Price - balancing
supply and demand
Coffee prices are determined day-today
on the world commodity markets
in London and New York and with so
many intermediaries standing between
the producer and the consumer, how
can we ensure that coffee growers
receive a fair reward for their labours?
Is the answer - as some believe - for
coffee manufacturers to cut out the
intermediaries, buy their coffee direct
from farmers and guarantee a minimum
price?
The price of coffee is determined by
the relationship between the amount of
coffee available to be sold (supply)
and the amount which people want to
buy (demand). If there is more coffee
available than people want to buy at
current prices, the price will fall. The
market thus ultimately determines the
price that the farmer receives.
There are circumstances in which
farmers can receive more than the
market price, for example:
if the quality of their coffee is high
if they undertake some or all of the
processing stages which someone
else would otherwise be paid to do
if they can sell direct to a
manufacturer rather than to
intermediaries.
Farmers can also reduce their costs if
they are able to share processing and
transportation facilities with other
farmers.
Coffee farmers may sell their coffee in
a number of ways:
they can sell to the next link in the
traditional supply chain - the collector
or processor
they may sell to government agencies
in countries where the coffee
trade is government controlled,
although this is becoming less
common
or, they may sell direct to a
manufacturer like Nestlé.
However, farmers usually cannot
choose the method by which they sell
their coffee. Selling directly to manufacturers
is attractive as farmers potentially
receive above the market price.
However, it would be impossible for
all the world’s coffee to be bought
directly by manufacturers from individual
farmers a few bags at a time.
Although direct purchasing is attractive,
it is only one of a number of
methods of trading, all of which have
their merits and none of which is necessarily
fairer than the others.
Ultimately it is the market price
which determines how
much farmers receive.
Nestlé’s trading methods
Nestlé is a pioneer in purchasing coffee
direct from growers. A growing percentage
of the company’s coffee is
bought direct from the producer and it
is now one of the world’s largest direct
purchasers. In countries where this is
not possible Nestlé operates in a way
that takes it as close to the growers as
possible.
Buying direct
In coffee-growing countries where
Nestlé also manufactures for export
or local consumption, it has a policy
of buying coffee direct from the farmers.
The company offers a fair price to
the farmers, and so ensures regular
supplies of guaranteed quality for its
own factories. Higher quality commands
a higher price - a premium that
Nestlé is happy to pay, since good
quality raw materials are essential to
its business.
In countries where direct buying takes
place, there is a widely advertised
Nestlé price, and a minimum base
price. By providing a reference level
for growers, other traders are forced to
keep their offer prices competitive.
Nestlé began its direct buying policy
in 1986 and the amounts involved
have steadily increased. In 1998,
around 15 per cent of its green coffee
purchases were bought directly.
As an example, in the Philippines,
farmers bring their produce to Nestlé’s
buying centres situated in the coffee
growing regions. Quality is analysed
while they wait and growers are paid
on the spot. In 1998, direct purchases
accounted for over 90 per cent of the
green coffee destined for its two instant
coffee factories in the country.
Buying from dealers
In countries like the UK it is simply
impossible for companies like Nestlé
to buy from the hundreds of thousands
of farmers who ultimately
supply the company, and so the coffee
is bought from dealers using the international
market. However, Nestlé
visits and gets to know as many
people as possible in the supply
chain. The company oversees the
relationship between the dealer and
exporter and often invites shippers to
the UK to train alongside its own
quality assurance staff. Nestlé agrees
procedures on everything from pest
control to methods of packing to
ensure everyone is working towards
the highest standards of quality.
Conclusion
Creating wonderful cups of coffee is
not only Nestlé’s business, it is the
business of everyone involved in the
supply chain. It is in everyone’s interest
- the farmers’ and Nestlé’s - that
farmers receive a fair income from
their coffee. This ensures that they will
continue to grow coffee, and to invest
in increasing their yield and quality,
and this in turn guarantees the supply
of quality coffee which companies like
Nestlé require.
