The Economics and Ethics of Coffee

The Economics and Ethics of Coffee


At this point I’ve pretty much explored almost
every aspect of coffee, but there’s still one last aspect I wanted to explore as a final
wrap up to our series. In our usual quest to…basically force myself
to learn to appreciate everyday items, I traveled all the way to Mexico to make my own cup of
coffee, starting from the tree. Using the usual method I use to calculating
the total cost, for this cup of coffee it cost around $1500. The actual labor involved in processing the
beans for a single cup of coffee was actually pretty small, in total about an 8 hours. So the bulk of the expense was mostly just
having to get there, which coming from the flatness and coldness of the midwest, was
definitely a necessity. However I didn’t actually grow the tree
myself as it takes 3-4 years, but if I had been able to just stay in Mexico for a full
growing season and been involved in the actual weekly maintenance of the the tree I harvested,
it’d probably add an extra 52 hours (1 hour per week), raising the price to a little over
$1900 then. So what does this number mean? It’s mostly just tells you the price of
a ticket to Mexico, which definitely illustrates the difficulties you’d face without today’s
modern infrastructure and trade networks for an international commodity like coffee. But it’s also worth mentioning that I calculated
the value of labor using the Minnesota state minimum wage of $7.75/hour. However in Mexico, the minimum wage is around
$4.30…a DAY. This economic disparity is definitely a factor
in how cheap we get our coffee. So now that I’ve meet some of the coffee
farmers one on one, like Froilán (who gave me this awesome hat), and hearing their struggles, it left curious: when I buy
a cup of coffee, how much of that actually makes it back to the original coffee farmer? So I turned to Wendover Productions for some
help with this economics question On average a 16 oz cup of coffee in the United States
costs $2.70 Obviously the numbers can vary widely from
shop to shop, but I’m going to give you a rough approximation of the cost breaking down. From the $2.70 you hand the barista
for your cup of coffee, the material costs such as the cup, lid, sugar, etc account for
around $0.27 About $0.45 of your payment goes toward paying
the salary of everyone at the coffee shop, while $0.79 goes for paying general operational
costs of the shop such as rent, utilities, advertising, taxes, etc.
$0.32 goes toward actual profit for the business. That leaves around $0.87 to actually spend
on the coffee beans. However, by the time a coffee shop is buying
their beans, they’ve already changed hands several times from farmer, to exporter, to importer, and then finally to roaster. Each middleman charges a bit more, so that they can make a profit. Backtracking from the coffee shop, the first
step is the roaster who is likely to charge around $0.58 markup for the shipping and handling
of beans, as well as the operational and salary costs of roasting the beans themselves. The roaster would get their beans from a coffee
importer, who handles the international shipping importing fees for bulk sales of beans. Around $0.13 of our initial payment will
end up going to them to cover these expenses. A coffee importer will usually receive their
coffee from exporters at the origin country. They usually charge around 10% for their services
to the farmer, which means they’ll receive $0.02 from us. That leaves around $0.14 for the farmer, which is
actually a pretty generous rate. At the moment, current commodities market
values coffee at around $1.49/lb, but how much a farmer actually makes is widely variant
to the deals he has with his co-op, exporters and importers. If they are lucky, farmers can strike a direct
deal with buyers and negotiate a better rate. For example, Starbucks has supposedly pays
double the commodities price to the farmers they have contracts with. Others sometimes face less ideal situations. At $0.14 from our cup of coffee, this is assuming the farmer is receiving double the commodity rate. If they were paid the fairtrade minimum,
it’d be $0.11 and if they were paid market value, they’d receive only $0.07. With only that amount of money going to
the farmer, that means only around 3-5% of your initial coffee purchase actually makes it back
to the original coffee farmer. And even then, there can be extra middlemen
that farmers could be forced to go through that could cut that amount in half. Obviously there is a lot of value that’s added along the way as it goes through various steps Before it goes from green coffee beans on the remote village on the side of a mountain All the way to your cup of coffee in your home, as you can see from my crude experiment in making it from scratch,
just getting the beans to my kitchen back home ended up being the majority of my costs. Coffee farmers overall end up being some of
the worst treated in the world. They end up taking on the majority of the
