The Magic Formula

…a magic formula…and an application.

The Formula:

Back in Juan’s World: Factor 90 and again in Worth I mentioned a “magic formula” that the coops use to determine the price that goes on the board out in front (meaning it’s public and therefore the same for everyone, whereas middlemen never have boards…) which becomes the starting point for figuring out how much a given grower will get for his/her coffee, accounting for the factor of course.

On Monday I was lucky (or bold?) enough to get one of the top dogs who guards the magic formula to give a gringa a math lesson.

Here it is: the magic formula that turns the New York futures price in dollars per pound to pesos per kilo (with data from Monday, May 20, 2013.)

1.35 x 1,842 x 219.2 x .95 = 517,000 pesos per 125 kilo “carga” of Factor 92.7 coffee in dry parchment! Magic!

Now, what in the world do all those magic numbers mean?

1.35    NYC price in dollars per pound

1,842   US dollars to Colombian pesos exchange rate

219.2   # of pounds necessary to get 125 kilos of coffee in parchment. This one’s a little tricky. 219.2 pounds only converts to 100 kilos. But we know from the previous math lesson that 20% of the weight of coffee in parchment is just burnable parchment (I say burnable because it usually does get burned as fuel for drying more coffee) and only 80% of the weight of coffee in parchment is exportable green coffee beans. 219.2 pounds is equal to 100 kilos, which is 80% of a 125 kilo carga. So a 20% parchment rate (known as merma) is rolled up into the posted price. Which is why the buyer takes a sample; if the coffee you bring in has less than 20% merma, you’ll get a slightly better price accounting for the higher percent of green beans you’re bringing in.

.95   This is the big one. Once the price in dollars per pound is converted to pesos per kilo, a maximum of 95% of that price is passed onto the seller. So the least greedy bite off this layer of the coffee pie is 5%. Although the coop is buying the coffee they aren’t the ones to actually see this 5% per se; it all goes to cover the costs of “commercializing” that coffee, meaning hulling it, transporting it, and storing it before finally selling it to an exporter, be it the FNC’s own Almacafe or an independent agent- like the ones middlemen sell to (so theoretically the coffee you sell to the middleman and to the coop could all end up in the same place).

Sometimes another 2%-4% gets eaten by the regional coops, for example if the points of purchase are extremely remote and require extra long transport to hulling mills/ports. So if the coop automatically takes 5%, and at most another 4%, the grower can still expect to get over 90% of the international trading price.

Not bad? Bad? Kind of irrelevant. Obviously the higher the percentage the better, but with a low price to start with and a weak exchange rate, even a 100% transference still doesn’t meet the cost of production.

Which is why the commodity market as a price setting mechanism seems, to growers, to be the absolute most illogical method for determining the price paid for something that always has a very straightforward cost to produce.

Growers are constantly grumbling about low prices (justifiably so, they’re loosing money just to keep the harvest from falling rotten to the ground), and have a history of accusing the FNC of pulling low prices out of the air.

Every region publishes and distributes a “coffee growers’” newspaper to its caficultores. Every single edition from every region I’ve seen includes an explanation of whence commeth the magic price on the sign board. The Risaralda region’s includes my favorite explanation yet: “speculators are market agents who look to gain an advantage from the movements the market offers; paradoxically without having the slightest intention to do anything with actual physical coffee.”

Basically:

“You’re absolutely right that these numbers are being pulled out of the air. It’s just that it’s not us doing the pulling; it’s someone else.”

The price paid to growers (landowners) determines the price paid to employees, like seasonal pickers. There was a lot of math (again! Sorry…) in this, and if you like math then maybe you care. But you probably don’t really want to know about conversion rates, you probably just want to know if the price being paid is a fair one.

The method in which the price paid to growers is determined is fair (well, fair in the way it’s fair to say, “if a kilo of bananas costs $3 the for that $3 you should be getting a kilo and a quarter, because a quarter of every kilo is just peels.” I find obsessively calculating the merma to be a bit petty, especially because it can be used as fuel so it doesn’t just get ‘thrown away’ or wasted).

But a fair enough method is only fair enough if it’s applied fairly, and while I have far from been to every purchase point of every coop in Colombia, the ones I’ve been to do fairly plug in all the numbers to a consistent formula for every seller who walks in.

But does a fairly applied fair enough method make the final price fair? Not really. Because in my understanding a fair price justly compensates someone for the work done; “justly” meaning actually pays someone for the work they’ve done, meaning pays them according to how much work it took to produce the thing you’re buying. So I would argue that the final price paid to producers is not fair simply because it never takes into account the work that is done; rather, it takes into account the activities of people “who have no intention of doing anything with actual physical coffee.”

I’ve met some of those people. Because of their role in this unfairness I want to hate them. Some of them are in fact rude and self important and hateable. But a lot of them are nice people, who will open the door for you and have pictures of their kids and the golden retriever as the backgrounds on their phones.

I had the chance to ask a few of them how they felt about what they do; knowing they’re making enough to have a BMW and the people who generate the actual physical coffee they trade-without-seeing/touching aren’t making enough to put rice in the bowls of their children year round.

The answers were always vague, “well, we all have our parts in the system, one couldn’t exist without the other…” kind of nonsense. I don’t think the vague nonsense is a product of these people being mean spirited individuals who don’t care about the livelihoods of others (although some probably are); I think it’s a problem of scale.

Thinking that if you make an extra 50k this year you’ll be able to buy your wife an extra nice piece of jewelry is a very concrete, direct, and cause-and-effect thought to have as motivation for making a lot of money this quarter.

