The Economics of Coffee: From Cherry to Cup
Follow our hypothetical cup of story and you’ll never see coffee in the same way.
It’s five in the morning. Rob in Chicago opens a bag of Kenyan whole coffee bean to brew a cup. Eight thousand-plus miles away across the Atlantic, Bushogo keeps out of the afternoon Kenyan sun and takes a breather in his shack. He has been tending the coffee trees in his small farm in Machakos since when Rob was getting ready to sleep the previous night. Rob and Bushogo, separated by an ocean, culture, time and lifestyle, are as intertwined to each other as the coffee and cream that go into Rob’s cup that morning. In our age of global economy, when Rob opens that coffee bag or Bushogo picks the day’s first coffee cherry, they set in motion a complex economic chain that hundreds of enterprises around the world are built on and hundreds of thousands of lives depend. This is the economics of coffee and this is our story from cherry to cup.
High in the hills of Machakos one early morning, Bushogo beams with excitement looking at the 500 or so coffee trees in his patch of land. They’re ripe for the picking. He should be excited. He has invested much to cultivate this year’s harvest. The International Coffee Organization, the global agency monitoring the economy of coffee, estimates that Bushogo may shell out around $136 per 60kg bag of cherries to cultivate his farm. The costs include water, fertilizer, pesticides and labor to pick and pack the cherries. Not that Bushogo has it good. He lives in a shack and only three of his five children can afford public education. He has to summon luck that this season, his cherries sell for a profit because coffee, like the dollar, can fluctuate at the whim of the world market. Failing to finish fifth grade, he may not understand the stock market; he just needs to know that he has to sell more than $136 per bag today. If not, he has to cut his kids’ school fees to have enough money to plow back to next season’s cultivation.
The Coffee coyote
Bushogo and his workers stack the last bag of cherries in a makeshift storage beside his shack. In a little while, a truck pulls over. It’s the coffee coyote, so called because this trader middle-man is known for his ability to rip coffee farmers of a fair price for their harvest. “Habari Gani?” the trader asks Bushogo in the same sincerity Americans greet a stranger with a how-are-you. Bushogo is ready and demands a fifty percent margin per bag. The trader, thinking for a few seconds, agrees. The bags of cherries are loaded to his truck and soon the trader’s clunky truck is rolling off to the dusty horizon onto the next farm.
Bushogo is happy his kids get to go to school this year. But the trader is happier. On his way to a coffee mill, he knows he can sell Bushogo’s cherries at three times the price he’s paid the farmer. The trader knows his game. He has good enough savings and education to pull his trade of buy and sell. Unlike Bushogo, the trader lives in the city where he keeps a modest house, modest furniture and possibly a decent car. He follows coffee prices in the Internet that when Bushogo insists on a 50% margin, the coyote thought that’s a real win from his 150% allowable cap. With the price he’s selling Bushogo’s cherries, the trader can easily cover his overheads: the cherries, his driver, two cargo hands and the fuel to run the fifty-five kilometer stretch from Machakos to Thika, the industrial town where Thika Coffee Mills will transform Bushogo cherries to coffee beans.
Our coyote arrives at the milling factory. But first he unloads Bushogo’s bags of cherries to an auction room. Here, prices are bid but centralized by the New York Coffee Exchange, where producers and buyers around the world hedge against the cash market (today) and futures market to manage price speculations. Our coffee coyote is up for this. He has loads of coffee cherries from other farmers aside from Bushogo’s. He can sell half of the farmers’ cherries now and hold on to the other half to speculate for higher margins in the future in case a frost in Brazil or a lost shipment in Vietnam in weeks to come may drive prices up. This is our coyote’s enterprise and he makes or loses his fortune on the tide of circumstances. But Thika Coffee Mills doesn’t rely on the tide or the weather. From here coffee becomes the big business’ playground that runs a global market built on mass consumption and dictated by consumer behavior .
The Coffee mill
Our coffee coyote sells Bushogo’s cherries at a premium and they’re now ready for processing. One of the biggest and oldest mills in Kenya, Thika Coffee Mills buys cherries from coffee estates, farm cooperatives and traders from nearby plantations. Bushogo’s cherries will go through dry milling to separate the pulp from bean. From here, they will go through a series of steps to remove foreign materials such as stones and rubbish, and separate the parchments and husks to reveal the gold within: the raw coffee bean also called green coffee.
Coffee mills are often in the urban center surrounded by large tracts of coffee farms. They are far and few in between because running one requires serious capital in a weak Third World economy, from $230,000 to $345,000 to construct the complex alone. It will need investment in machineries for pulping, fermenting, washing, drying, thrashing, grading, packing and storing; and business acumen to organize management and labor to run the plant. It is no surprise Thika Coffee Mills is owned by Pius Ngugi, one of Kenya’s richest men.