©
Price - balancing
supply and demand
Coffee prices are determined day-today
on the world commodity markets
in London and New York and with so
many intermediaries standing between
the producer and the consumer, how
can we ensure that coffee growers
receive a fair reward for their labours?
Is the answer - as some believe - for
coffee manufacturers to cut out the
intermediaries, buy their coffee direct
from farmers and guarantee a minimum
price?
The price of coffee is determined by
the relationship between the amount of
coffee available to be sold (supply)
and the amount which people want to
buy (demand). If there is more coffee
available than people want to buy at
current prices, the price will fall. The
market thus ultimately determines the
price that the farmer receives.
There are circumstances in which
farmers can receive more than the
market price, for example:
if the quality of their coffee is high
if they undertake some or all of the
processing stages which someone
else would otherwise be paid to do
if they can sell direct to a
manufacturer rather than to
intermediaries.
Farmers can also reduce their costs if
they are able to share processing and
transportation facilities with other
farmers.
Coffee farmers may sell their coffee in
a number of ways:
they can sell to the next link in the
traditional supply chain - the collector
or processor
they may sell to government agencies
in countries where the coffee
trade is government controlled,
although this is becoming less
common
or, they may sell direct to a
manufacturer like Nestlé.
However, farmers usually cannot
choose the method by which they sell
their coffee. Selling directly to manufacturers
is attractive as farmers potentially
receive above the market price.
However, it would be impossible for
all the world’s coffee to be bought
directly by manufacturers from individual
farmers a few bags at a time.
Although direct purchasing is attractive,
it is only one of a number of
methods of trading, all of which have
their merits and none of which is necessarily
fairer than the others.
Ultimately it is the market price
which determines how
much farmers receive.
Nestlé’s trading methods
Nestlé is a pioneer in purchasing coffee
direct from growers. A growing percentage
of the company’s coffee is
bought direct from the producer and it
is now one of the world’s largest direct
purchasers. In countries where this is
not possible Nestlé operates in a way
that takes it as close to the growers as
possible.
Buying direct
In coffee-growing countries where
Nestlé also manufactures for export
or local consumption, it has a policy
of buying coffee direct from the farmers.
The company offers a fair price to
the farmers, and so ensures regular
supplies of guaranteed quality for its
own factories. Higher quality commands
a higher price - a premium that
Nestlé is happy to pay, since good
quality raw materials are essential to
its business.
In countries where direct buying takes
place, there is a widely advertised
Nestlé price, and a minimum base
price. By providing a reference level
for growers, other traders are forced to
keep their offer prices competitive.
Nestlé began its direct buying policy
in 1986 and the amounts involved
have steadily increased. In 1998,
around 15 per cent of its green coffee
purchases were bought directly.
As an example, in the Philippines,
farmers bring their produce to Nestlé’s
buying centres situated in the coffee
growing regions. Quality is analysed
while they wait and growers are paid
on the spot. In 1998, direct purchases
accounted for over 90 per cent of the
green coffee destined for its two instant
coffee factories in the country.
Buying from dealers
In countries like the UK it is simply
impossible for companies like Nestlé
to buy from the hundreds of thousands
of farmers who ultimately
supply the company, and so the coffee
is bought from dealers using the international
market. However, Nestlé
visits and gets to know as many
people as possible in the supply
chain. The company oversees the
relationship between the dealer and
exporter and often invites shippers to
the UK to train alongside its own
quality assurance staff. Nestlé agrees
procedures on everything from pest
control to methods of packing to
ensure everyone is working towards
the highest standards of quality.
Conclusion
Creating wonderful cups of coffee is
not only Nestlé’s business, it is the
business of everyone involved in the
supply chain. It is in everyone’s interest
- the farmers’ and Nestlé’s - that
farmers receive a fair income from
their coffee. This ensures that they will
continue to grow coffee, and to invest
in increasing their yield and quality,
and this in turn guarantees the supply
of quality coffee which companies like
Nestlé require.
©
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