The numbers are clear that the retail price increase that we've seen in the specialty coffee industry has not reflected what's happened at the paid producers. I mean, I was looking at what they were saying was back in the 1940s, it was about 40% of every of all coffee income, 40 cents of every dollar flowed back to origin. 1999, it still was somewhat similar, right about the boom of the specialty coffee industry. And then somehow by 2001, it became 12 cents.
And now it's more like 10 cents of every dollar. So there was this strange correlation with somehow the specialty coffee industry boom, retail prices increasing, and yet the actual payback to producers as a whole has gone the opposite direction or has basically stayed steady while the retail prices have increased. Ethiopia's coffee harvest is wrapping up and coffee samples are becoming available and ready to ship in the Arcana Coffee marketplace. Arcana Coffee connects roasters directly with smallholder farmers in Ethiopia and builds in the hard parts, integrated QC, logistics support, and producer-led transparency.
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Welcome to the Daily Coffee Pro by Mapper Forward friends. I'm your host, Leigh Safar, and this is episode 1 of a brand new five-part series with Sean Warner from the Honduran Coffee Alliance. Shaun, welcome to the podcast for the very first time. Thanks for having me.
I'm excited for this. You and I both. We're going to talk about a subject that I love talking about, but nowhere near as much as I should know about it. And I think I speak on behalf of everybody in the audience when I say that.
We're going to be talking to folks about the way that coffee pricing is set now and into the future. This is a conversation that we had in our monthly discussion group. Sean is a part of the monthly Patreon discussion group. And also, for full disclosure, the Honduran Coffee Alliance is an advertiser on the podcast.
That has nothing to do with why Sean is on the podcast. To be clear, the first question I ask myself about allowing someone to advertise on the podcast is, would I have them as a guest on the podcast? And if I wouldn't have them as a guest on the podcast, they can't be an advertiser either. So that's just to give you guys some transparency into that process.
But Sean suggested this topic for our discussion group in December. And the conversation was excellent. We didn't get anywhere near close to resolving anything. And so I said to Sean, can we please have more of a conversation on the podcast?
So Sean, welcome to the podcast. It's really great to have you here so that we can talk about this. I'm confused about a lot of things. You have a lot of very exciting ideas.
Yeah, thanks. I'm confused on plenty of things as well, but I have lots of ideas. We're going to figure this out together. Yeah, we will.
So to get us started, Sean, tell people your journey into coffee and what the Honduran Coffee Alliance is and does. Yeah, absolutely. A little bit of my story and then how it became Honduran Coffee Alliance. I was an engineer back in the day and then ended up living in Texas for a while.
And then through actually our church there, we decided to move to Honduras more to do missions development work in 2013. So my wife and I moved down there and I knew nothing about coffee at the time. I didn't even drink coffee. But while there, a couple of years into being there, I had one small roaster in Texas approached me and say, Hey, I'd love to get coffee from a farmer, a producer in the area where you're living, where you work.
And I did know a couple people from our church that had coffee farms. So I just asked them, Hey, can I go explore this and check it out? And so me and my wife went out one weekend and got to see his farm and explore the world. And I dove into how do I get coffee from this producer to this small roaster?
Failed a couple of times, but really just fell in love with the world of coffee, coffee farms, drinking coffee, exploring the amazing qualities and flavors in coffee. But even more so, I think the biggest thing that drove me to really get into coffee was getting to know so many smallholders, producers that wanted to do specialty coffee, wanted to do great quality coffee, even knew how to do it, but had no way to connect to market. So it was kind of simple for me to say, I can knock on some doors and call people and try to. And so for me, it just very much started as that like a side thing where I was gonna try to just connect with people, but grew and evolved into what it is today.
So yeah, I'd started that in 2016 as just a thought venture. And then about a couple of years later, it formed what is now Honduran Coffee Alliance. And then for a couple of years, I was actually partnered with a, a Canadian nonprofit, SoCoDev. And we teamed up together to partner with some of these specific co-ops to help them connect to market.
Similarly, they didn't have any connection to market. So like my, my base a co-op where I lived in El Pariso down in the area of Honduras near Nicaragua, that area in particular just had no connection to market. Was still very new to growing specialty coffee, or like I said, really just didn't have any opportunities to find homes for those coffees. And so similarly, there's a couple other co-ops in other areas of Honduras that, that SoCoDev connected us to.
And we said, let's, let's start doing this in a bigger way. And as their funding for that project ended, it became us as a team, my partner, Javier in Honduras and my partner, Frederick Rivard in Montreal. And we've carried this out for the last eight, nine, almost 10 years now. And it's turned into lots of different things.
