The concept of “differential pricing” in the coffee trade refers to the practice where the buyer or seller applies a reduction or increase in the price based on specific conditions, such as transport costs, quality, and the brand’s reputation in the market. This is commonly applied in the coffee industry when dealing with FOB (Free on Board) prices, where the agreed market price is adjusted based on factors like shipping and quality standards. The adjustments are known as “price differentials” and can vary based on the quality of the coffee and the region of origin.
In practice, when trading coffee, if the market price of coffee is set at $1730 per ton for a certain month, the buyer might request a reduction (or increase) in the price based on certain factors like the transport cost, insurance, and the quality of the coffee. This would be calculated based on the difference between the market price and the buyer’s expectations or specifications.
Price differentials have evolved over time, especially with the increasing quality of coffee exports in countries like Vietnam. With better processing equipment, local producers have achieved higher quality standards, which might even result in a premium price (above the market price) instead of a discount.
Despite these improvements, challenges remain, as buyers often set the terms, and sellers must comply. This system of “price differential” has led to unequal market conditions for local producers, especially in countries like Vietnam.