Perspectives on the New SCA Report On Farm Profitability

In an article published on Daily Coffee News, Kraig Kraft from CRS Coffeelands addressed the Specialty Coffee Association’s recently released report that reviewed existing public information about farm profitability and costs.

The main — and surprising — conclusion from the analysis is that farm yield is not correlated to farm income. On the surface, this seems somewhat paradoxical.

Why wouldn’t higher production lead to more income?

According to the study, “Increasing yield typically increases the cost per hectare to produce coffee, especially in the short term, and hence may decrease a farm’s profitability.” In other words, producing more coffee is expensive and cuts into a farmer’s margins.

Breaking down the calculation of net income, Kraft says that it comes down to basic economic theory. Per the law of diminishing marginal returns, when you attempt to increase production, the incremental output of each input decreases. For example,  if you spend $100 on fertilizers, for each subsequent $100 that you spend, you would not get the same increase in output that you got on the initial $100.

So it isn’t that greater productivity doesn’t help farmers – it is a question of the right level of productivity.

To get a better understanding of how commercial farms balance the issue of yields and profitability, Kraft reached out to Gustavo Cerna, supply chain director of MACERCAFE, a family business in Nicaragua that currently operates 10 farms, each about 200 hectares in size.

Cerna agreed with the findings, since it mimics an approach that they have on their farms after analyzing their costs and income to maximize their economic efficiency.

“We try to go for a medium level of productivity – trying to produce about 25 to 30 quintales per manzana (3500 to 4200 pounds per hectare of green coffee),” he said. “That’s the sweet spot. We’ve tried producing 40-50 quintales and it’s just too expensive and we are exposed to too much risk.”

Increased productivity requires increased cost of production – and increased risk. Higher yield requires some combination of the following management: higher plant densities, increased quantities and number of applications of fertilizers, and higher frequencies of renovation. Access to labor is also a factor, as more person days are needed to apply these management techniques and more hands are required to harvest the coffee.

What can a small farmer learn from this? What are the keys for producing in an efficient manner?

After discussing these questions with Cerna, Kraft shared the following ideas:

1) Understanding fixed costs and maximizing productivity

Gustavo Cerna:

“A farm needs to understand what their fixed costs are and how to maximize the productivity from these. These costs don’t necessarily contribute to the farm’s productivity, but the (fixed) costs add up.”

The SCA report said that fixed costs for farmers are nearly zero, but this is an oversimplification of the issue. Household expenses could be considered as fixed costs, as they are necessary for the farm to function. And as the report mentioned, the depreciation of trees needs to be included in these fixed costs.

2) Minimizing risks through medium levels of productivity

Gustavo Cerna:

“It’s too expensive to produce a lot of coffee. You may generate a lot of cash flow with higher yields, but your costs will increase and you’ll have a lot of cash coming out. It also puts you at risk for the next disaster — coffee leaf rust, the weather, a bad crop year. You’ll have the costs, but none of the income.”

3) “Radio de control”

Gustavo Cerna:

 “A smaller farmer has a greater level of control than on a larger farm on all aspects — the productivity of labor, quality control. This is an advantage they should try to maximize.”

Small farmers often lack access to capital in order to make investments into productivity. They don’t have the ability to absorb the initial decrease in profitability needed to have higher yields later on. Small farmers are often looking for the highest margins possible, which means they may invest less in the farm — or not invest at all.

This is an uncomfortable answer for the coffee sector, especially when we consider the future needs of coffee consumers and the 22 million farming families involved in coffee production globally. Given this situation, we need to reframe the narrative and think about farmer return on investment rather than absolute increases in productivity.

In the report, the authors criticized the promotion of “Good Agricultural Practices” because while they may increase yields, they may not necessarily improve profitability. Therefore, the question we must be asking is, “What practices provide the biggest ROI?”

It is our job to ensure that we measure the returns not only in purely economic terms, but also considering natural resources and social aspects. Coffee farmers produce more than just a commodity that is the driver of an industry that contributes 1.6 percent of the GDP of the United States. They produce drinking water for local communities; they are sequestering carbon (unfortunately at rates slower than humans produce it); and they are providing jobs to locals and migrants in need of cash for work.

We need to find ways to value all of these contributions in order to fully compensate coffee farmers.

Read the full post at Daily Coffee News

Kraig Kraft is the CRS Technical Advisor for Coffee and Cacao for the Latin America/Caribbean. He is based in Managua.