Innovative Pricing in Costa Rica

In 2020, we took a dive into the economics behind the beans. Now, almost a year later we take a look back at the research about price transparency in Costa Rica. Last year, Marian Osinga, set out to do interviews with producers, millers and authorities, to start answering The Coffee Quest’s questions about pricing in Costa Rica. 

The country is in a unique situation where the number of coffee growers is steadily in decline. Sector organization ICAFE is implementing an interesting “dividing the pie” governance model.

Let’s have a look!

Law 2762

Costa Rica has a coffee law “law 2762”, which stands at the core of a unique governing system. The law was installed to provide price transparency and fair practice for all Costa Ricans farmers. ICAFE is the organisation behind the implemention of the law, working as development authority in the coffee sector. Through law 2762, ICAFE can regulate transactions between farmers and millers, miller and exporters, and guarantee that the returns from coffee are fairly distributed between all stakeholders.

The distribution of all returns in Costa Rica starts with the export price. Only after export, will the stakeholders in the chain know its final value. Then, they start counting backward to determine what slice of the pie goes to whom. 

Farmer's Perspective

The farmer is tied to the land and grows coffee. He sells his ripe coffee cherries to a miller and pays pickers and other staff that help him on his farm. When a farmer delivers cherries to a miller, the cherries are measured in a “fanega”, which is a measurement of volume (opposite to for example kg, which is a measurement of weight). 

The farmer gets an advance for the cherries delivered but has to wait for the closing of the export season to see how his cherries are valued in the end (after the miller has made them into green coffee and the exporter has found a buyer who wants to pay a particular price). Eventually, the farmer can get maximum up to 80% of the export price (FOB) of the coffee. 

Most producers have a simple supply agreement to deliver to the local cooperative on a daily basis. The cooperatives play a role in milling, export and commercialization of coffee. The maximum of 80% sounds good, but this is a best- case scenario. The division is influenced by the miller and exporter who are bound by a maximum profit.

Miller's Perspective

The miller buys cherries from farmers and processes them into green coffee ready for export. The coffee is either exported or sold to an exporter for consolidation with lots from other micro mills. All producers on our list fall into this last category. A miller registers the amount of cherry purchased and delivers a declaration of total sales and production costs. Then, it’s the turn of exporters with ICAFE. A miller can make a maximum profit of 9%.

Drying Coffee at Las Lajas Mill

Exporter's Perspective

The exporter buys coffee from a miller and sells it to an importer like The Coffee Quest. The exporter consolidates shipments, does sampling & paperwork, and plans logistical movements. The exporter will have expenses to complete the export, and declare the export costs and revenues with ICAFE. Exporters can make a maximum 2,3% profit on the export price.

ICAFE's Perspective

ICAFE’s role in the chain is very interwoven with all stakeholders. The organization helps the farmer on various developmental themes, like: agronomics, quality, sustainability and economics. In collaboration with the farmers, they do soil analysis, suggest fertilization schedules, help plant shade trees, and do research in new varieties and agricultural best practices. Through FONECAFE, it also maintains a security fund (0.6% of the export price), in case coffee prices fall below the cost of production for individual farmers. In order to fund their activities, ICAFE charges a tax or contribution on coffee business, which amounts to 1,47% of the export price.

At the end of the season, ICAFE will calculate a “Final Liquidation Price” from the revenues of all Costa Rica coffee exports, and the costs declared to make that revenue. Thereby they determine nationwide, how large the coffee pie actually was this year. A financial settlement then takes place among all coffee chain stakeholders, including each farmer. 

The Coffee Quest's Perspective

Price transparency is a complex promise to uphold. The result depends heavily on the structure of the sector, the amount of data available at moment of purchase, but also the time an import company to research the topic. 

In the Costa Rican context, it’s easy to get a FOB price that is paid to the exporter, or maybe from an exporting miller. This still doesn’t say anything about the price the farmer who grows the cherry actually gets. By buying coffee from a producer, who also processes, mills (often the case in niche specialty coffee), it’s more straightforward, however, this isn’t always the case.

The cherry farmer delivering to one of our micro-mill suppliers, will get 1 average price for his cherry as a result of the whole coffee season. The FOB price, The Coffee Quest pays to the exporter, will negatively or positively affect this average. We set our transparency ambition high at The Coffee Quest, so introducing more context is exactly what we aspire.

Worker at La Pira de Dota Mill.

Transparency is regulated by law in Costa Rica, and all internal prices and volumes as well as export prices and the final liquidation price per miller are published on ICAFE’s website. This means that we have been able to set up a calculation that derives the contribution of The Coffee Quest purchases in Costa Rica, to the final liquidation price to the farmer delivering cherry to the micro-mill.  

The method we use is based on data on our suppliers in ICAFE publications of coffee commercialization, which can be found here; ICAFE/coffee sector/final settlement benefit, and ICAFE/coffee sector/commercialization/sales per zone. The calculation results are validated, and costs are adapted according to interviews with millers and exporters. The result is a farm gate cherry price in Colones per Fanega, which we have translated for you into a price in Euro per kilo, in green coffee equivalent.

Context behind the farm-gate price

Our customers often want to know the farm-gate price, the amount that ends up in the farmers pocket. Without the right context this number is remains one-sided. How can we look at value addition in the supply chain? 

Not every farmer will deliver coffee in cherrry, others might also dry, wash, clean, export and commercialize the same type of coffee. The market mechanism in each country will take care of pricing. Let’s make sure the context is clear behind price transparency!

Hacienda Candelaria from Costa Rica

Driving through the regions such as Tarrazu or West-Valley show many new micro-mills on the side of the road. Hacienda Candelaria seems to be an excellent example of successfully reaching this point, as a result of a step they took some time ago. The family and estate are very involved in the local community and have sponsored a school and soccer field, among other contributions.

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