The Sourcing Process: Understanding Microlot Pricing

By Rachel Northrop

Historically, Arabica coffee price discovery and valuation have been based on a commodity market where the futures contract unit corresponds to the volume of physical coffee in a shipping container. Today, with ample demand for much smaller lots of coffee demonstrating more nuanced sensorial attributes than the regional qualities, which are assigned premiums or discounts in commodity trade, a new system is emerging for outright pricing based on costs of production, sensorial quality, and rarity. The development of new price discovery and valuation criteria reflects a trend across the coffee industry towards promoting financial sustainability of smallholder producers at one end of the chain and luxury lifestyle products at the other.

Coffee sales can be initiated in three main ways: buyers searching for sellers, importers and exporters connecting buyers and sellers, or sellers offering coffee to buyers. While it is more common today than ever for producers and roasters to visit each other in their home countries to see how coffee is grown and how it is served to customers, information about coffee flows more fluidly than the physical coffee itself, which must still traverse thousands of miles and travel out of at least one country and into another.

To facilitate the physical supply flow, the commodity system developed to promote consistency and reliable quality from specific regions of producing countries, always shipping coffee in full containers. Now that coffee professionals are exploring the possibilities of separating coffee into small lots based on where, when, and how it was grown and processed, these small batches retain distinct, individual qualities that make each lot a specific product. Buying and selling coffee in these microlot units is called the productization of coffee, where different products may share attributes but are not interchangeable in the way that commodities, by definition, are.

Commodity pricing is based on this concept of equivalency and is driven by the many factors—currency exchange rates, major weather events, global supply and demand—that influence other major economic indicators. Because microlots of coffees are unique in that each one displays a different combination of producer narrative, terroir and sensory attributes, and available total volume, a different array of factors determine the price.

As producing nations have developed and cost of living has increased, the commodity market price no longer yields small farm owners and workers living wage. Location-specific cost of production is the base factor for microlot pricing. Because it is exponentially more work to produce coffee in tiny batches, producers can only invest in this added effort if they can afford to put in the time. As with any business, the cost of making a product is calculated by accounting for the raw materials used, the price of labor, taxes and fees, and fixed costs related to land/infrastructure maintenance.

Therefore, microlot coffee is expensive even if it does not taste as delicious as everyone hopes. When small lots of coffee also meet high sensory standards, such as the Specialty Coffee Association’s rubric for assessing quality, then the lots further increase in price. High scoring coffee will always sell for a premium.

Finally, the rarity of a particular coffee, given many components that converge to yield a specific sensory profile, combined with measurable quality of a lot, drive price based on demand and scarcity. The primary example of this is Panama Geisha coffee. There is comparatively little coffee of the Geisha varietal planted and Panama’s farms are modest in size and produce a limited harvest. What they do produce consistently scores at top levels. There is a very limited supply of coffee that combines the sensory attributes of Panama’s volcanic terroir and the Geisha varietal. A small segment of this limited supply achieves close to perfect scores according to industry metrics, making the final product both impartially high quality and very rare. Panama uses the US dollar and has comparatively high costs of production. The result is coffee that exists in microlots of only several hundred pounds, selling for at or above $100.00/lb.

The more name recognition farms and producing families earn, the greater the demand without the capacity to increase supply. As with popular brands in any other industry, the combination of limited supply, demonstrable quality, and popular demand drives up price.

It is important to remember that microlot pricing is not determined by sensorial quality alone; creating separate lot registration, shipping documentation, customs declaration, warehouse intake, warehouse load out, and invoicing for each microlot of coffee also demands an increase in professional labor in both producing and consuming countries. Tracking and physically moving so many small lots of coffee is a costly activity. The result is a spectrum of distinctive, delicious coffees, but coffees that require a premium for all the added effort that went into making them, not all of which work directly correlates to added points in the final cup.

-Rachel Northrop is a contributor for the Specialty Coffee Magazine and the writer of When Coffee Speaks. 

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Photo Credit: Landon Yost
RACHEL NORTHROP is a contributor for Specialty Coffee Magazine. Her articles focus on agriculture, environmental and economic sustainability at origin, emerging US roasters and retailers, and the personal narratives of people involved at all points along the supply chain. She began researching coffee production in 2012 for the book When Coffee Speaks: Stories from and of Latin American Coffeepeople. She works as the Northeast US & Canada rep for Ally Coffee’s specialty division. Read more at whencoffeespeaks.com.

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