risks, with very small profits. A bad crop or a drop in price can easily ruin
the farmers. The average coffee farmers has two hectares
of land, yielding around 4,000 lbs of green coffee a year (or about 85,000 cups)
Meaning at those rates, an average coffee farmer might have $6,000-12,000 yearly revenue. After subtracting the costs of production
(which can vary widely), that means $1,200-7,200 total income per year for what
is usually an entire family working the farm. And that is still be fairly optimistic, as
some reports say coffee farmers make as little as $500-$1,000 a year for their coffee. With an average income in Mexico being around
$10,000/year, that puts them pretty low in the economic ladder. So, what can you do about it? How can you best give farmers their fair share? There are a variety of different organizations
that are attempting to remedy it through different methods, such as Fairtrade Probably the most commonly known, I’ll let
Noah from Cafe Imports describe it: It means that a group of producers have joined together in what’s called an association or a cooperative. And then those producers collectively both charge a premium, so we pay a premium that is then decided democratically how to be dispersed with in the community so they can do things like build new infrastructure needs, invest in potentially new varieties of coffee any number of things that basically they decide as a group they want to spend their money on is where that premium goes Fair Trade however has some criticisms. Some claim less money actually ends up reaching the
farmers as the cooperatives can eat up the extra money meeting Fairtrade political standards
and Fair Trade buyers can pocket some of the premium pricing. Some argue that the premiums don’t go far
enough and only gives a small amount over standard market price, where much more is needed. Noah also explained another approach Cafe Imports
takes to insuring they pay their farmers a fair and sustainable rate: The majority of the coffee that we have, which is not fair trade certified, We’re paying quality premiums for, so we’re paying premiums above where the coffee market’s at to incentivize essentially a higher quality production of coffee. And the same is true with the fair trade coffee that we have. We’re never just buying coffee because it’s fair trade certified. It’s fair trade certified plus it’s also delicious. So usually we’re paying premiums above and beyond even that fair trade premium for their coffee. Anytime that you’re dealing in a trade that crosses many different cultural lines and is typically grown in poor rural areas there is going to be opportunity for corruption. For people to not be paid fairly for their product. In our world in the high end coffee speciality world usually there’s us and 10 other people that are all trying to buy the same coffee so ultimately they’re selling that coffee to the best partner for them longterm. and the fact that we’re buying their best coffee also puts us in a good position to be able to compensate them fairly because they are going to make what they want to make. Another method used is “Direct Trade”
Which is a method used by some roasters to cut out some of the middlemen, and buy their beans
directly from the farmers and make sure they receive a larger cut of the profits. Another option is what’s done by Thrive
Farmers Coffee, an organization taking yet another approach, where the profits gained
later in the trade of coffee is shared back with the original farmers. Instead being paid for the green coffee beans,
they aren’t paid until after it’s been roasted, exported, packaged and sold. The markup added at these steps is then split
50-50 with the farmer, and supposedly can yield 4 times as much money as fair trade
for the farmers. The downside to this structure is that the
farmers don’t get paid until later, and take on additional risks, with the thin profits
of farming coffee, can leave them short on money for next years crops. Fair trade and other ethical considerations is not something I’ve honestly taken the time to consider in the past. But now, after meeting farmers like Froilán and learning how little they can get paid. It’s something I definitely want to be more mindful about in the future Thanks to Wendover Productions for his help with this video. Be sure to check out his channel for other great videos covering travel, economics, geography, marketing, and more. If you haven’t seen it yet, check out the full video where I attempt to make a cup of coffee entirely from scratch. But if you have already seen it, you may be getting as sick of coffee as I am, but good news: we’re moving on to a new subject in a couple of days Hard Cider Another beverage By “Everything”, we really just mean drinks. “How To Make Drinks” We’re also starting a new Audible partnership which we’ll be using to recommend some books relative to the topics we cover in future episodes But for now, if you haven’t yet, try a free 30-day trial of Audible on the link below.

