Friday, June 24, 2011

The Economics of Coffee

“Wake up and smell the coffee" was a phrase that was made famous in the ‘60s and ‘70s by the late newspaper columnist, Ann Landers.  She used the phrase in response to advice seekers who refused to see things that were right under their nose, for example, a woman stuck in a bad relationship and not doing anything about it.   It was her favorite phrase.  She used it so often that she even shortened it to WUASTC, which I like.  That has more class that the WTF or OMG acronyms currently popular.  I heartily agree with Ann Landers on almost all her advice.  The only problem was that the coffee Ann Landers was telling people to wake up and smell wasn’t very good. 

For most of the last hundred years, Americans have been drinking swill.  Really terrible coffee.  Part of the problem was the way it was prepared in percolators that recirculated the coffee over and over again through the grounds—brum papa, brumm papa.  Another part of the problem is that a lot of that coffee was robusta coffee, which is lower quality than Arabica coffee, which is the better and more expensive of the two species of coffee.  Robusta is what most mass market R&G (roasted, ground) coffee is.  This is also known as institutional or as I like to call it truck-stop coffee.  

Robusta has some advantages.  Robusta as the name implies is hardier, so it grows well in more places not just in the shade and in the mountains that Arabica plants prefer.  Vietnam is a big exporter of robusta coffee.  Another thing robusta has going for it is it’s higher in caffeine. 
Is caffeine bad for you?   I think caffeine has gotten a bad rap. It's been blamed for everything from excessive insomnia to birth defects, but there's little to no support for such claims.  And there have been a lot of scientific studies.  In fact, there’s some recent scientific evidence that caffeine actually works against liver disease and Alzheimer’s. So, if you’re drinking too many other adult beverages that cause liver damage you should consider adding a few cups of coffee.  The consensus scientific opinion at this point seems to be that caffeine risk is "nothing to lose sleep over."

The main point that I want to get across is that coffee is a perishable food - just like fresh produce or bread- and is best when it’s fresh roasted.  It tastes best one or two days after it’s roasted and stales quickly after that.  Unlike stale bread, which is inedible, stale coffee can still be drunk and enjoyed, especially if you add milk and sugar.  This is what most big commercial coffee companies are banking on.  They want you to think that coffee is these brown granules that come in a can rather than an agricultural product, where freshness counts.  What most people don’t realize is that most commercial coffee sits on the self for weeks or even months after its roasted.  Yes, that includes the 5 lb bags of French Roast beans you buy at Costco. 

The history of coffee is a fascinating subject.  Arabica coffee as the name implies came from the Arabian peninsula.  The story goes:  1500 years ago a shepherd boy was herding his goats and fell asleep.  When he woke up the goats had wandered away and when he went to look to them he found them chewing on a bush and acting very frisky.  He tries some of the berries and began feeling frisky himself.  In time, coffee was adopted and adapted to grow all over the world.  Today, coffee is the 2nd most trafficked commodity in the world after oil. 

I’m sure you’ve heard about fair trade coffee so I want to go into the economics of coffee a bit.  Fair Trade is a social movement that tries to get a higher price for coffee growers as well as promotes higher social and environmental standards.  Problem with Fair Trade movement is that it deals only with coffee co-ops, not small, family-owned farms.  I prefer the approach Sweet Maria’s in Oakland takes.  Sweet Maria’s is one of a small number of importers of green coffee beans that caters to artisan and home roasters.  Sweet Maria’s has a Farm Gate program, which is a direct coffee buying program that cuts out the middleman and deals directly with the farmer.  They also guarantee prices that are 50% higher than Fair Trade to the farmer and they have a higher quality standard than Fair Trade as well.


Coffee economics:  Let’s get specific. 

A local roaster (I’m not going to use the example of either Peet’s or Starbuck’s since they’re national and not local roasters).  A hypothetical local coffee roaster will pay something like  

  1. $1.30 a pound for Colombian green beans (and remember that this price can fluctuate wildly).
  2. Add 11 cents for freight-in, storage, and handling
  3. then factor in another 31 cents for the 18 percent weight loss during roasting (coffee is like popcorn, it expands and loses weight during roasting)
  4. 12 cents a pound for the fuel for roasting,
  5. 25 cents to hand-pack the roasted coffee in 5-pound valve bags for wholesale shipments
  6. Add 30 cents for shipping costs.
 That brings the total to $2.39, so far. 
  1. Add $2.15 to cover overhead for the roaster and distributor (overhead includes everything from mortgages and machinery loans to sales commissions, repairs, and garbage removal).
  2. Then tack on 24 cents profit (about 5 percent),
Our grand total is $4.78 to deliver wholesale roasted coffee to a specialty retailer (like Whole Foods).
  1. Depending on the retailer's size, rent, and other overhead costs, he or she must then charge between $8 and $10 a pound to make reasonable profit.
 Taking the coffee beans one step further, to a coffeehouse outlet,
  1. the coffeehouse proprietor converts the $4.78 per pound beans into regular coffee at $1 a cup or cappuccino or latte for $2 or more.
  2. If the proprietor gets 40 cups to the pound, that translates to an egregious $40 to $80 a pound for coffee in beverage form, minus the cost of the milk, stirrers, and sweeteners. 
 On the other hand, coffeehouse owners have to pay astronomical rents and allow customers to hog a table and sip their single cup of coffee for either solitary reading or to listen to long, boring conversations about esoteric subjects like the economics of coffee.
All these figures come from Mark Pendergrast’s book UncommonGrounds and are about 10 years old but the ratios are probably still valid.

Bottom line:  We live in a capitalistic society and as a consumer; you’re the one who has to decide if these high costs are justified, at least in terms of the U.S. economy and lifestyle.  But I agree there still is a big disparity between the affluence of the United States and the relative poverty of Central America and other coffee-growing regions. 

But here’s my final word on fair trade coffee:  if you want more economic justice in the world you should consider cutting out the middlemen and buying directly from the grower or if you can’t do that buy from the person that roasts the coffee.  That’s one way to be assured you’re getting fresh coffee and good coffee.

But that’s not my main call to action.  My main call to action is this:  when you order your coffee, taste it first before you dilute or doctor it with milk and sugar.  That’s your best assurance you’re not drinking stale coffee.  Remember coffee is a perishable food -- just like fresh produce or bread-- and it tastes and smells best when it’s fresh roasted.  If you do that, then … when someone says to you “Wake up and smell the coffee,” you just might want to do it.