At this point, Bushogo will no longer recognize his cherries not only because they are now clean, smooth green beans and neatly packed in bags by grade (density and size), far from his rugged, random and reddish brown cherries; but because they are now prized exports, not the ordinary farm produce he has sold the coyote a few days ago.
From Kenya to USA
A Norwegian ocean liner carrying bags of green coffee among other imports arrive at the New York harbor from Kenya. The Port of New York and New Jersey Authority knows the bags come from Kenya not because the label says KENYA WHOLE COFFEE BEANS-Thika Coffee Mills, but the shipper has papers that prove it. Even before leaving Kenya, the bags have already been pre-sold to an American importer, one of the biggest coffee house companies in the world. A representative arrives at the port, fulfills some paperwork and starts loading Bushogo’s green coffee to a spanking clean, climate-controlled, GPS-enabled delivery truck with the coffee house company’s green logo printed on its sides. It drives 186 miles to York, Pennsylannia where our coffee house company operates a $70-M sprawling, state-of-the-art roasting plant. Every week, tons of green beans from South America, Vietnam, Kenya and other parts of the world arrive at the plant, which can store up to 48 million pounds of beans ready for roasting.
The plant is a thriving economy in itself. It can employ as much as 140 manufacturing jobs on top of teams of managers and specialists who are needed to run the facility. Furthermore, the plant generates indirect economic impact across its supply chain, from construction to shipping and services that run the gamut of maintenance, engineering and marketing. Multiply the plant’s capital movement by the four other roaster plants that our coffee house company operates across the United States and you have one of the country’s capital machines that keep the American economy humming, all built on Bushogo’s and other farmers’ cherry beans.
Bushogo’s green beans are now herded through complex stages of pneumatic conveyors, storage hoppers, drum and hot-air machines and centrifugal roasters for sorting, roasting and cooling to achieve the exact flavor and aroma of gourmet whole beans. From here the roasted Kenya whole beans from a small farm in Machakos, funneled into retail packs and labeled with our coffee house company’s famous green logo, will be more familiar to Rob of Chicago than Bushogo in Kenya.
But Rob has to wait. The plant will not drive from Pennsylvania to Illinois just to deliver a batch of Kenyan whole coffee beans. Our coffee house company needs an economy of scale to deliver its goods to cut transportation costs. So it rides on the distribution network of another company to reach Rob.
Our coffee house company delivers its weekly quota of gourmet whole beans—Bushogo’s roasted bean included—to a warehouse facility within the state. From here, a logistics company takes over Bushogo’s coffee, now neatly packed and labeled as a U.S. brand. Unlike the coffee house company, the logistics company has volumes of other goods from other companies to deliver, so it can afford to send out a fleet of trucks at a predictable daily schedule. The coffee house company loves this because it knows that in two weeks, its Kenya whole coffee beans stock in Chicago will run out, and it relies on the logistics company to ensure that when Rob walks into his favorite shop next week his favorite gourmet coffee brand is there to greet him.
The logistics company is a major economic machine, too. It employs nearly 7,000 people including professionals and specialists to run its ten distributing centers across the country running on multiple-shift schedules to operate food grade facilities, climate controlled warehousing, inventory tracking and fleets of transportation. A capital-intensive business, our logistics company maintains state-of-the-art inventory and management systems to operate all these functions just to make sure Bushogo’s roasted beans reach Rob in time.
Rob enters coffee shop
Kenya whole coffee bean is Rob’s favorite. It has a twinge of acidity masked by a subtle flavor that shifts from berry to spice. Every morning, he makes sure he gets a cup before driving to his marketing job in downtown Chicago. Every other week, he stops by the coffee shop at the corner to get his supply. The shop, run by our coffee house company that roasted Bushogo’s beans, is just one of the 1,700 cafes spread out in the United States. Each branch employs between 20-30 people to run the shop. Each branch will be tapping local media for promotions. And each branch will be paying taxes to the city, state and federal government, more or less. The shop depends on its well-paid city clientele, mostly professionals that need some perk to run their respective functions in big-shot companies.
There is little chance that Rob will meet Bushogo in this lifetime. Every day, Rob will be grinding and brewing the beans, pouring them into a cup, and savoring its rich aroma in an almost ceremonial fashion, Bushogo, meantime, will be tendering his trees on the other side of the planet to make sure Rob can do his ritual every single day.
OTHER COFFEE RELATED ARTICLES YOU MIGHT FIND INTERESTING:
- There’s still a lot of people out there who ask “what is Fairtrade?” and they wonder why it should matter to them. Read our article and find out how Fair Trade works and what you can do to help.
- Do you ever wonder what’s the origin of the coffee cup you drink every morning? In this infographic we embark on the complex yet fascinating journey through the world of coffee economics.
- Do you want to learn how to make coffee like a pro? Our coffee infographic will teach you how to do that and share some cool tips, tricks and trivia for good measure.
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