Thinking that there are 25 million plus people hanging on your every move, praying to the Virgin or wallowing at the bottom of a bottle in desperation that the Magic Formula will turn in their favor and the price will go up is a very abstract, indirect, correlation-might-not-equal-causation thought to have. It’s too big to think about; we can only begin to conceptualize impacts on such a scale when we really, really need to or when we really, really want to.

The thing no one is saying is that most of these “no intention to do anything with actual physical coffee” people don’t need to and don’t want to attempt to think about something so massive. They’ve never met the people the commodity price most effects, and they don’t have to worry about running into them; if they did they would have to think about the real, human implications of the price they manipulate. The impactees are comfortably far away, and people usually don’t go out of their way to force themselves to think about something uncomfortable.

The people who work in coffee without seeing or touching it will never say it- probably to me or anyone- but they don’t make a habit of finding out what’s happening in or making the trek to comfortably far away places because they know that if the growers were to actually meet the people most responsible for moving the price on which they all depend, they would throw stones. 

The Application: Sustain Yourself

Part of the reason so many tropical land holders flip flop between the crops they cultivate is because when they choose what to plant and how to plant it they are exercising some influence and some control over their own lives and well being. The price of commodities is something that completely and directly affects them and their families, and yet they can grumble and pray and drink and wallow and scream and strike all they want, and the price will never blink. One of the most influential factors in their lives is something over which they have absolutely no control.

They can choose who they sell to, so obviously they shop around. And they can choose whether or not to keep growing a crop that is keeping them broke. Even though growing coffee is much more of an investment than growing corn, because the trees can live as long as people, you can rip up trees and buy thousands of seedlings pretty much from one week to the next.

If you’re going bust (which a depressing number of people in agriculture are, all over the world, all the time) the most difficult thing to do is nothing. To just wait and hope and do nothing feels pretty futile. Some growers respond by putting extra care into their finca to ensure that they will always be able to sell their coffee for a premium- via certifications or just via a really low Factor. Some choose to build their own dry mills and look directly for buyers and export by themselves to thus enjoy returns from higher up the supply/value chain.

But some ditch coffee- all or part of it- and plant bananas. Or tomatoes. Or just head to live with a sister in the city and leave their farms to be overgrown. Pretty much everyone who’s ever written about coffee points to the coffee cycle; when prices are high everyone plants coffee, such that in 2 or 3 years when that coffee produces a harvest there’s an overproduction and the price plummets, leading lots of growers to leave their farms, thus lowering production and driving the price up all over again.

That might have been true in the past (like when there were coffee quotas), but now weather is playing a more drastic role; the Central American coffee lost to roya is a huge chunk out of the coffee pie that has nothing to do with planting/abandoning in response to price. Neither did the La Niña that affected Colombia the past few years.

The factors affecting production are much more than just price. And conversely the factors affecting price are more than just production. From here at origin it looks like the majority of the factors affecting price have nothing to do with how little or how much people are producing; but that’s the trouble with the view from origin. If you’re a grower you can only ever see what’s going on at your own origin, and even though production volume (and related supply/demand triggers) might not be the strongest influence on price, they will always have something to do with it. So the amount/type/quality of coffee being grown at all other origins around the world is wound up in the price you get, and you have as much influence over fertilization in Vietnam and picking in Ethiopia as you do over short and long positions on Wall St.

Maybe from the trading desks in Hamburg and Rio and the Big Apple they’re all saying, “if only Brazil would stop turning out massive harvests the price would go up!” or “if only India would grow as much Arabica as Robusta the price would go down!” I don’t know what they’re saying, but I know they’re grumbling and praying and drinking and wallowing almost as much as (just as much as? More than) growers at origin. The only difference is that their actions do affect the price in the end; they can just never really be sure how, because they don’t know what all the other people are doing, which is why speculation is so risky and, well, speculative.

The commodity price of coffee keeps everyone up at night, and it stays as a thorn in my side because it doesn’t have anything to do with the actual physical coffee I’ve spent the last 8 months learning how to germinate, plant, prune, harvest and process.

I keep reminding myself that all prices are arbitrary anyway and linked to all other prices; the cost of producing coffee is what it is because the costs of fertilizers and agrochemicals are what they are (and who sets those?) and the cost of paying workers only is what it is because they costs of groceries, cigarettes, bus fare, health care and a cold beer are what they are (and who sets those??)- which ends in an economic black hole.

So man invented markets. And magic formulas. And neither of them have any soul or any ears to hear human supplication. So you do what you have to do to survive in spite of them.

You build furniture out of the trunks from felled coffee trees and you sell that too. You send your son to auto mechanic school so he can make money and then fix all the vehicles on the farm for free. You plant bananas and beans to cut grocery costs. You build a roaster from a propane tank screwed to a desk and roast your coffee and package it in little paper bags with hand drawn labels to sell around town.  You invest in bulk soda and candy from the warehouse an hour away and open up a store on the mountain top. You hire two really fabulous workers and pay them high weekly wages so they’ll do better work than four shoddy workers paid daily piecemeal. You machete hack some jiraca fronds from the jungle, dry them and make brooms to sell. You turn the roof of your house into a coffee drying patio so you don’t have to pay for the electricity of a dryer. You paint porch, dust out the bedrooms, bust out the wedding china and turn your hacienda into a hotel. You build a path through your forest and call it an “ecological reserve” where schools can pay to bring field trips. You slap a “Coffee Tour!” sign on the beneficio and charge tourists to see what you’re already busy doing. You invest in a load of California Red Wiggler worms, chop down and dry a bunch of bamboo to build raised beds, and you turn your coffee pulp not just into filler, but into black fertilizer as rich as what you buy at the store. And then you use that to cut your fertilizer costs and to sell to other farms also looking to cut costs.  You get ingenious.

Ingenuity is sustainable, but it’s also sustaining. The Magic Formula doesn’t care whether you eat or not. So you have to get creative.