What Is Specialty Coffee?

What is specialty coffee and why is this term becoming so popular among producers and consumers? Specialty coffee encompasses more than just the quality standards used to grade coffee – it involves a market segment where coffee producers can earn more for their coffees. This is different from the traditional pricing model determined by futures in the stock market where coffee is traded as a commodity. In the specialty coffee segment the price is set according to its quality grade, cupping score, processing method, and cost of production and transportation. Motivated by higher profits, producers are looking to establish direct trade relationships with buyers, who at the same time are aware or their quality and thrive for the producers' socioeconomic welfare.

Before we delve deeper into this topic, it should be said that the definitions of these two pricing concepts are quite open and have been debated within the global value chain. The purpose of this blog is to offer a reference of what specialty coffee is and to understand why Coffee Exchange focuses on helping producers find new markets for their coffees. By bringing specialty coffee into the conversation, we hope to encourage producers to see for themselves the real value of their coffees outside traditional trading and pricing channels.

Coffee bags on their way to China. Source: CEx file.

What's Specialty Coffee?

Referring to a superior quality and exclusive goods, this term is becoming more popular for two reasons: 1) a growing consumer preference for a direct connection with farmers and better quality and 2) the standards brought by the Specialty Coffee Association (SCA) for cupping and trading. More consumers are worried about the welfare of coffee producers and they are willing to pay more for higher quality instead of conventional coffee traded in bulk.

This new market allows better profit margins for producers and is shifting coffee to being traded as a delicatessen (rather than a commodity) where coffee quality is superior and well-appreciated. Rooted in the concept of terroir, the quality of the coffee is the result of human interaction and agricultural practices, in addition to the influence of geographical and natural surroundings that make the coffee a unique, limited, and exotic good.

Logo of the Specialty Coffee Association. (SCA)

To reach these quality expectations and grading standards, sophisticated processing methods and extensive labour are required. For this reason, the Specialty Coffee Association has set different criterion that uses coffee grading to determine what constitutes specialty coffee. While the term is still debated among different stakeholders, by the SCA standard, we can understand it as: "coffee that is free of primary defects, has no quakers, is properly sized and dried, presents in the cup free of faults and taints and has distinctive attributes."

Customers ready for cupping at our events. Source: CEx File.

In other words , the quality of the coffee is determined by the compliance to these standards taking into account the screening size and defect rate, biometrics and cupping scores (at least 80+ points). If standards are met, the evaluated coffees will be considered Specialty Coffee grade. Easy, right? It is more complicated than it sounds and every standard has its own parameters (for example, classification of defects) that we will discuss in different blogs. In Coffee Exchange we prefer coffee above 85+ points because it is the minimum requirement from our customers. This is also a term in the industry and helps us filter and source coffee for our clients.

Quality-Price Relationship. Specialty for the win!

After this introduction, we can see the inherent relationship between quality and price where coffee lots of higher quality get better prices. In practice, you can see this in the price comparison undergone in the Transaction Guide where different qualities are compared (and the prices too - and exclusively for Specialty Coffee lots). When negotiating directly, Specialty Coffee contracts are usually negotiated in FOB Terms (Free-On-Board: definition below). This price also includes transportation within the country, milling, warehousing, shipping, insurance and customs managements, giving the producer the position to request a better price contracted with the buyer according to the demand. We have to understand that the price is subject to different conditions but it doesn't rely in the futures price or any other differential.

From this introduction, we can see there is a clear correlation between quality and price, where higher quality coffees get better prices. This is also noted in the Transaction Guide for specialty coffee where varying qualities and prices are compared, exclusively for specialty coffee lots. When negotiating

This is very important because the prices, according to this report, are less tethered to commodity prices, where the profits of selling the crops at that price cannot cover the cost of production. We understand that reaching this level of quality can be expensive in terms of building infrastructure, acquiring equipment, and getting the instruction in processing and trading, but producing higher quality can yield higher profits. At Coffee Exchange, we can help you understand the price of your coffees. By evaluating the quality of the coffee, we determine a market price based on other green coffee companies to give you price reference and for you to decide which one is the best.

In conclusion, Specialty Coffee as a term is wide open but refers to different parameters and quality standards where compliance to them will determine the grade and influence price. Outside of the traditional pricing schemes coming from the futures market and differentials in producing countries, a direct relationship with the buyer and the sum of cost of production, transportation and related procedures will determine the price (subject to change depending on the negotiation terms). This is an opportunity for you as producer to receive a fair price for all the work you've done throughout the year. Coffee Exchange can help you to establish solid relationships with roasters and to understand the value of your coffees in the market.

References:

Transaction Guide 2020. Source: https://www.transactionguide.coffee

Free-On-Board definition: "Free on board (FOB) prices are ‘paid for coffees that are delivered and placed onto the ship at the port in the country of embarkation. They typically cover any overland transportation costs from mills or warehouses to the port of origin, but not any overseas shipping, insurance, or any transportation, customs, and overland freight costs incurred on arrival to the port of destination’. Taken from Transaction Guide, Page 3.