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  • QA 112
    Question:
    Do any guidelines exist for the setting of producer or farm gate prices?
    Background:
    Expertise in coffee was lost after the wars (from 1990) and the market has changed. Can you indicate the percentage of FOB prices that go to farmers in other countries? Differs and depends on services by traders and others but rule of thumb or guidelines would do. We follow international prices daily but have to agree prices with domestic buyers/exporters.
    Asked by:
    Association - Liberia
     
    Answer:

    The brief answer is no. In today's liberalised coffee market farm gate prices in the majority of producing countries are determined by supply and demand. To note though that the proportion of the market price, usually FOB*, that growers receive differs enormously between countries, ranging from as high as 90% to less than half.

    *FOB - delivered free on board export vessel.

    We are not aware of any recent studies comparing FOB values with producer prices for West African robustas and therefore can only offer a very generalised impression…

    The International Coffee organization in London (www.ico.org) provides regular information on prices.Market Prices (ICO Indicators - see topic 01.04.01 of the Guide), and Prices Paid To Growers in member countries (although not all countries provide these regularly, or at all). To note however that because of vastly differing quality and product standards at farm gate level, it is difficult to compare these market prices to fob values. Nevertheless, a comparison of the ICO Indicator for robusta coffee, adjusted to FOB, suggests that in 2003 and 2004 growers in Togo received over 70% of the FOB value. With around 60% growers in Cote d'Ivoire received less whereas the same calculation suggests that growers in Ghana received around 40% only.

    There is a direct link between the proportion growers receive and the success or otherwise of a country's coffee industry. Brazil and Vietnam, the worlds two largest producers, are good examples in that their production has shown strong growth: in both countries growers receive between 80 to 90% of the FOB value! Current estimates put production in Brazil at 40 million bags plus, and that in Vietnam at 13 to 14 million bags (of 60 kg). 

    Factors influencing grower prices include the level of competition (or lack thereof) at the farm gate, as well as a country's taxation and exchange rate policies. Where these factors are clearly unfavourable, production stagnates or falls whereas illicit cross-border trade is encouraged.

    Access to (accurate) market or price information is another major determining factor for farm gate prices. However, before translating international prices into suggested farm gate prices one should first establish the relationship between the quality represented by those international market prices, and the quality being offered at the farm gate*. Once this is clear then establishing a more or less accurate linkage from the FOB price back to the farm gate would enable one to translate international quotations into a local equivalent that growers could follow, using daily radio broadcasts for example.

    However, extreme care should be taken that such indications do not present an unrealistic picture… Over time average farm gate prices do have a close relationship with FOB values. But, because of time lags between prices established in the international market and prices set at the farm gate, these two sets of statistics are not necessarily related to each other on a daily basis.

    *In this respect we would most certainly recommend to include the option of producing washed robusta in your review. For more on coffee quality generally see chapter 11 of the Guide - topic 11.01.02 offers a schematic overview of the production process whereas section 11.09 deals with robusta. Chapter 12 covers quality control issues.

    Posted 24th of August 2006.
     

    Related chapter(s):
    Related Q & A:
    Q&A 068, 072