But mainly it still is that, that the base of how do we connect producers and roasters and form these long-term relationships and facilitate those. And it's been an exciting journey. The one question that a lot of people get confused by is why don't we know what coffee should cost? Like why isn't it just one standard thing?
And, and folks, if you're listening at home, wondering, yeah, I'm confused about that too. Once you start to scratch the surface of that question, you end up down a rabbit hole. That is mighty, mighty deep, right? Yeah.
So let me take this a couple of directions. Exactly. And I think this is what, in some ways brought my, my mind into like trying to figure this out. When I first got into it, I was like, how do you price coffee?
And there's just no good ways to do it. I don't understand what it looks like. I think producers basically just use the C price because they don't have any other way to reference and don't really understand cost of productions or really don't even have any need to because they know what the price of coffee is, what people tell them it is. And so I've quickly just jumped into this world of it, a sidebar, a side note.
When I started this living in Honduras, I was completely new to the coffee industry. I had no one kind of like, it was isolated there. So podcast became my education on coffee. So like back in the day, Tamper Tantrum was my podcast that I just fell in love with and learning so much from.
And then years ago, I discovered Rapid Forward and that's kind of been my podcast more and continue my education. So I'm enjoying now being a part of it in some ways. Yeah, nice. We're pleased to have you.
Yeah. But yeah, I think that, that the pricing question, the one, the question you asked there is really what has become one of my passions is trying to figure out better ways to do this. Um, I've the base of what we do, like I said, is forming these long-term relationships and that works well, but then also this big question, how do we price coffee? What does it look like to do that?
Um, And I think I'll just kind of share some numbers, some, some ideas of why that doesn't, hasn't worked in the past. I think that that's what really has driven me. Maybe a bit of a numbers guy. Um, I like to understand what's happening and try to figure that out.
And you just look at the past of what's happened in the coffee industry in the last 60 years. And you see that, you know, I think I saw Bob Fisher's on this podcast and I've seen him mention like 80% or more of the time that C price, the price paid to producers is less than the cost of production. And yet there's this strange contradiction as well in during that time with the late nineties was especially coffee boom that happened. And I just wanted to lay that foundation for people so that they understand why this is so nuanced.
Go ahead, John. Yeah, I think a few comments on why, I think one of the big questions I've had is, why has this happened? Why has it happened that the price paid to reduce your prices remains so steady, and yet we have so many, I think, roasters in our industry that do want to do things differently. Like, why does this dynamic happen?
And I think a few things. One is still the actual market, the huge volume, is still dominated by the conventional players in it. Big corporates. Yeah, exactly.
So there's still a huge volume that, you know, is in that world. Also, I think a second part tied to that is this strange dynamic that somehow cost of production really this year may be a little different, but normally, Brazil compared to Honduras is vastly different, yet the price paid in Honduras is completely tied to what's happening in Brazil. Most years has led to, has been an influence of why prices are paid so well below cost of production in Honduras. How people understand why that is a problem.
Yeah, and so if you have cost of production in Brazil, there's much more mechanized ways to produce coffee. And so their costs, when the sea price is down 140, could still be a decent wage. And I can't speak to that as much as other people in Brazil, but the cost of production is so much lower where that $1.40 in Honduras was nowhere close enough to cover the cost of production. And so why were we as an industry saying, we're going to accept that price, even though we know it has nothing to do with what's happening in Honduras?
And I think that's one of the failures of the futures market. It doesn't take into account that these aren't the same. It doesn't really take any nuance into account. Exactly.
It treats it all as one big commodity when there is so much nuance in quality and country and such. And I think one other point I wanted to make is, we understand specialty coffee roasters, that category of roasters, the ones that I engage with a lot. Typically, as they've scaled, is what I've seen, they're often super small roasters are able to do a lot of these high-end micro lots and really do engage with awesome coffees. And that category of coffees, sometimes I like using quality points and such, but to use it, that 86, 88 point range of just awesome coffees, those do well.
But as a roaster scales, they often end up saying, okay, now as I get more wholesale clients, as I get more, I have to do more and more of this, what I call the specialty blender category. And so then they end up being like 90, 95% of their volume is that category. And 5 to 10, 15% is still that single origin. What they often on their menu say is like, these are my single origin coffees, and these are my blender coffees.
Those single origin ones, I think there's a lot of, I can talk more to some of the failures of how things are priced in that. But in general, there's a lot of better ways that that money can work well for producers. The specialty blender category is where I see the biggest failure in challenge, black hole, where there's such an opportunity to say, let's find a better way to price it. We don't have to depend on the sea price.
