized like this isn’t a profitable career. I’m going to ditch, go to Guatemala City, go to the States, find other opportunities outside of my community.

The farmers don’t have that desire. They don’t want to just ditch their land. It’s their grandfather’s land, it’s their great grandfather’s land. They want to find a way to make it work.

Taya Brown: And that’s where they’re from. People have to leave their small-town life and go to the big city. It’s more congestion there and all kinds of stuff. So, yeah people generally I would say want to stay where they are. They want to go somewhere and have some life experience and come back.

Yeah.

Ryan Chipman: Thank you guys for coming.

59:00 Outro

Heather Ward: That was Taya Brown and Ryan Chipman at the Specialty Coffee Expo in April 2019. Remember to check our show notes for a full episode transcript of this lecture and a link to coffeeexpo.org for more information about this year’s event.

This has been an episode of the SCA Podcast’s Expo Lecture Series, brought to you by the members of the Specialty Coffee Association, and supported by SAP’s Softengine Coffee One. Thanks for listening!

ListenSCA StaffDecember 16, 2019Expo 2019, Research, Farm Profitability and Economics

#83 | Assessing and Addressing Profitability Constraints from Smallholder Coffee Producers in Yepocapa, Guatemala | Expo Lectures 2019

Special Thanks to Softengine Coffee One, Powered by SAP

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