by Maria Hill, Say Hey Girl

Over the past few years, the specialty coffee industry has experienced a fluctuating market with coffee prices trading slightly higher than traditionally expected. A shift in the price of coffee also affects the price of the finished cup, which has led even major cafe chains to increase their menu pricing. For consumers, the increase can be a bit confusing—a cursory look at the futures market shows coffee trading around $1.75 per pound, but when a consumer purchases a pound of coffee from their favorite roaster, they are paying $9-$12 per pound. So where is all the money going?

According to Ric Rhinehart, Executive Director of the Specialty Coffee Association of America, it turns out the money being made is not in the price difference between a pound of green coffee and a pound of roasted coffee. Instead, there are a lot of smaller moving pieces that make up the overall cost in a cup of coffee.

The calculation for any cup of coffee starts at the farm gate. Typical expenses at origin include labor, fertilizer, inspections, certifications (Organic, Rainforest Alliance, Fair Trade), transportation, and membership fees (if the producer is part of a cooperative). While the costs incurred by farmers are relatively easy to identify, they can vary dramatically based on the size and location of the farm and type of coffee the farmer is producing. This makes it challenging to calculate how much it actually costs to produce an average pound of green coffee at origin.

( Download 2014 Economics of the Coffee Supply Chain)

Once the coffee has been harvested, processed, put under contract by exporters, and transferred to importers, it moves on to the roaster. Roasters take on the actual cost of coffee: the agreed-upon purchase price per pound negotiated with the contract holder, as well as any add-ons, like import/export fees and transportation. During the actual roasting process, coffee has about 18 percent loss or shrinkage, so that pound of green coffee ends up as .82 lbs of roasted coffee. What does that mean as far as cost? Let’s say a roaster buys coffee for $2.25 per pound. After the 18 percent shrinkage during the roast, the adjusted price of that same pound of coffee is $2.75. General operating expenses like labor, overhead, and packaging bring the final cost of a pound of coffee to around $6.50. The roaster needs to make a profit on that pound of coffee when it is sold to a cafe, so the final price would be in the neighborhood of $7.50 per pound.

Cafes are the final stop on the cost-analysis chain. According to Rhinehart, “One thing that every farmer everywhere knows is a cafe typically sells coffee for $3.50 a cup, and you get about 50 cups to a pound of coffee. So theoretically, there should be $175 in a pound of coffee. They know they are only getting $2.25 per pound.” If we take a closer look, however, the actual yield on the pound of roasted coffee is not 50 cups. Cafes that follow the SCAA Golden Cup brewing standards use 3.75-4oz of coffee to brew a 64oz pot of coffee. Consumers purchasing brewed coffee in a cafe setting are typically ordering 16oz drinks. This means there are about 15-17 cups of coffee per pound once it has been brewed. If the retailer sells the 16oz brewed coffee for $1.95, the gross sales generated on a pound of coffee is around thirty dollars. While it would still appear that the cafe is making well over twenty dollars in profit, there are fixed costs. Rent, labor, utilities and other general overhead must be covered before an actual profit is realized.

Now that we have a better idea of where the money is going to produce a cup of coffee, we also need to address what’s lacking in this system. The current mechanism used to determine pricing for specialty coffee is inadequate and does little to empower farmers. It does not allow farmers to price coffees based on their value instead of the price determined by the futures market. As Rhinehart notes, “The coffee market looks at coffee with a small c.” In other words, “all coffee is coffee” and the only person in this process that is truly subjected to the whims of the market is the farmer. If a roaster suddenly increases their price on wholesale coffee, the retailer has the option to raise menu prices. If a roaster is told by their importer to expect a cost increase, the roaster has the option to raise prices for their wholesale customers. If the cost of production suddenly goes up for a coffee farmer, they have few to no options, because the selling price for coffee is determined by an average market price.

The other piece of the conversation that’s missing is that roasters are not buying “coffee with a small ‘c’,” and specialty consumers are not drinking it that way. The kinds of coffee used in the specialty category drinks represents 30 percent or less of the coffee in the world. While most of these coffees are reasonably priced, top-quality coffees are becoming increasingly scarce and expensive. The good news is that at least roasters, retailers, and consumers are in agreement that not all coffee is coffee.

Calculating the true cost of a cup of coffee involves navigating a complex system where small profits are carved away at each transaction point. Unfortunately, average consumers don’t understand the whole value chain. Roasters and retailers are working to raise awareness though participating in programs like Fair Trade and direct trade, so when a consumer purchases their cup of coffee it reflects a fairly compensated and empowered producer.

Maria Hill is a freelance writer, blogger and founder of the social media management company Say Hey Girl. She has been involved in the coffee community in a variety of roles: SCAA staff member, event manager and coordinator, and volunteer. Maria resides in Sacramento where she can often be found enjoying her favorite snack: a warm glazed doughnut and any coffee from Ethiopia.