Bryan Hasho

Mediocre Economics and Specialty Coffee

Some Measurement

Specialty coffee’s fervor for ethical green buying should be matched by the carefulness of its analysis.  As we continue to push a more progressive approach to conducting business abroad, we must maintain an appropriate degree of uncertainty, and take a similarly progressive approach to measurement.

Take  Counter Culture’s Direct Trade Transparency Report, the most recent of which was published in 2012 and is among the more progressive documents in specialty coffee buying.  In it, you’ll find a list of coffees purchased that year along with the Free On Board price, which is the price they paid at the point of export.  Here are five of the coffees listed, the country in which they were purchased from, and the price paid.  They are very productive, as commodity coffee prices hovered around $1.50 that year.

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Now let’s introduce Purchasing Power Parity (PPP), which lets us correct the exchange rate, which is affected by speculative investment forces and the distribution of the exchange rate components.  Basically, Purchasing Power Parity tells you how much everyday stuff you can buy.  The Economist’s Big Mac Index explains this plainly: if you go to Switzerland this weekend, you’ll get .9 Swiss Franc for your dollar.  But a Big Mac, which costs $4.16 in America, will cost you $7.14 dollars converted to the Swiss Franc.  So although you’re getting 90% Franc for your dollar, you’re able to buy 42% less Bic Mac.  Right now we’re seeing these price factors in the American importation of roasted Nordic coffees.  Tim Wendelboe and Drop Coffee undeniably produce some of the best coffees in the world, but that their retail prices are twice that of American specialty coffees is, I suspect, less a function of production costs and profit margin as it is currency dynamics.  Purchasing Power Parity corrects our exchange rates for these considerations.

Let’s adjust the Counter Culture prices for PPP:

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Ignore for the moment how much the values decline.  What’s relevant here is the change in price relative to the aforementioned exchange rates.  The Mpemba and the El Gavilan have roughly the same cupping scores (88, 88.5), so in the event a buyer needed to purchase only one of that quality, it would, on the surface, be well within reason to chose the Burundi, which would save them 12 cents per pound, or 3.8% of his investment.  After adjusting for PPP, however, we see that if they were to chose the El Gavilan, the Ecuadorian farmer would come away with 43% more purchasing power.

This might be important to your green buyer because he or she wants their decisions to be advantageous to the farmer’s well being.  Or perhaps your buyer is interested in increased access to the supplies the farmer needs to improve his operations, growing his business and improving his product to the benefit of their relationship.