Yet in that category, they still all hedge and use the sea price and say, we're going to use that as our price reference. And that's where I think I've been focused for a while on how do we solve that question. And the reason we want to solve this problem and really start digging into this question, folks, is because Arabica has a very strained future. We're going to spend a whole episode talking about this, but it has a very strained future.
And so the pricing structures may change over time and be forced to change. The sea market may have to go away at some point, etc., etc. And so if the status quo is going to be challenged down the track, if we start challenging this right now, we will be prepared for when that happens. And the part of that that's important, we think, to start at is the bulk of it.
And those specialty blenders are the bulk of it. That's most of people who are doing specialty blenders are buying somewhere between an 82 to an 84. And they're trying to, or maybe even an 81, 80, 79, and still calling it specialty. We see you folks out there.
But this is the bulk of the business that's done in specialty, in inverted commas. So we've talked about the futures market. We know that the price is set there, and it's quite arbitrary based on futures contracts. And that really is a tool that's for the corporates, right?
That's not something that the average small to medium farm or the small to medium roaster really has the cash to participate in because you're looking at an access point of somewhere between $8,000 to $10,000 at any given moment just to start trading. When we look at the other side of things, that takes care of the commercial grade coffee. But on the other side of it, the specialty blenders and the high-end specialty coffee, from your understanding and from your experience, how is that coffee priced, Sean? Typically, it's essentially priced on the C price.
So typically, it's, okay, an importer has a relationship with an exporter, and the exporter is buying a ton of different coffees in Honduras and just basically at whatever the local pricing is, which is based on the C price. And then after it leaves the hands of the producers, they'll separate into different categories. So, okay, these could fit into our nice exporter blend that we can offer to the importer and sell to a roaster. So typically in those categories, basically none of the benefit flows to a roaster and not that much benefit anyway.
There's not much plus there typically. And so I think one of the biggest challenges, I think one of the biggest things is the model of spot coffee. What I mean by that is typically how that works is an exporter is buying from a producer and has markets for the coffee, but doesn't know what they're going to actually sell it for. So they're buying different coffees from different producers, tasting it and saying, okay, this is what I think the score is, and assigning what to pay to the producer.
And they say, this 85-point coffee, whatever it might be, I think I might be able to sell this, but I have no idea if I end up having to get it sold at a really low price or not. Basically, they're stuck in a position because it's all kind of in the spot model where it's not pre-committed at time of sale. They are basically in a position saying, I need to minimize how much premium I give to a producer because I don't know what actual premium I'm going to get on the sale side. And the same thing happens from exporter to importer, is importer is going to have roasters that say, hope to buy that coffee, but they also don't know if they end up having to sell it at a discount because it ended up as an aged coffee or something.
We have all these roasters now seeking aged coffees because it's cheaper. So that often happens. So similarly, importer kind of feels like they need to minimize the premium they give to exporter because they don't know what they're going to sell it at. If you can change that model and do relationship coffee, that is a huge step because now at the time of sale between producer to exporter, you already know when it's getting sold at and where it's going to be taking out that question mark.
And you can, you're not motivated to minimize the premium back to producer. So I do think relationship is one of the very keys to how to change things. Yeah. And we're going to spend a whole episode talking about that.
But I just want to go over some of the things that you said to make sure that we're all understanding it correctly. So for those who've not heard the term spot coffee before, there's two different ways to buy coffee. You can future contract it so that you go, you figure out what you want to buy for, um, uh, you know, you'll forecast what you want to use for the whole year. You'll go and organize your stock.
You'll go and buy it ahead for all your, your organized forward, um, supplies, right? Spot coffee is where you're buying it retail. Essentially you're buying it off the shelf. You are paying a premium price because you are not going to, you're going to go to an importer and you're going to say, I need you to send me a pallet of coffee and you're going to pay a premium price for that.
Not retail. Sorry, I misspoke there. You're going to pay a premium for that and they're going to send it to you like tomorrow or whenever, you know, soon after that. And the reason that that is important for you to understand is because those two things have two different prices, right?
The more you can plan, the more, um, and the earlier you're committing to the coffee, the cheaper you're going to get it for. If you're paying spot, the reason that the price is different is because you're not the person who's carrying the risk. The importer is carrying the risk and risk is a really important part of this conversation. Um, and it is why it makes things so complicated.
And that is what we're going to talk about in the next episode. So join us for the next one where we're going to talk about why is coffee pricing complicated? And we're going to take those concepts that we're going, we just talked about and we're going to dig much, much, much deeper. So peace love and peanut butter.
Have an amazing rest of your day. If you enjoyed