63 thoughts on “The Economics and Ethics of Coffee

  1. I miss the old style of your videos.
    And I think changing it was a rushed idea.
    In time, you will/would grow in viewers.
    Alltough, great work on this economic insight!

  2. OK we double the coffee farmer income, what do you thing is going to happen? Corn farmer are going to switch to coffee farming as it will be a lot more profitable and quickly we will see a shortage of corn meaning lack of food for the local and a coffee oversupply meaning no sale/profit. Your explanation comes from a good sentiment but may have catastrophic consequences.

  3. Interesting. It's also worth keeping in mind that 1 dollar or 16-17 pesos goes a pretty long way in Mexico compared to the US from different standard of living, etc.

  4. As a Colombian i approve this video, good job man! we have a pretty good coffee federation here, so the farmers make good money, Mexico should do something similar.

  5. All the cafés I buy my coffee beans from here in Prague (multiple companies) are direct trade. So there's only one middle-man between me and a coffee farmer.

  6. You deserve to have more views. Your videos are so professionals and well done. Love the attention to detail that you put in each one of them. Greetings from Mexico

  7. the history of coffee has always been one of exploitation, only now its getting marginally better. thankfully I live in a coffee growing country and lately ive been getting into roasting my own beans

  8. Really interesting stuff, and high quality content. I hope more people find you! Your collaboration with wendover productions was really interesting, as was this!

  9. The average income in Mexico may be $10,000, but in the rural regions of Mexico where coffee is grown, its far lower. My home in California is worth four times as much as my cousin's home in Arkansas, and he has a nicer house. Just giving them more money out of the kindness of our hearts is not sustainable. During the Great Recession, local economies which had grown due to the largess of Fair Trade payments, collapsed as end consumers economized. As the overall size of the coffee market did not change, those who were selling at market rates felt no impact.

    The only way for coffee farmers to improve their standard of living is to collectively bargain to get more for it, the way Mexican avocado growers are doing right now.

  10. I found this channel from Wendover Productions. I'm looking forward to watching more videos, I like your style.

  11. This is the most economically ignorant video you've put out. I was a fan of this channel until this. You left out so much information when coming up with your numbers that it made it economically irrelevant. https://www.youtube.com/watch?v=7zvSO43SOtk

    Your travel has nothing to do with the economic costs for production. It is completely irrelevant. Furthermore, you do not understand currency value and cost of living inequities when dealing comparing all these global costs. Don't do this again. Stick with your gimmick of building things from scratch.

  12. Wouldn't the most ethical format/argument for this video have been advocating for actual, better international trade policies and domestic economic policy, to actually deal with the systemic issues that directly encourage this exploitation? …Lol.

  13. For me, the coffee bean supply and food supply in general is more important than most of the service industry jobs here, those people should be paid more.

  14. A cup of coffee costs like $2.70 if you go to Starbucks, sure. But if you're got a machine at home (and don't care for quality) you can get three-packs of keurig cups at the dollar store, which even including machine price divided over its lifetime, and the minimal costs of sugar, milk, water, and electricity, is still likely less than 50 cents per cup. Naturally, the biggest cost difference is likely going to boil down to the quality of the beans, and surely the beans that get ground into $0.33 coffee are worth less than the ones going into $3 coffee, but it's still a huge implication. They CAN'T make fake coffee (even freeze-dried shit is still just reprocessed) in a factory, and they CAN'T grow it outside the tropics. If you life in the USA or Europe or East Asia, and drink coffee of any cost or quality, it's been grown on one of these farms thousands of miles away for barely more than the cost of shipping it.

  15. try making a bandaid from scratch- it would be interesting to see the history and how you go about making the adhesive or some how securing it to yourself

  16. Are you saying "Hectacres"? 4.28, pretty sure you say Hectacres; like a metric acre. It's hectare buddy.

    Next can you show us how to make a baby?

  17. You're not going to solve third world poverty by buying a cup of coffee at a mark up.
    We need to start teaching economics in schools.

  18. My first job in middle school was picking coffee. I used to make 20$ a day and it wasn’t easy. Now I live in the States and make 6 figures a year and fully support small business and fair trade.

  19. I think its responsibilty of anyone with financial leeway to research a bit about things they buy. Money talks, what you buy and consume is most effective and direct way to affect things.

  20. I've always wanted to try Kopi Luwak or Civet coffee (beans picked from cat poop) but then I learned (aside from the astronomical prices) it is not harvested ethically. That made me wonder if there could be such a thing as fair trade civet coffee, where the animals are treated humanely? Could be an interesting coffee topic!

  21. How about attempting to make a bicycle tire from scratch? Then do another episode like this to look into the ethics of rubber farming.

  22. "14 cents – a pretty generous rate" lmao. Let's keep it really real tho: EXPLOITATION is inherit to the capitalist mode of production. the price of the exploited labor that produces everything in society – priceless…..capitalism and Imperialism must be DESTROYED by the working class. Class struggle determines it all…..

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